MOLX MOLX
Q3 2013 Earnings Call Transcript
Transcript Call Date 04/23/2013

Operator: Good day, ladies and gentlemen, and welcome to the Third Quarter 2013 Molex Incorporated Press Release Conference Call. My name is Gwynn and I'll be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. 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, Mr. Steve Martens. Please proceed.

Steve Martens - VP, IR: Thank you, Gwynn. Good morning, everyone. I'm here this morning with Martin Slark, our Chief Executive Officer who will provide an overview of the quarter results and comments by market; and Dave Johnson, our CFO who will cover our financial results and guidance for the June quarter. During our prepared remarks, we will be referring to a small slide deck, which is available in the Investors Relations section of our website, molex.com. A replay of this call will also be available on the site.

Before we begin, I have a few comments regarding our Safe Harbor statements, which are on Slides 1 and 2 of the presentation. 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 statement section of our press release and Form 10-K for an understanding of the risks and uncertainties associated with forward-looking information and the reconciliation of non-GAAP measures to GAAP.

And now, I'll turn the call over to Martin.

Martin P. Slark - Vice Chairman and CEO: Thank you, Steve, and good morning, everybody, and welcome to our third quarter call. If you would, please turn to Page 3 now which is the first of the slides that actually provide some information on the quarter. I'll now give you a quick overview of what we think were the key items that occurred this quarter. First of all, after two years of litigation, we settled the lawsuit brought by Mizuho Bank over activities in our Japanese subsidiary as we explained to all of you occurred many years ago. We've been incurring ongoing legal fees to try and defend our position and we were facing significant potential interest penalties. Therefore, we decided to settle this case, so that we could focus on executing our business strategies. I have to tell you that we weren't happy with the final outcome of this case, but as we stated many times in Investor Meetings, we were a U.S. company fighting a Japanese bank in Japan.

Dave will explain the final charges and the cash impact of the settlement in a few minutes and hopefully we can then put this issue behind us.

Revenue was much weaker than we anticipated during the March quarter with significant sequential declines in components for mobile phones and tablets. The decreases were largely due to lower sales to one customer for new program that was introduced in the September and December quarters. Excluding this program, we would have experienced a normal seasonal revenue decline of about 4% sequentially.

Profitability was relatively strong, considering the weak demand environment. Margins were in line an SG&A was better than our guidance for the quarter. Consistent with our capital allocation priorities, the Board of Directors has approved a 9% increase to dividend effective in the September quarter. The new annual rate will be $0.96 per share. This reflects the Board's view that cash flows will continue to grow as we move forward.

Please turn now to Slide 4. This shows our revenue and order trend. Revenue was $853 million for the quarter while orders were $909 million, resulting in a book-to-bill ratio of 1.07 to 1. On a channel basis, distribution revenue was 23% of total revenue and decreased 3% sequentially and 6% year-on-year. Orders for distribution however were much stronger, increasing 16% sequentially and 1% from last year.

Our view has been that inventory levels are in line with end demand and it now appears that our distribution partners are increasing inventory levels in response to what they see as a general improving macro demand environment. Overall, I see this as a positive trend for the market. On a geographic basis, revenue in Asia was down due to Chinese New Year and large reductions in components for mobile phones and tablets, while the Americas continues to grow, led by automotive. We also saw growth in Europe for the first time in several quarters as most markets expanded, again, led by automotive. The book-to-bill ratio in Europe, however, was just below 1-to-1, so we don't expect significant growth in the European region this year. However, the good news is that it does appear the market has stabilized with some signs of positive growth in certain sectors. For the quarter, we realized 31% of total revenue in the Americas, 14% in Europe and 55% in Asia.

Looking at the order pattern for the quarter, January was unusually strong and actually we thought we were going to get off to a very good start this year. February was very weak, probably weaker than we normally see even allowing for Chinese New Year and March was about the level we expected.

If you turn now to Slide 5, I'll talk about our changes in revenue and orders by market segment. For the total Company, revenue was down 12% sequentially, but increased 2% from the March quarter last year. Due to the rapid growth of connector content in smartphones and tablets and the significant opportunity they present to us we've made a decision to add a new end market to our MD&A. You will now see that mobile devices, which is split out separately, will include component sales for mobile and smartphones, tablets, laptops and other mobile devices. These items were previously included either in infotech if they were a tablet or in telecom if they were cell phone related. We think that this gives us a far more transparent view of our sales and also better aligns our results with market data that is more broadly available.

Revenue in the automotive market was quite strong during the quarter increasing 10% sequentially and 13% from the prior year. Auto production generally increases in the March quarter and a higher content for the infotainment and safety systems continues to drive growth. European kiosk sales remained weak in general but our European automotive revenues were up double-digit sequentially on higher production and on design and content wins by Molex.

In Asia, revenue was down this quarter because of Chinese New Year. However, orders were up. Most analysts are predicting that global vehicle production will increase by 2% in 2013, largely in the U.S. and China. We believe this will provide a steady base for this key end market and overall we are encouraged by our automotive results. It's worth noting here that our sequential and year-over-year growth was all organic and reflects ongoing design wins by our automotive team.

