UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ | | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended March 31,September 30, 2010
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o | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 0-7491
MOLEX INCORPORATED
(Exact name of registrant as specified in its charter)
| | |
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Delaware | | 36-2369491 |
(State or other jurisdiction of | | (I.R.S. Employer |
incorporation or organization) | | 36-2369491 (I.R.S. Employer Identification No.) |
2222 Wellington Court, Lisle, Illinois 60532
(Address of principal executive offices)
Registrant’s telephone number, including area code: (630) 969-4550
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yesþ Noo
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yesoþ Noo
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filerþ | | Accelerated filero | | AcceleratedNon-accelerated filero | | Non-accelerated filero | | Smaller reporting companyo |
| | | | (Do not check if a smaller reporting company) | | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ
On April 22,October 21, 2010, the following numbers of shares of the Company’s common stock were outstanding:
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Common Stock | | | 95,560,076 | |
Class A Common Stock | 78,373,570 | | 79,225,200 | |
Class B Common Stock | 94,225 | | 94,255 | |
Molex Incorporated
INDEX
Section 302 Certification of Chief Executive Officer
Section 302 Certification of Chief Financial Officer
Section 906 Certification of Chief Executive Officer
Section 906 Certification of Chief Financial Officer
| | | | 2
PART I
Item 1. Financial Statements
Molex Incorporated
Condensed Consolidated Balance Sheets
(in thousands)
| | | | | | | | | | | | | | | | |
| | Mar. 31, | | June 30, | | | Sept. 30, | | June 30, | |
| | 2010 | | 2009 | | | 2010 | | 2010 | |
| | (Unaudited) | | | (Unaudited) | |
ASSETS | ASSETS | |
Current assets: | | |
Cash and cash equivalents | | $ | 431,754 | | $ | 424,707 | | | $ | 340,644 | | $ | 376,352 | |
Marketable securities | | 11,636 | | 43,234 | | | 18,261 | | 18,508 | |
Accounts receivable, less allowances of $42,445 and $32,593 respectively | | 657,280 | | 528,907 | | |
Accounts receivable, less allowances of $49,831 and $43,650 respectively | | | 790,101 | | 734,932 | |
Inventories | | 419,864 | | 354,337 | | | 546,808 | | 469,369 | |
Deferred income taxes | | 42,793 | | 27,939 | | | 113,455 | | 112,531 | |
Other current assets | | 70,093 | | 68,449 | | | 41,963 | | 64,129 | |
| | | | | | | | | | |
Total current assets | | 1,633,420 | | 1,447,573 | | | 1,851,232 | | 1,775,821 | |
Property, plant and equipment, net | | 1,054,575 | | 1,080,417 | | | 1,111,292 | | 1,055,144 | |
Goodwill | | 130,099 | | 128,494 | | | 132,848 | | 131,910 | |
Non-current deferred income taxes | | 78,163 | | 89,332 | | | 90,318 | | 94,191 | |
Other assets | | 189,549 | | 196,341 | | | 181,831 | | 179,512 | |
| | | | | | | | | | |
Total assets | | $ | 3,085,806 | | $ | 2,942,157 | | | $ | 3,367,521 | | $ | 3,236,578 | |
| | | | | | | | | | |
| | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | LIABILITIES AND STOCKHOLDERS’ EQUITY | |
Current liabilities: | | |
Current portion of long-term debt and short-term borrowings | | $ | 103,048 | | $ | 224,340 | | | $ | 116,200 | | $ | 110,070 | |
Accounts payable | | 325,398 | | 266,633 | | | 385,271 | | 395,474 | |
Accrued expenses | | 253,121 | | 218,429 | | |
Accrued expenses: | | |
Accrual for unauthorized activities in Japan | | | 175,076 | | 165,815 | |
Income taxes payable | | 7,493 | | 4,750 | | | 37,374 | | 21,505 | |
Other | | | 214,599 | | 219,832 | |
| | | | | | | | | | |
Total current liabilities | | 689,060 | | 714,152 | | | 928,520 | | 912,696 | |
Other non-current liabilities | | 19,330 | | 21,862 | | | 18,672 | | 19,869 | |
Accrued pension and postretirement benefits | | 114,949 | | 113,268 | | | 140,889 | | 135,448 | |
Long-term debt | | 182,459 | | 30,311 | | | 171,907 | | 183,434 | |
| | | | | | | | | | |
Total liabilities | | 1,005,798 | | 879,593 | | | 1,259,988 | | 1,251,447 | |
| | | | | | | | | | |
| | |
Commitments and contingencies | | |
| | |
| | |
Stockholders’ equity: | | |
Common stock | | 11,193 | | 11,138 | | | 11,232 | | 11,207 | |
Paid-in capital | | 631,848 | | 601,459 | | | 644,944 | | 638,796 | |
Retained earnings | | 2,307,993 | | 2,355,991 | | | 2,280,685 | | 2,232,445 | |
Treasury stock | | | (1,097,518 | ) | | | (1,089,322 | ) | | | (1,100,402 | ) | | | (1,098,087 | ) |
Accumulated other comprehensive income | | 226,492 | | 183,298 | | | 271,074 | | 200,770 | |
| | | | | | | | | | |
Total stockholders’ equity | | 2,080,008 | | 2,062,564 | | | 2,107,533 | | 1,985,131 | |
| | | | | | | | | | |
Total liabilities and stockholders’ equity | | $ | 3,085,806 | | $ | 2,942,157 | | | $ | 3,367,521 | | $ | 3,236,578 | |
| | | | | | | | | | |
See accompanying notes to condensed consolidated financial statements.
3
Molex Incorporated
Condensed Consolidated Statements of Operations
(Unaudited)
(in thousands, except per share data)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | | Three Months Ended | |
| | March 31, | | March 31, | | | September 30, | |
| | 2010 | | 2009 | | 2010 | | 2009 | | | 2010 | | 2009 | |
Net revenue | | $ | 756,294 | | $ | 505,539 | | $ | 2,159,903 | | $ | 2,011,252 | | | $ | 897,672 | | $ | 674,033 | |
Cost of sales | | 520,564 | | 412,143 | | 1,520,218 | | 1,492,312 | | | 622,596 | | 482,614 | |
| | | | | | | | | | | | | | |
Gross profit | | 235,730 | | 93,396 | | 639,685 | | 518,940 | | | 275,076 | | 191,419 | |
| | | | | | | | | | | | | | |
| | |
Selling, general and administrative | | 156,374 | | 139,071 | | 452,108 | | 450,034 | | | 157,056 | | 145,628 | |
Restructuring costs and asset impairments | | 9,068 | | 44,344 | | 90,596 | | 105,904 | | | — | | 55,894 | |
Loss on unauthorized activities in Molex Japan | | 30,967 | | — | | 30,967 | | — | | |
Goodwill impairment | | — | | — | | — | | 93,140 | | |
| | | | | | | | | | |
Unauthorized activities in Japan | | | 5,542 | | 5,554 | |
| | | | | |
Total operating expenses | | 196,409 | | 183,415 | | 573,671 | | 649,078 | | | 162,598 | | 207,076 | |
| | | | | | | | | | | | | | |
| | |
Income (loss) from operations | | 39,321 | | | (90,019 | ) | | 66,014 | | | (130,138 | ) | | 112,478 | | | (15,657 | ) |
| | |
Interest (expense) income, net | | | (2,298 | ) | | 251 | | | (4,584 | ) | | 2,287 | | | | (1,335 | ) | | | (1,000 | ) |
Other (expense) income | | | (2,721 | ) | | 3,259 | | 62 | | 24,252 | | | | (351 | ) | | 3,484 | |
| | | | | | | | | | | | | | |
Total other (expense) income | | | (5,019 | ) | | 3,510 | | | (4,522 | ) | | 26,539 | | | | (1,686 | ) | | 2,484 | |
| | | | | | | | | | | | | | |
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Income (loss) before income taxes | | 34,302 | | | (86,509 | ) | | 61,492 | | | (103,599 | ) | | 110,792 | | | (13,173 | ) |
| | |
Income taxes | | 10,476 | | | (27,909 | ) | | 29,975 | | | (2,052 | ) | | 35,688 | | 1,963 | |
| | | | | | | | | | | | | | |
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Net income (loss) | | $ | 23,826 | | $ | (58,600 | ) | | $ | 31,517 | | $ | (101,547 | ) | | $ | 75,104 | | $ | (15,136 | ) |
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Earnings (loss) per share: | | |
Basic | | $ | 0.14 | | $ | (0.34 | ) | | $ | 0.18 | | $ | (0.58 | ) | | $ | 0.43 | | $ | (0.09 | ) |
Diluted | | $ | 0.14 | | $ | (0.34 | ) | | $ | 0.18 | | $ | (0.58 | ) | | $ | 0.43 | | $ | (0.09 | ) |
| | |
Dividends declared per share | | $ | 0.1525 | | $ | 0.1525 | | $ | 0.4575 | | $ | 0.4575 | | | $ | 0.1525 | | $ | 0.1525 | |
| | |
Average common shares outstanding: | | |
Basic | | 173,858 | | 173,228 | | 173,689 | | 174,985 | | | 174,370 | | 173,486 | |
Diluted | | 174,838 | | 173,228 | | 174,523 | | 174,985 | | | 175,156 | | 173,486 | |
See accompanying notes to condensed consolidated financial statements.
