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Molex Incorporated (NASDAQ:MOLX)

Q2 2013 Earnings Call

January 23, 2013 9:30 am ET

Executives

Steve Martens

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

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

Analysts

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

Shawn M. Harrison - Longbow Research LLC

Brian John White - Topeka Capital Markets Inc., Research Division

Sherri Scribner - Deutsche Bank AG, Research Division

Mike Wood - Macquarie Research

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

Steven Bryant Fox - Cross Research LLC

Jim Suva - Citigroup Inc, Research Division

Ruplu Bhattacharya

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

Amit Daryanani - RBC Capital Markets, LLC, Research Division

Amitabh Passi - UBS Investment Bank, Research Division

James M. Kisner - Jefferies & Company, Inc., Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2013 Molex Earnings Conference Call. My name is Juscinia, 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 Mr. Steve Martens, Vice President Investor Relations. Please proceed, Sir.

Steve Martens

Thank you, Juscinia. Good morning, everyone, and welcome to our December 2012 conference call. I'm here this morning with Martin Slark, our CEO, who will provide an overview of the quarter results and comments by market; and Dave Johnson, our CFO, who will cover financial results and guidance for the March quarter. Please visit our website, molex.com, for a copy of presentation materials and to access the replay of this call.

Now we will review our Safe Harbor statements, which are on Slides 1 and 2 of the presentation materials. During the course of this presentation, we will be looking -- we will be providing forward-looking information and referring to non-GAAP measures. Please read carefully the forward-looking statements of our press release and Form 10-K for an understanding of the risks and uncertainties associated with the 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

Thank you, Steve, and good morning to everybody and let me wish everyone on the call a happy New Year as well. And perhaps you could now turn to Page 3. Prior to giving you an overview of our results by market, I'd like to give you a quick high-level summary of the key points that resulted from this quarter. As you now know, we reported record revenues for the quarter, and we were pleased to see such strong growth in an uncertain operating environment. Our record revenues were driven primarily by new product launches. In recent years, the economic cycle has overwritten the normal seasonal pattern that we see for orders. However, this year, we did see a normal seasonal slowdown in orders, particularly in the consumer and mobile sectors. The bookings pattern, frankly, continues to be very volatile on a day-to-day basis, and it's very difficult to predict the overriding trend in the market. We still believe that there are growth opportunities as we move into calendar year '13 and during the last quarter, we completed a number of investments that we think will help our future growth. As I said in the release, we are, however, waiting until the post-Chinese New Year period before, we believe, we can get a stronger fix on how calendar year '13 will turn out.

The investments we have made in the last quarter include completing our Affinity Medical acquisition, which is doing very well and reported record results in its first couple of months, and CapEx for our new plants in the Philippines and a new facility in Korea, clearly a high-growth market. In addition, we continue to invest in R&D, particularly in high-speed, high power and microminiature products.

During the quarter, we completed the due diligence on a couple of acquisitions that we decided not to move forward with at this time. As we've stated in prior calls, our acquisition focus will continue to be on the industrial, medical and value-added areas. Despite a challenging environment, our organization continues to operate extremely well. For the quarter, we reported record on-time delivery performance and record quality metrics. We believe that these outstanding levels of customer service will continue to help us win business and key customers.

If you'd now turn to Page 4. During the December quarter, our record revenue was $968 million, and that was up 6% sequentially and 13% from the December 2011 quarter. Our orders decreased 2% -- 2.8% -- 2.6% sequentially but increased 13% from the prior year. The book-to-bill ratio for this quarter was 0.95:1. On a regional basis, we recognized 64% of our revenues in Asia, 25% in the Americas and just 11% in Europe. It will come as no surprise that Europe continues to be the weakest region as revenues were down 3% sequentially and 10% year-over-year, while bookings were down 1% sequentially and 6% year-over-year. I was just in Europe last week and I guess one comment I would make about that is I think at least in some of the major markets, we've seen some bottoming out and some -- improvement in some local trends. However, it's clear that European economy is in very challenging situation.

If you look at the Americas and Asia, both regions grew nicely during the quarter with double-digit increases in revenue measured on a year-over-year basis. The automotive, medical and high-end infotech markets drove increased bookings in the Americas which were up 8% sequentially. In Asia, we benefited from new product launches which was sold primarily into on a range of mobile applications. 21% of our revenue was through the distribution channel which continues to struggle. Our distribution channel was down 3% sequentially, but was up 1% year-over-year.

Given the uncertainty of end markets, it seems as though our distributors are remaining cautious and closest -- closely monitoring their inventory levels. The good news is that inventory levels within our distributors are at normal levels and our own vendor-managed inventory locations have inventory days that are actually below target. So as far as we can tell, there has been no inventory buildup through the end of the calendar year and so therefore, no need for corrections as we move into Q3 for Molex.