Revenue in the infotech market declined 6% sequentially and 10% from last year's March quarter. The sequential decline is seasonal in nature as most of that customer's production is in Asia and this was impacted again by Chinese New Year. Servers, storage and peripheral devices, including printers were down and we also had some high end PC business that was down as well. Orders did increase sequentially and we do expect growth in the June quarter, particularly in the storage sector.

Looking now at the telecom market, that decreased 7% sequentially and 9% from last year. Similar to infotech, the sequential decline is seasonal. Orders did increase on a sequential basis and we expect this market to improve in the June quarter, with perhaps more robust growth in the second half of 2013.

One particular driver for better results in the second half of the year could be an acceleration of 4G LTE licenses in China, which we've been told will be released ahead of the usual plan. We are well positioned with industry leaders in the telecom sector, and they continue to develop new products, which are using our sophisticated high-speed designs and we're confident of our position with this market sector.

Looking at the mobile sector, the mobile device market declined at a very significant 30% sequentially, but increased 35% from last year. The sequential decline was driven by two factors; the normal seasonal production schedule for mobile phones and as I mentioned earlier, a significant reduction in a new program for single customer that was launched early in the year. Revenue for mobile devices was very strong in the December quarter due to seasonality of new product introductions.

Looking back, we think that some pull-ins took place in December particularly for some of our new products and that had the detrimental impact on the March quarter. Increasing volumes of smartphones and increased connector and antenna opportunities were the key factors driving our growth from last year, and we are well-positioned with all of the industry leaders and believe that this remains an attractive sector for Molex in the long run.

Revenue from the consumer electronics market declined 17% sequentially and 19% on a year-over-year basis. The decline was worse than normal seasonality. The TV and gaming sectors were down the most sequentially and year-over-year and the digital still camera market, continues to be impacted by the adoption of smart phones with cameras. Frankly, we don't see that particularly sector recovering in the near future.

It's important to note however that the white goods, car navigation and Pachinko subsectors were flat sequentially and year over year and we believe has potential strength in the second half of the year. As many of largest customers in this market are based in Japan, we believe that the weakening of the yen will allow them to be more competitive and result in higher production volumes in future quarter.

Q3 is always the weakest quarter for the consumer market and we see a recovery as new products are launched over the next two quarters. Our design position in this market remained strong.

Revenue from the industrial market improved 6% sequentially, but decreased 5% from prior year. Orders increased 18% sequentially and distributors are increasing inventory to support stronger end demand. Also, orders increased sequentially in all regions indicating what could be a broader economic recovery. The energy and semiconductor test subsectors saw the strongest growth. Project linked to government spending has slowed and factory automation projects still seem to be on hold in many areas.

The medical and military markets showed modes sequential and significant year-over-year growth. Our results in this sector benefited from our Affinity Medical acquisition which is doing very well and reporting record results. This area is now a 5% of the Company's overall sales and we expect continued growth in organic basis as well as through acquisition.

Our acquisition focus has not changed and we have a good pipeline of opportunities in these lower volume higher mix, higher margin markets. We believe that acquisitions in these sectors will over time help to offset our exposure to more cyclical consumer driven markets.

In summary, this would have been an encouraging Q3 but for the dramatic turndown in business volume at our largest customer. For the quarter, we no longer had a 10% customer. Without that customer, our base business booking for Q3 versus Q2 were up by $1.4 million a day. The market remains challenging and uncertain, but there were some encouraging signs, particularly in our distribution channel and the automotive and industrial market sectors. Let me now turn the call over to Dave Johnson.

David D. Johnson - EVP, Treasurer and CFO: Thank you Martin, and good morning to everyone. Our financial summary is shown on Page 6. As mentioned, our revenue for the quarter of $852.9 million was well below our previous forecast due almost entirely to the sharp reduction in demand for our new complex connector program that launched in Q1 and ramped in Q2.

Despite the reduction in revenue, our gross margin at 29.1% was at approximately the level we guided to during our last conference call, supported to some extent by favorable foreign currency trends, action games, and lower commodity costs. Our SG&A for the quarter of $167.4 million came in below our guidance due to our companywide initiative to reduce SG&A spending as well as some one-time benefits in the quarter including a sequential $1.6 million foreign exchange benefit.

Recall that we discussed in the last conference call that Q2 included approximately $5 million in one-time charges in SG&A. We expect SG&A to be approximately $170 million for the fourth quarter. As we previously announced, we settled our Japanese litigation matter in the quarter and took a one-time charge of $21.2 million or approximately $0.08 per share after-tax. Without this item, our EPS for the quarter would've been $0.33 per share, as compared to the $0.25 per share reported.

Our effective tax rate for the quarter was 23.6%, but that includes a significant benefit for the Japan litigation settlement. Excluding the Japan settlement charge, our effective tax rate would've been 26.6% and this includes a $3.1 million benefit related primarily to the reinstatement of the R&D tax credit, which was a bigger benefit than we had factored into the quarterly guidance.

Please turn now to Page 7 for our balance sheet metrics. Our cash flow continues to be very strong. Net cash was reduced sequentially by $62 million to $313 million at the end of March, but realize that this is after the Japan settlement payment of $183 million during the quarter.

Today, we are closing the amendment of our revolving credit facility with eight-member bank group led by J.P. Morgan. With this new five-year agreement, we will lower our borrowing costs by approximately 50 basis points, which is expected to reduce our interest expense by about $800,000 in the coming year. We also increased the total commitment from $350 million to $500 million, of which $165 million was drawn at quarter end.

