Executives
Martin Slark - Vice Chairman, Chief Executive Officer and Member of Executive Committee
David Johnson - Chief Financial Officer, Executive Vice President and Treasurer
Steve Martens - VP of Investor Relations
Analysts
Matthew Sheerin - Stifel, Nicolaus & Co., Inc.
Wamsi Mohan - BofA Merrill Lynch
Shawn Harrison
Anil Doradla - William Blair & Company L.L.C.
Brian White - Ticonderoga Securities LLC
Jim Suva - Citigroup Inc
Amitabh Passi - UBS Investment Bank
Sherri Scribner - Deutsche Bank AG
Ryan Jones - RBC Capital Markets, LLC
Steven O'Brien - JP Morgan Chase & Co
William Stein - Crédit Suisse AG
Craig Hettenbach - Goldman Sachs Group Inc.
Molex (MOLX) Q3 2011 Earnings Call May 3, 2011 5:00 PM ET
Operator
Good day, ladies and gentlemen, and welcome to the Quarter 3 2011 Molex Inc. Earnings Conference Call. My name is Kelly, and I'll be your operator for today. [Operator Instructions] I would now like to turn the conference over to your host for today, Mr. Steve Martens, Vice President of Investor Relations. Please proceed.
Steve Martens
Thank you, Kelly. Good afternoon, and welcome to our March 2011 conference call. I'm here today with Martin Slark, our CEO; Dave Johnson, our CFO; and Liam McCarthy, our COO. Martin will give an overview of the quarter and provide commentary on revenue and orders, as well as developments in our key markets. Dave Johnson will be reviewing the financial performance for the quarter and discuss guidance for the June quarter. [Operator Instructions] Please visit the Investor Relations section of our website to download the presentation materials and to access a replay of this call.
Before we turn our attention to the quarterly results, let's review Slides 1 and 2, which are our Safe Harbor statements. During the course of this presentation, we will be providing forward-looking information and referring to non-GAAP measures. Please read carefully the forward-looking statements section of our press release and Form 10-K for an understanding of the risks and uncertainties associated with forward-looking information and the reconciliation of non-GAAP measures to GAAP. And now I’ll turn the call over to Martin.
Martin Slark
Thank you, Steve, and good afternoon, everybody and thank you for joining the call. If you'd like to turn to Slide 3, I'll start off by giving you a quick high-level summary of the third quarter.
First of all, let me comment on the situation in Japan. We were obviously, as everybody else was, very saddened by the news of the events in Japan and the effect that it's having on the country of Japan. Fortunately, all of Molex's employees were safe and our facilities were barely impacted on a direct basis. However, our supply chain in Japan does rely on the use of subcontractors for additional capacity and to produce primarily high-mix, low-volume and near-end-of-life products. Unfortunately, 3 of our subcontractors were located in the impact zone and were directly affected. Our tools located with these suppliers are either missing or not operational, and we have taken steps to put new tools in place and to ensure that we can satisfy our customers' requirements.
After the earthquake hit, using our SAP system, we were able to quickly identify which parts and customers were impacted by the earthquake, assess global inventory both on a direct basis and through our distributors, look at the backlog and inform customers who were impacted. We expect that over 18 new tools will be operational by the end of this quarter. Most will be built by our own tooling centers around the world. I'd like to compliment on this call our global management team of Molex that worked on the situation. It was a 24x7 effort with people working on both sides of the Pacific. And to the best of our knowledge, we have caused a very little direct impact to our major customers to date, and this was a tremendous team effort to accomplish that end objective.
On a local basis in Japan, we did see a reduction in the average daily rate of orders after March 11. But the average daily rate of incoming orders for the total company remains strong and did not decline after March 11. It appears that the global economy is continuing to strengthen and our balance distribution across many markets, geographies and customers has largely insulated us from the immediate impacts of the disasters in Japan.
The impact of the power shortages and the potential reduced demand in Japan are much harder to assess as is the indirect impact from other suppliers not being able to supply components to our customers. Liam McCarthy and I both traveled to Japan shortly after the disaster, and our Molex management team in Japan has been in close communication with our customers as they continue to assess the potential longer-term impact to their supply chains and end demand.
In addition to the issues in Japan, our March quarter was influenced by Chinese New Year, which resulted in a back-end loaded quarter. In general, the quarter developed as we expected with strong January revenues followed by a pause in February and then a very strong March. This strength has continued through April with orders in April over $300 million for the month and with a daily run rate that actually was above March, which we believe will give us good momentum for the June quarter.
Dave Johnson will cover further details of the final -- end financial impact of the disasters in Japan in his section as well as more information on our balance sheet. However, I'd like to comment quickly in this introductory section about how strong our free cash flow was for the quarter at $80 million. Given the significant growth opportunities in our end markets and the slow-but-sure improvement in the vendor [ph] global economy and our strong cash flow, our board has authorized another increase in our dividend to $0.20 per share per quarter. This increase is effective in the June quarter but payments to be made in July.
Now please turn to Slide 4 where we'll talk about the quarterly trend of revenues and orders. Revenues for the March quarter were $875 million, a sequential decline of 3% from the December quarter, which is in line with our 10-year average. So in this respect, we appear to be returning to more normal seasonal cycles. Last year's economic recovery somewhat overshadowed the normal seasonal slowdown that we see during the quarter which includes Chinese New Year.
Revenue increased 16% in the March 2010 quarter when the recovery was well under way and we're certainly pleased with the year-over-year growth rate. Orders were $880 million, an increase of 1% from December and 5% from March 2010, and the book-to-bill ratio was 1.01:1 with orders well over $300 million for both March and April. Our lead times are now stable at approximately 20 days, which is fairly typical for our business in normal economic times.
Price erosion was below our normal range, largely due to the price increases that we initiated early in the quarter. Given the tremendous pressure we are seeing for raw material cost increases, which we'll discuss later in the call as well, we are planning further rolling price adjustments as we move forward.