Now turn to Page 5, and I'll make some comments on each of our end markets. On an end-market basis, the automotive market continues to grow with revenues increasing 3% sequentially and 15% year-over-year. The global market for light vehicles was up approximately 6% in volume terms for calendar year '12 with approximately 81 million vehicles produced on a global basis. Electronic content, most vehicles continues to expand, particularly in applications for safety and infotainment. Given that our automotive sales were up by 15% year-over-year in the quarter, we believe we're gaining from both increases in electronic content and design wins at key customers.

On a regional basis, vehicle production in North America increased 17% in calendar year '12 more than compensating for production declines in Europe of approximately 6%. In calendar year '13, we expect continued growth in North America, a challenging environment in Europe and renewed growth in China, which is now the largest vehicle market in the world. The March quarter is typically strong for automotive production, and we expect good results from this sector as we move into the March quarter.

If you look at the infotech market, our revenues increased 11% sequentially and 31% from the prior year quarter. Orders decreased 3% sequentially but increased 26% year-over-year. The 26% growth is relative to the inventory correction period that occurred during the final quarter of calendar year '11, while the 3% sequential decline we think reflects uncertainty in the economic environment and cutbacks in year-end capital expenditures.

For December quarter, demand for tablet components drove the increase in our revenue in this sector. It is clear that the tablet sector is growing at the expense of the notebook sector. The vehicle players in the infotech market are clearly struggling for revenue growth, and we have seen several hardware sectors remain largely flat for the year. What we have seen, however, is a number of small and niche players bringing out new solutions, and those companies seem to be doing better and creating smaller opportunities to gain revenue.

Server revenues have been declining for several quarters, but unit volumes have actually been slightly increasing. Blade servers continue to outgrow rack-mounted servers, and Molex has good design wins with high-speed backplane and power products in this sector. The storage market continues to grow but at a more modest rate, and given the demands for ever-increasing storage, we expect that market to continue to grow in calendar year '13.

As we move into calendar year '13, we expect continued growth in both units and content in the tablet market, where we are clearly an interconnect leader. We expect more modest growth in other hardware sectors. Longer term, the need for high-speed solutions, data center upgrades and increasing storage requirements represent good opportunities for growth for Molex.

Revenue in the telecom sector increased by 15% both sequentially and year-over-year. The telecom infrastructure market is really about the 4G LTE buildout. The largest deployments to-date had been in North America, Japan and Korea, but it's clear that upgrades will migrate to the BRIC countries over time. As OEMs migrate to LTE equipment, they will need to upgrade their legacy interconnect due to high-speed requirements. This is good for Molex as we have strong product offerings in the optical routing and the digital cross-connect space. The mobile portion of the telecom market increased significantly both on a year-over-year and sequential basis on the strength of our new product introductions and the usual seasonal increase in production that takes place in December quarter.

During calendar year '12, we believe the global handset production approached almost 2 billion units with close to 800 million units being smartphone products. With smartphones continuing to add functionality, we believe there's good opportunities for increase content with connectors, antenna and value-added products.

The consumer electronics market for us increased -- decreased 9% sequentially and 11% year-over-year. Orders were also down during the -- versus the prior quarter and the prior year. We saw a significant drop-off in consumer-related orders as we moved into the month of October, particularly with our Japanese consumer customers. The hardest hit sectors for us were televisions and digital still cameras, and these digital still cameras are clearly being impacted by increased smartphone sales with built-in cameras. Orders and revenues for white goods and gaming products generally improved sequentially and year-over-year, provided a partial offset to decline in other sectors. Our major TV customers have indicated that production volumes will remain down through Chinese New Year but should improve as we move into the final quarter of our fiscal year.

Revenue in the industrial market was down 9% on a sequential basis and 4% from the year-ago quarter. Industrial customers, including distributors, are proceeding with caution in an uncertain economic environment. The European industrial market was particularly weak, the U.S. was mixed but APS was strong. The market clearly tracks the global economy and we have seen customers hold back on capital investments.

During the current difficulties, we remain optimistic that this large and diverse market will recover during calendar year '13. We anticipate additional demand for factory automation, nonautomotive transportation and energy-related subsectors.

The revenue for the medical and military markets increased 31% sequentially and 54% year-over-year. From almost 0 a few years ago, these sectors now represent 4% of total revenue, and we expect that percentage to increase as we move forward. In the past year, we made 2 small acquisitions in the medical market, Affinity Medical Technologies in October 2012 and Temp-Flex in December 2011. These 2 companies have given us a strong base in this attractive market and we continue to look for additional acquisitions that will build out our products and market portfolio.

Overall, we were pleased with our revenue growth in this quarter and we view the sequential decline in bookings as being primarily seasonal in nature. Our strategy going forward is to continue to drive organic growth, continue to look for more complex assemblies that we can manufacture for our major customers and supplement our organic growth with appropriate acquisitions.

Now let me call -- turn the call over to Dave Johnson.

