12/04/2013 //
There are three things that will kill the profitability of an industry and the individual companies within an industry.
In 2009, the connector industry was faced with all three profit killers:
Year 2009 was a perfect storm of profit killers. Operating income declined -16.8%. Net income declined -17.0%. Return on equity and return on assets were -19.7% and -10.4% respectively.
In 2010, the industry experienced a complete reversal of misfortune when sales increased +28.5%, raw material prices stabilized and the industry implemented price increases for the first time in years.
This resulted in a return to high profitability, the historical norm for the connector industry. Operating income soared to 13.4% of sales. Net income was an impressive 9.5% of sales and return on equity and return on assets increased to a very healthy 12.3% and 6.4% respectively.
Since 2010 the industry has maintained excellent profitability in spite of modest growth. The reason is connector price stability (no price erosion) and declining raw material costs.
The following table shows the industry income statement (percentage of sales) from 2008 through the first half of 2013. You will note double digit operating income, near double digit net income, and double digit return on equity. You will also note the industry experienced zero price erosion.
The following table shows the industry income statement (percentage of sales) from 2008 through the first half of 2013. You will note double digit operating income, near double digit net income, and double digit return on equity. You will also note the industry experienced zero price erosion.
2008 | 2009 | 2010 | 2011 | 2012 | 1st Half 2013 |
|
Sales | 100.0% | 100.0% | 100.0% | 100.0% | 100.0% | 100.0% |
COGS | 73.8% | 72.6% | 68.6% | 69.8% | 69.9% | 68.3% |
Gross Profit | 26.2% | 27.4% | 31.4% | 30.2% | 30.0% | 31.7% |
SG&A | 16.8% | 18.7% | 17.1% | 15.4% | 15.2% | 18.3% |
Operating Income | 9.3% | -16.8% | 13.4% | 12.7% | 12.0% | 13.4% |
Net Income | 5.8% | -17.0% | 9.5% | 9.0% | 8.8% | 9.8% |
Return on Equity | 14.8% | -19.7% | 12.3% | 13.1% | 11.3% | 12.5% |
Return on Assets | 8.3% | -10.4% | 6.4% | 7.0% | 5.9% | 6.5% |
% Change in Sales | 2.7% | -21.9% | 28.5% | 6.6% | -2.7% | 1.7% |
Price Erosion | -2.0% | -3.0% | 3.0% | 0.0% | -1.0% | 0.0% |
Ronald E. Bishop founded Bishop & Associates Inc., a market research firm that specializes in the world electronic connector industry, in 1985. The firm publishes a monthly newsletter titled “The Bishop Report,” and the twice-monthly digital publication Connector Supplier.
The reports, produced by a staff of 20 researchers, focus on geographic regions, end-user equipment markets, connector products, and interconnect technologies.
The firm also provides executive placement services and conducts multi-client studies and customer surveys, and assists in merger and acquisition activity.