Both inventory days and AR days were up sequentially in the quarter to 70 and 89 days, respectively, but these increases are due primarily to the sharp sequential decline in revenue, and we expect them to revert to more normal levels in Q4. Return on net assets came down slightly to 18.6% due to the reduction in operating income and our R&D expense of $46.2 million or 5.4% of revenue is down modestly from the sequential quarter.

Our cash flow chart is shown on Page 8. Please note that for the purposes of this analysis, we have added back the Japan litigation settlement payment. Free cash flow was very strong in the quarter at almost $107 million, which is the highest level and well over a year. As noted in the chart, free cash flow is up significantly from the sequential quarter, which was impacted by the working capital required to support this significant new product launch in Q2.

After several quarters of above average spending on new product introductions, capital spending returned to more normal levels. CapEx was just under $56 million or 6.6% of revenue for the quarter. For the full year ending in June, we expect CapEx to be in the range of 7% to 7.5% of revenue.

Now, let's turn to the forward guidance on Page 9. The global economic environment continues to be uncertain and we have set our outlook for Q4 with the situation in mind. We expect revenue for the June quarter to be in the range of $870 million to $910 million, which at the midpoint of the range, is a sequential increase of 4.4%. This assumes that the level of revenue from the complex Connector program that declined significantly in Q3 will be relatively flat in Q4. At this forecasted revenue, we expect EPS in the range of $0.33 to $0.37 per share.

In summary, despite the significant revenue shortfall to expectations, many aspects of our business were very positive in Q3. Our margins were maintained at expected levels; SG&A was driven significantly lower; and CapEx spending was back in line with normal levels. In addition, we were able to put the Japan litigation matter behind us and we were successful in negotiating a new five-year revolving credit agreement providing us both with lower cost of financing as well as more flexibility going forward.

This concludes our prepared remarks and we would now like to open up the line for questions.

Transcript Call Date 04/23/2013

Operator: Matt Sheerin, Stifel, Nicolaus.

Matthew Sheerin - Stifel, Nicolaus and Company: First question, Martin, is around your biggest customer. It sounds like you're guiding sort of flattish for that customer, and is that whole segment going to be flat then, because I know mobile devices now includes lots of different products, but are you looking sort of flattish for that whole sector sequentially?

Martin P. Slark - Vice Chairman and CEO: Yeah, I would think Matt, that's probably a good assumption and frankly that's what we've basically modeled. We're seeing a lot of customers in that sector bring out new designs, both smartphones and tablets. But as you know, increasingly that's becoming a consumer driven market. And so the big quarter for that is probably going to be the third quarter of the calendar year. So even though, we're increasingly supplying new small quantities into new designs, I would say the volumes there are going to pick up in the third quarter and so our model is flat for this one.

Matthew Sheerin - Stifel, Nicolaus and Company: And if you breakdown that segment into subcategories, smartphones versus tablets versus Ultrabooks, what would that approximation be?

Martin P. Slark - Vice Chairman and CEO: Off the top of my head, Matt, I don't know that right now, but I'd be happy to get it for you, and pass it on through Steve, I can make – obviously the biggest I think for us would be mobile phones. Second biggest for us would be tablets and then Ultrabooks and other mobile devices would be smaller, but exact percentages, we can get it for you, I don't have it off the top of my head.

Matthew Sheerin - Stifel, Nicolaus and Company: And then just as a follow-up, your commentary on industrial and orders are up pretty significantly in distribution are certainly encouraging. Are you getting a sense that the sellout in distribution and orders for distribution are also increasing and that's why you're seeing some inventory pull in there?

Martin P. Slark - Vice Chairman and CEO: We actually had next month, the electronic distributions show in Vegas where we get together with all of our distributors and I'm very interested to kind of hear what they are seeing in the end markets. You saw – the stock market pick up with the expectation that the end economies were getting stronger, and there was some really – for us, I think some confusing signs this quarter in that, consumer markets were down on anything that was driven by the consumer was down. And obviously, for us, we have a very big concentration in Asia and you get the impact of Chinese New Year, I would say all of those things were relatively normal. But the strength in distribution, the strength in industrial and the strength of the automotive sectors, I think, were relatively encouraging and there are some signs of some increasing strength in some of those markets. I would say distributors tend to only increase inventory when they're seeing better demand, so I have to take that at face value.

Operator: Amitabh Passi, UBS.

Amitabh Passi - UBS: Just a couple of questions. Martin, if I look at your backlog and the orders in the quarter, you guidance seems a tad conservative, so just wanted to understand the thought process in terms of the guidance relative to your backlog and bookings? Then I just had a clarification, you largest customer in the March quarter, were they down in line with the overall mobile devices segment, down 37%, was it worse, better, can you give us any indication there?

Martin P. Slark - Vice Chairman and CEO: Relative to guidance, I think as I said to you, when you look at the seasonality of the business, January was very strong, and I'm sure you've heard from a lot of people that frankly the year got off to a very good start. February was way weaker than we normally see allowing for Chinese New Year and then March came back somewhat, and so if you look at it, our revenue for the next quarter largely reflects what we saw in bookings in this quarter and that's what it was based on. I think where the market goes from here frankly you have as good ideas as I do. Relative to that largest customer in the market, they were for us, down more than the market in total on a sequential basis, but I think as we've said to you, some of that was linked to some specific programs where looking back, we think those parts were over ordered in the second quarter.