David D. Johnson

Thank you, Martin, and good morning, everyone. The quarterly P&L results are shown on Slide 6. Revenue of $967.7 million increased 5.5% sequentially after a 6.8% sequential increase last quarter to a new record level for Molex. The revenue growth has been driven in large part by new programs that began in the first quarter and ramped up significantly in the second quarter. Our gross margin was 29.9%, 60 basis points higher than the September quarter due primarily to leverage from the revenue increase. SG&A of $181 million was about $5 million higher than anticipated due mainly to some onetime items. About 1/2 of this variance was due to higher stock option and retirement costs, while the other 1/2 was for acquisition-related costs, travel and sales meetings. I should also remind you that SG&A in the September quarter included insurance proceeds related to the March 2011 Japanese earthquake and tsunami of $9.9 million. The other income expense line, which generally reflects income, included a $4.2 million foreign exchange loss due to the currency fluctuations in the quarter that were unhedged. We have increased our currency hedging activities to help mitigate these types of cost fluctuations going forward. Our effective tax rate for the quarter was 31.1% resulting in earnings per share of $0.39 per share.

Please turn now to Slide 7 for our balance sheet and operating metrics. Net cash decreased by $106 million sequentially to $374.9 million. The primary drivers for this decrease were acquisitions of $55.3 million and dividends of $77.9 million, as well as an increase in working capital. We accelerated our January dividend into December, so in effect, we paid 2 dividends during the December quarter and our next dividend will be paid in April. Both AR days and inventory days again improved sequentially, AR to 67 days and inventory to 83 days. Our return on net assets increased as expected to 19.1% as the RONA from our new programs is better than the corporate average. And R&D of $47.9 million has increased by $1.6 million from the sequential quarter due to merit increases that take place in October each year and increased costs as we continue to invest in new product development and designing activities for our key customers.

The slide on Page 8 compares our free cash flow to net income, and recall that our goal is for free cash flow to approximate net income. After many quarters of extremely strong free cash flow, we have pulled back in the December quarter as expected due to the working capital requirements of our quickly ramping new programs. Cash flow from operations declined sequentially by $80 million, which as mentioned is due primarily to increased working capital related to our ramping programs. Capital expenditures of $78.6 million continue to trend higher than recent quarters due to investments for tooling and equipment for our new product launches and for engineering and enterprise software. Since our new programs in the tablet and smartphone markets have now completed the ramp phase and are expected to be sequentially lower in the March quarter, we are expecting to return to very positive free cash flow results in the coming quarter.

And finally, on Slide 9, we show our outlook for the following quarter. The global economic environment continues to be relatively uncertain, and of course, we must also be prepared for the usual disruption caused by the Chinese New Year holidays. We are also factoring in the sequential decrease in new programs that ramped in Q1 and continued to ramp in Q2. After considering these factors, we are guiding to revenue in the range of $900 million to $930 million and EPS in the range of $0.33 to $0.37 per share. This outlook implies that gross margins will decline sequentially but should approximate the gross margin level of our first quarter which was at a similar revenue level. SG&A is expected to decline sequentially due to the onetime items in Q2, as well as additional spending reductions resulting in an SG&A level of approximately $175 million for Q3.

In summary, Q2 was a record quarter for revenue driven by new product introductions. Gross margins were strong, translating to incremental gross margins of greater than 40% on the increased revenue. SG&A was higher than expected by $5 million, but we would see -- we expect to see this revert to more normal levels in the coming quarter due to the onetime nature of the cost variance. And solid operational execution across all of our businesses have continued to result in very positive customer service metrics.

That concludes our prepared remarks, and we would now be very happy to answer any questions you may have.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Matt Sheerin from Stifel, Nicolaus.

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

So just a question on the telecom business, which was up sharply, I know due to mobility ramps. Was the non-mobility business down sequentially?

Martin P. Slark

No, Matt. Actually, it was sequentially, we think it's fairly flat. As you know, I think most of last year, the CapEx spending by the service providers in that market was pretty muted. Surprisingly, our business in the infrastructure market was stronger in North America for that sector but weaker last year in Asia. And that's why I made that comment and I think that some of the new technology we've seen rolled out in North America should rollout in Asia. But basically, you're right, the growth came from mobile applications with the infrastructure stuff being fairly flat.

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

Okay. And it looks like the upside to your revenue in the quarter did come from both mobility and tablets and we've seen from other suppliers selling into that space the same thing. But we've also seen signs of perhaps sharper than seasonal order cuts. But it looks like you're guiding to seasonal levels in those sectors?

Martin P. Slark

Yes. I think we -- if you look at the midpoint of our guidance, we're talking about being down about 5% from a revenue perspective next quarter, and that's pretty consistent I think with other Q3 periods. If you take out some of the periods where you've had overriding economic challenges. If anything, it's probably a little higher. And I would say the other market that's, frankly, been strong for us in addition to the one you mentioned, which I think provides a lot of stability, is automotive. And automotive is actually normally weaker going into Christmas but, as you know, the March quarter is stronger for automotive, so we're seeing that -- that sector, I think, will help us in this quarter. The 2 weaknesses going into Q3 is clearly mobile and consumer. We think the infotech market, we think automotive will be sequentially stronger for us.

