Molex (MOLX)

Q1 2012 Earnings Call

October 25, 2011 8:30 am ET


Martin P. Slark - Vice Chairman, Chief Executive Officer and Member of Executive Committee

David D. Johnson - Chief Financial Officer, Executive Vice President and Treasurer

Steve Martens - VP of Investor Relations


Brian J. White - Ticonderoga Securities LLC, Research Division

Anil K. Doradla - William Blair & Company L.L.C., Research Division

Steven J O'Brien - JP Morgan Chase & Co, Research Division

Wamsi Mohan - BofA Merrill Lynch, Research Division

Anthony C. Kure - KeyBanc Capital Markets Inc., Research Division

Amit Daryanani - RBC Capital Markets, LLC, Research Division

William Stein - Crédit Suisse AG, Research Division

Amitabh Passi - UBS Investment Bank, Research Division

Jim Suva - Citigroup Inc, Research Division

Sherri Scribner - Deutsche Bank AG, Research Division

Unknown Analyst -

Shawn M. Harrison - Longbow Research LLC

Craig Hettenbach - Goldman Sachs Group Inc., Research Division

Matthew Sheerin - Stifel, Nicolaus & Co., Inc., Research Division



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Good day, ladies and gentlemen, and welcome to the Molex FY '12, First Quarter Press Release Conference Call. My name is Chanel and I'll be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, to Mr. Steve Martens, Vice President of Investor Relations. Please proceed.

Steve Martens

Thank you, Chanel. Good morning, and welcome, everyone, to our September 2011 conference call. I'm joined here today with Martin Slark, our CEO; Dave Johnson, our CFO; and Liam McCarthy, our COO. We would like to limit the call today to one hour. We have quite a few participants on the line, so when we get to Q&A we're going to ask for one question only and one very brief follow-up per participant. Please visit the Investor Relations section of our website to download the presentation materials and to access a replay of this call at your convenience.

Before we turn our attention to the quarterly results, let's review the Safe Harbor statements on Slides 1 and 2 of the presentation materials. During the course of this presentation we will be providing forward-looking information and referring to non-GAAP measures. Please read carefully the forward-looking statements section of our press release and Form 10-K for an understanding of the risks and uncertainties associated with forward-looking information and a reconciliation of non-GAAP measures to GAAP. And now, I'll turn the call over to Martin Slark.

Martin P. Slark

Thank you, Steve, and hello to everybody on the call this morning. If you'd now to turn to Page 3, let me give you a quick summary of our first quarter for fiscal year '12. The first quarter was another strong quarter for Molex. We set a new high watermark for revenue and EPS, and we tied our previous records for bookings. Setting those records in what is clearly a difficult operating environment took a tremendous effort from all of our employees around the world and frankly, we are proud of these results. We also took another step towards achieving our profitability goals. Both gross margin and operating margin expanded in the September quarter, despite pressures for materials and other input costs. Our fixed costs are now lower as a result of our restructuring program, and we have expanded the use of temporary labor. We now have about 25% of our labor around world on temporary contracts, which gives us improved flexibility in an uncertain demand environment. For example, we have been adjusting our headcount on a regular basis, and our headcount is now about 5% lower than it was in September 2010 despite the rise in revenue. Also contributing to margin expansion, we'll benefit from our pricing initiative as price erosion for us continue to improve. Our operations in Japan had a particularly good quarter, as business conditions continue to improve from the unfortunate earthquake and tsunami that occurred in March.

Free cash flow exceeded net income even as revenue increased, and we again expanded our net cash position. While we remain committed to using a cash dividend to return excess cash to our shareholders, we're also looking at opportunities to expand the business through M&A. We have a very good pipeline of candidates and we continue to build relationships that we believe are necessary to successfully complete the transaction. While the demand environment may be uncertain, we still see some strong long-term trends supporting our business, namely a proliferation of mobile devices, an increased need to enhance network capacity, a rapidly growing middle-class in emerging markets, increased electronic content in automotive and industrial products and a need to replace aging hardware. These trends are not going away despite economic fluctuations, and it will only accelerate in the long run. And we believe we're well positioned to provide innovative products that will be required to support these long-term trends. Our next slide, we have our quarterly progression of revenue and orders. That is Slide 4. If you look at this progression, revenue for the quarter was $936 million, and bookings were $910 million. Revenue was up 2% from the June quarter and 4% from September last year. While our orders increased slightly on a sequential basis and they were up 4.8% from the same quarter in fiscal year 2010. The book-to-bill ratio was 0.97:1, and we reduced backlog during the quarter. Orders in July and August were relatively strong, while the order rate decreased in the second half of September and has remained at this lower level thus far in October.

If you now turn to Slide 6, which is on page 5, we have revenue and orders by end markets for the quarter. Automotive revenue was flat for the June quarter because of summer shutdowns, but increased 17% from the September 2010 quarter, reflecting higher vehicle builds as well as content growth. We see significant opportunities in this market going forward due to increased electronic content to safety systems, powertrain enhancements, infotainment and telematics, and for the increased production rates, particularly in the U.S. and Asia. In the infotech market, revenue was up 6% from the June quarter and 20% from last year. We see significant demand for our high-speed data and small form factor products, which are used in server, storage and tablets markets. These were the strongest sectors within the infotainment sector for us. We also see strong demand for our fiber optic products, and we're very excited about a number of new design opportunities for our active optical cable products linked to our acquisition from Luxtera. These end markets have been very strong for several quarters, and we expect this performance to moderate to varying degrees in the short term. In the long term, we are well-positioned in terms of customers and products to continue to capitalize on opportunities in this end market.

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