Plexus Corp. (PLXS) reported fourth quarter 2010 earnings of 65 cents per share, beating the Zacks Consensus Estimate of 60 cents, posting a surprise of 8.3%.
Operating Performance
Earnings per share (EPS) leaped 71.1% from year-ago quarter earnings of 38 cents. Sequentially, EPS escalated 10.2% from 59 cents. EPS was above management’s guidance of 58 cents to 63 cents. EPS excluded restructuring charges but included 6 cents per share in stock-based compensation expense.
Earnings increased significantly, riding on improving end-market conditions and production ramps of manufacturing programs won over the past few quarters.
Gross margin was 10.1% and operating margin was 5.2% in the fourth quarter, consistent with the company’s expectation. This compares with gross margin of 9.6% and operating margin of 3.8% in the year-ago quarter.
Selling and administrative expenses increased 17.5% year over year.
Quarterly revenues came in at $555.6 million, an increase of 41.4% from $393.0 million in the year-ago quarter, attributable to new business wins and improving end-market demand. Sequentially, revenues increased 3.7%. Revenues were at the high-end of the company’s guided range of $530 million to $555 million and surpassed the Zacks Consensus Estimate of $546 million.
Better-than-expected results were attributable to a robust sector performance, as the company experienced a sequential revenue growth in some of its sectors such as the Wireless Infrastructure, Medical and Industrial/Commercial. However, the decline in the Wireline/Networking and Defense/Security/Aerospace sector during the quarter acted as a headwind.
Wireline/Networking sector (40% of total revenue) declined sequentially by 0.5%. The Defense/Security/Aerospace sector (7% of total revenue) fell 9.3%.
The decline in the above two sectors was fully offset by the growth in the Medical sector (21% of total revenue) that increased 4.5% sequentially.The Industrial/Commercial sector (21% of total revenue) was up approximately 18.4%. The Wireless Infrastructure sector (11% of total revenue) grew 3.3%.
The company had won 24 new manufacturing programs during the quarter, which will likely generate approximately $115 million in annualized revenues over the next few quarters, primarily affecting 2011 revenues. The engineering services business continued to build a healthy backlog with $21 million in new program wins in the quarter.
During the quarter, Juniper Networks Inc. (JNPR) accounted for 16% of the company’s revenues and was the only customer representing 10% or more of revenues. The company’s top 10 customers accounted for 57% of total revenue.
Full Year 2010 Results
EPS shot up 65.9% to $2.19 in fiscal 2010 from $1.32 in fiscal 2009. EPS excluded restructuring charges but included 6 cents per share in stock-based compensation expense.For full year 2010, revenues came in at $2.01 billion, an increase of 25.0% from $1.62 billion in 2009.
Management reached its expectation of a growth of over 20% year over year to $2 billion in organic revenues in 2010. With growing revenues, the company reached 19.5% in return on invested capital (ROIC) in fiscal 2010, above its expectation of 19% in ROIC.
For full year 2010, the company won approximately $501 million in annualized revenues from manufacturing solutions group.
Balance Sheet & Cash Flow
Plexus exited the quarter with $188.2 million in cash and investments, down from $190.2 million in previous quarter. Long-term debt and capital lease obligations (including the current portion) amounted to $130.6 million versus $134.8 million in the previous quarter.
Plexus generated $28 million of cash from operating activities versus $32 million cash used in the previous quarter. Capital expenditures in the quarter were $27 million versus $16 million in the previous quarter. This resulted in a positive free cash flow of $1 million versus a negative free cash flow of $48 million in the previous quarter. ROIC improved to 19.5% versus 19.0% in the previous quarter and near the company’s long-term target of 20%.
Cash cycle days totaled 75 days at the end of the quarter, flat compared with the previous quarter. Days in Inventory were 90 days compared with 89 days in the previous quarter.
Guidance
For the first quarter of 2011, EPS is expected to be in the range of 56 cents to 62 cents, excluding restructuring charges but including 6 cents per share in stock-based compensation expense. The current Zacks Consensus Estimate for the first quarter 2011 is a profit of 60 cents per share, in line with the company’s expectation.
Revenues for the first quarter are projected in the range of $550 million to $580 million, flat to modestly up sequentially. Revenues for the second quarter are expected to slow down due to the ramp down of production for two customers that were acquired during the past year and an increase in operating cost, management pointed out.
Management remains apprehensive that first half of 2011 will remain weak with significant headwinds; however, the second half is expected to be strong due to ramp up of new customer wins, pulling up full year results.
In the run up to the earnings release, both revenue and earnings estimates had been lowered for the quarter. We expect Plexus to drive its top line with large orders and customer wins in 2011; however, soft outlook for the first half of fiscal 2011 has led the analysts to lower revenue and earnings estimates for 2011. Plexus has a short-term Neutral recommendation (Zacks #3 Rank). We also maintain our long-term Neutral recommendation.
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