Plexus Beats in Q3 - Analyst Blog

Plexus Corp. (PLXS) reported third quarter 2010 earnings of 59 cents per share, beating the Zacks Consensus Estimate of 57 cents per share.

Operating Performance

Earnings per share climbed 156.5% from last year’s 23 cents. Sequentially, earnings per share escalated 16%. Earnings per share came in line with management’s guidance of 54 cents to 60 cents per share. Earnings per share excluded restructuring charges but included 6 cents per share in stock-based compensation expense.

Earnings increased significantly riding on the back of improving end-market conditions and production ramps of manufacturing programs won over the past few quarters.

Gross margin was 10.4% and operating margin was 5% in the third quarter 2010, consistent with the company’s expectations. This compares with gross margin of 9.1% and operating margin of 3.2% in the year-ago period.

Selling and administrative expenses increased 26.8% year over year.

Revenues

Quarterly revenues came in at $536.4 million, an increase of 41.7% from $378.6 million in the year-ago quarter, attributable to new business wins and improving end-market demand. Sequentially, revenues increased 9%. Revenues were in line with the company’s guided range of $520 million to $545 million.

Better-than-expected results for the quarter were due to robust sector performance, as the company experienced a sequential revenue growth in each of its sectors except the Wireless Infrastructure, which declined during the quarter.

Wireline/Networking sector (42% of total revenues) grew sequentially by 6.2%, in line with the company’s expectation of a growth in the low single digit percentage range. The Medical sector (21% of total revenue) soared 19.4% sequentially, primarily attributable to end-market improvement and was in line with the company’s expectation of a growth in the high-teens percent range.

The Industrial/Commercial sector (18% of total revenues) was up approximately 21% sequentially. The company had anticipated that the segment will grow in the mid-20% range sequentially. The Defense/Security/Aerospace sector (8% of total revenues) grew 16.2% sequentially.

The Wireless Infrastructure sector (11% of total revenues) was weak in the quarter but in line with management’s expectations. The segment declined 12.9% due to the presence of only a few significant customers in the sector and a lumpy demand trend. Plexus had apprehended that Wireless Infrastructure revenues will decline in the high single digit percentage range in the third quarter 2010.

The company had won 22 new manufacturing programs during the quarter, which it believes will generate approximately $141 million in annualized revenues over the next few quarters, primarily affecting 2011 revenues. The engineering services business continued to build a healthy backlog in the quarter with $16 million in new program wins.

During the quarter, Juniper Networks Inc. (JNPR) accounted for 16% of revenues and was the only customer representing 10% or more of revenues for the quarter. The company’s top 10 customers accounted for 54% of total revenues in the quarter.

Balance Sheet & Cash Flow

Plexus exited the quarter with $190.2 million in cash and investments, down from $234.0 million in previous quarter. Long-term debt and capital lease obligations (including the current portion) amounted to $134.8 million versus $139.3 million in the previous quarter.

Plexus used $32 million of cash from operating activities versus $15 million cash generated in the previous quarter. Capital expenditures for the quarter were $16 million versus $19 million in the previous quarter. This resulted in a negative free cash flow of $48 million versus a negative free cash flow of $4 million in the previous quarter. Return on invested capital (ROIC) improved to 19.0% versus 18.7% 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, up 9 days from the previous quarter due to rising working capital requirements, given that demand continued to remain volatile with increased supply constraints for components.

Guidance

For the fourth quarter of 2010, earnings per share are expected to be in the range of 58 cents to 63 cents, excluding restructuring charges but including 6 cents per share in stock-based compensation expense. The mid point of the guidance represents sequential and year-over-year growth rates of 2% and 59%, respectively.

The current Zacks Consensus Estimate for the upcoming quarter (fourth-quarter 2010) is a profit of 63 cents per share, at the high end of the company’s expectations.

Plexus expects modest sequential revenue growth in the fourth quarter of fiscal 2010. Revenues are anticipated in the range of $530 million to $555 million, up 1.1% quarter over quarter and 38% year over year at the mid point, due to the ramp of new business and improving end-market demand.

Full fiscal year 2010 organic revenues are expected to grow over 20% year over year to $2 billion. With growing revenues, the company plans to reach 19% in ROIC in fiscal 2010.

The company plans to build additional manufacturing facilities in Penang, Malaysia, which will begin operations in early fiscal 2012, and also expand its footprint in China and Romania.

Plexus faces intense competition from Flextronics International Ltd. (FLEX), Sanmina-SCI (SANM), Benchmark Electronics (BHE) and Jabil Circuit (JBL).