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

Okay. That's helpful. And just lastly, just on the expense line, I know that's going to be down sequentially. But on an operating margin basis, it looks like you're going to shake out to 10% or so which is clearly below where you were last year on lower revenue. I know mix is an issue. But sort of going forward, what should we think about margin expansion given the mix of your business now?

Martin P. Slark

Yes. I think, Matt, what we're trying to do -- and that was the final comment I've made in my remarks is there's kind of 2 things happening for us. One is, obviously, the revenue growth this year has come from new applications and some of these complex assemblies we've been doing for companies in the mobile applications. And we were very clear when we initiated those that the gross margins on those projects were lower because of the purchase component, what we bought. What we're also trying to do, as you've seen with the Affinity Medical acquisition, is to diversify into some other, what I call higher mix, lower volume but higher-margin markets. And I think it's a little bit of what's the mix of those markets as we move forward. The real issue, I think, is there was a blip this quarter due to some onetime things that Dave talked about in the expense category. I think the real issue is obviously around the gross margin line and that's largely around the end markets that we supply to and what happens with those initiatives we're drawing. Our clear goal though, as we move into next year, assuming a reasonable economy would be to progressively to expand that margin.

Operator

Your next question comes from the line of Shawn Harrison from Longbow Research.

Shawn M. Harrison - Longbow Research LLC

Just thinking about the March quarter, more within the consumer electronics business. Given that the December quarter sales were much weaker than seasonal, it looks like the drop-off in bookings is pretty sharp relative to that. I guess, is that market bottoming out? Is there something I'm missing there because off a weaker base, you're still seeing a pretty sharp drop-off.

Martin P. Slark

Yes. I think the big issue there, as I said, is if you look within subsectors of that market, the TV market and the digital still camera market were very weak going into Christmas. That's for 2 different reasons. The TV market really is a huge inventory issue around the world, which I think has been well-publicized, and I think the digital still camera market has finally got hammered by the smartphone market where people aren't buying digital still cameras, they're buying smartphones with the cameras built in. The feedback we got from our customers in that market is that as they went through Christmas and offered tremendous discounts, that has largely corrected itself. And their expectation is post-Chinese New Year, we should start to see that improve. And on the other side of the coin, the gains were pretty good going into Christmas and white goods have remained fairly stable. And I think the one area where the rising wage rates in Asia has benefited us is consumers in Asia buying white goods. And so if you look at washing machines, refrigerator, that kind of stuff, that's a sector which I think will be stronger as we move forward.

Shawn M. Harrison - Longbow Research LLC

And so I guess if I think about that commentary and I think about seasonality, should your consumer and maybe telecom business be down high-single digits and infotech maybe down low-single digits sequentially into the March quarter?

Martin P. Slark

I would say that the consumer market on the December quarter should be down single digits. That's the one that tends to get impacted the most by Chinese New Year because it's Asia-based. The telecom, infotech market, I'm not sure because, frankly, we've seen some surprising strength there in North America in high-end products, et cetera. And obviously, that doesn't have a Chinese New Year effect. So I'm not sure I'd agree with your comment there, but I'm, frankly, not sure. As I said, one of the challenges we've seen is a very volatile order pattern. It's pretty hard to predict these trends.

Shawn M. Harrison - Longbow Research LLC

Okay. And then just as a follow-up, Dave. Incremental gross margins, given the shift in mix that's happened at least here for the past 2 quarters. Where should we expect it, maybe for the next few quarters exiting '13 and into early '14?

David D. Johnson

We think probably about 30% for incremental margins as we go into the couple of quarters.

Operator

The next question comes from the line of Brian White from Topeka.

Brian John White - Topeka Capital Markets Inc., Research Division

Just so on the server storage networking, you're expecting normal seasonality in the March quarter or does it look a little weaker than seasonality?

Martin P. Slark

I would say networking looks a little weaker, storage looks fairly flat.

Brian John White - Topeka Capital Markets Inc., Research Division

And servers? What do you think about servers?

Martin P. Slark

Same thing.

Brian John White - Topeka Capital Markets Inc., Research Division

Okay. And just mobile device. When we think about the mobile market, do we have the breakdown telecom infrastructure and mobile in the quarter?

Martin P. Slark

We don't.

Brian John White - Topeka Capital Markets Inc., Research Division

Okay. So infrastructure you said sounds like it's pretty stable maybe in the March quarter. It's uncertain but it looks like there's some strength at least. What -- how should we think about mobile devices? Is it something down like 30%, 35%?

Martin P. Slark

I think that's the sector which is pretty well publicized where there was some significant order cutbacks as they went into Christmas. And I would say somewhere in the 20% to 30% sequentially down in the third quarter for mobile devices versus the December quarter from a revenue perspective.

Operator

Your next question comes from the line of Sherri Scribner from Deutsche Bank.

Sherri Scribner - Deutsche Bank AG, Research Division

I just wanted to check in on your expectation of seeing about 8% to 10% revenue growth in fiscal '13. It looks like the December quarter strength largely offsets the lower guidance in March. Just wanted to get a sense of your view for June. And do you still think you can hit that 8% to 10% revenue growth in fiscal '13?