Now let's turn to Slide 5, where we show our orders by channel and by geography. Channel activity was very interesting this quarter. Our distributors seem to be very adept at managing their inventory. And from what we can see, they tend to destock approaching the calendar year end and then build up again through the year as warranted by business conditions. In contrast to the September and December 2010 quarters, distributions bookings have been very strong particularly since Chinese New Year. The activity in the EMS channel this quarter is largely driven by companies that support the tablet computer market and the overall infotech sectors. OEMs were a mixed bag by end market, and I'll discuss the market trends on the next slide.
On a geographic basis, sequential improvements in the Americas and Europe were largely due to increased automotive builds, which was expected, as well as orders for telecom networking equipment. Asia was generally down on a sequential basis due to the impact of Chinese New Year as well as seasonal pullback in the cellphone sector and the consumer electronics sector.
Focus Accounts continued to perform extremely well. They represent 32% of total revenue in this quarter, up from 25% in Q3 fiscal year '10. The new accounts that we added at the beginning of the fiscal year tended to be customers where we had a very limited presence. We have now had a good project pipeline at these customers, and we expect these accounts to continue to contribute more significantly to our growth in the quarters ahead.
Given that in a normal quarter, over 65% of our business is in Asia, we were generally pleased with the bookings strength, given that we absorbed the impact of Chinese New Year and the disruptions in Japan, but still reported very strong year-over-year growth.
If you now turn to Slide 6, I'll talk about the trends by market. Automotive and infotech posted the strongest revenue growth from the December quarter and year-over-year. Automotive revenues increased to 8% sequentially and 17% from the March 2010 quarter, reflecting increased vehicle builds as well as increased content. Orders increased 16% sequentially, which indicates further growth in this market in the June quarter.
Global unit market growth for the period was about 10% with the biggest increases coming from India, Brazil and Russia. Automotive production in Japan has been significantly impacted by the events in Japan, with the current expectation that at least 3 million units of production will be lost. Our direct exposure to the Japanese auto market -- automotive market is fairly small, so we would expect the impacts on us to be no more than $2 million to $4 million per month in the near term.
We are encouraged by the many growth opportunities in the global automotive market in areas such as hybrid and electric vehicles, safety systems and entertainment. For many of these applications, we can sell standard products or we can modify products from our existing portfolio to meet customers' needs. Year-over-year growth in the Chinese domestic market, which was growing very rapidly this time last year, slowed to only about 7% this quarter as incentives ended and the government attempted to slow down the market growth. And clearly their efforts there have had an impact.
Revenue for the infotech market increased 1% sequentially and 24% year-over-year. The strongest sub-markets for us were tablets, storage and the service segments. The slowdown in this market that we experienced over the past few quarters appears to be over, and much of the inventory that we were concerned about seemed to have been burned off through the calendar year end. We were also seeing customers introduce new products, and many customers seem to be more bullish about their plans for the balance of this calendar year. We are optimistic about near-term growth in this key market, given recent design wins and the number of new high-speed products we're introducing to major customers.
Consumer revenues and orders decreased 8% sequentially, which is in line with normal seasonality. Revenue increased 10% against the March 2010 quarter, while bookings declined 4%. The holiday season appears to have been reasonably successful with no significant build-up of inventory of consumer electronic goods. We did see some slowdown in orders from our Japanese customers in March, but we are starting to see some recovery as we got to the end of April. Our key customers continue to develop products in the faster-growing markets including the BRIC countries as well as Vietnam and Thailand. Energy-efficient appliances, single lens reflex cameras, next-generation TVs should all be good product growth areas for us this year, largely from increased demand from the emerging middle class as well as good designing activity by our sales organization.
Telecom revenues increased 10% from the December quarter and increased 15% from March 2010 quarter. As expected, the overall cellphone sector was relatively soft this quarter even though the smartphone segment was very strong. We expect this area to rebound quickly on the strength of further smartphone adoption and new product introductions by our customers. Telecom infrastructure improved and appears to be growing again after flat performance for several quarters. According to one of our major customers, global mobile data traffic is predicted to have a 90% compound annual growth rate through 2015. So given that underlying demand, there should be no shortage of growth opportunities in this segment.
Revenue for the industrial market decreased 3% from the December quarter primarily in Asia, but increased 12% from March 2010. This market continues to strengthen along with the global economy as manufacturers are adding capacity and changing out the lines for new products. Automotive assembly in particular has been very strong as automotive companies retool for new products and restore capacity. The semiconductor test market has also been strong for us on demand to support capacity additions.
Going forward, we're excited about the opportunities we had in the food and beverage, non-automotive transportation and energy markets as well. Orders increased sequentially 6% in the industrial market, and this should support continued growth in the near term. Orders and revenues were up sequentially in our medical and military markets. But as you know, these are still relatively small markets for us, but we're pleased to see them continue to grow with our expanding customer base and a dedicated sales team now focused on both of these markets. Now I'll turn the call over to Dave Johnson who will give you a more detailed review of our financial results.
David Johnson
Thank you, Martin. Please now turn to Page 7 for our P&L summary.
Revenue of $875 million exceeded the midpoint of our guidance, even though we estimate that the impact of the recent natural disasters in Japan would be in the range of about $5 million to $7 million. Revenue declined 3% sequentially as expected due to the seasonal nature of the consumer and telecom markets and the impact of Chinese New Year.
Gross profit of $261 million and SG&A of $159 million were both roughly in line with our expectations, even though our costs were increased by $1.6 million due to charges related to asset and inventory write-offs caused by the Japanese earthquake and tsunami. So including the revenue impact, the events in Japan reduced our EPS by approximately $0.02 in the quarter.
The unauthorized activities in Japan caused $2.9 million and were for legal fees incurred in defending our case against Mizuho Bank. This impacted EPS by approximately $0.01 in the quarter. We announced last Friday, in a filing with the SEC, that the commission has issued a formal order to investigate the unauthorized activities at Molex Japan. Given the magnitude of this matter, an investigation was expected and we are cooperating fully with the SEC. It is our understanding that the formal order gives the SEC subpoena authority to investigate the activities of all persons involved in the matter, including financial institutions and third-party lenders. I would also like to point out that the SEC has already reviewed our restated 10-K for last year and there are no unresolved comments. Given that this is an ongoing investigation, we will not comment further or take questions relative to this matter on the call.
