Plexus Q2 Earnings in Line, Revs Beat - Analyst Blog

Plexus Corp. PLXS reported a better-than-expected second-quarter fiscal 2014. While earnings of 60 cents per share were in line with the Zacks Consensus Estimate, revenues beat the same. The company provided positive second-quarter guidance. Shares were up 8.0% ($3.22) in after-hours trading.  

Revenues

Revenues were almost flat year over year, but increased 4.4% sequentially to $557.6 million. Revenues came above the mid-point of management's guided range of $535.0 to $565.0 million.

As anticipated, Juniper's JNPR disengagement negatively impacted second-quarter revenues by approximately $92.0 million on a year-over-year basis.

Revenues from Networking/Communications sector (29.0% of revenues) decreased 23.9% year over year but were almost flat on a sequential basis to $162.0 million. The better-than-expected performance was due to improving end-market demand.

Healthcare/Life Sciences (30.0% of revenues) reported a better-than-expected quarter. Revenues increased 29.5% from the year-ago quarter and 1.2% sequentially to $167.0 million.

Industrial/Commercial sector (26.0% of revenues) increased 3.6% on a year-over-year basis and 6.6% sequentially to $145.0 million, below management's guidance.

Defense/Security/Aerospace segment (15.0% of revenues) rebounded in the quarter. Revenues increased 10.5% year over year and 20.0% sequentially to $84.0 million, below management's guidance.

During the quarter, Plexus won 41 new programs in the manufacturing solutions group, which is expected to generate approximately $159.0 million (54.1% in APAC) in annualized revenues once production commences. Approximately 45.0% of program wins were in the Networking/Communications sector.

Margins

Gross profit increased 1.6% year over year and 2.6% sequentially to $52.8 million. Gross margin expanded 20 basis points (bps) from the year-ago quarter but contracted 10 bps from the previous quarter to 9.5%.

Selling and administrative (S&A) expense decreased 3.6% year over year but increased 6.3% quarter over quarter to $27.8 million. As a percentage of revenues, S&A declined 20 bps from the year-ago quarter but increased 10 bps from the previous quarter to 5.0%.

Operating income (excluding restructuring charges) increased 8.0% year over year but declined 1.3% sequentially to $25.0 million. Operating margin expanded 30 bps from the year-ago quarter but contracted 30 bps from the previous quarter to 4.5%.

Net income jumped 15.9% year over year but declined 2.1% sequentially to $20.8 million. Earnings (excluding restructuring and impairment charges and discrete tax benefit) increased 15.9% year over year but declined 2.1% quarter over quarter and was in line with the mid-point of management's guided range of 57 to 63 cents.

Balance Sheet & Cash Flow

Plexus exited the second quarter of fiscal 2014 with $323.7 million in cash and investments versus $324.2 million in the first quarter of fiscal 2014. Long-term debt and capital lease obligations (including the current portion) amounted to $260.0 million.

Cash flow from operations was $16.0 million in the quarter while free cash flow amounted to $7.2 million. During the quarter, Plexus repurchased shares worth $7.6 million at an average cost of $41.18 per share.

Outlook

For the third quarter of fiscal 2014, revenues are projected in the range of $600.0 to $630.0 million. Management expects revenues (mid-point of the outlook range) to increase 10.2% on a sequential basis.

The mid-point reflects approximately 7.5% increase in revenues on a year-over-year basis. Management's revenue guidance is much better than the Zacks Consensus Estimate for revenues of $578.0 million for the third quarter.

Moreover, management expects Network/communication segment revenues to be up more than 20.0% sequentially based on new program wins.

Healthcare/Life Sciences revenues are expected to increase in low-to-mid single digits on a sequential basis. Industrial/Commercial revenues are expected to increase at high single-digit percentage on a sequential basis.

Revenues from Defense/Security/Aerospace are expected to increase in the mid single-digit percentage point range over the second quarter.

Earnings are projected between 69 cents and 74 cents per share, excluding any restructuring charges but including approximately 10 cents per share in stock-based compensation expenses. The Zacks Consensus Estimate (including stock-based compensation) is pegged at 67 cents.

Management expects gross margin in the range of 9.4% to 9.6% while operating margin is expected in the range of 4.6% to 4.8%. The company expects its S&A expense to be between $29.0 million and $30.0 million, slightly up from the previous quarter.

For fiscal 2014, management expects to spend $75.0 million on capital expenditures.

Our Take

We believe 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 headwinds for the company.

However, we believe new program wins in the networking/communications, 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. Additionally, 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 #3 (Hold).