MOLX Molex Incorporated (MM)

Molex Inc’s (MOLX) earnings for the first quarter of fiscal 2012 beat the Zacks Consensus by 5 cents, or 12.5%. Strong revenue growth, especially in the Data segment, a recovering Japanese business and a benign pricing environment helped results.

Revenue

Molex reported revenue of $936.0 million, which was up 2.4% sequentially and up 4.3% year over year, exceeding management expectations of $880-920 million, or down 4% to up 1% sequentially. Revenue also came in much higher than the consensus expectation of around $899.6 million. Molex generates the bulk of its revenue from the connector market, so results continue to be positively impacted by the secular growth in markets using these products.

Revenue by End Market

The most significant revenue contributor in the last quarter was the Data or Infotech market (26% revenue share), which increased 6.5% sequentially and 9.7% from the year-ago quarter. Molex did not suffer from the current weakness in the traditional computing market, since its connector technology is equally relevant for the tablet segment.

Management stated that the company also benefited from continued investment in servers and storage that was driven by data center upgrades. New products from its customers and fresh design wins are expected to drive demand through 2011. Fiber-optic products also did extremely well in the last quarter (helped by products acquired through Luxtera), although management expects this rapid growth rate to moderate slightly in the next few quarters.

Longer-term drivers in this market continue to be the migration to SAAS 2.0 and 16GB fiber channel networks in the storage market, as well as the popularity of tablets, notebooks and other MIDs.

Telecommunications was the second largest market in the last quarter, with a revenue contribution of 23%. Segment revenues were up 10.0% sequentially and down 9.1% from the year-ago quarter. The infrastructure side of Molex’s business (typically lumpy) was very weak in North America and Europe, although mobile phones remained strong. 

The long-term drivers for mobile phones are the growing adoption of smartphones and the continued cramming of features into increasingly smaller devices. Secular drivers of the infrastructure business include increased Internet usage, increased volumes of mobile devices of various kinds, more video being watched and transmitted, as well as the adoption of cloud computing.

Consumer Electronics, the third largest market, generated 20% of total revenue, representing a sequential increase of 11.05%, while dropping 10.3% from the year-ago quarter. Molex stated that the pre-Christmas build had been delayed on account of disruptions in Japan, so the strong sequential increase in the last quarter was mostly related to these builds.

However, comparisons from last year continue to be impacted by the uncertain economy and the impact it is having on consumer confidence. Molex should do well longer-term, as its customers introduce new products targeting the BRIC countries, as well as Vietnam and Thailand, where growth is expected to be stronger than in other parts of the world. Higher disposable income and increased consumerism in developing countries are secular drivers of demand in this market.

The automotive market brought in 15% of total revenue, down 3.8% sequentially and growing 23.3% from the year-ago quarter. The sequential weakness was attributed to summer shut-downs, while the increase from the year-ago quarter was mostly on account of increased production of vehicles (particularly in the U.S. and Europe), as well as increasing electronic content for safety systems, powertrain, infotainment and telematics.

The increasing electronic content in automobiles is a positive because it expands the market for Molex’s connector technology. This and Molex’s exposure to China (where a large amount of auto manufacturing has shifted) are secular drivers of demand in this market.

Industrialgenerated 13% of revenue, up 3.0% sequentially and down 6.0% from last year. Molex stated that there was broad-based weakness across all geographies, although Europe turned out weakest. Molex generates a significant portion (around 65%) of industrial revenue through distributors and this section weakened considerably in the last quarter. The business typically reflects global GDP growth rates.

The remaining 3% of Molex’s revenue came from medical/military markets, revenues from which were down 1.6% sequentially and up 2.0% year over year.

Orders

Orders were flat sequentially and up 4.4% in the September quarter. However, backlog slid both sequentially and from the year-ago quarter, as the book to bill stayed below unity.

Approximately 26% of Molex’s total orders were in the data/infotech market, 23% in the telecom market, 20% in consumer electronics, 16% in automotive, 12% in industrial and 3% in medical/military. The consumer market saw the highest sequential increase (11.1%) followed by data, which was up 4.0%. Automotive and Medical/military orders were flattish, while the other markets saw declines.

The order split between OEM/distribution/EMS was 54%-24%-22% in the last quarter, compared to 55%-26%-19% in the June quarter. Distribution was the only channel recording a year-over-year decline (5%). EMS increased 22% and OEM 4%. However, OEM was the only channel that grew sequentially (9%). Distribution dropped 13% and EMS 3%.

Asia/Pacific North was the strongest region in the last quarter, growing 22.2% sequentially, although flat from last year. The Americas and Europe declined 8.0% and 13.3%, respectively on a sequential basis, but both regions grew 4.4% from last year. Asia/Pacific South was flat sequentially, but up 7.0% year over year.

Margins

Molex reported a gross margin of 31.3%, up 48 basis points (bps) sequentially and 63 bps year over year. Management stated that higher volumes and the recovery in Japan were the main reasons for margin expansion. Additionally, price erosion (3-5% historically) was below 3%. Increasing volumes, new products and efficiencies will be beneficial for longer-term expansion.

Operating expenses of $169.2 million were higher than the previous quarter’s $167.9 million. The operating margin was 13.2%, up 77 bps from 12.4% recorded in the previous quarter. Both cost of sales and operating expenses as a percentage of sales contributed to the increase

Net Income

Molex’s pro forma net income was $83.4 million or 8.9% of revenue compared to $80.6 million or 8.8% of revenue in the June 2011 quarter and 80.6 million or 9.0% of revenue in the September quarter of 2010. Our pro forma estimate for the last quarter excludes losses related to unauthorized operations in Japan.

Including the special item, the GAAP net income for Molex was $80.5 million ($0.46 per share) compared to an income of $77.3 million ($0.44 per share) in the previous quarter and income of $75.1 million ($0.43 per share) in the year-ago quarter.

Balance Sheet

Inventories were up 2.1%, with inventory turns flat at 4.7X. DSOs went from 81 to around 76.

Molex ended with a cash and short term investments balance of $568.5 million, up $22.0 million during the quarter. Cash generated from operations was $150.5 million, up from $144.4 million in the fiscal third quarter. Capital expenses were $42.8 million, or 4.6% of revenue, down from 7.1% of revenue in the previous quarter. The company also spent $35.1 million on cash dividends in the last quarter.

Guidance

Molex expects revenue of $870-910 million in the next quarter, down 3-7% sequentially. The pro forma EPS is expected to be 37 to 43 cents a share, assuming a tax rate of 30-32%. The Zacks Consensus estimate for the fiscal fourth quarter at the time of the earnings announcement was 40 cents, within the guided range.

Conclusion

Molex is a leading player in the fast-growing connector market, with several secular growth drivers. Although there are some near term pressures on the business, such as macro concerns in Europe and North America, the secular drivers of the business remain and Molex’s strong position in the connector market is hard to refute. Given the nature of business, there is some commoditization resulting in price erosion. However, new product launches by customers and the evolving nature of the served markets are positives. Therefore, our long-term (3-6 month) recommendation on the shares remains Neutral. 

However, considering the uncertainties in core traditional markets, we think the shares could be under pressure in the near term. Molex shares therefore carry a Zacks Rank of #4, implying a Sell rating in the short term (1-3 months).

Molex Incorporated (MM) (NASDAQ:MOLX)
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