4
Molex Incorporated
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
| | | | | | | | | | | | | | | | |
| | Nine Months Ended | | | Three Months Ended | |
| | March 31, | | | September 30, | |
| | 2010 | | 2009 | | | 2010 | | 2009 | |
Operating activities: | | |
Net income (loss) | | $ | 31,517 | | $ | (101,547 | ) | | $ | 75,104 | | $ | (15,136 | ) |
Add non-cash items included in net income (loss): | | |
Depreciation and amortization | | 180,699 | | 190,085 | | | 59,108 | | 60,589 | |
Share-based compensation | | 21,024 | | 19,393 | | | 5,149 | | 7,092 | |
Goodwill impairment | | — | | 93,140 | | |
Non-cash restructuring and other costs, net | | 20,041 | | 20,041 | | | — | | 13,191 | |
Other non-cash items | | 21,817 | | | (10,649 | ) | | 8,634 | | 6,625 | |
Changes in assets and liabilities: | | |
Accounts receivable | | | (122,127 | ) | | 282,082 | | | | (29,343 | ) | | | (72,586 | ) |
Inventories | | | (62,059 | ) | | 93,916 | | | | (57,988 | ) | | 1,482 | |
Accounts payable | | 48,808 | | | (167,781 | ) | | | (24,876 | ) | | 32,131 | |
Other current assets and liabilities | | 31,147 | | | (50,148 | ) | | 27,886 | | 39,092 | |
Other assets and liabilities | | 11,059 | | | (56,947 | ) | | | (1,079 | ) | | | (1,862 | ) |
| | | | | | | | | | |
| |
Cash provided from operating activities | | 181,926 | | 311,585 | | | 62,595 | | 70,618 | |
| | |
Investing activities: | | |
Capital expenditures | | | (150,001 | ) | | | (127,688 | ) | | | (71,192 | ) | | | (45,634 | ) |
Proceeds from sales of property, plant and equipment | | 8,082 | | 7,561 | | | 643 | | 3,192 | |
Proceeds from sales or maturities of marketable securities | | 47,339 | | 11,694 | | | 2,184 | | 35,303 | |
Purchases of marketable securities | | | (15,259 | ) | | | (33,399 | ) | | | (1,257 | ) | | | (958 | ) |
Acquisitions | | | (10,097 | ) | | | (73,447 | ) | |
Other investing activities | | | (5,308 | ) | | 655 | | | — | | | (355 | ) |
| | | | | | |
| | | | | |
Cash used for investing activities | | | (125,244 | ) | | | (214,624 | ) | | | (69,622 | ) | | | (8,452 | ) |
| | |
Financing activities: | | |
Proceeds from revolving credit facility and short term loans | | 154,000 | | 115,000 | | | 20,000 | | 90,000 | |
Payments on revolving credit facility | | | (79,000 | ) | | | (105,000 | ) | | | (10,000 | ) | | | (40,000 | ) |
Net change in long-term debt | | | (53,194 | ) | | 47,300 | | |
| |
Proceeds from issuance of long-term debt | | | 797 | | — | |
Payments of long-term debt | | | | (24,840 | ) | | | (196 | ) |
Cash dividends paid | | | (79,420 | ) | | | (73,222 | ) | | | (26,565 | ) | | | (26,486 | ) |
Exercise of stock options | | 2,257 | | 1,233 | | | 358 | | 266 | |
Purchase of treasury stock | | — | | | (76,342 | ) | |
Other financing activities | | | (2,056 | ) | | | (870 | ) | | | (967 | ) | | | (700 | ) |
| | | | | | | | | | |
| |
Cash used for financing activities | | | (57,413 | ) | | | (91,901 | ) | |
Cash (used for) provided from financing activities | | | | (41,217 | ) | | 22,884 | |
| | |
Effect of exchange rate changes on cash | | 7,778 | | | (23,019 | ) | | 12,536 | | 11,242 | |
| | | | | | | | | | |
Net increase (decrease) in cash and cash equivalents | | 7,047 | | | (17,959 | ) | |
Net (decrease) increase in cash and cash equivalents | | | | (35,708 | ) | | 96,292 | |
Cash and cash equivalents, beginning of period | | 424,707 | | 475,507 | | | 376,352 | | 424,707 | |
| | | | | | |
| | | | | |
Cash and cash equivalents, end of period | | $ | 431,754 | | $ | 457,548 | | | $ | 340,644 | | $ | 520,999 | |
| | | | | | | | | | |
See accompanying notes to condensed consolidated financial statements.
5
Molex Incorporated
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
Molex Incorporated (together with its subsidiaries, except where the context otherwise requires, “we,” “us,” and “our”) manufactures electronic components, including electrical and fiber optic interconnection products and systems, switches and integrated products in 4039 manufacturing locations in 1716 countries.
The accompanying Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments consisting of normal recurring accruals considered necessary for a fair statement of results for the interim period have been included. Operating results for the three and nine months ended March 31,September 30, 2010 are not necessarily an indication of the results that may be expected for the year ending June 30, 2010.2011. The Condensed Consolidated Balance Sheet as of June 30, 20092010 was derived from our audited consolidated financial statements for the year ended June 30, 2009.2010. These financial statements and related notes should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended June 30, 2009.2010.
The preparation of the unaudited financial statements in conformity with GAAP requires the use of estimates and assumptions related to the reporting of assets, liabilities, revenues, expenses and related disclosures. Significant estimates and assumptions are used in the estimation of income taxes, pension and retiree health care benefit obligations, stock options, accrual for unauthorized activities in Japan, allowances for accounts receivable and inventory and impairment reviews for goodwill, intangible and other long-lived assets. Estimates are revised periodically. Actual results could differ from these estimates. Material subsequent events are evaluated and disclosed through the report issuance date.
2. Loss on Unauthorized Activities in Molex Japan
InAs we previously reported, in April 2010, we launched an investigation into unauthorized activities in Molex Japan. We learned that an individual working in Molex Japan’s finance group obtained unauthorized loans from third party lenders, that included in at least one instance the attempted unauthorized lienspledge of Molex Japan facilities as security, in Molex Japan’s name which we believethat were used to cover losses resulting from unauthorized trading, activities, including margin trading, in Molex Japan’s name. We also believelearned that the individual has misappropriated cashfunds from Molex JapanJapan’s accounts to cover losses from unauthorized trading activities.trading. The individual has admitted to forging documentation in arranging and concealing the transactions. We have retained outside legal counsel, and they have retained forensic accountants, to investigate the matter and the extent of Molex Japan’s liability, if any, for the unauthorized loans and any possible recourse to recover the misappropriated cash.matter. The investigation includes a review of the facts and circumstances surrounding the unauthorized transactions, including a search of relevant physical and electronic documents and interviews with officers and employees.