David D. Johnson - EVP, Treasurer and CFO: Let me add one clarification if I could, Amitabh. The bookings that we saw in the March quarter, some of those bookings were a little bit longer-tailed than our usual bookings. Some of those go out into the first quarter of next year. That's the only thing that's a bit unusual this quarter and that why we have bookings of $909 million but are giving guidance to revenue of $890 million in the fourth quarter.

Amitabh Passi - UBS: Then just a quick follow-up. Any color you can give us in terms of how bookings have trended in the month of April?

Martin P. Slark - Vice Chairman and CEO: Yeah, fairly – but I think flat with March. So, not the strength we saw in January, not the weakness we saw in February, but fairly flat with March to okay and it's consistent with that revenue guidance, but no concerns of the downside here, nothing that would give us any upside opportunity either at this point.

Operator: Amit Daryanani, RBC Capital.

Amit Daryanani - RBC Capital Markets: Just two questions from me. One, maybe if I look at your June quarter guide and if I exclude your largest customer with my math at least, it would suggest ex that customer you're looking for about a 5.5% or so sequential revenue growth which is in line with the historical trends. A, could you just verify that, and B, maybe talk about what segments do you see doing much better in the June quarter and which ones do you see being a bit of a headwind?

Martin P. Slark - Vice Chairman and CEO: I'd say, Amit, plus or minus a bit. You're right in terms of your math. As usual, on the back of your envelope is pretty accurate. In terms of sectors that are strong, we continue to see automotive being good, industrial being good and we expect sequentially as I said in the commentary some pickup in the consumer and data sectors, because obviously for us both of those sectors, we do a lot of business in Asia and just sequentially, this quarter will be stronger because there is no Chinese New Year.

Amit Daryanani - RBC Capital Markets: Then Martin if you could maybe just talk about with the Japan litigation you guys, which obviously was a big headwind or drag from a management perspective, how do you think about M&A going forward. Does this enhance your ability to do deals going forward? Was this a constraining factor at all historically?

Martin P. Slark - Vice Chairman and CEO: Absolutely, it does. I would like to be able to tell you that it didn't stop us getting things done. But I think when you've got that uncertainty hanging over your head, it's something that's in the back of your mind. I think now we've put that behind us. I think it makes it much easier for us to move forward, and I think putting the new credit line in place is to make sure we have the liquidity to get those deals done as well.

Amit Daryanani - RBC Capital Markets: Perfect. Thanks a lot. I look forward for deals in June now.

Martin P. Slark - Vice Chairman and CEO: You set me up for that.

Operator: Mark Delaney, Goldman Sachs.

Mark Delaney - Goldman Sachs: I was hoping you could talk a little about the outlook for your gross margins and some of the factors that might influence that such as commodities and FX?

David D. Johnson - EVP, Treasurer and CFO: Sure. Yeah, I think we look at the two kind of together. Those are the two factors that we often talk about, commodities and FX. In this quarter, we probably had about a $2 million net benefit between the two more weighted toward the FX than commodities, because the Japan yen was down, boy, about 12% sequentially in the quarter. So that helped us a bit in terms of our transaction situation. As we look forward, now both gold and copper, since the end of the quarter have both dropped about 10%. In the quarter itself, the average in Q3 versus Q2 was a fairly close. Gold was down a little bit, but the big change has been since the end of the quarter. So we would expect to get some more benefit in the commodities now in Q4 and probably more so into Q1 of next year. I can't size that for you, but I'd say that of those two items, the benefits will now move more towards the commodities away from the currencies.

Martin P. Slark - Vice Chairman and CEO: Just a couple of added comments that are probably of benefit to you in terms of moving forward with the gross margin. Number one, I think there obviously is a mix component in that, and I would say generally speaking to the extent that we can see markets like telecommunications and things recovering, and the higher end data products, obviously the margins tend to be higher there than they are in the consumer driven market. So, mix has an impact. Then even though I think commodities are way more favorable than they were say a year ago, I mean it's nice to see that headwind disappear. We are seeing, I think, increasing headwind in terms of Asian labor costs. So, I think we have to factor in all those things when we're looking at the gross margin going forward.

Mark Delaney - Goldman Sachs: As my follow-up, I was hoping you could talk a little bit about your market share, you if any of the weakness that you are seeing, your largest customer has anything to do with market share, and then sort of related to that, if there has been any change in the competitive activity within the mobile device market in terms of any share issues there?

Martin P. Slark - Vice Chairman and CEO: Great question. I don't think there is any meaningful shift in the market share issues. I don't think that had any impact, whatsoever on what you saw in this quarter. I would actually say, in some sectors, because in the automotive industry for example, they are using more and more electronics in the cockpit. I would say Molex Is gaining shares in the automotive market in particular, because they are putting in more and more sophisticated electronics. We are able to leverage technologies from other markets into that area. I think we are actually gaining share design in light in some of the telecom and data markets, because we've got a lot of new products there. So, I don't think it's a market share issue there at all. I would say from a competitive standpoint, I would give you two points of reference. Number one, I think the largest players that you're very familiar with are very disciplined that I are very profit focused and so I think we're not seeing anything irrational in the market from those. I would say in the Chinese markets, the very low end of the market, we are seeing some increasing numbers of low end Chinese competitors, and obviously their ability to compete in that market in the very low end of the market is a challenge. But frankly, that's a relatively small portion of the overall $50 billion market we play in.

