) earnings for the third quarter of fiscal 2013 missed the Zacks
Consensus Estimate by 3 cents, or 7.3%. The company has
significant exposure to the computing and consumer markets, so
expectations were low going into the earnings announcement.
Molex's quarterly results reflected market concerns, so shares
didn't move much in after-hours trading.
Molex reported revenue of $852.9 million, which was down 11.9%
sequentially and up 1.9% year over year, short of management
expectations of $900-930 million (down 4-7% sequentially).
The weakness in consumer and computing markets that impacted
), also hurt Molex in the last quarter. Additionally, Molex had
to contend with inventory corrections at a customer and the
impact of orders that were pulled into the Dec quarter, which
negatively impacted the sequential comparison. Since these
markets generate roughly half of Molex's revenue, the company's
top line missed expectations.
Both the Americas and Europe were up from the Dec quarter,
with the Asia/Pacific declining double-digits. While the Chinese
New Year was partly to blame, significant reduction in component
inventories for mobile phones and tablets were also a major
factor. The strength in the Americas and Europe was driven
primarily by the automotive end market.
Revenue by End Market
market generated 20% of quarterly sales, making it the largest
contributor. Segment revenue was up 10.2% sequentially and 13.4%
year over year, helped by growing electronic content, increasing
design wins and increasing automobile production. The softness in
Asia is festival-related and not expected to continue since Molex
saw orders increasing. 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.
market was the second largest segment at 19% of revenue.
Management has taken all mobile device-related revenue (tablets,
mobile phones, smart phones and others from other segments to
form this growing segment). Accordingly, the end market
presentation of revenue and orders for prior periods has been
restated. This end market was impacted by seasonality, order
pull-ins into the Dec quarter and inventory corrections at a
major customer, which resulted in a 37.0% sequential decline.
Revenue was still 35.3% higher than the year-ago level.
Increasing smartphone production, growing opportunities in
connectors and antennas and Molex's strong position at all of the
industry leaders are longer-term positives.
market (17% revenue share) declined 6.2% and 9.6% from the
previous and year-ago quarters, respectively. The decline was
broad-based across service, storage, high-end PC and peripheral
devices. Management stated that the Chinese New Year resulted in
some seasonal softness as well.
, at 13% of revenue, was down 7.1% sequentially and 9.4% from
last year. 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 in China. Spending on this infrastructure has so far
been mainly in North America, Japan and Korea.
Secular drivers of the telecom 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.
dropped 16.8% sequentially and 18.8% year over year to 13% of
revenue. Continued weakness in TVs, gaming and digital cameras
(that are being impacted by increased demand for camera phones)
were responsible for the softness.
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 devaluation of the Yen should also help this
accounted for another 13% of revenue, up 6.3% sequentially and
down 4.6% from last year. The cautiousness of previous quarters
continued in the last quarter although order rates started
improving, particularly in energy and semi test segments.
Government and factory automation looks the weakest. Around 65%
of the company's industrial revenue comes through distributors.
The business typically reflects global GDP growth rates.
The remaining 5% of Molex's revenue came from
markets, which were up 1.5% sequentially and 34.8% year over
year. The strength in the last quarter is attributable to the
Affinity Medical acquisition.
Total orders were down 1.1% sequentially and up 4.2% from the
Dec quarter. As a result, backlog strengthened, increasing 13.6%
sequentially while increasing 19.9% from last year. The book to
bill went up sharply to well over 1.07.
Approximately 21% of Molex's total orders came from the mobile
devices segment, 19% from the auto market, 17% from the data/
infotech market, 14% from industrial, 13% from consumer, 12% from
telecom and 4% from medical/military. While the mobile device,
consumer and medical/military dropped 18.9%, 5.9% and 7.6%,
respectively the other end markets grew.
Molex reported a gross margin of 29.1%, down 74 basis points
(bps) sequentially and 134 bps year over year. The sequential
decline in the gross margin was on account of lower volumes that
were partially offset by favorable currency movements and lower
commodity costs. 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
Operating expenses of $167.4 million were up 7.5% from the
previous quarter's $181.0 million, with the operating margin
shrinking 166 bps sequentially and 139 bps year over year to
Molex's pro forma net income was $58.3 million or 6.8% of
revenue compared to $72.0 million or 7.4% of revenue in the Dec
2012 quarter and $67.4 million or 8.1% of revenue in the Mar
quarter of 2012. Our pro forma estimate for the last quarter
excludes losses related to unauthorized operations in Japan on a
Including the special item, Molex reported a GAAP net income
of $44.8 million ($0.25 per share) compared to an income of $70.4
million ($0.39 per share) in the previous quarter and income of
$64.9 million ($0.36 per share) in the year-ago quarter.
Inventories were down 3.9%, with inventory turns increasing
from 4.8X to 4.4X. DSOs were flat at around 70 days.
Molex ended with a cash and short term investments balance of
$712.9 million, down $3.9 million during the quarter. Cash
generated from operations was $87.2 million, down from $167.4
million in the first quarter. Capital expenses were $55.9
million, or 6.6% of revenue, down from 8.1% of revenue in the
Molex expects revenue of $870-910 million in the next quarter,
up 2-7% sequentially. The pro forma EPS (excluding 8 cents 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 fourth quarter of fiscal 2013 was 41 cents,
above the guided range.
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.
In the near term, we expect the shares to remain under
pressure due to weakness across key end markets. Molex shares
carry a Zacks Rank #4 (Sell).
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