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Tickers in this Article: PLXS, JNPR
Plexus Corp. (PLXS) reported earnings of 47 cents in the first quarter of 2013, which missed the Zacks Consensus Estimate by a couple of cents (4.1%). Plexus' result continued to suffer from lower end-market demand. Revenue

Total revenue remained flat on a year-over-year basis but plunged 10.8% sequentially to $530.5 million. Revenue also missed the Zacks Consensus Estimate of $552.0 million. The weak performance was primarily due to soft demand in the Networking/Communications segment.

Revenue from Networking/Communications (37.5% of total revenue) decreased 13.5% year over year and 12.7% sequentially to $199.0 million. Healthcare/Life Sciences (25.1% of total revenue) surged 16.7% from the year-ago quarter but declined 3.6% sequentially to $133.0 million.

Industrial/Commercial sector (24.7% of total revenue) declined 3.0% on a year-over-year basis but plunged 17.6% from the previous quarter to $131.0 million. Revenue from Defense/Security/Aerospace sector (12.8% of total revenue) soared 33.3% year over year but declined a modest 2.9% on a sequential basis to $70.0 million.

During the quarter, Plexus won 23 new programs in the manufacturing solutions group, which is expected to generate approximately $193.0 million in annualized revenue once production commences.

Margins

Gross profit decreased 0.9% from the year-ago quarter and 9.0% from the previous quarter to $51.2 million. Gross margin edged up 10 basis points ("bps") sequentially but contracted 20 bps from the year-ago quarter to 9.6%.

Selling and administrative (S&A) expense increased 6.4% year over year and 2.7% quarter over quarter to $29.7 million.

Operating income decreased 9.6% year over year and 21.4% sequentially to $21.5 million, primarily due to lower gross margin base and higher expense. Operating margin contracted 50 bps from the year-ago quarter and 60 bps from the previous quarter to 4.0%.

Net income decreased 7.0% year over year and 29.3% sequentially to $16.6 million. Earnings per share (EPS) decreased 7.3% from the year-ago quarter and 28.6% from the previous quarter to 47 cents.

Balance Sheet

Plexus exited the first quarter of 2013 with $274.2 million in cash and investments versus $297.6 million in the fourth quarter of 2012. Long-term debt and capital lease obligations (including the current portion) amounted to $580.3 million versus $270.4 million in the previous quarter.

Cash flow from operations was $9 million in the quarter compared with $41.0 million in the previous quarter. Free cash flow was ($17.0) million compared with $22.0 million in the fourth quarter of 2012.

Return on invested capital (ROIC) was 12.6% at the end of first quarter compared with 14.2% in the year-ago quarter and 15.5% in the fourth quarter of 2012.

Outlook

For the forthcoming second quarter of 2013, total revenue is projected in the range of $550.0 million to $580.0 million (mid-point up 6.0% year over year). Earnings per share are projected to be between 50 cents and 55 cents per share, excluding any restructuring charges and including approximately 8 cents per share in stock-based compensation expenses.

Plexus expects fiscal 2013 revenue to remain flat on a year-over-year basis primarily due to negative effect from Juniper's (JNPR) disengagement, offset by approximately $956.0 million of new program wins in 2012. Plexus expects to achieve modest revenue growth in fiscal 2014.

Our Take

We believe that sluggish demand environment will continue to hurt Plexus in the near term. Moreover, a matured electronic manufacturing services ("EMS") market and intense competition remains the other major headwinds for Plexus over the long term.

However, we believe that new business opportunities, particularly in the industrial/commercial and medical sector and global expansion will drive growth over the long term. Moreover, the disengagement with Juniper is expected to improve the product mix going forward.

Thus, we have a Neutral recommendation on Plexus over the long term (6-12 months). Currently, Plexus has a Zacks Rank #3 (Hold).

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