David D. Johnson

Sure. Sherri, this is Dave. We did give a high-level 8% to 10% revenue growth. We don't give full year guidance but we did give the 8% to 10%. I would say, at this point, the -- our view will be much, much clearer after we get through Chinese New Year, but at this point, I would say we're quite at the low end of that range, maybe just even below the 8% level for the full year.

Sherri Scribner - Deutsche Bank AG, Research Division

Okay. And did you have any greater than 10% customers this quarter?

David D. Johnson

Yes, we did.

Operator

Your next question comes from the line of Mike Wood, Macquarie.

Mike Wood - Macquarie Research

Does the December order pace that you reported in telecom and infotech reflect the full ramp of the recent new business wins that you mentioned? And are the operating margins in those businesses now at company average levels?

Martin P. Slark

I would -- 2 things. I think in terms of the order pattern, the pattern for that -- those new products was very strong in terms of orders through September. The orders dropped off in the December quarter, but obviously revenues picked up. So I think people are getting the orders in place so they can get the stuff shipped, obviously, for Christmas-related shipments, et cetera. So that was a sector along with consumer, where we saw the drop off. Operating margins here are close to average. Now -- we're now -- we're at sort of full production volumes with those product lines.

Mike Wood - Macquarie Research

Okay. And is there any update on the Japan litigation? I saw on the filing that you had a hearing on December 26.

Martin P. Slark

Yes, there is. The witness examination phase of that whole issue is now complete. The core proceedings effectively concluded on October 10. And the judge was expected to give a judgment at the end of December. In late November, were the court supervised settlement discussions, and they commenced between us and the other parties involved, and as a result, the court postponed its decision until February 27, 2013. I can't give you any assurances that those settlements will result in agreement by the parties, and though I can tell you that no new facts have emerged since we started. And obviously, given this is an ongoing legal matter, I can't make any further comments other than that.

Operator

Your next question comes from the line of Anil Doradla from William Blair.

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

A couple of questions. You talked about some drop off on the mobile handsets. What were the key reasons that you saw for that beyond seasonal patterns? And on the telecom infra, when I look at this 4G ramp that's happening in North America, I mean it's just -- I look at it as once-in-a-decade transition. So can you walk us through, Martin, how you believe say, over the next 12 to 24 months, whether this ramp is sustainable on a global basis? And can you give us some color as to on the regional basis, how you look at it?

Martin P. Slark

Sure. In terms of the mobile bookings, Anil, I think clearly, we view that as just seasonal. If you look back in prior years, obviously, a disproportional amount of those mobile devices, whether it's smartphones or tablets, et cetera, gets sold going into the Christmas season. So I think having strong bookings in the September quarter when we have record bookings and then strong revenues in the December quarter and record revenues, is consistent with that pattern. I think what has emerged, however, which has been well publicized, is the increased level of competition across that market. I mean, a lot of new companies bringing out a lot of competing devices, many of which were seen at the Consumer Electronics Show. So I think the key is, I mean, it's not just a tablet or a smartphone, the key is to be in as many different mobile products as you can across as many different customers as you can. And I think that market is becoming more and more fragmented with a lot more competitive devices across that market. And then relative to the telecom infrastructure, I know that's a market you look at a lot closely yourself. We were surprised, frankly, that when we looked back in the last calendar year that the U.S. market for us was much stronger than Asia. And we believe some of the new products that we have sold into in North America given the rising functionalities mobile devices, the lack of infrastructure there is in Asia, that has to be rolled out over time in those BRIC countries. As for the timing of that, when it happens, I think that's really hard to predict. I think the key that we have to do is make sure that we're designed in into that equipment so that when it is deployed, it results in revenue for us.

Operator

Your next question comes from the line of Steven Fox from Cross Research.

Steven Bryant Fox - Cross Research LLC

Two questions for me, please. First of all in terms of new programs, I think you've been highlighting 3 major areas. You've been talking a lot about mobile devices this morning, but also auto programs, and then also on the networking infrastructure side with backplane connectors, I believe. Can you just sort of talk how those -- what type of growth you would expect from those areas over the rest of the calendar year? And then secondly, Dave, just on the exchange losses in the quarter. It looked like that cost you a few cents during the quarter, if I got my math right. But how do -- how is that reversing again? I'm not sure I understand what you meant by adjusting the hedges for this quarter and what it means in terms of either an EPS benefit or a drag going forward.

Martin P. Slark

Dave, why don't you take the first question?

David D. Johnson

Sure. The primary losses were $4.2 million. It occurred early in the quarter. It was mostly because of the strength of the RMB in China and the Malaysian ringgit. We have receivables and cash in those locations that are in U.S. dollars. We are moving toward hedging our Chinese RMB process more thoroughly so that we will be able to, in the future, offset some of those hedges and minimize that fluctuation. So it was about -- it was $4.2 million in the quarter which as I said is quite unusual for us. Usually it balances out during the quarter, but this time it was a negative. It should -- our forecast going forward is that it should be even going forward. We don't ever forecast to have exchange gains or losses going forward.