Following is a summary of our preliminary findings of the unauthorized loans and misappropriated cash, which we conducted with the assistance of our legal counsel:
| • | | The amount of unauthorized loans outstanding as of March 31, 2010 was ¥16.0 billion ($173.0 million). The dates, terms and amounts of the original borrowings are unclear. These unauthorized loans were not recorded in Molex’s books and records. |
|
| • | | The amount of misappropriated cash was ¥1.864 billion ($20.2 million) as of March 31, 2010. Molex Japan repaid a ¥1.0 billion ($10.8 million) unauthorized loan on April 5, 2010. As of March 31, 2010, we recognized an expense for the amount of misappropriated cash and repayment of the unauthorized loan pending the investigation of the unauthorized activity. |
We believe that if Molex Japan is liable for the unauthorized loans, our maximum loss would be approximately $193.2 million, of which $31.0 million has been reflected as a charge in the current quarter and $162.2 million is a contingent liability. With respect to the contingent liability, we do not believe that a loss is probable at this time and consequently did not record any loss pendingcompleted.
Based on the results of the completed investigation, and extent of ourwe recorded for accounting purposes an accrued liability if any. The total amountfor the effect of unauthorized activities pending the resolution of these matters including the legal proceedings reported in Note 12. Cumulative investigative and legal costs through September 30, 2010 were $10.3 million, including $5.5 million in the first quarter of fiscal 2011. We believe these unauthorized activities and related losses occurred from at least as early as 1988 through 2010, with approximately $167.4 million of losses occurring prior to June 30, 2007. The accrued liability for these potential net losses was $175.1 million as of September 30, 2010, including $9.3 million in foreign currency translation, which was recorded as a component of other comprehensive income. To the extent we prevail in not having to pay all or any portion of the outstanding unauthorized loans, we would recognize a gain in that amount.
In addition, we have a contingent liability of $11.2 million for other loan-related expenses, interest expense and misappropriated cash referred to above are baseddelay damages on the status of the investigation.outstanding unauthorized loans.
6
Moreover, we have also learned that the actual timing, terms and amounts of authorized loans with an authorized Japanese bank were inconsistent with documents provided to Molex Japan by the above referenced individual. These differences have been resolved and the terms of our authorized borrowings in Molex Japan are included in Note 9.
3. Restructuring Costs and Asset Impairments
During fiscal 2007,On June 30, 2010 we undertookcompleted a multi-year restructuring plan designed to reduce costs and to improve return on invested capital in connection with a new global organization that was effective July 1, 2007. A majority of the plan relatesrelated to facilities located in North America, Europe and EuropeJapan and, in general, the movement of manufacturing activities atfrom these plants to otherlower-cost facilities. Net restructuring cost during the three months ended March 31, 2010 was $9.0 million, consisting of $8.9 million of severance costs and $0.1 million in asset impairments. Net restructuring cost during the three months ended December 31, 2009 was $25.6 million, consisting of $18.8 million for severance costs and $6.8 million of asset impairments. Net restructuring costs during the three months ended March 31, 2009, was $44.3 million, consisting of $28.9 million of severance costs and $15.4 million in asset impairments. The cumulative restructuring costs and related asset impairments since we announced the restructuring plan totaled $288.5 million.
We expect to incur total restructuring and asset impairment costs related to restructuring actions approximating $300 million. Management approved several actions related to this plan. The total cost estimates increased as we formulated detailed plans for the latest additions to the restructuring actions, which included reorganization of our global product divisions in fiscal 2009. A portion of this plan involves cost savings or other actions that do not result in incremental expense, such as better utilization of assets, reduced spending and organizational efficiencies. This plan includes employee reduction targets throughout the company, and we expect to achieve these targets through ongoing employee attrition and terminations.
The following table sets forth restructuring costs and asset impairments by segment (in thousands):
| | | | | | | | | | | | | | | | |
| | | | | | Custom & | | | Corporate | | | | |
| | Connector | | | Electrical | | | and Other | | | Total | |
Cumulative costs at June 30, 2009 | | $ | 116,066 | | | $ | 38,555 | | | $ | 43,278 | | | $ | 197,899 | |
Net restructuring costs during the first quarter: | | | | | | | | | | | | | | | | |
Severance costs | | | 37,469 | | | | 4,639 | | | | 595 | | | | 42,703 | |
Asset impairments | | | 13,191 | | | | — | | | | — | | | | 13,191 | |
| | | | | | | | | | | | |
Cumulative restructuring costs and asset impairments at Sept. 30, 2009 | | $ | 166,726 | | | $ | 43,194 | | | $ | 43,873 | | | $ | 253,793 | |
Net restructuring costs during the second quarter: | | | | | | | | | | | | | | | | |
Severance costs | | | 12,209 | | | | 3,189 | | | | 3,455 | | | | 18,853 | |
Asset impairments | | | 6,119 | | | | 459 | | | | 204 | | | | 6,782 | |
| | | | | | | | | | | | |
Cumulative restructuring costs and asset impairments at Dec. 31, 2009 | | $ | 185,054 | | | $ | 46,842 | | | $ | 47,532 | | | $ | 279,428 | |
Net restructuring costs during the third quarter: | | | | | | | | | | | | | | | | |
Severance costs | | | 6,459 | | | | 2,490 | | | | — | | | | 8,949 | |
Asset impairments | | | 85 | | | | — | | | | 34 | | | | 119 | |
| | | | | | | | | | | | |
Cumulative restructuring costs and asset impairments at Mar. 31, 2010 | | $ | 191,598 | | | $ | 49,332 | | | $ | 47,566 | | | $ | 288,496 | |
| | | | | | | | | | | | |
7
The cumulative changeChanges in the accrued severance costs balance related to restructuring charges isare summarized as follows (in thousands):
| | | | |
|
Balance at June 30, 2009 | | $ | 69,928 | |
Cash payments | | | (17,677 | ) |
Charges to expense | | | 46,604 | |
Non-cash related costs | | | 3,598 | |
| | | |
| | | | |
Balance at September 30, 2009 | | $ | 102,453 | |
Cash payments | | | (31,754 | ) |
Charges to expense | | | 18,853 | |
Non-cash related costs | | | (5,538 | ) |
| | | |
| | | | |
Balance at December 31, 2009 | | $ | 84,014 | |
Cash payments | | | (33,074 | ) |
Charges to expense | | | 8,949 | |
Non-cash related costs | | | (3,218 | ) |
| | | |
| | | | |
Balance at March 31, 2010 | | $ | 56,671 | |
| | | |
The accrued severance costs balance at March 31, 2010 is recorded in accrued expenses. | | | | |
|
Balance at June 30, 2010 | | $ | 26,898 | |
Cash payments | | | (9,390 | ) |
Non-cash related costs | | | 1,519 | |
| | | |
Balance at September 30, 2010 | | $ | 19,027 | |
| | | |
4. Acquisitions
In the second quarter of fiscal 2010, we completed an asset purchase of a company in China for $10.1 million and recorded goodwill of $2.2 million. The purchase price allocation for this acquisition is preliminary and subject to revision as more detailed analysis is completed and additional information about the fair value of assets and liabilities becomes available.
5. Earnings (Loss) Per Share
A reconciliation of the basic average common shares outstanding to diluted average common shares outstanding is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | | Three Months Ended | |
| | March 31, | | March 31, | | | September 30, | |
| | | 2010 | | 2009 | |
Net income (loss) | | | $ | 75,104 | | $ | (15,136 | ) |
| | 2010 | | 2009 | | 2010 | | 2009 | | | | | | |
Basic weighted average common shares outstanding | | 173,858 | | 173,228 | | 173,689 | | 174,985 | | | 174,370 | | 173,486 | |
Effect of dilutive stock options | | 980 | | — | | 834 | | — | | | 786 | | — | |
| | | | | | | | | | | | | | |
Diluted weighted average common shares outstanding | | 174,838 | | 173,228 | | 174,523 | | 174,985 | | | 175,156 | | 173,486 | |
| | | | | | | | | | | | | | |
| | |
Earnings (loss) per share: | | |
Basic | | | $ | 0.43 | | $ | (0.09 | ) |
Diluted | | | $ | 0.43 | | $ | (0.09 | ) |
Excluded from the computations above were anti-dilutive shares of 6.06.1 million and 7.3 million for the three months and nine months ended March 31, 2010, respectively, compared to 9.5 million and 8.9 million for the same prior year periods. During the three months and nine months ended March 31, 2009, we incurred a net loss. As common stock equivalents have an anti-dilutive effect on the net loss, the equivalents were not included in the computationas of diluted loss per share for the three and nine months ended March 31, 2009.September 30, 2010.