Moving down the P&L now to interest expense. Interest -- net interest expense of $1.7 million was in line with the December quarter, and other income of $1.3 million was down from the December quarter, primarily due to an exchange loss during the quarter. The effective tax rate of 30.4% was in line with the December quarter and just slightly above our guidance due to the mix of earnings from high-tax countries. And our EPS for the quarter was $0.39 per share on 176.4 million diluted shares outstanding.
Please turn now to Page 8. Net cash increased 42% to $153 million, due to very positive cash flow and stable debt levels compared to the December quarter. The increase in net cash is after the payment of a $30 million dividend in the quarter. And as Martin mentioned, our board has voted to increase the dividend to coincide with our new fiscal year beginning in July to the level of approximately $35 million per quarter.
During the quarter, we amended our revolving credit facility with our existing group of 8 banks led by JPMorgan. In doing so, we increased the size of the facility from $270 million to $350 million. We extended the term for another 5 years from this March. We simplified and improved the covenant structure and we reduced the interest rate by 125 basis points. At the end of March, we had $165 million outstanding on this credit facility.
Accounts receivable days increased 3 days from December to 76 days. Inventory at 87 days was at the same level as December. However, we did reduce the dollar value of inventory by $14 million sequentially.
The capital expenditures increased just $2.7 million sequentially to $64.2 million, while cash flow from operations increased $25 million to $144.5 million. And as Martin mentioned, free cash flow was $80 million, which is up from $58 million in the December quarter and is now at a level of 118% of net income.
Page 9 shows our trend of operating margin toward our goal of 14%. Our gross margin of 29.8% for the quarter was down just slightly sequentially on the $27 million sequential reduction in revenue. SG&A in absolute dollars remained below our target of $160 million, but at 18.2% of revenue, it was slightly above our target level of 18% due to the reduction in revenue in the March quarter.
Higher commodity costs and foreign exchange rate impacts continued to challenge our gross margins. But our commodity hedging program, pricing initiatives and continuing operational efficiency improvements are helping to mitigate these headwinds. Our quarterly rolling gold and copper hedging program is now fully in place. We are hedging approximately 60% of our gold and copper spend for the June quarter. And for the June quarter, our weighted average strike prices are $1,300 per troy ounce for gold and $3.70 per pound for copper. But even with the benefits of hedging, we continue to evaluate further pricing actions as commodity prices increase.
Our return on net assets trend or RONA is shown on Page 10. This is a key internal metric for Molex. And the growth from 14.2% a year ago, steadily up above 19% in Q1, then above 21% in Q2 and now up to 21.4% in the current quarter is a very positive signal of the underlying improvements that we are making to our business model. We expect our RONA to continue to move higher as we make progress toward our 14% operating income model, as we continue to manage our capital expenditures and as we improve our working capital efficiency over time.
Page 11 shows our outlook for the next quarter. Based on the bookings during the March quarter and continuing through April, we expect revenue in the range of $900 million to $930 million for the June quarter. This guidance reflects an estimated $20 million negative impact due to the Japan earthquake and tsunami. And as described by Martin, though we have not had any damage at Molex facilities, certain customers and suppliers have been impacted directly or indirectly by this tragedy.
Our EPS outlook for the quarter is $0.42 to $0.48, including an estimated $3 million to $4 million of pretax costs related directly to the events in Japan including expedited freight costs, production and procurement inefficiencies and resourcing impact to suppliers and potential asset write-offs. Coupled with the revenue impact, the expected effect on EPS of the events in Japan for the June quarter is approximately $0.05 per share. Of course, we have comprehensive property and business interruption insurance, and we're working with our insurance provider to assess our coverage for the Japanese situation. But at this time, no estimated recovery has been included in the numbers we have provided.
In addition, we have assumed a cost in effective tax rate of 30% for the June quarter and have factored in $2.5 million to $3 million or $0.01 per share due to the continuing legal costs for Japan for our Mizuho Bank litigation.
Despite the disruptions in Japan and the pressures of higher raw material costs, we are confident that we are -- that we will end the full fiscal year with record revenues, record operating income and record earnings per share. This concludes our prepared remarks, and we will now open up the call for questions.
Question-and-Answer Session
Operator
[Operator Instructions] Your first question comes from the line of Amitabh Passi of UBS.
Amitabh Passi - UBS Investment Bank
Dave, I was hoping you could just clarify the guidance. I'm a little confused. You said the impact from Japan, $3 million to $4 million pretax, but at the same time you're also talking about a $0.05 impact. Can you just reconcile the two because $0.05 would imply almost about $9 million impact on the net income line?
David Johnson
Yes, thanks for the question, Amitabh. The revenue impact in the quarter is $20 million. So our guidance with the midpoint of $915 million has been reduced by $20 million due to the impact, and that has roughly a 50% fall through then plus the impact of the $3 million to $4 million of direct costs is how we reconcile to the $0.05.
Amitabh Passi - UBS Investment Bank
Got it, okay. And then just as a follow-up maybe for Martin, your order trends in consumer electronics, medical, military down year-over-year; industrial, flat year-over-year. I would love to hear your thoughts just in terms of what you think some of the dynamics are that are driving these trends.
Martin Slark
Yes, it's been an interesting period as I'm sure you can appreciate. And our sense is looking at it overall is that clearly the consumer market, it was down year-over-year in the quarter as was the mobile phone market, excluding smartphones and tablets and the like and the stuff which obviously was very strong. And so we were actually pleasantly surprised that our bookings were as strong as they were given the fact that Molex has a lot of presence in those 2 end markets. And certainly, the consumer slowdown was further impacted by the issues in Japan, all that's done for the Japanese customers. Automotive has been very strong. The data infotech markets, that seem to be burning off inventory during the -- leading up to Christmas, seem to have picked up after Chinese New Year as has the distribution market. So underlying demand post-Chinese New Year, in general, seems fairly good with the exception of the consumer and mobile sectors. So I guess that's how I'd characterize it, and it seems as though underlying economic growth seems to be hanging in there as well. So other than coping with the slowdown in Japan and perhaps a weaker consumer market, it seems fairly good and we're particularly good, I think, in automotive and industrial.
