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Industry Profitability is Excellent

12.04.2013 // Ronald E. Bishop // Connectors

There are three things that will kill the profitability of an industry and the individual companies within an industry.

  1. A significant decline in sales. This happened in 2009 when the U.S. experienced the financial crisis that was the result of the housing market crash. Sales declined -21.9% and operating income plunged from double digits to -16.8% of sales (see the table in this article).
  2. A significant increase in raw material costs. This happened in the 2007 through 2010 time frame. Copper, gold and plastics, all important raw materials in the connector industry, experienced a rapid and sustained rise in price.
  3. A decline in connector prices. This occurred in 2008 and 2009 when connector prices declined 5% over the two year period.

In 2009, the connector industry was faced with all three profit killers:

  1. Sales decline -21.9%
  2. Raw material costs soured
  3. Connector prices declined -3.0%

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.

Industry Income Statememt

Percentage of Sales

2008-2013)

  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%
             
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Statements of fact and or opinions expressed in MarketEYE by its contributors are the responsibility of the authors alone and do not imply an opinion of the officers or the representatives of TTI, Inc.

Featured Contributor:
Ronald E. Bishop

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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.

Bishop & Associates, Inc.

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