8
6.5. Comprehensive Income (Loss)
Total comprehensive income (loss) is summarized as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | | Three Months Ended | |
| | March 31, | | March 31, | | | September 30, | |
| | 2010 | | 2009 | | 2010 | | 2009 | | | 2010 | | 2009 | |
Net income (loss) | | $ | 23,826 | | $ | (58,600 | ) | | $ | 31,517 | | $ | (101,547 | ) | | $ | 75,104 | | $ | (15,136 | ) |
Translation adjustments | | 4,849 | | | (67,650 | ) | | 45,379 | | | (159,939 | ) | | 70,255 | | 42,836 | |
Accumulated actuarial loss | | — | | — | | | (5,831 | ) | | — | | | — | | | (5,831 | ) |
Unrealized investment gain (loss) | | 708 | | 5,564 | | | (2,185 | ) | | | (5,952 | ) | |
Unrealized investment gain | | | 49 | | 354 | |
| | | | | | | | | | | | | | |
Total comprehensive income | | | $ | 145,408 | | $ | 22,223 | |
| | | | | |
Total comprehensive income (loss) | | $ | 29,383 | | $ | (120,686 | ) | | $ | 68,880 | | $ | (267,438 | ) | |
| | | | | | | | | | |
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During the nine months ended March 31, 2010, we recognized a pension liability remeasurement of $5.2 million related to the merger of two pension plans and $0.6 million related to a pension curtailment.
7.6. Inventories
Inventories are valued at the lower of first-in, first-out cost or market. Inventories, net of allowances, consist of the following (in thousands):
| | | | | | | | | | | | | | | | |
| | Mar. 31, | | June 30, | | | Sept. 30, | | June 30, | |
| | 2010 | | 2009 | | | 2010 | | 2010 | |
Raw materials | | $ | 79,524 | | $ | 58,720 | | | $ | 99,418 | | $ | 86,338 | |
Work in process | | 134,493 | | 113,782 | | | 157,299 | | 139,922 | |
Finished goods | | 205,847 | | 181,835 | | | 290,091 | | 243,109 | |
| | | | | | | | | | |
Total inventories | | $ | 419,864 | | $ | 354,337 | | | $ | 546,808 | | $ | 469,369 | |
| | | | | | | | | | |
8.7. Pensions and Other Postretirement Benefits
During the nine months ended March 31, 2010, we recognized a $3.8 million pension curtailment gain from the merger of two pension plans. During the three months ended March 31, 2009, we recognized curtailment expenses of $1.2 million related to our U.S. and Japan pension plans and a $0.3 million special termination benefits expense in our postretirement medical benefit plan in connection with the early termination of participants resulting from our restructuring plans. During the nine months ended March 31, 2009, we also recognized a $4.0 million curtailment gain in our postretirement medical benefit plan by reducing the number of employees eligible for retiree medical coverage. The curtailment adjustments and special termination benefits reduced cost of sales by $1.6 million and reduced selling, general and administrative expense by $2.4 million and increased restructuring expense by $1.5 million for the nine months ended March 31, 2009.
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The components of pension benefit cost are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | | Three Months Ended | |
| | March 31, | | March 31, | | | September 30, | |
| | 2010 | | 2009 | | 2010 | | 2009 | | | 2010 | | 2009 | |
Service cost | | $ | 1,990 | | $ | 2,066 | | $ | 5,970 | | $ | 6,198 | | | $ | 2,197 | | $ | 1,990 | |
Interest cost | | 2,041 | | 2,064 | | 6,123 | | 6,192 | | | 1,967 | | 2,041 | |
Expected return on plan assets | | | (1,696 | ) | | | (2,180 | ) | | | (5,089 | ) | | | (6,540 | ) | | | (1,812 | ) | | | (1,696 | ) |
Amortization of prior service cost | | 10 | | 11 | | 30 | | 33 | | | 53 | | 10 | |
Recognized actuarial losses | | 57 | | 62 | | 173 | | 186 | | | 893 | | 57 | |
Amortization of transition obligation | | 624 | | 106 | | 1,871 | | 318 | | | 9 | | 624 | |
Curtailment adjustment | | — | | 1,151 | | | (3,849 | ) | | 1,151 | | | — | | | (3,849 | ) |
| | | | | | | | | | | | | | |
| |
Benefit cost | | $ | 3,026 | | $ | 3,280 | | $ | 5,229 | | $ | 7,538 | | | $ | 3,307 | | $ | (823 | ) |
| | | | | | | | | | | | | | |
The components of retiree health care benefit cost are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | | Three Months Ended | |
| | March 31, | | March 31, | | | September 30, | |
| | 2010 | | 2009 | | 2010 | | 2009 | | | 2010 | | 2009 | |
Service cost | | $ | 271 | | $ | 611 | | $ | 813 | | $ | 1,833 | | | $ | 342 | | $ | 271 | |
Interest cost | | 621 | | 796 | | 1,863 | | 2,388 | | | 617 | | 621 | |
Amortization of prior service cost | | | (516 | ) | | | (160 | ) | | | (1,548 | ) | | | (480 | ) | | | (516 | ) | | | (516 | ) |
Recognized actuarial losses | | 175 | | 157 | | 525 | | 471 | | | 333 | | 175 | |
Curtailment adjustment | | — | | 299 | | — | | | (3,701 | ) | |
| | | | | | | | | | |
| | | | | |
Benefit cost | | $ | 551 | | $ | 1,703 | | $ | 1,653 | | $ | 511 | | | $ | 776 | | $ | 551 | |
| | | | | | | | | | | | | | |
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9.8. Debt
We had available linesTotal debt consisted of creditthe following:
| | | | | | | | | | | | | | | | |
| | Average | | | | | | | | | | | |
| | Interest | | | | | | | September 30, | | | June 30, | |
| | Rate | | | Maturity | | | 2010 | | | 2010 | |
Long-term debt: | | | | | | | | | | | | | | | | |
U.S. Credit Facility | | | 2.76 | % | | | 2012 | | | $ | 110,000 | | | $ | 100,000 | |
Unsecured bonds and term loans | | | 1.31 – 1.65 | % | | | 2012 – 2013 | | | | 60,705 | | | | 81,431 | |
Mortgages, industrial development bonds and other debt | | | 5.92 | % | | | 2013 | | | | 1,202 | | | | 2,003 | |
| | | | | | | | | | | | | | |
Total long-term debt | | | | | | | | | | | 171,907 | | | | 183,434 | |
Current portion of long-term debt and short-term borrowings: | | | | | | | | | | | | | | | | |
Unsecured bonds, term loans and short-term credit line | | | 1.31 – 2.48 | % | | | | | | | 109,876 | | | | 104,359 | |
Other short-term borrowings, including capital leases | | | 4.86 | % | | | | | | | 6,324 | | | | 5,711 | |
| | | | | | | | | | | | | | |
Total current portion of long-term debt and short-term borrowings | | | | | | | | | | | 116,200 | | | | 110,070 | |
| | | | | | | | | | | | | | |
Total debt | | | | | | | | | | $ | 288,107 | | | $ | 293,504 | |
| | | | �� | | | | | | | | | | |
In September 2010, Molex Japan renewed a ¥5.0 billion overdraft loan, with a six month term and an interest rate of approximately 2.48%. At September 30, 2010, the balance of the overdraft loan, which requires full repayment by the end of the term, approximated $59.6 million.
In March 2010, Molex Japan entered into a ¥3.0 billion syndicated term loan for three years, with interest rates equivalent to six month Tokyo Interbank Offered Rate (TIBOR) plus 75 basis points and scheduled principal payments of ¥0.5 billion every six months. At September 30, 2010, the balance of the syndicated term loan approximated $30.0 million, of which $12.0 million was current.
In September 2009, Molex Japan issued unsecured bonds totaling $197.2¥10 billion with a term of three years, an interest rate of approximately 1.65% and scheduled principal payments of ¥1.6 billion every six months. At September 30, 2010, the outstanding balance of the unsecured bonds approximated $81.0 million, at March 31, 2010 expiring between 2010 and 2013.of which $38.3 million was current.