Martin P. Slark

I'm sorry, go ahead.

Steven Bryant Fox - Cross Research LLC

No, I was just going to -- just to clarify on the currencies, there is no impact from the yen going forward in terms of plus or minus on earnings.

David D. Johnson

Well -- I mean there's a benefit to us in the sense that as the yen weakens, we are producing in Japan, selling a lot of those products in China in U.S. dollars. And so there is, in a sense, a transaction benefit. It wouldn't show up on our foreign exchange gain or loss line, but it is a little bit of a tailwind for us in terms of our margin.

Martin P. Slark

Steve, I think in terms of the new products, you're right that the focus has been the smartphone market, the tablet market, and so generally in mobility and then in automotive, and we have seen growth in all of those 3 areas. And when we look at that 8% growth for the year, I believe it is roughly 50% of that growth comes from those new programs and then balance would come from just general organic growth in those other markets. As you know, really, the acquisitions we've made aren't material to our results, so you're largely looking at organic numbers.

Operator

The next question comes from the line of Jim Suva from Citi.

Jim Suva - Citigroup Inc, Research Division

The question I have was kind of on some of your longer-term financial goals. If you can just kind of update us and remind us of what those are, especially as now you've mentioned that you have this new consumer product where I believe you're embedding some additional semiconductor products in that and so because you're purchasing those products, you have to embed it. It doesn't impact your margin profile. So maybe you can just update us on your margin profile, your financial goals, whether that be operating margins, gross margins, SG&A and the likes?

Martin P. Slark

I get you. I think we have not given up on our 14% operating margin target. Obviously, I think in the current economic climate, it's very hard to drive those kind of margins in the end markets that we sell into. You're absolutely correct that to the extent that we take on some of these more complex assemblies that have a higher purchase components, that tends to negatively impact the gross margin line. But that doesn't negatively impact the operating margin line because typically, there's less SG&A on that incremental revenue. So in the short run, we think we have an opportunity to grow operating income through growing into adjacent areas and taking on these complex interconnect products. And we think they'll support faster growth. But it's going to result probably in a slightly different P&L profile and that I would say is relative to where we were of years ago, our goal is going to be to probably end up with slightly lower gross margin and drive the SG&A lower so that we can ultimately get to that 14% target. But I would not see us getting to that target until 2 things happen. I think, number one, we have a positive economic environment where we see stronger growth. Number two, I think you can clearly see through our acquisitions, we're trying to change the profile of end markets we're in. And to the extent that we can grow our revenue in higher mix, lower-margin markets like medical, et cetera, that will obviously help our overall margin profile as well.

Operator

Your next question comes from the line of Ruplu Bhattacharya.

Ruplu Bhattacharya

This is Ruplu filling in for Wamsi today. Just had 2 questions. Martin, in the beginning, you mentioned -- you talked about acquisitions and you mentioned that you had looked at some but you didn't go through with it. Just wondering like what was the reason for that? Was it valuation or was it like in markets that you weren't seeing growth?

Martin P. Slark

No. Actually, it was -- we have got through some due diligence activities and found some things that we weren't comfortable with. And obviously, Molex has been very careful with our acquisitions so far to date. And I think the last thing we needed to do was to make a bad acquisition. And so consistent with accounting rules, we've written off the cost of the work that we did on due diligence, including some outside help on those targets, and have backed away from those. We do, however, I think have -- the reason we were looking at more companies this quarter is we have a very good pipeline we're looking at and I can't predict the timing of those. But I can tell you there is more focus on that area at Molex, but we want to make sure that as we add acquisitions, they are good ones. And it was purely a case of finding things in due diligence that we weren't happy with.

Ruplu Bhattacharya

Great. That makes sense. Just -- also, I just wanted to clarify, I think you said that some of the new programs that you were ramping, they are now fully ramped. I think in the past you've talked about having to purchase outside components or off-the-shelf components that was hurting your margins. Have some of those been in-sourced or -- and can we now believe that the margins are going to be better going forward?

Martin P. Slark

No. On the particular programs that ramped for this Christmas season, the -- we are still buying the same components. As we take on other programs, obviously, one of the things that we look at and you factor in the automotive area that has happened, we do look to where we can in-source some of the components. And the benefit from a margin perspective is more just getting beyond the startup costs than having higher volumes that we ship.

Ruplu Bhattacharya

Okay, got it. I'm sorry, the last one for me is on industrial. I didn't catch the guidance for the next quarter. Do you think the segment can be up sequentially?

Martin P. Slark

No. I think the industrial sector largely tracks the economy. And I think given the uncertain environment we're in today, our expectation is that, that market is going to be fairly flat. And interesting enough, as I said, if you look at it by geography, our biggest growth in the industrial market, our strongest market was in APS. And obviously, the next quarter you're going to see that impacted by Chinese New Year. I clearly don't see much of a recovery in Europe. Now I think to the extent we get any economic momentum, clearly people are looking out there to add additional factory automation, et cetera. That will be the bit in the market that would benefit the most from economic recovery.

