Molex Inc’s (MOLX) earnings for the fiscal second quarter ended December 2009 beat the Zacks Consensus by 2 cents. Revenue beat the Consensus by 2.9%. Shares were up 2.5% after-hours as investors responded to the improving business metrics for the rest of fiscal year 2010.
 
The sentiment on Molex shares has been improving, with three analysts raising estimates in the last 30 days. The Zacks Consensus Estimate also hiked last week. Further, while the company has missed estimates a couple of quarters in fiscal 2009, it started fiscal 2010 on a fresh note. Consequently, the trend indicated another good quarter and the positive price movement was on the cards. 
 
Revenues
 
Revenue of $729.6 million was up 8.2% sequentially and 9.4% year over year. The quarter marked the first year-over-year revenue increase since the onset of the recession. The sequential improvement was slightly higher than seasonality would dictate. The company generates the bulk of its revenue from the connector market, so results are picking up strongly with a recovery in markets using these products.
 
Revenue by End Market
 
Telecommunications was the largest market in the last quarter, with a revenue contribution of 25%. The company saw substantial strength in infrastructure and smart phone segments of the telecom market, which drove a sequential increase of 6% in the last quarter. However, sales remained 3% lower than the year-ago quarter, mainly due to the relative softness in the overall cell phone market.
 
The second largest end market was Data (23% revenue share), which benefited from renewed enterprise spending as well as capacity increases to support high volume data downloads such as video. Specifically, Molex saw strength in notebooks, servers, storage and networking segments, which drove sequential and year-over-year increases of 15% and 24%, respectively.
 
Consumer Electronics was the third largest market, with a 21% revenue share. The segment had better-than-expected results in the last quarter due to strong sell-through particularly at TV customers in Asia. As a result, revenue was flat sequentially rather than facing the usual seasonal decline and up 13% from the year-ago quarter, reflecting much stronger demand this year.
 
The automotive market brought in 16% of total revenue, as the company saw better-than-seasonal demand. Although this represents a 60% increase from the year-ago quarter, comparisons are affected by the particularly dismal conditions in the December 2008 quarter, when the auto market was hard hit by the recession. However, auto market revenue was up 6% sequentially, a trend that should continue, given the number of new functionalities (rear-view cameras, navigation systems HD and satellite radios) being incorporated into cars.
 
Industrial generated 13% of revenue, a sequential increase of 6%, although the business was flat compared to the year-ago quarter. Growth in the industrial business will be a slower than in the above markets, as the business typically reflects GDP growth rates and is dependent on the higher GDP growth rates in Europe.
 
The remaining 2% of revenue came from medical/military markets, where new projects drove a 25% sequential increase. However, it was still down 34% from the year-ago quarter.
 
Orders
 
Orders were up 7.8% in the December 2009 quarter, following two quarters of double-digit increase. However, they were up 38.9% from year-ago levels, reflecting the ongoing strength in the company’s business. Further, orders for the June quarter are also gaining momentum, lending visibility to the company’s business on a going-forward basis. Backlog accumulation continued in the last quarter, increasing double-digits on both sequential and year-over-year bases.
 
Approximately 25% of total orders were in the telecom market, 22% in data, 20% in consumer electronics, 16% in automotive,  14% in industrial and 3% in medical/military. All except the consumer electronics market grew in the last quarter although telecom and data witnessed the biggest increases.
 
The strong sell-through drove a 15% increase in orders through distribution. Both OEM and EMS customers also increased orders, reflecting the much stronger demand.
 
The Americas, Europe and Asia-Pacific South saw double-digit sequential and year-over-year order increases. Asia-Pacific North (Japan and Korea) declined 6% sequentially, impacted by a seasonally softer demand.
 
Margins
 
The pro forma gross margin for the quarter was 29.1%, up 73 basis points (bps) from the previous quarter’s 28.4%. Higher volumes and a lower cost structure were responsible for the increase. However, this was partially offset by operational inefficiencies, as production continues to be shifted in line with the restructuring plan, resulting in shipment bottlenecks and higher freight and other costs.
 
Operating expenses of $150.1 million were higher than the previous quarter’s $155.9 million. The operating margin was 8.6%, up 329 bps from 5.3% recorded in the previous quarter. Selling, general and administrative expenses (as a percentage of sales) were flat sequentially, although Molex incurred an extra $3 million for the reinstatement of pay and another $2 million for foreign exchange related losses.
 
Net Income
 
The pro forma net income was $41.4 million or 5.7% of revenue compared to $29.2 million or 4.3% of revenue in the September 2009 quarter and $52.0 million or 7.8% of revenue in the December quarter of 2008. Our pro forma estimate excludes restructuring charges and related tax adjustments in the last quarter.
 
 Including special items, GAAP income was $19.3 million (11 cents per share) compared to a loss of $11.6 million (7 cents per share) in the previous quarter and a loss of $87.2 million (50 cents per share) in the year-ago quarter. The GAAP profits came after four consecutive quarters of decline.
 
Balance Sheet
 
Inventories were up 6.3% to support the higher level of demand and inventory turns went up slightly from 5.5x to 5.6x. Collection improved, with the days sales outstanding (DSOs) decreasing from 83 to around 78. Collection patterns have been improving over the last few quarters. The company ended with a cash balance of $496.0 million, down $34.2 million during the quarter. Cash generated from operations was $71.2 million. Capital expenses were $47.7 million or 6.5% of revenue in the quarter. The company also spent $10.1 million on acquisitions, $15.1 million to pay down long term debt and $26.4 million on cash dividends.
 
Guidance
 
Management expects revenues of $715−735 million in next quarter, flat to down slightly from second quarter levels. The conservatism is based on seasonality. The pro forma EPS is expected to be 22−26 cents a share, excluding around 4 cents for restructuring charges. The tax rate is expected to remain in the 30% range.
 
The Zacks Consensus Estimate at the time of the earnings announcement was 19 cents, below the guided range.
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