In June 2009, we entered into a $195.0 million committed, unsecured, three-year revolving credit facility in the United States, amended in January 2010, that matures in June 2012 (the “U.S. Credit Facility)Facility”). Borrowings under the U.S. Credit Facility bear interest at a fluctuating interest rate (based on London InterBank Offered Rate) plus an applicable percentage based on our consolidated leverage. The applicable percentage was 250 basis points as of March 31,September 30, 2010. On upIn September 2010, we exercised the feature to two occasions we may, at our option, increase the credit line by an amount not to exceed $75.0$270.0 million upon satisfaction of certain conditions.and added three lenders. The instrument governing the U.S. Credit Facility contains customary covenants regarding liens, debt, substantial asset sales and mergers, dividends and investments. The U.S. Credit Facility also requires us to maintain financial covenants pertaining to, among other things, our consolidated leverage, fixed charge coverage and liquidity. As of March 31,September 30, 2010, we were in compliance with these covenants and had outstanding borrowings of $100.0$110.0 million. We obtained waiver letters from the participating banks for any default of the U.S. Credit Facility arising from the unauthorized activities in Japan.
We have three unsecured borrowing agreements in Japan totaling ¥18 billion ($194.7 million) with weighted average fixed rates of 1.53%. As of March 31, 2010, we hadCertain assets, including land, buildings and equipment, secure a remaining balance on these agreements of ¥16.4 billion ($177.4 million).
The current portion of our long-term debt and short-term loans as of March 31, 2010 consists principally of unsecured term loans approximating ¥9.2 billion ($99.5 million) with weighted-average fixed interest rates approximating 1.53%. Ourdebt. Principal payments on long-term debt including capital lease obligations approximates $184.0are due as follows: fiscal 2012, $132.9 million; fiscal 2013, $35.9 million; fiscal 2014, $3.1 million.
We had available lines of credit totaling $258.1 million including an outstanding balance of $100.0 million on the Credit Facility at March 31,September 30, 2010 the Japanese yen borrowings approximating $77.9 millionexpiring between 2010 and other unsecured term loans and capital lease obligations approximating $6.1 million.2013.
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10.9. Income Taxes
The effective tax rate was 30.5%32.2% for the three months ended March 31,September 30, 2010 and 32.3%(14.9)% for the three months ended March 31,September 30, 2009. As of March 31, 2010, unrecognized tax benefits were $21.2 million, which if recognized, would reduce the effective income tax rate. Changes in the amount of unrecognized tax benefits in the ninethree months ended March 31,September 30, 2010 were not significant.
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We are subject to tax in U.S. Federal, State and foreign tax jurisdictions. We have substantially completed all U.S. federal income tax matters for tax years through 2005.2006. The tax years 20062007 through 2009 remain open to examination by all major taxing jurisdictions to which we are subject.
It is our practice to recognize interest and/or penalties related to income tax matters in tax expense. As of March 31,September 30, 2010, there were no material interest or penalty amounts to accrue.
11.10. Fair Value Measurements
The following table summarizes our financial assets and liabilities as of March 31,September 30, 2010, which are measured at fair value on a recurring basis (in thousands):
| | | | | | | | | | | | | | | | |
| | | | | | Quoted Prices | | | | | | | |
| | | | | | in Active | | | Significant | | | | |
| | Total | | | Markets for | | | Other | | | Significant | |
| | Measured | | | Identical | | | Observable | | | Unobservable | |
| | at Fair | | | Assets | | | Inputs | | | Inputs | |
| | Value | | | (Level 1) | | | (Level 2) | | | (Level 3) | |
Marketable and available for sale securities | | $ | 25,840 | | | $ | 25,840 | | | $ | — | | | $ | — | |
Debt | | | 283,602 | | | | — | | | | 283,602 | | | | — | |
Derivative financial instruments, net | | | 4,381 | | | | — | | | | 4,381 | | | | — | |
| | | | | | | | | | | | | | | | |
| | | | | | Quoted Prices | | | | |
| | | | | | in Active | | Significant | | |
| | Total | | Markets for | | Other | | Significant |
| | Measured | | Identical | | Observable | | Unobservable |
| | at Fair | | Assets | | Inputs | | Inputs |
| | Value | | (Level 1) | | (Level 2) | | (Level 3) |
Available for sale and trading securities | | $ | 29,605 | | | $ | 29,605 | | | $ | — | | | $ | — | |
Derivative financial instruments, net | | | 6,401 | | | | — | | | | 6,401 | | | | — | |
We determine the fair value of our marketable and available for sale securities based on quoted market prices (Level 1). We generally use derivatives for hedging purposes, which are valued based on Level 2 inputs in the fair value hierarchy. The fair value of our financial instruments is determined by a mark-to-market valuation based on forward curves using observable market prices.
The carrying value of our long-term debt approximates fair value.
12.11. New Accounting Pronouncements
Effective September 30, 2009, we adopted ASC 105,In January 2010, the Financial Accounting Standards Board (the FASB) Accounting Standards Codification (ASC)issued new guidance to enhance disclosure requirements related to fair value measurements by requiring certain new disclosures and the Hierarchy of Generally Accepted Accounting Principles.clarifying certain existing disclosures. The Codification is now the single source of authoritative GAAP for all non-governmental entities. ASC 105, which was effective July 1, 2009, changes the referencing and organization of accounting guidance. The adoption of ASC 105 will only affect how specific referencesnew guidance requires additional information related to GAAP literature are disclosedactivities in the notesreconciliation of Level 3 fair value measurements. The new guidance also expands the disclosures related to our consolidated financial statements.
We adopted ASC 805-10, Business Combinations, effective July 1, 2009. ASC 805-10 requires that acquisition-related costs are recognized separately from an acquisition and expensed as incurred and that restructuring costs are expensed in periods after the acquisition date. ASC 805-10 also requires that acquireddisaggregation of assets and liabilities are recorded atand information about inputs and valuation techniques. The new guidance related to Level 3 fair value. The impact of the adoption of ASC 805-10 did not have a material impact on our financial statements.
We adopted ASC 810-10, Consolidation, effective July 1, 2009. ASC 810-10 requires interests in subsidiaries held by parties other than us to be reported separately within the equity section of the consolidated financial statements and purchases or sales of equity interests that do not result in a change of control be accounted for as equity transactions. It also requires net income attributable to the noncontrolling interest to be clearly identified and presented on the face of the consolidated statement of income and when a subsidiary is deconsolidated, any retained noncontrolling interest in a former subsidiary and resulting gain or loss on the deconsolidation of the subsidiary, is measured at fair value. The adoption of ASC 810-10 did not have a material impact on our financial statements.
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We adopted ASC 815-10, Derivatives and Hedging, effective July 1, 2009. ASC 815-10 requires enhanced disclosures about an entity’s derivative and hedging activities. The adoption of ASC 815-10 did not have a material impact on our financial statements.
In February 2010, the FASB issued amended guidance on subsequent events. Under this amended guidance, SEC filers are no longer required to disclose the date through which subsequent events have been evaluated in originally issued and revised financial statements. This guidance was effective immediately and we adopted these new requirements for the quarter ended March 31, 2010.
In October 2009, the FASB issued Accounting Standard Update (ASU) No. 2009-13, Revenue Recognition (Topic 605). The accounting standard update addresses the accounting for multiple-deliverable arrangements to enable vendors to account for products or services separately rather than as a combined unit. Specifically, this subtopic addresses how to separate deliverables and how to measure and allocate arrangement consideration to one or more units of accounting. ASU 2009-13value measurements will be effective for us on JulyJanuary 1, 2010.2011. We are currently evaluating the requirements of ASU 2009-13,this new guidance, but do not expect it to have a material impact on our consolidated financial statements.
In June 2009, the FASB expanded ASC 810-10, to provide guidance for variable interest entities (VIEs). The change modifies our approach for determining the primary beneficiary of a VIE by assessing whether we have control over such entities. This change is effective for us on July 1, 2010.12. Contingencies
We are currently evaluatinga party to various legal proceedings, claims and investigations including those disclosed in this note. While management presently believes that the requirementsultimate outcome of these proceedings, individually and in the aggregate, will not materially adversely impact our financial position, cash flows, or overall trends in operations, legal proceedings are subject to inherent uncertainties, and unfavorable rulings or other events could occur. If unfavorable final outcomes were to occur, then there exists the possibility of a material adverse impact.