Operator

Your next question comes from the line of Anthony Kure from KeyBanc.

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

Just wanted to review the Asian numbers as far as year-over-year sequential growth and then the bookings trend. Could you go through those numbers again real quick, I didn't catch them.

Martin P. Slark

Sure. If you look at the results by geography, we said that the Americas and Asia grew nicely during the quarter with double-digit increases in both revenue measured on a year-on-year -- year-over-year basis. So we've seen double-digit growth in both the Americas and Asia both sequentially and year-over-year. If you want specific percentages, sequentially, year-over-year, the Americas was up 15% and -- from a bookings perspective and Asia was up 16%.

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

And Asia was -- you said 16%?

Martin P. Slark

16%, yes.

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

Okay, great. And that was a sequential number, you said?

Martin P. Slark

That was year-over-year.

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

I'm sorry. I'm sorry, your -- got you. And then I just want to clarify one other thing. I think you said 15%, 1-5 percent, of the 8% growth target so to speak was from the new programs, is that correct?

Martin P. Slark

No, no. 5-0. Sorry, I have a terrible English accent so...

Operator

[Operator Instructions] Your next question comes from the line of Amit Daryanani.

Amit Daryanani - RBC Capital Markets, LLC, Research Division

Just to -- first to start off on the gross margin line, could you just talk about what drove the 60-basis-point or so gross margin expansion in the December quarter? Because I imagine a lot of the revenue growth you're getting is actually from the mobility tablet side which is low of 20 percentile gross margin business, I believe. So I'm assuming FX helped you guys. Could you maybe quantify what's the FX benefit, if that's case, in the December quarter and also for the March quarter regarding the Japanese yen?

David D. Johnson

I'd say the biggest factor was that in the first quarter we talked about the fact that we had startup costs. And so those startup costs did not recur in the second quarter. I'd say that's the biggest factor. In terms of the FX that affects the gross margin, there really was very small FX impact on the gross margin. We had a little bit of a benefit from commodities that helped us, but it was really mostly the absence of the startup cost that drove that improvement.

Martin P. Slark

When you launch those programs, I'll give you a good example. Often, there's are a lot of startup scrat [ph] and yields off of automation equipment, et cetera, are lower. And so I think we have the benefit of 2 things: one, improved yields from those programs and obviously, you do get bigger fall-through once the volumes are bigger too.

Amit Daryanani - RBC Capital Markets, LLC, Research Division

Got it. That's helpful. And then is there any FX impact in the March quarter on the gross margin line?

David D. Johnson

Not that -- we don't forecast FX going forward like that, but in the last couple of quarters, it's been a remarkably benign in terms of the impact on our gross margin.

Martin P. Slark

I think when you look at our guidance, you should assume that our guidance is based on both stable currencies and stable commodities. We don't try and forecast those going forward.

Amit Daryanani - RBC Capital Markets, LLC, Research Division

Got it. And then if I could just maybe go back to the smartphone tablet dynamics. I think, Martin, made a comment that you're seeing smartphone-centric orders being down 20%, 30%. Is that applicable to the tablet side of the business as well? And could you maybe just talk about what percent of your revenues today are coming for smartphones and tablets in aggregate?

Martin P. Slark

Okay. To answer that, I would say that relative to the breakdown between orders for smartphones and tablets, I would say the drop-off in smartphone orders was higher than the drop-off in tablets. And I think, this is just my own observation, I think just a question of the level of saturation in the market of smartphones in the developed world versus tablets. So relative terms, it was more severe for smartphones than it was for tablets. We don't break out what our total revenues are from that. What we do look at, I think, is obviously overall mobility products and of course, included in that is notebooks and netbooks, et cetera. And so the whole bunch of other mobile devices that will be in that sector. So I couldn't tell you what the breakdown is between smartphones versus tablet revenues.

Operator

Your next question comes from the line of Amitabh Passi from UBS.

Amitabh Passi - UBS Investment Bank, Research Division

I just had a few clarifications. Martin, you talked about strength in your telecom infrastructure business related to your North American wireless buildouts. I thought you didn't have much base station contents. I'm just wondering, was this a derivative benefit in some other areas such as optical or any other areas? And then just clarification for -- on the cash flow side, just -- what should we expect for CapEx as a percent of sales in the March quarter? And then does your EPS guidance still include about $0.01 impact from the unauthorized activities in Japan, the $0.33 to $0.37 guidance?

Martin P. Slark

Yes. Let me answer the telecom question you had, and then Dave can soon after answer the question you had about the guidance. The real issue is that when you look at the products -- equipment that's used in the 4G LTE, there's a very different connector content in that. There's a much higher backplane of power products content in that. And so Molex has got a lot of design wins in that. Historically, base stations have not been a strength for us when you have more RF components in them. And so as 4G LTE gets rolled out, that's better for us in terms of, I think, our connector volume and potential increased sales. In the market, we've historically not been particularly strong in.