Amitabh Passi - UBS Investment Bank
Martin, any specific pockets of consumer?
Martin Slark
I think if you look at a year ago, there were a lot of incentives being provided in Asia, particularly in China in the TV market. And we've seen that markedly down, particularly the Japanese customers, although the Korean markets have been complete -- Korean plays have been very strong. The appliance market, it's also down, largely around the fact I think it's tied to housing builds in North America and Europe. Where we've seen the appliance market be a little strong with some of the energy-efficient units that they're now building for some of the developing countries. So I would say appliances, in TVs in particular.
Operator
Your next question comes from the line of Craig Hettenbach of Goldman Sachs.
Craig Hettenbach - Goldman Sachs Group Inc.
Martin, in addition to the unit growth in smartphones, can you talk about dollar content trends you're seeing in that market? And then also any update on tablet design win activity and ramp in that business?
Martin Slark
Sure. In terms of dollar content, it's well publicized that the dollar content in the smartphones that are coming out today, it's significantly higher than in the voice-only phones that are sold in the developing markets. And I think it varies a lot by end customer. And so coming out with some generic numbers, it doesn't make a whole bunch of sense. I think if you wanted to pick an average number, you're looking at the low end voice-only phones $0.20 to $0.40. And if you look at some of the high-end smartphones today, they can get up as high as $5 or $6. And obviously, not any one supplier necessarily gets all that content, and that's pure connectors. And then you start looking at antennas and things like that, that could add to that. The tablet market is clearly today, in terms of sales, dominated by one player and I don't need to tell everybody who that is. But the design activity that is being done by a wide range of customers is enormous, and we have a lot of design activity. I think what remains to be seen is how many of those designs go into volume production and how successful all those customers are. But I think it's unlikely that given the way that this market has now taken off and we're looking at somewhere between 55 million to 60 million tablets this year, there's clearly going to be growth from other companies other than just the one that's dominating the market today. And I think it's a market where Molex is well positioned and that growth area is reflected in our infotech sector.
Craig Hettenbach - Goldman Sachs Group Inc.
Okay. And then follow-up for Dave, just trending gross margin expectation for the June quarter. And then beyond June, how you're thinking about OpEx relative to revenue growth as you go forward?
David Johnson
Okay. Yes, the gross margin trend will clearly be up in the fourth quarter because our revenue, as we gave in the guidance, will be up in the range between where it is now and probably 31%, so between 30% and 31% in that range, I would say. And also OpEx for the fourth quarter, we would probably expect a bit of a modest increase in OpEx in the fourth quarter just as we're hitting a very high level of revenue in that quarter. And then going into your question about OpEx going forward into our fiscal 2012, our belief is still that we will see a modest increase in OpEx, but at a rate of about 10% of the growth in revenue. So incrementally 10%, we said 10% to 15% growth in OpEx for every dollar growth in revenue. So that -- I think that still is -- would describe how our OpEx will go next year.
Craig Hettenbach - Goldman Sachs Group Inc.
Okay. And then just one last quick one. Just on the free cash flow, $80 million in the quarter, just thoughts on free cash flow generation as you go forward as well.
David Johnson
That should continue to increase. We think the free cash flow in the fourth quarter will be stronger than it was in this quarter. And as we said, we've come out of a period where we've had negative and low free cash flow last year, and we're seeing that continue to be very strong.
Operator
Your next question comes from the line of Brian White of Ticonderoga.
Brian White - Ticonderoga Securities LLC
Dave, just on the margin trend, I know you talked about operating margins potentially approaching your goal some time maybe in the June quarter as kind of a stretch target. How should we think about it now? And the impact from Japan, should that be gone after the June quarter?
David Johnson
First of all, the impact for Japan is very difficult to assess how that will be. We have got a pretty good handle on the direct impact. That is our specific products that were impacted by the tools that Martin described. The indirect impact to our customers, it's still too soon to say and that's an impact that could continue on beyond the June quarter for some extent. So I think we'll have to wait for a few more months to see how that trends before we can say that the impact is confined to just the June quarter.
Martin Slark
Certainly, the impact on -- in terms of our ability to ship will be eliminated by the end of the June quarter. The due dates of all the tools that we've had to rebuild, some of them are actually already in operation and the rest of them will be complete by early June. So certainly, if customers are ordering about level, we'll have the ability to ship. But as Dave said, I think the end demand impact because of other components are not available, could be a challenge. And when Liam and I were in Japan, what's apparent is it appears as though the power shortage there, which is about, they've estimated it to be about 20% lower than target needs in Japan. It's going to be ongoing. And what they're trying to do in Japan is cut down, for example, in the use of air-conditioning to free up power. But to the extent that you have rolling blackouts in parts of Japan, that's certainly going to have a big impact on semiconductor production and other things like that. So I think it's impossible for us to guess the impact of all that. And even the number of 3 million cars being impacted came from a consulting company, and I would say that has to be in our best guess.
Brian White - Ticonderoga Securities LLC
Okay and just on the material front, what type of impact -- you did a great job with hedging, so that took care of some of the rising metal costs. What type of impact is that having on the June quarter gross margin? And were you able to raise prices as you talked about last quarter?
David Johnson
The impact on both the March quarter and then going into the June quarter is quite significant. When you look at a year-over-year calculation, it's about a $15 million impact in this March quarter versus a year ago. And as you've seen from the end of the quarter up until now, gold has continued to increase. It's probably up about 10% just in the last month, and copper has come down. So we're expecting that to be an impact and that's factored into our guidance.
