MOLX Molex Incorporated (MM)

Molex Inc’s (MOLX) earnings for the second quarter of fiscal 2012 missed the Zacks Consensus by 3 cents, or 8.0%. Weaker-than-expected revenue pulled down results, despite increasing cost efficiencies.

Revenue

Molex reported revenue of $857.6 million, which was down 8.4% sequentially and 4.9% year over year, short of management expectations of $870-910 million, or down 2-8% sequentially. Revenue also missed the consensus expectation of around $890.2 million.

Molex generates the bulk of its revenue from the connector market, so its infotech and consumer businesses were negatively impacted by the Thai flooding, which threw HDD manufacturers Western Digital (WDC) and Seagate (STX) out of gear, disrupting the supply chain for computer manufacturers, such as Hewlett Packard (HPQ) and Dell (DELL). Other component suppliers, such as Molex, naturally did not go unscathed.

Revenue by End Market

Telecommunications was the largest contributor in the last quarter, with a revenue contribution of 26%. Segment revenues were up 10.0% sequentially and down 2.0% from the year-ago quarter. Molex stated that the smartphone and fiber optic lines did well in the last quarter, offsetting the softness in other areas.

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.

The Data or Infotech market (24% revenue share), grew 6.5% and 15.7% from the the previous and year-ago periods. Although notebooks and tablets weakened in the last quarter, servers grew, while storage stayed flat. 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.

Consumer Electronics, the third largest market, generated 18% of total revenue, representing a sequential increase of 11.5% and a year-over-year increase of 5.2%. The Thai flooding was an addition to the weak pre-Christmas build that did not gain momentum in the last quarter, so revenue was down across practically all categories. Comparisons with the year-ago quarter were also tough, as Molex benefited from economic recovery and government stimuli from all over the world in 2010.

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 16% of total revenue, down 3.8% sequentially and up 8.0% from the year-ago quarter. The sequential weakness was attributed to weaker production in Europe, particularly France and Southern Europe. The Americas region was quite strong, as production increased from both the previous and year-ago quarters.

The increasing electronic content for safety systems, powertrain, infotainment and telematics is a positive in automobiles 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.

Industrial generated 13% of revenue, up 3.0% sequentially and down 0.2% from last year. Around 65% of the company’s segment revenue comes through distributors. Molex stated that distributors continued to cut inventories that were built in anticipation of a stronger recovery.

This cutback is expected to continue at least until the end of March. Macro concerns in Europe further aggravated the situation 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 4.7% year over year.

Orders

Total orders were down 10.4% sequentially and 6.5% in the December quarter. Backlog also slid both sequentially and from the year-ago quarter, as the book to bill stayed below unity.

Approximately 25% of Molex’s total orders were from the telecom market, 24% from the data/infotech market, 18% from consumer electronics, 17% from automotive, 13% from industrial and 3% from medical/military. All segments were down on a sequential basis, although data/infotech and consumer declined the most. All except the automotive segment declined from last year.

The order split between OEM/distribution/EMS was 52%-25%-23% in the last quarter, compared to 54%-24%-22% in the September quarter. The OEM channel declined double-digits both sequentially and on a year-over-year basis. Distribution was also down, but at a mid-single-digit rate. The EMS channel on the other hand declined sequentially although it was up on a year-over-year basis.

Orders were down across all geographies except the Americas on both sequential and year-over-year bases. Asia/Pacific North was the weakest, followed by Asia/Pacific South and then Europe. The Americas grew 4% sequentially and 8% from last year.

Margins

Molex reported a gross margin of 30.7%, down 62 basis points (bps) sequentially and up 59 bps year over year. Management stated that lower freight and duty costs, improving plant efficiency, its pricing initiative and the benefits of its commodity hedging program helped improve the gross margin over the past year. Lower volumes impacted the sequential comparison.

Operating expenses of $163.1 million were 3.6% lower than the previous quarter’s $169.2 million. The operating margin was 11.6%, down 155 bps from 13.2% 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 $66.7 million or 7.8% of revenue compared to $83.4 million or 8.9% of revenue in the September 2011 quarter and 81.0 million or 9.0% of revenue in the December 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 $64.0 million ($0.36 per share) compared to an income of $80.5 million ($0.46 per share) in the previous quarter and income of $78.3 million ($0.45 per share) in the year-ago quarter.

Balance Sheet

Inventories were up 0.9%, with inventory turns down from 4.7X to 4.3X. DSOs went from 76 to around 75.

Molex ended with a cash and short term investments balance of $618.6 million, up $50.0 million during the quarter. Cash generated from operations was $141.0 million, up from $150.5 million in the fiscal first quarter. Capital expenses were $52.3 million, or 6.1% of revenue, up from 4.6% of revenue in the previous quarter. The company also spent $24.0 million on acquisitions, $35.1 million on cash dividends in the last quarter.

Guidance

Molex expects revenue of $830-860 million in the next quarter, down 0-3% sequentially. The pro forma EPS is expected to be 32 to 36 cents a share, assuming a tax rate of 32%. The Zacks Consensus estimate for the fiscal third quarter at the time of the earnings announcement was 39 cents, better than 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).

 
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