Operator: Sherri Scribner, Deutsche Bank.

Sherri Scribner - Deutsche Bank: I wanted to ask a little bit about the disconnect between your guidance for the full year '13 which you gave a couple of months ago of 8% to 10% and then now the guidance or at least the implied guidance for growth for this year of about 4%. I know you've commented that you think some of your mobile devices business moved into the December quarter and was pulled out of the March quarter; but on balance, all of the business should have been able to get you to that 8% to 10%. So, I wanted to understand what you're seeing that's different that makes the growth a little bit slower? Is that do you think the customer is a bit weaker? Do you think potentially you've lost share to someone? Just wanted to understand that a little bit better.

David D. Johnson - EVP, Treasurer and CFO: Sherri, the guidance that we gave at 8% to 10% was assuming that the new programs that we're ramping in the second quarter would continue at that rate for the balance of the year. That's the primary reason for that change. I would say that when we look across a broad spectrum of our business, there are other areas that have been a little weaker, but really not significantly. I think even if you look at this last quarter, if you remove those ramped programs, we would have had revenue that would be down sequentially at regular rate and pretty good profitability. So, it's mostly that one program that drove that difference.

Martin P. Slark - Vice Chairman and CEO: I think Sherri if you add back that revenue that was missing this quarter, which we were led to believe, was going to continue and actually ramp for this calendar year. If you added that back to Q3 and Q4, you'd bridge that gap between the 4% versus the 6% to 8% we were talking about in terms of overall growth. So I think that's primarily where the gap is. We absolutely don't have any areas where we believe we have lost share in any case, and as I mentioned in the previous question. I think in some sectors, particularly automotive, electronics, are actually gaining share.

Sherri Scribner - Deutsche Bank: And just – I guess I just want to dig into a little bit more, you had the expectation that your orders would continue at the same rate in the March quarter. Do you think that was maybe overoptimistic build plans from your top customer, do you think that you misunderstood, that maybe they were inflating those numbers, just trying to understand what missed that sort of March expectation?

Martin P. Slark - Vice Chairman and CEO: I think Sherri; I don't want to get into too many specifics about a particular customer who said what to move in, because I think that can get a bit derogatory if you go down that path. I would tell you though that normally, when you ramp a new program and it ramps adversely zero to very high revenue in the December quarter, there was an expectation that it would continue to grow this year. And so that was factored into our plans for the year, and obviously we've had to correct for that and it had a dramatic impact. So certainly, I think the customers could be having issue in terms of what they're selling. I think obviously building inventory ahead of a new product launch is there and so, there are a whole bunch of factors that could factor into that, and I'm not going to play. We certainly, we should take some of that blame ourselves, but certainly I think when you get the expectation, you're going to get a higher revenue program, it doesn't materialize, it has a significant impact.

Sherri Scribner - Deutsche Bank: And then just thinking about the second half of the year for you, you seem to be very positive in many of the other end markets. You talked about automotive, what type of growth expectations do you think the industry is going to see this year and as you move into fiscal '14, do you think you will sort of similar growth rates that you've seen in fiscal '13?

Martin P. Slark - Vice Chairman and CEO: That's a great question, and I think when you look back, last year, for example, on a calendar year basis, Ron Bishop, who serves as one of the independent analysts out there talked about the fact that the connector industry actually shrunk on a global basis, and as you know, really on an organic basis, Molex was up slightly. So, the last couple of calendar years, I think it has been tough to generate organic growth, and if you were able to grow, it was largely by people making acquisitions. I think the people are feeling that the economies around the world are starting to strengthen a little bit and I think that's why you probably saw the stock market go up. Now if you look at our design inactivity, we have a lot of programs that should launch in the second half of this year that should help us grow. The challenge, I think has been, as fast as those new programs ramp you see old ones go away. So, I think we believe that the second half of this year will be stronger than the first. Certainly, there is some vibes in the telecom market in China and some other things like that, that would help, and we think the underlying trend with our distributor seems to be improving, but trying to predict an exact percentage is really hard.

Operator: Brian White, Topeka Capital Markets.

Brian White - Topeka Capital Markets: I am just wondering on the networking market, could you talk about what you saw in the March quarter and what you are thinking about for the June quarter.

Martin P. Slark - Vice Chairman and CEO: Brian, I talked about the various subsectors of the infotech market and the fact that most sectors there whether it was PCs, data storage, networking, et cetera, printers, we're weaker. The two sectors I would tell you that was relatively the strongest were actually networking and data storage. I'd say data storage was across the board. Networking was specific customers and their projections for this next quarter seem to be stronger as well. So I would say those are the two areas where we believe there is the best growth opportunity in the Infotech sector for us.

Brian White - Topeka Capital Markets: Japanese litigation for the June quarter going forward, nothing, is that correct?

Martin P. Slark - Vice Chairman and CEO: Nothing, yes.