Martin Slark
And I think in terms of price increase, if you went back a year ago, material costs for us have gone up almost 3 points as a percent of sales. And not all of that has obviously dropped through in terms of negative impact on the gross margin. The offset of that has been the efforts we have made, I think, to push through price increases and also the efforts that have been made to improve our freight and duty costs around the world. With the global structure we have in place, there's a lot that's being done to improve the logistics. But certainly, the discussion area in our industry today is, given the unprecedented rise in the key raw materials that we buy, is that there's going to have to be ongoing price increases. And we see that continuing on a rolling basis as we attempt to do it. So I think our price -- efforts of a price increase absolutely did stick. They offset some of the impact that these raw material costs had, but not all of it, and we need to keep going at it.
Operator
Your next question comes from the line of Steve O'Brien of JPMorgan.
Steven O'Brien - JP Morgan Chase & Co
Looking at the order trends and from the commentary you had here, Martin, for the April month. The Asia Pacific North dropped dramatically and I just wondered if you could give us more detail on the orders in April. How weak they might have been? How much of this Asia Pacific North? I believe it's maybe more than 80% of that bucket comes from Japan. And then going into April with the $300 million pace well above the March quarter, are you still seeing -- is that unprecedented strength in other areas with Asia Pacific North still dragging?
Martin Slark
Yes. Asia Pacific North was particularly -- and you're absolutely right, I mean it's about an 80:20 ratio. Asia Pacific North for us has got Japan and Korea in it. And obviously, the dominant market there is consumer electronics. And the issue there, I think, has been 2 things. One is customers being impacted in terms of not being able to produce products to ship elsewhere around the world and then secondly, I think with the impacts of the nuclear power plant issue there and some of the impacts in Japan, demand actually being down in Japan as well. What we saw was that those bookings dropped in Asia Pacific North. They were already weak in that third quarter, but they got weaker still after the earthquake. We've seen a little bit of recovery at the back end of April, but certainly not where near back to the levels that they were in the ramp-up back to Christmas. So that's why I think we were pleased with the overall bookings because obviously consumer is a strong segment for us. And with that being down, we still had a good order trend.
Steven O'Brien - JP Morgan Chase & Co
If I could follow up, looking at the margin, if I do the math, I add $0.01 back for Japan litigation. I know you're really only talking or guiding to GAAP EPS. But I add $0.01 back for Japan. I add $0.05 back for -- to the Japan disruptions, so $0.06 total. It seems like guidance for the June quarter sort of straddled that 14% goal. Is that the way you're looking at it, Dave? And does it mean that when sort of this Japan disruptions normalize, we could have, barring the commodities, continued commodities inflationary environment, we could snap up to that 14% target pretty quickly?
David Johnson
I would say, as you said, barring a commodities continued increases there because that is what we're seeing now as the biggest headwind. But yes, that's where we think we are. We're getting pretty close to it, and we believe that in the next year we'll be able to get to that level.
Operator
Your next question comes from the line of Wamsi Mohan of Bank of America Merrill Lynch.
Wamsi Mohan - BofA Merrill Lynch
Martin, of the $20 million impact next quarter from Japan, is that all direct? And can you break that out by end market by any chance?
Martin Slark
I couldn't break it out by end market on this call. We do have that detail in terms of which customers we think are going to be impacted, and it's a combination of 2 things. It's talking to that customers in terms of where their demand is down versus what they would normally would have been ordering from us. And obviously, some of it is delayed shipments from us based on being unable to supply some of the products that were impacted at the subcontractors. We've been able to cover some of that through distribution, inventories, other things like that. But of course, if that stuff is already in stock and we have to replenish, then we don't record that as revenue ourselves in the quarter. So it's a combination of end customer demand and us not being able to ship from our own factories during that period. I will tell you, the bulk of the demand is in 2 areas. And if you want me to roughly estimate, I would say about 70% of the impact is in the consumer market and about 30% of it is in automotive with a minor amount in the data segments. We looked through the customers that we've been talking to, most of them are consumer and automotive related.
Wamsi Mohan - BofA Merrill Lynch
That's very helpful, Martin. And then as a follow-up, you mentioned the orders strength in April, $300 million. Was it sort of -- you also alluded to strong post-Chinese New Year and March. So do you think that was all driven by demand? Or was there an element of restocking ahead of potential supply chain disruption fears, which also played into that order pattern?
Martin Slark
That's a great question and I know, I think that question's been asked of a lot of other component companies. And the only thing I can tell you, and frankly this is an opinion that I don't have hard data to back up, is when you look at the spike that we got in our distribution bookings immediately after the Japan issues, I wonder whether there was some stocking going on there in preparation for what they thought might be component shortages. But if it was a bubble, it was a little bubble, and I don't think that was evident in the April numbers. So if it was there, I think it was the back end of March and not so much in April. If you look at the April numbers, it appears to be pretty evenly spread across all of the end markets..
Operator
Your next question comes from the line of Anil Doradla of William Blair.
Anil Doradla - William Blair & Company L.L.C.
I had a couple of questions. There's some commentary about potential shortages in components on the handset space. Have you guys seen anything along those lines? And I have a couple of follow-ups.
Martin Slark
Anil, we haven't seen direct impact. And I guess where we would see it would be customers pushing out existing orders on us because they're unable to get other components. Like you, I've read about potential issues with perhaps, display screens and some other things like that. What seems to have happened, I think, is a lot of those customers are looking very hard on where else can they source the same products from where there is an issue. So I can't tell you as of yet. We have seen significant push outs in the cellphone market as a result of other component shortages. What I can tell you is I think that, that mid-market in the cellphone seems to have been weak in the third quarter generally. And I think that's been evident in the results of some of the companies that are strong in that segment.
Anil Doradla - William Blair & Company L.L.C.
Right. And clearly, you talked about smartphones and tablets, and that's what they could buy the larger industry to. For Molex's perspective, given that this trend, which perhaps would it be fair to say would continue on over the next couple of years, are you relocating your resources to perhaps focus more on these and de-emphasize on some other -- some of the other end markets?