Employment and Benefits Litigation
In 2009, a French subsidiary of Molex, Molex Automotive SARL, decided to close a facility it operated in Villemur-sur-Tarn, France. Molex Automotive SARL submitted a social plan to Molex Automotive SARL’s labor representatives providing for payments to terminated employees. This social plan was adopted by Molex Automotive SARL on September 15, 2009. On September 24, 2010, 188 former employees of Molex Automotive SARL filed suit against Molex Automotive SARL in the Toulouse Labor Court, requesting additional compensation on the basis that
10
their dismissal was not economically justified. The total amount sought by the 188 employees is approximately €25 million ($34.9 million). Molex has initiated liquidation of Molex Automotive SARL, and is assessing the impact of this action on the pending lawsuits.
Molex Japan Co., Ltd.
As we previously reported in our Annual Report on Form 10-K, we launched an investigation into unauthorized activities at Molex Japan Co., Ltd. in April 2010. We learned that an individual working in Molex Japan’s finance group obtained unauthorized loans from third party lenders, that included in at least one instance the attempted unauthorized pledge of Molex Japan facilities as security, in Molex Japan’s name that were used to cover losses resulting from unauthorized trading, including margin trading, in Molex Japan’s name. We also learned that the individual misappropriated funds from Molex Japan’s accounts to cover losses from unauthorized trading. The individual admitted to forging documentation in arranging and concealing the transactions. We retained outside legal counsel, and they retained forensic accountants, to investigate the matter. The investigation has been completed.
On August 31, 2010, Mizuho Bank, which holds the unauthorized loans, filed a complaint in Tokyo District Court requesting the court to find Molex Japan liable for the payment of the VIE provisionsoutstanding unauthorized loans and to enter a judgment for such payment. Mizuho is claiming payment of ASC 810-10, but do not expect itoutstanding principal borrowings of ¥3 billion ($35.7 million), ¥5 billion ($59.6 million), ¥5 billion ($59.6 million) and ¥2 billion ($23.8 million), other loan-related expenses of approximately ¥106 million ($1.3 million) and interest and delay damages of approximately ¥832 million yen ($9.9 million) as of September 30, 2010. On October 13, 2010, Molex Japan filed a written answer requesting the court to have a material impact on our consolidated financial statements.dismiss the complaint. We intend to vigorously contest the enforceability of the outstanding unauthorized loans and any attempt by the lender to obtain payment. See Note 2 of the “Notes to the Condensed Consolidated Financial Statements” for accounting treatment of the accrual for unauthorized activities in Japan.
13. Segments and Related Information
Our reportable segments consist of the Connector and Custom & Electrical segments:
| • | | The Connector segment designs and manufactures products for high-speed, high-density, high signal-integrity applications as well as fine-pitch, low-profile connectors for the consumer and commercial markets. It also designs and manufactures products that withstand environments such as heat, cold, dust, dirt, liquid and vibration for automotive and other transportation applications. |
|
| • | | The Custom & Electrical segment designs and manufactures integrated and customizable electronic components, including connectors, across all industries that provide original, differentiated solutions to customer requirements. It also leverages expertise in the use of signal, power and interface technology in industrial automation and other harsh environment applications. |
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Information by segment is summarized as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Custom & | | Corporate | | | | Custom & | | Corporate | | |
| | Connector | | Electrical | | & Other | | Total | | Connector | | Electrical | | & Other | | Total |
For the three months ended: | | |
March 31, 2010: | | |
September 30, 2010: | | |
Revenues from external customers | | $ | 540,822 | | $ | 215,103 | | $ | 369 | | $ | 756,294 | | | $ | 661,136 | | $ | 236,031 | | $ | 505 | | $ | 897,672 | |
Income (loss) from operations | | 26,934 | | 34,668 | | | (22,281 | ) | | 39,321 | | | 98,647 | | 42,566 | | | (28,735 | ) | | 112,478 | |
Depreciation & amortization | | 47,304 | | 8,309 | | 3,823 | | 59,436 | | | 47,536 | | 7,523 | | 4,049 | | 59,108 | |
Capital expenditures | | 52,866 | | 2,235 | | 1,580 | | 56,681 | | | 58,757 | | 7,254 | | 5,181 | | 71,192 | |
| | |
March 31, 2009: | | |
September 30, 2009: | | |
Revenues from external customers | | $ | 349,834 | | $ | 155,178 | | $ | 527 | | $ | 505,539 | | | $ | 489,141 | | $ | 184,771 | | $ | 121 | | $ | 674,033 | |
Income (loss) from operations | | | (51,477 | ) | | 586 | | | (39,128 | ) | | | (90,019 | ) | | 4,675 | | 11,151 | | | (31,483 | ) | | | (15,657 | ) |
Depreciation & amortization | | 51,410 | | 8,111 | | 4,215 | | 63,736 | | | 48,513 | | 8,383 | | 3,693 | | 60,589 | |
Capital expenditures | | 24,396 | | 2,985 | | 3,671 | | 31,052 | | | 40,591 | | 2,599 | | 2,444 | | 45,634 | |
| | |
For the nine months ended: | | |
March 31, 2010: | | |
Revenues from external customers | | $ | 1,564,960 | | $ | 594,011 | | $ | 932 | | $ | 2,159,903 | | |
Income (loss) from operations | | 76,996 | | 65,548 | | | (76,530 | ) | | 66,014 | | |
Depreciation & amortization | | 144,526 | | 25,007 | | 11,166 | | 180,699 | | |
Capital expenditures | | 131,944 | | 9,744 | | 8,313 | | 150,001 | | |
| | |
March 31, 2009: | | |
Revenues from external customers | | $ | 1,382,550 | | $ | 626,706 | | $ | 1,996 | | $ | 2,011,252 | | |
Income (loss) from operations | | | (112,362 | ) | | 36,749 | | | (54,525 | ) | | | (130,138 | ) | |
Depreciation & amortization | | 151,857 | | 25,260 | | 12,968 | | 190,085 | | |
Capital expenditures | | 99,074 | | 15,613 | | 13,001 | | 127,688 | | |
Corporate & otherOther includes expenses primarily related to corporate operations that are not allocated to segments such as executive management, human resources, legal, finance and information technology. We also include in Corporate & Other the assets of certain facilities that are not specific to a particular division. The loss from operations for the Connector segment includes a $93.1 million goodwill impairment charge in our Transportation business unit during the second quarter of fiscal 2009.
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Segment assets, which are comprised of accounts receivable, inventory and fixed assets, are summarized as follows (in thousands):
| | | | | | | | | | | | | | | | |
| | | | | | Custom & | | Corporate | | |
| | Connector | | Electrical | | & Other | | Total |
March 31, 2010 | | $ | 1,601,239 | | | $ | 430,932 | | | $ | 99,548 | | | $ | 2,131,719 | |
June 30, 2009 | | | 1,388,110 | | | | 390,906 | | | | 184,645 | | | | 1,963,661 | |
| | | | | | | | | | | | | | | | |
| | | | | | Custom & | | Corporate | | |
| | Connector | | Electrical | | & Other | | Total |
September 30, 2010 | | $ | 1,832,342 | | | $ | 449,830 | | | $ | 166,029 | | | $ | 2,448,201 | |
June 30, 2010 | | | 1,720,866 | | | | 437,614 | | | | 100,965 | | | | 2,259,445 | |
The reconciliation of segment assets to consolidated total assets is as follows (in thousands):
| | | | | | | | | | | | | | | | |
| | Mar. 31, | | June 30, | | | Sept. 30, | | June 30, | |
| | 2010 | | 2009 | | | 2010 | | 2010 | |
Segment net assets | | $ | 2,131,719 | | $ | 1,963,661 | | | $ | 2,448,201 | | $ | 2,259,445 | |
Other current assets | | 556,276 | | 564,329 | | | 514,323 | | 571,520 | |
Non current assets | | 397,811 | | 414,167 | | | 404,997 | | 405,613 | |
| | | | | | | | | | |
Consolidated total assets | | $ | 3,085,806 | | $ | 2,942,157 | | | $ | 3,367,521 | | $ | 3,236,578 | |
| | | | | | | | | | |
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Molex Incorporated
| | |
Item 2. | | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Unless otherwise indicated or the content otherwise requires, the terms “we,” “us” and “our” and other similar terms in this Quarterly Report on Form 10-Q refer to Molex Incorporated and its subsidiaries.
The following discussion and analysis should be read in conjunction with our condensed consolidated financial statements and accompanying notes contained herein and our consolidated financial statements and accompanying notes and management’s discussion and analysis of results of operations and financial condition contained in our Annual Report on Form 10-K for the fiscal year ended June 30, 2009.2010. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including but not limited to those described below under the heading “Cautionary Statement Regarding Forward-Looking Information ”.Information.”
