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Molex Inc’s earnings for the fourth quarter of fiscal 2013 missed the Zacks Consensus Estimate by 2 cents, or 6.8%. Earnings were impacted by weaker-than-expected revenue and a higher tax rate, helped by foreign exchange gains.
Molex reported revenue of $882.9 million, which was up 3.5% sequentially and 2.8% year over year, within the guidance range of 870-910 million (up 2-7% sequentially).
Both the Americas and Europe were up from the Mar quarter, with the Asia/Pacific remaining flat. Weaker-than-expected sales of mobile devices impacted sales in the region. The Americas region appears to be regaining strength with Europe showing signs of stabilization.
Revenue by End Market
The automotive market generated 21% of quarterly sales, making it the largest contributor. Segment revenue was up 6.2% sequentially and 22.4% year over year. The strength in the last quarter was driven by the Americas due to growing electronic content, increasing design wins and increasing automobile production. Asia also rebounded strongly from the seasonally softer Mar quarter. Europe was notably weak, partially offsetting the strength in the other two regions.
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.
The Infotech market (18% revenue share) grew 11.3% sequentially, but remained 3.4% below the year-ago level. The weakness is of course because of the PC market, which remains a sore point not just for Molex, but also all the big technology companies such as Intel (INTC - Analyst Report), Hewlett Packard (HPQ - Analyst Report) and Microsoft Corp (MSFT - Analyst Report) that remain dependent on it. Management stated that storage, peripheral devices and services drove results in the last quarter. The growth in cloud computing, increasing demand for storage and the aging computer infrastructure remains longer term drivers for this segment.
The mobile device market, at 15% of revenue, dropped to the third position. Management has taken all mobile device-related revenue (tablets, mobile phones, smart phones and others from other segments to form this segment). Accordingly, the end market presentation of revenue and orders for prior periods has been restated. This segment accounted for most of the weakness in the last quarter. Management stated that the smartphone segment remained strong and it was in the other areas that market saturation brought on some weakness. Antennas were a weak point in the last quarter. Segment revenues shrank 17.8% sequentially while growing 16.2% from last year.
Industrial accounted for 14% of revenue, up 10.3% sequentially and 1.3% from last year. The strength in the last quarter was quite broad-based across instrumentation, factory automation and transportation segments. Molex also saw improved order trends at distributors, which is a big positive considering that they account for 65% of the company’s industrial revenue. The business typically reflects global GDP growth rates.
Consumer Electronics grew 9.3% sequentially and dropped 17.1% year over year to 14% 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.
Telecommunications, at 13% of revenue, grew 8.8% sequentially and declined 7.8% from last year. Switching and networking equipment product lines drove results in the last quarter. Overall service provider spending remains cautious however. Molex’s 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.
The remaining 5% of Molex’s revenue came from medical/military markets, which were up 3.2% sequentially and 36.0% year over year. The increase from the year-ago quarter is attributable to the Affinity Medical acquisition. Molex is gradually building its position in this market.
Total orders were down 3.2% sequentially and 2.3% from the Mar quarter. As a result, backlog also dropped 3.4% sequentially, while increasing 4.5% from last year. The book to bill was around 1.0.
Approximately 20% of Molex’s total orders came from the automotive segment, 18% from the data/ infotech market, 15% from the mobile devices segment, and 14% each from the telecom, consumer and industrial markets. The remaining 5% came from the medical/military market. Mobile devices orders were down 31.8% sequentially, automotive was flat, while all other end markets grew.
Molex reported a gross margin of 29.1%, down 3 basis points (bps) sequentially and 90 bps year over year. Molex attributed the decline from the year-ago quarter to mix changes. Its costs are going up, particularly with respect to certain new applications and assemblies for the mobile segment.
Operating expenses of $174.0 million were up 4.0% from the previous quarter’s $167.4 million, with the operating margin shrinking 12 bps sequentially and 179 bps year over year to 9.4%.
Molex’s net income was $57.1 million or 6.5% of revenue compared to $58.3 million or 6.8% of revenue in the Mar 2013 quarter and $75.1 million or 8.7% of revenue in the Jun quarter of 2012.
There were no one-time items in the last quarter. Therefore, the GAAP net income was the same as the pro forma net income of 32 cents a share, which was up from 25 cents in the previous quarter and 40 cents in the year-ago quarter.
Inventories were down 2.4%, with inventory turns increasing from 4.4X to 4.7X. DSOs went up from 70 to around 73 days.
Molex ended with a cash and short term investments balance of $721.9 million, up $9.0 million during the quarter. Cash generated from operations was $148.1 million, down from $87.2 million in the first quarter. Capital expenses were $59.0 million, or 6.7% of revenue, similar to 6.6% of revenue in the previous quarter.
Molex expects revenue of $890-930 million in the next quarter, up 1-5% sequentially. The forma EPS is expected to be 35 to 39 cents a share, assuming a tax rate of 30-32%. The Zacks Consensus estimate for the fourth quarter of fiscal 2013 was 40 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 in key end markets. Molex shares carry a Zacks Rank #4 (Sell).