Martin Slark
No, because if you look at the companies that are leading players in that market, and again, the key for us is to supply to all of them. I think trying to pick winners ahead of that time, it doesn't make sense. We already have significant sales coverage at all of those major customers. In fact, as we add sales resources going forward, what we're trying to do is increase our coverage of markets where we have a lower market share. So we're looking at some increased resources in industrial and medical and military markets. And then the Focus Accounts that I told you we've added this year, clearly we've added resources to cover those accounts and they're spread across all the end markets. But if you think about all of the companies that are challenging, the current industry leader in the tablet market, Molex would already have significant sales coverage at all those companies.
Anil Doradla - William Blair & Company L.L.C.
Right. And finally on the automotive segment, you guys were kind of close to breakeven a couple of quarters ago. Given the strong strength there, can you talk about -- give us some color around profitability of that particular segment?
Martin Slark
Yes. What I can tell you is if you went back 3 years ago, that was the market where we were losing the most money. And I think we're very proud to say as a result of the restructuring we've done and the tremendous efforts of our automotive team. And actually somewhat diversifying our customer base in Asia and being able to sell more standard products to a broader customer base and the success we've had particularly in infotainment and safety applications. We're now profitable in that automotive segment and believe we'll continue to improve that profitability as we move forward.
Operator
Your next question comes from William Stein of Crédit Suisse.
William Stein - Crédit Suisse AG
You guys are raising the dividend today, and I'm wondering what that signals to investors about your priorities for use of cash as it relates to M&A, which is something you've spoken about in the last couple of years about doing more of to drive growth.
Martin Slark
Yes, I think we have been fairly clear about our priorities for cash. Obviously the #1 priority is to have enough cash to reinvest back into the business, to keep it growing and we clearly are generating way more than the cash flow we need to do that. #2, we intend to protect the dividend and we've talked about trying to maintain this 3% yield. And so it signals that. We have a good pipeline of acquisition opportunities. And if you look at the strength of our balance sheet and the work that Dave has been doing with our bank to create additional liquidity, as appropriate opportunities come along, we will absolutely continue to make those. And the dividend will not restrict our ability to make those acquisitions. And so we believe -- and the thing we've cut back on and if you look back over the last 5 years, I think is the buyback. We believe that we would, the end of this fiscal year, probably talk to our board about a buyback, enough to avoid some asset dilutions from equity incentives. But of the priorities, we think we can with our cash flow and our growth fund reinvestment back in the business, dividend at the kind of yield rates we're talking about today and appropriate acquisitions to continue to grow the business. We can certainly do all 3.
William Stein - Crédit Suisse AG
That's helpful. Dave, maybe I can ask you one on margins.
David Johnson
Sure.
William Stein - Crédit Suisse AG
It looks like we're still after next quarter -- based on next quarter's guidance, we're still maybe 1% below the 14% target on op margin from the gross line. Am I correct to understanding the company's view that this is all a matter of metals pricing? Or is there more from an efficiency perspective that's something the company has to do aside from just pricing in metals.
David Johnson
Well, I will say there's things that we can do and are doing, continuing to do to try to improve our gross margin. There is -- we have a lot of initiatives going on. But the biggest single impact when you look back year-over-year is the metals pricing.
Martin Slark
Yes, let me chip into that too. I think a different way to look at that would say is the single biggest reason why we're not at 14% today is because of what's happened to raw material costs. So when you think the key raw materials we buy, not just gold but also copper, and think about the rising price of all the impact on plastics. If they had stayed reasonably flat, we would be at our goal. Now having said that, we believe that we have to attack that with pricing. We also think we have to attack it through change in the mix of business we bring in at the top end. The reason for going after these Focus Accounts is we think they're are end market segments where we can grow faster and be more profitable. And certainly change in the business mix over time helps. And then the work we've been doing to streamline our global logistics and our global footprint as a company, we think will also help that. So it's, I think, a two-sided coin. We certainly wouldn't sit here and say there's nothing we can do because of raw material costs. We think we can continue to grow and change the mix of our business and bring in more profitable business to the top end and attack the overall cost structure here to try and offset the raw material costs market.
William Stein - Crédit Suisse AG
I appreciate that. It's just, I mean, it sounds like the materials are going up and you're successful in increasing prices. So I guess maybe it eventually catches, the pricing catches up with materials or materials level out. But assuming that happens and you continue to attack logistics costs and you continue to improve the mix, can you talk to us about what a longer-term, whether there could be a higher longer-term operating margin through a combination of leverage and cost saves on the COGS line?
Martin Slark
I think when we set off on trying to change the model that Molex had, we said our goal was to get to 32% gross margin, 18% SG&A and 14% operating profit. And I think we've demonstrated now that we can control in our new structure, our costs at the SG&A level. And I think we have obviously seen headwinds from raw material costs in the last year that it stopped [ph] as getting to that 32% gold. So I can tell you we are focused like a laser on getting there first. But I think we need to get there first then talk about it, talk about where we go from there afterwards.
Operator
Your next question comes from the line of Shawn Harrison of Longbow Research.
Shawn Harrison
Just hopefully a few clarifications. When the direct Japan impact revenue of $20 million, I guess comes back to you, should there be any reason not to think the incremental margins will be the same on the upside as they were kind of on a drag right now?
David Johnson
No reason to think so. And just to clarify that, we're using 50% fall-through on that because our Japanese business has a higher fall-through than other parts of our business because of their cost structure.
Shawn Harrison
Okay. And then just maybe a quick cash flow follow-up and then if you could also just maybe guide us for the other income into the June quarter as well given the decline this quarter. But cash flow, it looks like there's an $18 million payment for acquisition this quarter.
David Johnson
Yes.
Shawn Harrison
Just that it was tied to a legacy acquisition or something that happened? And then also just CapEx...
David Johnson
That was the acquisition that we did in the first quarter for Luxtera.
Shawn Harrison
Okay, Luxtera. And then CapEx, is there any change in terms of kind of the range right now that maybe you have to spend a little bit more short term, I think it's a tooling up, so maybe that rises more into the high single digits. Just any...
David Johnson
Good point. What we would expect to do, as we said, is to get insurance coverage for the rebuilding of the tools. We have not factored that in yet. So yes, generally speaking, we would be looking at a $62 million to $63 million range for CapEx for the fourth quarter, which is below our 7% level. There may be some movement on that given, as you said, the tools that we would be putting in place because of the Japan situation.
