Molex Inc’s (MOLX) earnings for the fourth
quarter of fiscal 2012 beat the Zacks Consensus by 4 cents, or
10.8%. Revenues were again weaker-than-expected, but the earnings
beat raised share prices 3.09%, making up for the 3.00% loss during
the day.
Revenue
Molex reported revenue of $858.5 million, which was up 2.6%
sequentially and down 6.0% year over year, missing management
expectations of $870-900 million (up 4-7% sequentially). Revenue
was also short of the consensus expectation of around $880.5
million, which management attributed to weakness in the consumer
electronics market (particularly in Japan), in the mid-range
handset market and in the industrial market in Europe.
Revenue by End Market
The Data or Infotech market (26% revenue share)
remained the largest contributor to revenue, growing 6.7% and 6.2%
from the previous and year-ago quarters. Molex stated that tablets
were the major driver of revenue, with high-end computing, server
and storage, and peripheral equipment remaining stable. However,
the notebook segment continued to disappoint, being cannibalized by
tablets from Apple (AAPL) and Samsung among
others.
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 and other MIDs. The transition
from copper to fiber-optic platforms will also drive results, as
Molex remains well-positioned with solutions for this market.
Telecommunications stayed in the second place,
increasing 2.6% sequentially and declining 17.3% year over year to
22% of total revenue. Both the mobile and infrastructure sides of
the business were stable sequentially and weak in comparison with
the year-ago quarter.
Management appears optimistic about improving trends in the
infrastructure segment. The dynamics in the mobile segment are both
positive and negative for Molex at this point. As smartphone
penetration increases, Molex should benefit from its position at
leading manufacturers. At the same time, feature phones (midrange
devices) will continue to decline, which will be a negative for
Molex.
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 automotive market brought in 18% of total
revenue, up 2.6% sequentially and 12.8% from the year-ago quarter.
Molex is seeing normal seasonal trends in this business, as well as
increased design activity and project wins. The growing adoption of
standard devices in Asia is a positive in terms of
profitability.
The increasing electronic content for safety systems,
powertrain, infotainment and telematics in automobiles is a
long-term 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.
Consumer Electronics grew 2.6% sequentially
while declining 15.9% year over year to 17% of revenue. The
sequential increase was helped by increasing orders toward the end
of the quarter, which appears to be the beginning of a
pre-Christmas build. The decline from last year was because of
cautious consumer spending, as well as weakness at a leading
Japanese customer.
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.
Industrial generated 14% of revenue, up 2.6%
sequentially and down 12.3% from last year, similar to the trend in
the March quarter. This seems to indicate improving markets, which
management stated was the case in the Americas and Asia. However,
Europe remained weak, as macro concerns remained. Around 65% of the
company’s industrial revenue comes through distributors that
continued to maintain lean inventories. The business typically
reflects global GDP growth rates.
The remaining 3% of Molex’s revenue came from
medical/military markets, which were down 23.1%
sequentially and 6.0% year over year. Molex is currently seeing
greater opportunities in medical.
Orders
Total orders were up 3.2% sequentially and down 0.6% in the June
quarter. However, backlog strengthened, growing 10.9% sequentially
and 2.3% from last year. The book to bill increased to 1.05,
positive for the second straight quarter.
Approximately 26% of Molex’s total orders were from the data/
infotech market, 24% from telecom market, 17% from auto, 17% from
consumer, 13% from industrial and 3% from medical/military. All
except industrial and auto grew on a sequential basis, while all
except infotech and auto declined from the year-ago quarter.
Molex decided not to give region-wise specifics as it has done
in the past, merely stating that orders weakened in Europe,
stabilized in the Americas and grew in Asia. The Asia/Pacific North
region (Japan and Korea) was hit by weakness in Japan. Therefore,
Asia/Pacific South fared better.
Molex also did not provide any insight into the breakup by
OEM/distribution/EMS.
Margins
Molex reported a gross margin of 30.0%, down 48 basis points
(bps) sequentially and 79 bps year over year. The margin was
impacted by a higher percentage of lower-margin business, as well
as commodity cost and currency headwinds.
Operating expenses of $161.6 million were up 1.4% from the
previous quarter’s $163.1 million, with the operating margin
expanding 28 bps sequentially, while shrinking 123 bps year over
year to 11.2%.
Net Income
Molex’s pro forma net income was $75.0 million or 8.7% of
revenue compared to $67.4 million or 8.1% of revenue in the March
2012 quarter and $80.6 million or 8.8% of revenue in the June
quarter of 2011. Our pro forma estimate for the last quarter
excludes losses related to unauthorized operations in Japan.
Including the special item, Molex reported a GAAP net income of
$72.0 million ($0.40 per share) compared to an income of $64.9
million ($0.36 per share) in the previous quarter and income of
$77.3 million ($0.44 per share) in the year-ago quarter.
Balance Sheet
Inventories were down 2.8%, with inventory turns increasing from
4.3X to 4.5X. DSOs went from 79 to around 80.
Molex ended with a cash and short term investments balance of
$652.2 million, up $29.8 million during the quarter. Cash generated
from operations was $143.3 million, up from $138.9 million in the
fiscal third quarter. Capital expenses were $77.7 million, or 9.1%
of revenue, up from 6.5% of revenue in the previous quarter.
The significantly higher capex is related to new products that
the company will be introducing in the next quarter. Molex also
paid $20.0 million for acquisitions, $96 million for repayment of
long-term loans and $35.3 million for cash dividends in the last
quarter.
Guidance
Molex expects revenue of $900-940 million in the next quarter,
up 5-10% sequentially. The pro forma EPS (excluding a cent for
unauthorized activities in Japan) is expected to be 38 to 42 cents
a share, assuming a tax rate of 30-32%. The Zacks Consensus
estimate for the first quarter of fiscal 2013 was 43 cents, better
than the guided range.
Conclusion
Molex is a leading player in the fast-growing connector market,
with several secular growth drivers. However, the company appears
to be seeing more growth in lower-margin segments, which is
impacting its profitability.
Additionally, macro conditions in Europe are impacting results,
and the negative effect may be expected to continue in the next few
quarters. The Zacks Rank for Molex shares is therefore #4,
indicating a Sell recommendation in the short term (1-3
months).
A few other factors need to be considered for the long term. For
instance, the nature of the business necessarily leads to some
commoditization, which in turn results in price erosion. New
product launches by customers and the evolving nature of the served
markets are offsetting positives that Molex should be able to take
advantage of given its market position. Therefore, our long-term
(3-6 month) recommendation on the shares is Neutral.
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