Plexus Corp (PLXS) reported second quarter 2011 diluted earnings per share of 59 cents, surpassing the Zacks Consensus Estimate of 56 cents and improving 15.7% from the year-ago quarter. Earnings also topped management’s guidance range of 53 cents to 58 cents.
However, on a sequential basis, earnings decreased 3.3%.
Quarter in Detail
Total revenue for the quarter increased 0.4% sequentially and 15.7% on a yearly basis to $568.1 million, beating the Zacks Consensus Estimate of $567.0 million. It was at the higher end of management’s guidance range of $540.0 million to $570.0 million.
The better-than-expected revenue was due to strength in the Medical, Industrial/Commercial and Defense/Security/Aerospace markets. However, the decline in the Wireline/Networking and Wireless Infrastructure sectors during the quarter acted as headwinds.
On an end-market basis, Medical (23.0% of total revenue) increased 10.3% sequentially. Industrial/Commercial (22.0% of total revenue) and Defense/Security/Aerospace (9.0% of total revenue) were up 4.2% and 22.0%, respectively. However, Wireline/Networking (40.0% of total revenue) decreased 1.7% and Wireless Infrastructure sector (6.0% of total revenue) decreased 35.1%.
The company won 21 new programs in the manufacturing solutions group, which are expected to generate approximately $134.0 million in annualized revenue when ramped into production. The engineering solutions group also had a robust quarter of new program wins of approximately $18.0 million.
Fifty-three percent of the total revenue was attributable to the top 10 customers, which was down 3 percentage points from the previous quarter. Juniper Networks Inc. (JNPR) (16.0% of revenue) was the only customer representing 10.0% or more of revenue for the quarter.
Gross profit increased 1.1% sequentially and 9.9% from the year-ago quarter to $55.5 million, while gross margin for the quarter was 9.8%.
Operating profit decreased 5.0% sequentially but increased 12.8% from the prior-year quarter to $26.4 million, with the operating margin for the quarter coming in at 4.6%.
Balance Sheet and Cash Flow
Plexus exited the quarter with $123.4 million in cash and investments, down from $149.5 million in the previous quarter. Long-term debt and capital lease obligations (including the current portion) amounted to $121.1 million versus $125.3 million in the previous quarter.
Cash flow provided by operations in the quarter was approximately $73 million. Capital expenditures were $15 million and free cash flow was positive for the quarter, approximately $58 million.
Cash cycle days totaled 71 days, at the end of the quarter, versus 78 days in the previous quarter. Days in Inventory were 89 days, compared with 93 days in the previous quarter.
During the quarter, 2.7 million shares were repurchased under the share repurchase plan approved on February 16, 2011, totaling $83.4 million at an average price of $30.57.
Quarter Ahead
For the upcoming quarter, management expects diluted EPS between 52 cents and 57 cents, excluding any restructuring charges and including approximately 7 cents per share of stock-based compensation expense. The guidance was above the Zacks Consensus Estimate of 48 cents per share.
Revenue for the third quarter is projected in the range of $550.0 million to $580.0 million.
Going forward, management expects operating results to be affected by the production ramp-down at two customers, as well as the ramp up of new programs, which are less profitable in the early stages of production.
Conclusion
Analyst estimates remained unchanged in the run-up to the earnings release (in the last 7 days). The average estimate was 56 cents when the company reported earnings. We note that Plexus Corp. has consistently exceeded estimates over the past year or so. The average surprise in the preceding 4 quarters is a positive 4.40%, and another positive surprise was therefore expected.
Nonetheless, we remain concerned about the company achieving its 2011 targets, given the new project ramp up costs that will have a temporary negative impact on its results. Other headwinds include intense competition in the electronic manufacturing services (EMS) market from Flextronics International Ltd. (FLEX) and Jabil Circuit Inc. (JBL), as well as small market share, continued component challenges and supply chain constraints.
Thus, we have an Underperform rating on Plexus for the long term (6-12 months).
However, expansion of its global footprint, a healthy pipeline of program wins and improving end-market demand are long-term drivers for growth and, therefore, keeps us interested in the stock.
We currently have a Zacks #2 Rank for Plexus Corp., which translates into a 'Buy' rating for the short term.
FLEXTRONIC INTL (FLEX): Free Stock Analysis Report
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