Shawn Harrison
Okay. And then the other income expectation for the June quarter?
David Johnson
It's probably somewhere between where it is today. So I think something around probably $1 million to $2 million income roughly is probably a fair place to be.
Shawn Harrison
Okay. And you said the principal decline quarter-to-quarter was mainly FX?
David Johnson
Yes.
Operator
Your next question comes from the line of Sherri Scribner of Deutsche Bank.
Sherri Scribner - Deutsche Bank AG
I just wanted some clarification. Did you mention how much the Focus Accounts grew this quarter?
Martin Slark
We've mentioned that the Focus Accounts had now become 32% of revenue year-over-year. We didn't give a specific growth number for the Focus Accounts year-over-year. I can get that number for you and certainly give it to you at the end of the call.
Sherri Scribner - Deutsche Bank AG
Okay. And then just thinking about the higher raw material costs going forward, I don't know if anyone is expecting that to abate in fiscal '12. But if we assume that material costs stay at these high levels, is there a certain amount of revenue that you could reach that would help you get to the operating margins of 14%? Or are we not really looking at 14% until the raw material costs come down?
David Johnson
Our belief is that in fiscal year '12 if raw materials stay where they are that we can get to the 14%, assuming that the situation in Japan resolves itself. Then when that is resolved and if the prices stay where they are, we do believe we can get to the 14% in fiscal year '12.
Martin Slark
And the Focus Accounts, were up 25% this quarter versus the same quarter last year.
Sherri Scribner - Deutsche Bank AG
Okay, great. So is there a specific revenue level that you need to get to that 14%? Or you just believe that you can get to it in fiscal '12 after we move beyond the Japanese issues?
David Johnson
We haven't tried to calculate the specific revenue level. But if you -- we were heading for a significant increase in revenue in Q4 ex the Japanese situation that would have gotten us pretty close to the 14%.
Operator
Your next question comes from the line of Jim Suva of Citi.
Jim Suva - Citigroup Inc
A question on the use of cash following up from some of your previous commentary, and you mentioned that you wanted to first of all invest in the business. Does that include right now a, I guess you call it a rightful distraction to rebuilding the Japan post the natural disaster? Or do you straight look at M&A? What I'm wondering is, is just rebuilding Japan right now kind of the top priority? Or can you look past that event if it's already in process and already start looking at M&A?
Martin Slark
It's really different people, Jim. It's a great question but when I talked about the 80 tools, it's roughly 60 dyes and some 20 assembly machines that are being built either by our own tooling operations or in a couple of cases, outside vendors. And as Dave mentioned, the replacement cost of those is covered by insurance. So that certainly doesn't, in any way, take money away from us in terms of money we would have spent on M&A. And obviously, the people that are working on M&A for us is not the same people in our operations group that are focused on replacing those tools. So certainly from a senior management perspective, immediately after the earthquake, try and understand impact of the damage, making sure we didn't impact our customers and that we could recover quickly, which we're obviously going to be able to do, took a little bit of time. But certainly, it's not a distraction from this point onwards that would have an impact on our ability to close appropriate acquisitions or from a funding perspective.
David Johnson
And the impact on our operations in Japan are very minor. So in terms -- about those tools and their recovery is very fast and operationally, it's very small.
Martin Slark
I think one thing Jim just to put it in context, we ship each month about 53,000 -- each quarter, about 53,000 different SKUs. The number of tools in Japan impacted 442 part numbers. So that puts in context, but I think the extent of the impact on us is an organization.
Jim Suva - Citigroup Inc
Great. And then as a quick follow-up because unfortunately I am not an insurance expert, can you just remind us a little bit about in situation like the Japan earthquake, which is a natural disaster, what does your insurance cover or you at least put in to the policy claim? It sounds like the tooling and equipment destruction. Is there also like loss of business or business interruption or loss of earnings, recoupment? Or can you just walk us through kind of how that process is?
David Johnson
Sure. There's really -- there's 3 general categories. There's the direct property insurance, which is for the tools and we are covered on the replacement cost of those tools. So despite the value, the written down value of the tools when we replace the tool, we will get reimbursement subject to deductibles for the replacement cost of those tools. That's the simplest. And there's really 2 business interruption impacts. One is what I'll call direct business interruption where revenue and business is impacted because of the situation in Japan directly. And we are working to quantify what that is, and we've given you some numbers now of what we believe it is to begin with. And the second one is an indirect business interruption when the supply chain causes an impact on our business, which is more of an indirect nature. That's more difficult to calculate. We will still work with that, but that's a more complex calculation.
Martin Slark
And then that last point that Dave mentioned, we are initially concerned about not being able to get some plastic materials and things from some vendors that are in Japan. But between their own recovery and alternative sources we can use, we think that third one is a really minor factor in the whole picture.
Jim Suva - Citigroup Inc
And the expedited shipping costs or fulfilling, let's say from Europe and shipping it around the world, is that the burden or responsibility of Molex? Or do you share that with the customer? Or how did that dialogue work?
Martin Slark
It's a combination of both. I think in some cases when we work with the customers, we are able to pass some of that on. But some major customers, we absorbed it ourselves, and a little bit of it is covered by the business interruption. But there's clearly in the current quarter and at the end of March, there were some costs that we wouldn't recoup.
Operator
Your next question comes from the line of Matt Sheerin of Stifel, Nicolaus.
Matthew Sheerin - Stifel, Nicolaus & Co., Inc.
Just most of the questions obviously have been asked here, a couple of follow-ups. On Japan, it sounds like you don't really have enough visibility into the September quarter to tell whether or not you're either going to have a positive or negative impact from what you're seeing now. Is that correct?