[Audio Gap]

David D. Johnson

Okay. And I think I had a couple of action items. One was on the CapEx as a percent of revenue for the March quarter. We're looking at somewhere in the range of 6.5% to 7% for the March quarter, so it's coming down as a percent of revenue, and then it will come down again, we think, in the June quarter. So for the full year, we still think our guidance of being between 6% and 7% is correct. But closer to the higher end of that range for the full year. And in terms of the Japanese costs for litigation, the reason we didn't put the guidance in is it's probably less, a little bit less than $0.01 at this time so we didn't make that estimate. It's coming down. The costs are coming down. As Martin has explained, we've gone through the litigation process. So we didn't put that in because there will be a cost, but it will be probably, we think, less than $0.01.

Operator

Your next question comes from the line of James Kisner from Jefferies & Company.

James M. Kisner - Jefferies & Company, Inc., Research Division

So a quick clarification and then a question. Would you mind sharing the VMI days? You said they were down significantly. And then also pricing in December quarter?

Martin P. Slark

Sure. We are contractually required to hold 30 days of inventory at -- there's something like 400 locations of vendor event -- vendor management inventory that we manage. As of the end of December, the average number days of inventory cost, that was at 28. And I view that as a positive data point because typically, when we're going to go into a market slowdown or a sequential slowdown, often, you see those number days creep up because our major customers aren't pulling inventory. The good news is at the end of December, those pulls did take place and the number of days is actually low. So at least we're not in the position of not having to refill that. So I think that, that -- it's one data point that I think is positive which is why I mentioned it, given all the uncertainty in all the other areas. In terms of price erosion, we've got, as you know, have talked about in the range of 3% to 5% historically. It continues to be relatively low and below the low end of that range for the quarter which again I think is good news.

David D. Johnson

Yes, I think it's been below the 3% now for 8 consecutive quarters. So that's been a very solid trend.

James M. Kisner - Jefferies & Company, Inc., Research Division

Great. And then just to -- I really just want to clarify why we think we're not going to make this or be close to the low end, this 8% to 10%, just make sure I'm absolute clear. I remember you said that I think in the past you were checking some growth in infotech, it's a drive growth in the back half. Is that still the case? Has infotech, new product initiatives changed versus your prior expectations? And is it really just smartphone market share loss that's driving your lowered expectation for the full fiscal year?

Martin P. Slark

Sorry, what did you mean by market share loss?

James M. Kisner - Jefferies & Company, Inc., Research Division

Well, I thought you said that the smartphone weakness was seasonal but also you're seeing a lot of competition in phones. And I thought perhaps, that's what you meant that was share loss amongst your customers. Like maybe I was wrong about that. Can you clarify that?

Martin P. Slark

I mean, just to clarify that point. What I meant was is that if you went back a year ago, that smartphone and tablet market was largely dominated by 1 or 2 players. What I think we're seeing now in that market is increased competition in the end market in terms of more people participating in it. I mentioned once before that Molex had designing and content on something like 40 different tablet designs. So I think to the extent the market gets fragmented, I think that that's good news. And I think that if you -- when we talk about the 8% to 10%, I think we feel given the economic climate, it's likely to be in the low end of that range. We still think that about 1/2 of that growth will come from these major new programs we've talked about a lot. The one negative I would say is that the adoption of active optical fiber implications or applications in the infrastructure market and in infotech market, I think seems to be pushed out a little bit. And if you look at the hardware growth last year across the whole infotech market, if we look a lot of the major companies there in that sector, I'd say the infotech market from a hardware perspective was relatively weak. And so clearly, we need that to pickup. And I think a lot of companies have got pent-up demand for new hardware. If that takes place, that helps. If it doesn't, and I think you'll see it reflected in IBM, HP, people like that, if their hardware business improves, that obviously benefits us from a connector perspective as well.

James M. Kisner - Jefferies & Company, Inc., Research Division

Great. And just to wrap this up. So you guys have talked a lot about last quarter about the fiscal cliff being overhang. It sounds like the alleviation of that hasn't really helped. Is it that fair to say? Like your sentiment is not really -- people have not gotten more confidence as a result of the fiscal cliff kind of being temporarily resolved.

Martin P. Slark

Well, I think you exactly hit the nail on the head there. That is I think it was really was temporarily resolved. And I think in terms of companies making major capital investments in automation, et cetera, I think there needs to be a longer-term solution. I think the good news is the U.S. economy seems to be bubbling along, which and hopefully that growth rate would start to pick up. It's certainly not negative. I think since the change of leadership in China, we have seen a little bit of benefit there in terms of increased activity. So we don't see a lot of negative -- negativity relative to where we are, but I don't think we see a huge amount of upside either. So our expectation I think is a normal seasonal downturn for Chinese New Year. And assuming the economy continues to be strong globally or pickup globally, we would ride whatever increase is apparent.

We show that is the last question. So I'd like to thank everybody for being on the call. We'll certainly be available later today to follow up, and we look forward to talking to all of you at the end of next quarter. Thank you very much.

Operator

Thank you very much. This concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.

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