Plexus Corp. (PLXS) reported earnings of 67 cents per share in the fourth quarter of fiscal 2013, in line with the Zacks Consensus Estimate. Earnings (excluding discrete tax benefit) climbed 1.0% on a year-over-year basis but declined 1.3% sequentially.
Revenues
Revenues declined 4.5% year over year and 0.7% sequentially to $567.7 million, almost in line with the Zacks Consensus Estimate. Revenues came within management’s guided range of $545.0 million to $575.0 million. The decline in revenues was primarily due to weak end-market demand and negative impact of Juniper’s (JNPR) disengagement.
Revenues from Networking/Communications sector (38.0% of revenues) decreased 13.6% year over year and 9.6% on a sequential basis to $197.0 million.
Healthcare/Life Sciences (25.0% of revenues) revenues increased 15.2% from the year-ago quarter and 12.0% sequentially to $159.0 million. The sequential increase was due to better-than-expected performance from its top customers.
Industrial/Commercial sector (24.0% of total revenue) plunged 10.1% on a year-over-year basis but increased 3.6% sequentially to $143.0 million.
Revenues from Defense/Security/Aerospace sector (13.0% of total revenue) decreased 1.4% year over year and 6.8% sequentially to $69.0 million.
During the quarter, Plexus won 34 new programs in the manufacturing solutions group, which is expected to generate approximately $155.0 million in annualized revenues once production commences.
Margins
Gross margin expanded 10 basis points (bps) from the year-ago quarter but declined 10 bps from the previous quarter to 9.6%.
Gross margin was positively affected by Plexus’s efforts to improve operating performance that includes shifting of production to low cost areas. Better customer mix and robust performance from Engineering Solutions organization also led to the year-over year expansion. However, lower revenue base resulted in the sequential contraction.
Selling and administrative (S&A) expense as a percentage of revenues remained flat year over year but declined 40 bps from the previous quarter to 4.9%, reflecting stringent cost control. As a result, operating margin expanded 10 bps from the year-ago quarter and 30 bps from the previous quarter to 4.7%.
Net income margin improved 10 bps from the year-ago quarter but remained flat sequentially at 4.1%.
Balance Sheet & Cash Flow
Plexus exited the fourth quarter of fiscal 2013 with $341.9 million in cash and investments versus $285.6 million in the third quarter of fiscal 2013. Long-term debt and capital lease obligations (including the current portion) amounted to $261.3 million.
Cash flow from operations was $92.0 million in the quarter while free cash flow amounted to $68.0 million. During the quarter, Plexus repurchased shares worth $13.8 million at an average cost of $33.60 per share.
Outlook
For the first quarter of fiscal 2014, revenues are projected in the range of $520.0 million to $550.0 million. Management expects revenues to decline by $42 million sequentially due to the disengagement from Juniper.
Moreover, management expects revenues to be down in high teens range for Network/communication segment. Excluding the effect of Juniper’s disengagement, revenues from the segment are expected to increase in the low-single digit range in the upcoming quarter.
Healthcare/Life Sciences revenues are expected to remain flat on a sequential basis. Industrial/Commercial revenues are expected to decline by mid-single-digit percentage points sequentially. Revenues from Defense/Security/Aerospace are expected to increase in the high-single digit percentage range sequentially.
Earnings are projected to be between 57 cents and 63 cents per share, excluding any restructuring charges and including approximately 8 cents per share in stock-based compensation expenses.
Management expects gross margin in the range of 9.6% to 9.8% while operating margin is expected in the range of 4.6% to 4.8%. The company expects its selling, general and administrative (SG&A) expenses to be between $26.0 million and $27.0 million.
For fiscal 2014, management expects to spend $75.0 million on capital expenditures.
Our Take
We believe that a sluggish demand environment will continue to hurt Plexus in the near term. Moreover, a matured electronic manufacturing services market and intense competition from the likes of Jabil Circuit (JBL) and Flextronics (FLEX) remain other long-term headwinds for Plexus.
However, we believe that new business opportunities, particularly in the industrial/commercial and healthcare/life sciences sectors and global expansion will drive growth over the long term. Moreover, the disengagement from Juniper is expected to improve the product mix, going forward. Moreover, the consolidation of the company’s production facilities in low-cost areas is expected to boost margins going forward.
Currently, Plexus has a Zacks Rank #1 (Strong Buy).
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