Overview
Our core business is the manufacture and sale of electromechanical components. Our products are used by a large number of leading original equipment manufacturers (OEMs) throughout the world. We design, manufacture and sell more than 100,000 products including terminals, connectors, planar cables, cable assemblies, interconnection systems, backplanes, integrated products and mechanical and electronic switches in 4039 manufacturing locations in 1716 countries. We also provide manufacturing services to integrate specific components into a customer’s product.
Our reportable segments consist of theWe have two global product segments: Connector and Custom & Electrical segments:Electrical.
| • | | The Connector segment manufactures and sells products for high-speed, high-density, high signal-integrity applications as well as fine-pitch, low-profile connectors for the consumer and commercial markets. It also designs and manufactures products that withstand environments such as heat, cold, dust, dirt, liquid and vibration for automotive and other transportation applicants. |
|
| • | | The Custom & Electrical segment designs and manufactures integrated and customizable electronic components, including connectors, across all industries that provide original, differentiated solutions to customer requirements. It also leverages expertise in the use of signal, power and interface technology in industrial automation and other harsh environment applications. |
Worldwide economic conditions and instability in the global economy led to a significant drop in demand for our products beginning in the second quarter of fiscal 2009. The drop in revenue was significant as our customers attempted to manage their inventory. Customer demand and revenue has improved significantly in fiscal 2010 and 2011 due to rapid recovery in the world’s gross domestic product from the instability in the global economy in fiscal 2009, particularly in Asia. The stronger end market demand and release of new products increased our net revenue and gross margins during the three and nine months ended March 31,September 30, 2010 compared with the prior year periods.period. Selling, general and administrative expenses as a percent of revenue also decreased during the three and nine months ended March 31,September 30, 2010 compared with the prior year periodsperiod due to higher net revenue and our lower cost structure resulting from our restructuring effortsprogram and specific cost containment activities.
During fiscal 2007,On June 30, 2010 we undertookcompleted a multi-year restructuring plan designed to reduce costs and to improve return on invested capital in connection with a new global organization that was effective July 1, 2007. A majority of the plan relatesrelated to facilities located in North America, Europe and EuropeJapan and, in general, the movement of manufacturing activities atfrom these plants to otherlower-cost facilities. Net restructuring costRestructuring costs during the three months ended March 31,fiscal 2010 was $9.0were $116.9 million, consisting of $8.9$79.6 million of severance costs and $0.1 million in asset impairments. Net restructuring cost during the three months ended December 31, 2009 was $25.6 million, consisting of $18.8$37.3 million for severance costs and $6.8 million of asset impairments. Net restructuring costs during the three months ended March 31, 2009, was $44.3 million, consisting of $28.9 million of severance costs and $15.4 million in asset impairments. The cumulative restructuring costs and related asset impairments since we announced the restructuring plan totaled $288.5 million.
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We expect to incur total restructuring and asset impairment costs related to restructuring actions approximating $300 million. Management approved several actions related to this plan. The total cost estimates increased as we formulated detailed plans for the latest additions to the restructuring actions, which included reorganization of our global product divisions in fiscal 2009. A portion of this plan involves cost savings or other actions that do not result in incremental expense, such as better utilization of assets, reduced spending and organizational efficiencies. This plan includes employee reduction targets throughout the company, and we expect to achieve these targets through ongoing employee attrition and terminations. See Note 3 of the “Notes to the Consolidated Financial Statements” for further discussion. We expect to complete the actions under this plan by June 30, 2010 with estimated annual cost savings of $205 million.
We recorded a $93.1 million goodwill impairment charge during the second quarter of fiscal 2009 to write-off goodwill based on lower projected future revenue growth in our Transportation business unit. During the second quarter, we determined that there were indicators of impairment in our Transportation business unit resulting from the sudden economic downturn and potential liquidity risk in the automotive industry. The economic downturn had a negative impact on the business unit’s operating results and the potential liquidity risk extended our estimate for the industry’s economic recovery.
Our financial results are influenced by factors in the markets in which we operate and by our ability to successfully execute our business strategy. Marketplace factors include competition for customers, raw material prices, product and price competition, economic conditions in various geographic regions, foreign currency exchange rates, interest rates, changes in technology, fluctuations in customer demand, patent and intellectual property issues, availability of credit and general market liquidity, litigation results and legal and regulatory developments. We expect that the marketplace environment will remain highly competitive. Our ability to execute
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our business strategy successfully will require that we meet a number of challenges, including our ability to accurately forecast sales demand and calibrate manufacturing to such demand, manage volatile raw material costs, develop, manufacture and successfully market new and enhanced products and product lines, control operating costs, and attract, motivate and retain key personnel to manage our operational, financial and management information systems. Our sales are also dependent on end markets impacted by consumer, industrial and infrastructure spending, and our operating results can be adversely affected by reduced demand in those end markets.
Loss on Unauthorized Activities in Molex Japan
InAs we previously reported, in April 2010, we launched an investigation into unauthorized activities in Molex Japan. We learned that an individual working in Molex Japan’s finance group obtained unauthorized loans from third party lenders, that included in at least one instance the attempted unauthorized lienspledge of Molex Japan facilities as security, in Molex Japan’s name which we believethat were used to cover losses resulting from unauthorized trading, activities, including margin trading, in Molex Japan’s name. We also believelearned that the individual has misappropriated cashfunds from Molex JapanJapan’s accounts to cover losses from unauthorized trading activities.trading. The individual has admitted to forging documentation in arranging and concealing the transactions. We have retained outside legal counsel, and they have retained forensic accountants, to investigate the matter and the extent of Molex Japan’s liability, if any, for the unauthorized loans and any possible recourse to recover the misappropriated cash.matter. The investigation includes a review of the facts and circumstances surrounding the unauthorized transactions, including a search of relevant physical and electronic documents and interviews with officers and employees.
Following is a summary of our preliminary findings of the unauthorized loans and misappropriated cash, which we conducted with the assistance of our legal counsel:
| • | | The amount of unauthorized loans outstanding as of March 31, 2010 was ¥16.0 billion ($173.0 million). The dates, terms and amounts of the original borrowings are unclear. These unauthorized loans were not recorded in Molex’s books and records. |
|
| • | | The amount of misappropriated cash was ¥1.864 billion ($20.2 million) as of March 31, 2010. Molex Japan repaid a ¥1.0 billion ($10.8 million) unauthorized loan on April 5, 2010. As of March 31, 2010, we recognized an expense for the amount of misappropriated cash and repayment of the unauthorized loan pending the investigation of the unauthorized activity. |
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We believe that if Molex Japan is liable for the unauthorized loans, our maximum loss would be approximately $193.2 million, of which $31.0 million has been reflected as a charge in the current quarter and $162.2 million is a contingent liability. With respect to the contingent liability, we do not believe that a loss is probable at this time and consequently did not record any loss pendingcompleted.
Based on the results of the completed investigation, and extent of ourwe recorded for accounting purposes an accrued liability if any. The total amountfor the effect of unauthorized activities pending the resolution of these matters including the legal proceedings reported in Note 12. Cumulative investigative and legal costs through September 30, 2010 were $10.3 million, including $5.5 million in the first quarter of fiscal 2011. We believe these unauthorized activities and related losses occurred from at least as early as 1988 through 2010, with approximately $167.4 million of losses occurring prior to June 30, 2007. The accrued liability for these potential net losses was $175.1 million as of September 30, 2010, including $9.3 million in foreign currency translation, which was recorded as a component of other comprehensive income. To the extent we prevail in not having to pay all or any portion of the outstanding unauthorized loans, we would recognize a gain in that amount.
In addition, we have a contingent liability of $11.2 million for other loan-related expenses, interest expense and misappropriated cash referred to above are baseddelay damages on the status of the investigation.
Moreover, we have also learned that the actual timing, terms and amounts of authorized loans with an authorized Japanese bank were inconsistent with documents provided to Molex Japan by the above referenced individual. These differences have been resolved and terms of our authorized borrowings in Molex Japan are included in Note 9 of the “Notes to the Condensed Consolidated Financial Statements”.outstanding unauthorized loans.