Brian White - Topeka Capital Markets: Just finally, when we think about kind of this 14% operating margin target. Even if we back out your Japanese litigation, obviously, it was well below expectations. But is that still something we could see over the next couple of years? Is that still a target or should we completely take it off the table?

Martin P. Slark - Vice Chairman and CEO: No, I think – we don't take it off the table, but I think what you've got to see is some sort of reasonable industry growth. If you start to see connector industry organic growth opportunities, being in the sort of 5% to 6% range, which has been the historic average, Molex will grow faster than that. I think with that kind of growth, we'll see the fall through that will generate that level of profitability. I mean, the reality is, if you look back the last two years and I just read a very interesting report that Ian White put out about the growth rate of the top 100 technology companies around the world. If you look over the last two years after the recovery from the financial crisis, the technology markets on an organic basis really haven't grown. I think, for us, to drive that level of profitability, we need stronger growth and more pull through.

Operator: Jim Suva, Citi.

Jim Suva - Citi: As you guys lead and guide Molex going forward as managers, can we kind of take a step back and look about the return on invested capital goals or your margins regarding this new mobility program ramp? As we sit here today versus, say, maybe a year ago and I believe a year ago, you let everybody know that it was going to be lower margins but higher units, and I wonder now if the volatility is not quite what you're expecting for and are you still able to meet those ROIC goals, or do you have to redeploy some of those assets, or is it simply that you're going to have some fluctuations of capacities up and down that maybe we weren’t expecting and maybe you weren't expecting? So maybe big picture, can you kind of walk us back about what you thought, say, a year ago, the ROIC goals or the returns on capital and this customer and utilizations, or do you have to go through some restructuring or do you think that they are going to fill things back up to what it has been in the past?

Martin P. Slark - Vice Chairman and CEO: It's a good question, Jim. I think when we started talking about this program, I mentioned the fact that we saw them in three areas. We saw them in the mobility area, which has what's obviously had the biggest impact, both up and down last year. We see them in the Automotive market which is continuing to be strong and be very successful, and we also see them in the high-end data markets, which we said were going to occur later as we get into 100 Gigabit I/O systems and deployed fiber in those markets. We believe as those programs start to ramp, and particularly when you start to look at the automotive ones and the high-end data ones that the return on invested capital of those markets is actually better than it is in that connector business, albeit that the gross margins could well be lower depending on the purchase component. The challenge I think in the last 12 months has been that the initial programs that have launched have largely been in the mobility area, which as you know is a far more volatile market. So I think if we get a couple years down the road, I think the reality is at a macro level if you go out into the industry, contract manufacturers are trying to build more and more finished products. They are trying to outsource those electromechanical subassemblies as are OEMs and connect the companies like Molex and being asked not just to sell the connector but sell value added assemblies. And to the extent we can do that and have good engineering and material content in those, we would do that because it makes us more important to our customers, it makes the business more sticky and it will drive better return on invested capital, probably with slightly lower margins. We absolutely aren't thinking about restructuring of any kind at this point in time given what we thought was a one program driven reduction in revenue in this quarter. And we made appropriate adjustments to our headcount in the plants to build that product, but we believe we're well-positioned to move forward with both our core connector business and those value-added assemblies as we do more of them in the future.

Operator: Shawn Harrison, Longbow Research.

Shawn Harrison - Longbow Research: Getting back to your largest customer, the comment that you are forecasting essentially flattish sales for the June quarter, is that based upon data they are providing you in terms of orders rates or if you've given that a haircut? I guess second, given the volatility that we've seen, should we expect normal seasonality in the back half of the calendar year for that business?

Martin P. Slark - Vice Chairman and CEO: Sure, I think what happens with not just that customer, but also our other customers in the consumer markets, is a couple of things that you may or may not be familiar with. I mean, first of all, 70% of what Molex ships in month, is actually ordered in the same month. So, we stated many times, our visibility is pretty good for the current month. We try and give you our best estimate for the quarter, and to the extent that we have obviously high-volume consumer driven products, that's really challenging. What those customers do in those markets, in fact, they give you orders for the current month and they give you a forecast for the next couple of months. But they have the ability to adjust that going forward based on their own sales. So, we base those revenue projections for this quarter based on the latest forecast we have, not just from them, but from every other customer we have. But particularly in those consumer sectors, they can adjust those literally month-to-month. So, obviously, we use the best information we have at this point in time. Now, if you look at things like the higher end data infotech products, you look at automotive, you look at telecommunication infrastructure, some of those things that have much longer design-in cycles, those customers give us longer forecast and it give us a little bit more visibility and most of those have got a number of program launches in the second half of the year. So our confidence in the second half of the year is built around those program launches and the possibility that they would be successful themselves in the marketplace.

Shawn Harrison - Longbow Research: I guess maybe I'm still confused just on – so the program launches drive a better second half, not – you aren't expecting normal seasonality or you are expecting normal seasonality plus the benefit from program launches?

Martin P. Slark - Vice Chairman and CEO: We would expect normal seasonality in the second half of the year if you want a specific answer to that. I would say in most years, a big chunk of that normal seasonality is driven by program launches.

