Molex Inc’s (MOLX) earnings for the second
quarter of fiscal 2013 beat the Zacks Consensus Estimate by a
penny. Revenues also beat by a sliver. Shares dropped 2.9% during
the day but did not move in after-market trading because of the
disappointing guidance.
Revenue
Molex reported revenue of $967.7 million, which was up 5.5%
sequentially and 12.8% year over year, exceeding management
expectations of $930-970 million (up 1-6% sequentially).
Overall, infotech and telecom were clearly the high points,
although automotive also improved. Molex’s gains in infotech speak
for its position at key customers and products. Most other
companies serving the market, such as Intel Corp
(INTC), Advanced Micro Devices (AMD) and
Texas Instruments (TXN) have suffered.
Management stated that Europe was again very weak, declining 13%
sequentially and 16% year over year.
Revenue by End Market
The Data or Infotech market (28% revenue share)
remained the largest contributor to revenue, growing 9.5% and 31.6%
from the previous and year-ago quarters, respectively. Molex
continued to see strength in tablets that was supported by flattish
server and growing storage revenues.
Management stated that although server revenue declined in the
last quarter, units sales were on the rise. Molex had some wins in
the server segment, which helped it gain market share and generate
relatively steady revenue.
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 18.7% sequentially and 17.2% year over year to 27% of
total revenue. Management did not say how the infrastructure side
of the business did in the last quarter, but its optical routing
and digital cross connect products position it well for 4G LTE
build-outs.
Spending on this infrastructure has so far been mainly in North
America, Japan and Korea; spending in the BRIC countries should not
be too far off. The mobile phone business was strong as may be
expected of a typical holiday season and Molex stated that new
products also played a part.
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 16% of total
revenue, flat sequentially and up 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.
Safety and infotainment remained the strongest areas in the last
quarter.
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 dropped 7.7% sequentially
and 12.2% year over year to 14% of revenue. Continued weakness in
TVs and digital cameras (that are being impacted by higher camera
phone sales) were responsible for the softness. Management stated
that Japan accounted for most of the decline.
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 11% of revenue, down 10.7%
sequentially and 4.5% from last year. Management stated that
customers including distributors were exercising extreme caution,
particularly in Europe. The good news was that parts of North
America and overall Asia did well. Around 65% of the company’s
industrial revenue comes through distributors. The business
typically reflects global GDP growth rates.
The remaining 4% of Molex’s revenue came from
Medical/Military markets, which were up 40.7%
sequentially and 50.5% year over year. Molex is building this
business both internally and through acquisitions.
Orders
Total orders were down 2.5% sequentially and up 12.9% in the Dec
quarter. As a result, backlog also softened, declining 10.4%
sequentially while increasing 16.3% from last year. The book to
bill dropped well below unity. The sequential decline was more or
less in line with normal seasonality.
Approximately 27% of Molex’s total orders were from the data/
infotech market, 26% from telecom market, 17% from auto, 164 from
consumer, 11% from industrial and 5% from medical/military. While
the consumer, industrial and infotech markets declined in the last
quarter, the decline in industrial was the greatest. Telecom and
auto and medical/military were up 5.6%, 3.5% and 21.8%,
respectively.
Margins
Molex reported a gross margin of 29.9%, up 61 basis points (bps)
sequentially and down 78 bps year over year. The sequential
improvement in the gross margin was on account of higher volumes.
Molex’s costs are going up, particularly with respect to certain
new applications and assemblies for the mobile segment. This is the
main reason for the decline from last year.
Operating expenses of $181.0 million were up 11.0% from the
previous quarter’s $163.1 million, with the operating margin
shrinking 31 bps sequentially and 47 bps year over year to
11.2%.
Net Income
Molex’s pro forma net income was $72.0 million or 7.4% of
revenue compared to $73.9 million or 8.1% of revenue in the Sep
2012 quarter and $66.7 million or 7.8% of revenue in the Dec
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
$70.4 million ($0.39 per share) compared to an income of $76.4
million ($0.43 per share) in the previous quarter and income of
$64.0 million ($0.36 per share) in the year-ago quarter.
Balance Sheet
Inventories were up 0.4%, with inventory turns increasing from
4.6X to 4.8X. DSOs went from 77 to around 70.
Molex ended with a cash and short term investments balance of
$716.8 million, up $14.7 million during the quarter. Cash generated
from operations was $87.2 million, down from $167.4 million in the
first quarter. Capital expenses were $78.6 million, or 8.1% of
revenue, up from 7.6% of revenue in the previous quarter. Molex
also paid $77.9 million for cash dividends in the last quarter.
Guidance
Molex expects revenue of $900-930 million in the next quarter,
down 4-7% sequentially. The pro forma EPS (excluding a cent for
unauthorized activities in Japan) is expected to be 33 to 37 cents
a share, assuming a tax rate of 30-32%. The Zacks Consensus
estimate for the third quarter of fiscal 2013 was 38 cents, below
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.
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.
Molex shares carry a Zacks Rank #3 (Hold).
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