Plexus Falls on Weak Outlook - Analyst Blog

Plexus Corp. (PLXS) shares fell 8.7% ($2.65) to $28.00 in after hours trading yesterday, following the company's first quarter 2011 earnings announcement. Plexus reported mixed quarterly results. While earnings per share (EPS) beat the Zacks Consensus Estimate by a penny, revenue missed the Consensus Estimate by 1.4%.

Weak Outlook

Plexus reduced its outlook for the next two quarters of 2011 due to significant headwinds as a result of a slow down in production for two unnamed customers, an increase in operating costs and a significant production delay for its customer, Coca-Cola Co. (KO). Plexus' weak revenue outlook weighs on the company's results for 2011.

For the second quarter of 2011, EPS is expected to be in the range of 53 cents to 58 cents, excluding restructuring charges but including 8 cents per share in stock-based compensation expense. At the time when the company reported earnings, the Zacks Consensus Estimate for the second quarter is a profit of 56 cents per share, in line with the company's expectation.

Revenues for the second quarter are projected in the range of $540 million to $570 million, down 1.9% sequentially at the mid point. Revenues were below the Zacks Consensus Estimate of $576.0 million at the time of first quarter earnings. Revenues are expected to slow down due to the ramp down of production for two significant customers that were acquired during the past year and an increase in operating costs.

Management also remains apprehensive about third quarter 2011 and expects revenues to be down sequentially with difficult operating performance. The major reason for the decline is the winding down of the two other manufacturing programs and a significant production delay in the two programs for Coca-Cola Company.

Plexus partnered with The Coca-Cola Company to manufacture Coca-Cola Freestyle, a new proprietary fountain dispenser. Plexus expected to ramp up production levels of the “Coca-Cola Freestyle” program and the “crew serve” program in fiscal 2011. The delay in production for its customer Coca-Cola Co will lead to lower revenues in 2011.

For fiscal 2011, management anticipates revenues to growin the range of 10% to 13% from the 2010 level. This is below management's long-term target of a compounded annual revenue growth of over 15%.

Operating Performance

Plexus Corp. reported first quarter 2011 earnings of 61 cents per share, beating the Zacks Consensus Estimate by a penny. EPS increased 56.4% from year-ago quarter earnings of 39 cents. Sequentially, EPS fell 6.2% from 65 cents. EPS was in line with management's guidance of 56 cents to 62 cents.

EPS excluded restructuring charges but included 6 cents per share in stock-based compensation expense. Earnings increased on improving end-market conditions and production ramps of manufacturing programs won over the past few quarters.

Gross margin was 9.7% and operating margin was 4.9% in the first quarter, consistent with the company's expectation. This compares with gross margin of 10.3% and operating margin of 4.7% in the year-ago quarter.

Selling and administrative expenses increased 111.3% year over year.

Revenues

Quarterly revenues came in at $565.8 million, an increase of 31.5% from $430.4 million in the year-ago quarter. Sequentially, revenues increased 2.0%. Revenues were in line with the company's guided range of $550 million to $580 million but missed the Zacks Consensus Estimate of $574 million.

The company experienced a sequential revenue growth in some of its sectors such as the Wireline/Networking, Defense/Security/Aerospace and Industrial/Commercial. However, the decline in the Wireless Infrastructure partially offset the growth. Medical remained constant sequentially.

Wireline/Networking sector (41% of total revenue) increased sequentially by 5.4%. Industrial/Commercial sector (21.0% of total revenue) and Defense/Security/Aerospace sector (7.0% of total revenue) were up 1.7% and 5.1%, respectively.

The increase in the above three sectors were partially offset by the decline in the Wireless Infrastructure sector (10.0% of total revenue), which decreased 9.5%. The Medical sector (21.0% of total revenue) remained flat sequentially.

The company had won 24 new manufacturing programs during the quarter, which will likely generate approximately $130 million in annualized revenues over the next few quarters, primarily affecting 2011 revenues. The engineering services business continued to build a healthy backlog with $17 million in new program wins in the quarter.

During the quarter, Juniper Networks Inc. (JNPR) accounted for 17% of the company's revenues and was the only customer representing 10% or more of revenues. The company's top 10 customers accounted for 56% of total revenue, down 1% from the previous quarter.

Balance Sheet & Cash Flow

Plexus exited the quarter with $149.5 million in cash and investments, down from $188.2 million in previous quarter. Long-term debt and capital lease obligations (including the current portion) amounted to $125.3 million versus $130.6 million in the previous quarter.

Plexus used $21 million of cash from operating activities versus $28 million cash generated in the previous quarter. Capital expenditures in the quarter were $13 million versus $27 million in the previous quarter. This resulted in a negative free cash flow of $34 million versus a positive free cash flow of $1 million in the previous quarter. ROIC decreased to 17.3% from 19.5% in the previous quarter and near the company's long-term target of 20%.

Cash cycle days totaled 78 days at the end of the quarter, compared with 70 days in the previous quarter. Days in inventory were 93 days compared with 90 days in the previous quarter.

Recommendation

We believe that over the long term, Plexus will be in the top tier of the EMS universe with the highest gross margin and above industry growth rates. Expansion of its global footprint, new customer wins and improving end-market demand are long term drivers of growth.

The company plans to deliver 18.5–10.5 financial model (18.5% ROIC target, 10% gross margin target, and 5% operating margin target) in fiscal 2011. For the long term, management anticipates compounded annual revenue growth of over 15% and ROIC in the range of 18.5% to 20%.

However, intense competition in the EMS market from Flextronics International Ltd. (FLEX) and Jabil Circuit Inc. (JBL), small market share, continued component challenges and supply chain constraints are negatives. Moreover, a soft outlook for 2011 could lead the analysts to lower revenue and earnings estimates for 2011.

Plexus has a short-term Hold recommendation (Zacks #3 Rank). We also maintain our long-term Neutral recommendation on the stock.

 
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