Shawn Harrison - Longbow Research: And then just on the SG&A profile, there were some, I guess, if you strip out the Japan, litigation costs, some one-time benefits you're forecasting it to, I guess, normalized to be up a little bit. But can you hold SG&A flat as we look over the next couple of quarters? It's kind of bounced around a bit over the past 12 to 18 months. So, Dave, where can that go from here?

David D. Johnson - EVP, Treasurer and CFO: We have a very intensive internal project going on to hold SG&A flat. That is our intent. It does bounce around a little bit based upon the one-time items. But it is one of the things that we are heavily focused on. We gave the guidance of about $170 million for the last quarter. But we have a pretty rigorous process in place within the Company to manage down SG&A. Even though there were some one-time items that got it up to the level of $181 million last quarter, that was high. That was high for us and we've taken action now to really look at that across the board and put in place a pretty rigorous process, as I said, to manage that lower. So, I think, yes, over the next year or so, we should see our SG&A being at that lower level. Now next year, we have still merit increases in things that take place and as I said, there always will be some one-time items that will come in, but we'll try to give good color on that and you should watch for us to be managing our SG&A at the lower level.

Martin P. Slark - Vice Chairman and CEO: Another thing to look at, Sean, actually if you look back the last seven quarters, including this quarter, our SG&A has all been in the $160 million other than the one quarter where we said we have those one-time issues in Q2. So I think trying to manage it in that range is what we've done except for the one-time charges in Q2. The rest of the time, all of last year and this year, it's all been plus or minus a bit in that $160 million range and you get certain amount of fluctuations obviously, based on exchange rates and things like that as well.

Operator: Steven Fox, Cross Research.

Steven Fox - Cross Research: Two questions for me. First of all, not to beat a dead horse, but on your largest customer, are you saying that you don't see any kind of change in terms of second or third sourcing with that customer going forward or in the past? Then how we should anticipate sort of you growing in line with that customer or wherever this new connector is used?

Martin P. Slark - Vice Chairman and CEO: I think Steve, if you look at those high-volume consumer customers and I want to get away from talking about just a specific customer. The reality is, if you go into any high-volume consumer driven device, there are always at least two sources. In the specific programs we're talking about, there are two or three sources and we are maintaining our share of that business. So I think the same, the downturn that we saw was experienced by the other suppliers through the same program. So, we would continue to see that going forward. I think when you look at the various end markets we're in, when you look at high-volume consumer, you look at high-volume data, you're going to see a couple of sources. When you obviously get into the medical, industrial applications, that's where I made that comment about higher mix, lower volume type applications, you have a much greater likelihood of being single sourced as you do in automotive.

Steven Fox - Cross Research: Then just secondly Dave, I know you talked about the gross margins going forward, but just looking at the quarter you just reported, the gross margins were down about 80 basis points and I understand volumes has an impact, but it seems like the mix net of what you described was better in the quarter, and I'm just trying to understand what else would have driven gross margins downs as opposed to maybe flat given how the mix was for the quarter?

David D. Johnson - EVP, Treasurer and CFO: I'm not sure what you mean by the mix of the…

Steven Fox - Cross Research: Well, to be specific, you had a big decline with your largest customer, (indiscernible) that was lower gross margin product.

David D. Johnson - EVP, Treasurer and CFO: When you look at that versus, say, Q2 versus Q3. In Q2, we had very significant volume with those programs and even though they're lower margin, we had better margins in Q2 because of that – the significant reduction in volumes in Q3 caused that mix to be a headwind in Q3. Just you can imagine the rapid reduction in the business caused that to be a headwind, even though we are eliminating lower margin business.

Steven Fox - Cross Research: Now, would that volume impact be all of the 80 point – 80 basis point decline or was there anything little bit more than that?

David D. Johnson - EVP, Treasurer and CFO: If you exclude that business, our margins were very consistent Q2 to Q3, and in fact our operating margin would have been higher in Q3 versus Q2.

Operator: Mike Wood, Macquarie Capital.

Michael Wood - Macquarie Capital: Since you haven't broken out telecom and infotech to exclude mobile previously, can you give us an idea of how the decline in orders this quarter compare to what you had been seeing previously?

Martin P. Slark - Vice Chairman and CEO: You mean, if you look at the mobile sector in Q3 versus Q2 in prior years?

Michael Wood - Macquarie Capital: Like the telecom and the infotech had previously included the mobile devices; now you're reporting them separately. So I'm curious if that 17% year-on-year decline and the 7% in infotech have been the declines that you had been seeing in these segments previously or is this a worsening or improving trend?

Martin P. Slark - Vice Chairman and CEO: I would say the decline in infotech, excluding mobile, is about normal compared to what we've seen in the last – we've got the data the last couple years, and we're actually going to publish that so analysts could look at what the trends would have been. We'll restate the last two years to be able to see that. I would say the decline in mobile, sequentially, was higher than we've previously seen as a step down from Q2 to Q3. I would say in telecommunications, about the same.

David D. Johnson - EVP, Treasurer and CFO: Mike, if you look at the very last slide in the slides, that shows the trend for the last eight quarters of orders and revenue for the markets – in the restated market. That gives you a good background.

Michael Wood - Macquarie Capital: And also just a follow up on the M&A, can you talk about what sort of deal sizes that you're looking at or considering and what kind of urgency that you'd like to see a deal done shortly?