Martin Slark
I think Matt, you're right. I mean it's too far out to guess. And I don't think anybody knows yet how Japan is going to recover with this power shortage, et cetera. And there's a lot of moving pieces here. For example on the upside, we've seen some situations where we have some competitors in Japan whose own plants were directly impacted. And we've been asked whether we could supply replacement products, et cetera. And so we don't know whether there would be incremental upside revenue for those things. And what we're also seeing, of course, is some of the big major Japanese companies look at moving production to other offshore locations and things like that. So there's a lot of moving pieces there. But my sense is that certainly, all of our own tooling will be back and fully operational by the end of June. I think the direct disruption to most of the manufacturers in terms of the earthquake, et cetera should be recovered over the next quarter or so. And I think the loss of volume there is something that could go on for the second half of this year and early into next year. For example, the loss of those 3 million vehicles, I think you get that back over time. Now what I don't think is very hard to calculate and certainly when Liam and I were in Japan, Japan was very quiet and all the country itself has obviously been very severely impacted by this. And Japan is a significant end market for us, so certainly consumer markets -- consumer demand in Japan is going to be down for some time and it's impossible for us to guess that.
Matthew Sheerin - Stifel, Nicolaus & Co., Inc.
Got you. Okay. And at the tablet space because you seem to be pretty upbeat about prospects there. Obviously as you said, there's one big customer. You talked about a lot of design activities with other customers. But are you starting to see real volume orders from those other customers? Or if not, when would you expect to see that?
Martin Slark
We have seen, as I mentioned in previous calls, we have a global CRM System where we track all the different projects that we do. And there's billions and billions of dollars of projects on there. There are about 80 different design projects related to tablet products in that CRM System. Now many of those are different size products, some of them never end up going into production. What we have seen is some initial orders going and we actually shipped into other customers who are obviously trying to compete with the industry leader there. But the relative dollar values are still fairly small. And I think you're pretty familiar with the companies that have come out with other tablet products on the Android platform, we're trying to compete in that segment. What we have to do, I think, is it's impossible for us to tell in the long run where that market share is going to go. So we just have to make sure that we are working with all those companies. And the good news is, these aren't new companies. I mean, these companies we're already selling to -- who are making cellphones or notebooks, who are now bringing out tablet format products. We're already in there calling on them every day. And I don't know who's going to win in that market, but I think we're pretty confident to get our fair share of the business. Now I think you also have to put in context. I don't know what the exact dollar content is as for connector wise in a tablet. But think about sort of a $4, $5 range and if you think about $50 million to $60 million -- 50 to 60 million units being built this year, you're talking about $300 million in a $40 billion market. So it's an exciting new format and certainly a growth opportunity that wasn't there a year ago, but it doesn't move the needle overall.
Operator
Your next question comes from the line of Ryan Jones of RBC Capital Markets.
Ryan Jones - RBC Capital Markets, LLC
Just a quick one here at the end. I know you talked in the past about your automotive business being relatively balanced by geography. I was wondering do you have content on all the 3 million cars you expect to come out of the forecast due to Japan? Could you quantify what the dollar content is for your Japanese business? And can you tell us what the relative mix is of your Japanese OEMs relative to as a percentage of your total Asia auto business in that segment?
Martin Slark
Yes. It's very hard for me to give you all that detail because we don't sell directly to Toyota and Honda and the direct Japanese companies that have been impacted by this. What we do is we sell to the tier 1 companies that supply them with the sub-assemblies that go into those cars. What I can tell you is that compared to a few years ago when our automotive business was very U.S. biased, it's expanded significantly in Europe. And in recent years when we moved a lot of our resource to do that, is now growing tremendously in Southeast Asia. And we have an automotive unit in Japan that focuses on those Japanese customers. You do the design in work at those companies that supply the products to the tier 1 companies like Yazaki and people like that, that supply them. So very impossible for me to give you the kind of granular detail that you talked about. Yes, in terms of the loss of vehicles, we believe that the impact on us directly as a result of losing those vehicles and disrupted production in Japan as we've said is about $2 million to $4 million a month. So the $20 million we think we would lose in the fourth quarter for us of automotive total revenue, we think probably about $10 million to $12 million of that is in the automotive market, obviously primarily with Japanese tier 1 suppliers.
Ryan Jones - RBC Capital Markets, LLC
All right. And then my one follow-up question, hopefully with all this Japan focus, it hasn't obscured the fact that your OpEx stayed relatively flat sequentially on a dollar basis, which I think is quite a positive accomplishment considering how weak the dollar has become in the quarter and how rapid wage rates are growing overseas. So I was hoping you give us a little color on what specifically drove the sequential flatness this quarter.
Martin Slark
Yes. We worked really hard, I think, to try and get our gross margin to 32% and get our SG&A down below 18%. And we've set some pretty tight limits around the organization, what we're going to spend money on. And I think now with our new global structure and then interestingly as more growth occurred in Asia where our SG&A costs are lower, we think we can hold that. And so as we continue to grow the company, we are going to continue to focus on this gross margin, hold that SG&A costs. And we think we'll be able to drive more fall-through to the bottom line, which is clearly what we're trying to do.
Operator
Your final question is a follow-up question from Amitabh Passi of UBS.
Amitabh Passi - UBS Investment Bank
Martin, to the extent that you are able to get some incremental business from suppliers in Japan that are unable to satisfy demand, I mean would you expect this to be a quarter 2 phenomena? Or do you think there could be some potential permanent shift in business here?
Martin Slark
I think for the purposes of this call, I would say that it's a short-term phenomenon because obviously there's very tight linkage between Japanese suppliers and the Japanese customers. Now Molex is viewed very much as a Japanese company in Japan. And I think we are and to some extent, we'll be trying to help out the situation there on a short-term basis. The only reason you would get it long term, I think, it would be if those companies decided not to retool those products. What I honestly don't know is the insurance coverage in Japan is not what you would normally see around the rest of the world. In terms of Japanese companies, typically don't have similar levels of insurance. So there may be situations there where they decide not to retool products where we keep it. But it's too early to say that. And certainly by the end of the fourth quarter, our fourth quarter, I can give you a clearer picture of what we think the longer-term trends would be.
Great. We appreciate all of you being on the call today. I think we've answered all the questions now, and we certainly look forward to talking to you again at the end of our fourth quarter. Thank you very much.
Operator
Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day.
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