Martin P. Slark - Vice Chairman and CEO: I would say the vast majority of them are in the $30 million to $50 million range, similar to the Affinity Medical thing that we looked at. I mean, the reality is, if you look at the structure of the connector industry and there's like 2,000 connector companies out there, many of whom you wouldn’t want to touch. Once you get outside of the top five, the revenue level drops off significantly. There are some opportunities potentially in that $200 million range but they are relatively few, I would say there's a much greater likelihood of us closing smaller deals over the next couple of quarters than one of those big ones.

Operator: James Kisner, Jefferies & Company.

James Kisner - Jefferies & Company: First question here is just around base stations, I believe you said that you thought that you could see some positive impact from 4G deployments in China. I guess I always thought you guys didn't have much of the base station business. Could you clarify those comments and sort of the magnitude of what that ramp could do for you?

Martin P. Slark - Vice Chairman and CEO: Sure. I actually just spend some couple of weeks in Asia, and one of the things that's talked about lot of is the fact that China is planning to bring forward some of their 4G licenses that were planned for the next calendar year into this year. If you look at some of the new base stations designs that are coming out, we actually do have content on those which is for us, an incremental market, you're actually right, if we went back two years ago, we didn't have. So it's incremental revenue for us, over and above what would have been our normal base revenue.

James Kisner - Jefferies & Company: And that's in telecom, right? Is it on the telecom segment?

Martin P. Slark - Vice Chairman and CEO: Yes, it is, yeah.

James Kisner - Jefferies & Company: Just a quick follow-up, you guys alluded to 100-gig AOCs, remember you originally that that might ramp in the front half of this year. Do you have any thoughts, updated thoughts on when that potentially could ramp for you, could that be in the second half of this year, or is that more of a 2014 event?

Martin P. Slark - Vice Chairman and CEO: It's more 2014; I mean we have been sampling some of the 100 Gigabit IOs that we demonstrated at DesignCon. But it's really a function of customers deploying their end products, so you're really looking at '14 but what you will see is some higher speed copper solutions coming out in the second half of this year.

Operator: Anil Doradla, William Blair.

Anil Doradla - William Blair: Martin, quick question, so going forward, can you share some thoughts on steps you're taking to ensure that the situation that you've experienced with your large customer doesn't take place and I ask you this question because I wonder whether this is a new challenge for a company like you given the short product cycles and fickleness and the success and failure of these mobile devices or – and the excess inventory that you have with this large customer, could you reuse or is it very customer specific?

Martin P. Slark - Vice Chairman and CEO: Yes, I guess Anil, if you look back in time, at one point of reference, I think, it's worth looking at particularly for people like you who've got this kind of experience is that – we lived through the Motorola boom and bust. We lived through the Nokia boom and bust, and I think that's just the nature of being in that market. And the reality is, you want to sell to the industry leaders and if industry leaders go through a period of struggle, that's going to be reflected on your results. I would actually say if you look back to previous periods when we've seen major customers have a downturn, the impact this time on our margins, and their cash flow on our operating income has been far less significant, which I think shows the fact we're actually making progress in the diversification of that business, and that they are able to weather those downturns with big customers far more effectively than we have in the past. Relative to the inventory levels, the one good thing about these downturns is that the cycle as you know, with these customers is very, very short. So it's not like when the tech bubble burst and people were left with a hop-onto custom ASICs or custom cable assemblies and things like that. The inventory level here is relatively minimal. So there's not an issue of potential inventory write-off or things like that. There is an opportunity to sell these custom solutions to other customers, so it is a question of selling them to these customers as their own demand picks up.

Operator: Wamsi Mohan, Bank of America.

Wamsi Mohan - Bank of America Merrill Lynch: Martin, you have a decent sized Japan business and have some overlap with other Japanese connector companies, especially on the microminiature side. Have you seen or are you anticipating any change in the pricing there? I mean, obviously, the pricing could vary unfavorably, but you also get the favorable part of having your exposure there. So just wondering what the puts and takes are?

Martin P. Slark - Vice Chairman and CEO: That's a great question. Actually, you hit both sides of the argument there and that is that obviously, with the malaise of the Japanese economy and the fact, as you know, a lot of Japanese suppliers tend to focus primarily on Japanese customers and those Japanese customers have been under pressure from Korean and Chinese competitors, there's been a lot of price competition in that market, I think, trying to eat out share in what's been a relatively challenging market. So that's the bad side of it. The plus side, I think, is that the new administration in Japan is clearly trying to do things to stimulate the economy and weaken the yen. To the extent they're successful there, I think that bodes well for both our customers, our Japanese competitors and ourselves. As you know, the good news about those Japanese companies, including our own, is they're phenomenally efficient. So in the event that they get incremental revenue, the pull-through on that is very, very positive. So, if the net result here is some incremental volume going into those markets, which we would hope going into Christmas with all the things being seen, that should be positive for everybody, including us.

Wamsi Mohan - Bank of America Merrill Lynch: Okay. Great, thank you.

Martin P. Slark - Vice Chairman and CEO: That's the last of the questions we show on the list. I want to thank everybody for participating today. We'll obviously be available for follow-up questions and thank you for listening in and we look forward to talking to you again next quarter. Thanks, bye-bye.

Operator: Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a wonderful day.