Critical Accounting Policies and Estimates
This discussion and analysis of financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States. The preparation of these financial statements requires the use of estimates and assumptions related to the reporting of assets, liabilities, revenues, expenses and related disclosures. In preparing these financial statements, we have made our best estimates and judgments of certain amounts included in the financial statements. Estimates are revised periodically. Actual results could differ from these estimates.
The information concerning our critical accounting policies can be found under Management’s Discussion of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended June 30, 20092010 filed with the Securities and Exchange Commission, which is incorporated by reference in this Form 10-Q.
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Results of Operations
The following table sets forth consolidated statements of operations data as a percentage of net revenue for the three months ended March 31September 30 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Percentage | | Percentage | | | Percentage | | Percentage | |
| | 2010 | | of Revenue | | 2009 | | of Revenue | | | 2010 | | of Revenue | | 2009 | | of Revenue | |
Net revenue | | $ | 756,294 | | | 100.0 | % | | $ | 505,539 | | | 100.0 | % | | $ | 897,672 | | | 100.0 | % | | $ | 674,033 | | | 100.0 | % |
Cost of sales | | 520,564 | | | 68.8 | % | | 412,143 | | | 81.5 | % | | 622,596 | | | 69.4 | % | | 482,614 | | | 71.6 | % |
| | | | | | | | | | | | | | | | | | |
Gross profit | | 235,730 | | | 31.2 | % | | 93,396 | | | 18.5 | % | | 275,076 | | | 30.6 | % | | 191,419 | | | 28.4 | % |
| | |
Selling, general & administrative | | 156,374 | | | 20.7 | % | | 139,071 | | | 27.5 | % | | 157,056 | | | 17.5 | % | | 145,628 | | | 21.6 | % |
Restructuring costs and asset impairments | | 9,068 | | | 1.2 | % | | 44,344 | | | 8.8 | % | | — | | | 0.0 | % | | 55,894 | | | 8.3 | % |
Loss on unauthorized activities in Molex Japan | | 30,967 | | | 4.1 | % | | — | | | — | % | |
Unauthorized activities in Japan | | | 5,542 | | | 0.6 | % | | 5,554 | | | 0.8 | % |
| | | | | | | | | | | | | | | | | | |
Income (loss) from operations | | 39,321 | | | 5.2 | % | | | (90,019 | ) | | | (17.8 | )% | | 112,478 | | | 12.5 | % | | | (15,657 | ) | | | (2.3 | )% |
| | |
Other (expense) income, net | | | (5,019 | ) | | | (0.7 | )% | | 3,510 | | | 0.7 | % | | | (1,686 | ) | | | (0.2 | )% | | 2,484 | | | 0.3 | % |
| | | | | | | | | | | | | | | | | | |
Income (loss) before income taxes | | 34,302 | | | 4.5 | % | | | (86,509 | ) | | | (17.1 | )% | | 110,792 | | | 12.3 | % | | | (13,173 | ) | | | (2.0 | )% |
Income taxes | | 10,476 | | | 1.4 | % | | | (27,909 | ) | | | (5.5 | )% | | 35,688 | | | 3.9 | % | | 1,963 | | | 0.3 | % |
| | | | | | | | | | | | | | | | | | |
Net income (loss) | | $ | 23,826 | | | 3.2 | % | | $ | (58,600 | ) | | | (11.6 | )% | | $ | 75,104 | | | 8.4 | % | | $ | (15,136 | ) | | | (2.3 | )% |
| | | | | | | | | | | | | | | | | | |
The following table sets forth consolidated statements of income data as a percentage of net revenue for the nine months ended March 31 (in thousands):
| | | | | | | | | | | | | | | | |
| | | | | | Percentage | | | | | | | Percentage | |
| | 2010 | | | of Revenue | | | 2009 | | | of Revenue | |
Net revenue | | $ | 2,159,903 | | | | 100.0 | % | | $ | 2,011,252 | | | | 100.0 | % |
Cost of sales | | | 1,520,218 | | | | 70.4 | % | | | 1,492,312 | | | | 74.2 | % |
| | | | | | | | | | | | |
Gross profit | | | 639,685 | | | | 29.6 | % | | | 518,940 | | | | 25.8 | % |
| | | | | | | | | | | | | | | | |
Selling, general & administrative | | | 452,108 | | | | 20.9 | % | | | 450,034 | | | | 22.4 | % |
Restructuring costs and asset impairments | | | 90,596 | | | | 4.2 | % | | | 199,044 | | | | 9.9 | % |
Loss on unauthorized activities in Molex Japan | | | 30,967 | �� | | | 1.4 | % | | | — | | | | — | % |
| | | | | | | | | | | | |
Income (loss) from operations | | | 66,014 | | | | 3.1 | % | | | (130,138 | ) | | | (6.5 | )% |
| | | | | | | | | | | | | | | | |
Other (expense) income, net | | | (4,522 | ) | | | (0.2 | )% | | | 26,539 | | | | 1.3 | % |
| | | | | | | | | | | | |
Income (loss) before income taxes | | | 61,492 | | | | 2.9 | % | | | (103,599 | ) | | | (5.2 | )% |
Income taxes | | | 29,975 | | | | 1.4 | % | | | (2,052 | ) | | | (0.1 | )% |
| | | | | | | | | | | | |
Net income (loss) | | $ | 31,517 | | | | 1.5 | % | | $ | (101,547 | ) | | | (5.0 | )% |
| | | | | | | | | | | | |
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Net Revenue
We sell our products in five primary markets. Our connectors, interconnecting devices and assemblies are used principally in the telecommunications, infotech (formally referred to as data), consumer, industrial and automotive markets. Our products are used in a wide range of applications including notebook computers, computer peripheral equipment, mobile products, digital electronics such as cameras and flat panel display televisions, automobile engine control units and adaptive braking systems, factory robotics and diagnostic equipment.
Revenue increased significantly across all markets during the thirdfirst quarter of fiscal 2011 compared with the first quarter of fiscal 2010 compared with the third quarter of fiscal 2009 (comparable quarter) as economic conditions in key geographiescustomer demand improved over the prior year. Revenue increased in the Industrialtelecommunications, infotech, consumer and Automotiveindustrial markets but remained flat or declined slightly in the Consumer, Telecommunications and Data markets reflecting lower than expected seasonality decline during the thirdfirst quarter of fiscal 20102011 compared with the secondfourth quarter of fiscal 2010 (sequential quarter)., but declined in the automotive market due to seasonal effect. The changeincrease (decrease) in revenue from each market during the thirdfirst quarter of fiscal 20102011 compared with the comparable quarter and the sequential quarter follows:
| | | | | | | | | | | | | | | | |
| | Comparable | | Sequential | | | Comparable | | Sequential |
| | Quarter | | Quarter | | | Quarter | | Quarter |
Telecommunications | | | | 33.3 | % | | | 10.0 | % |
Infotech | | | 38.2 | | 5.8 | |
Consumer | | | 45.7 | % | | | (2.3 | )% | | 25.1 | | 12.2 | |
Telecommunications | | 30.8 | | | (0.8 | ) | |
Industrial | | | 50.4 | | 3.4 | |
Automotive | | 72.6 | | 5.9 | | | 20.7 | | | (4.1 | ) |
Data | | 57.4 | | | (1.8 | ) | |
Industrial | | 49.6 | | 17.7 | | |
ConsumerTelecommunications market net revenue increased against both the comparable quarter and sequential quarter due to increased demand for mobile products, including higher demand for smartphones and our customers’ introduction of smartphone models.
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Infotech market net revenue increased against the comparable quarter primarily because of depressed enterprise spending in the prior year and increased demand for networking and storage products in the current period. Infotech market net revenue increased modestly against the sequential quarter reflecting backlog reduction.
Consumer market net revenue increased against both the comparable and sequential quarters due to government incentives in certain countries, customers replenishing inventory levels and increased demand for our components in portable navigation devices, home appliances, digital cameras and flat panel display televisions partially offset by a decline in gaming equipment.and digital cameras. Consumer market net revenue declinedincreased modestly against the sequential quarter as the second quarter benefitted fromdue to pre-holiday production volumes in home entertainment and gaming equipment based on our customers’ anticipation of increased consumer spending during the holiday season.
TelecommunicationsIndustrial market net revenue increased substantially against the comparable quarter as global economic conditions improved over the prior year period. Demand for industrial instruments and production equipment improved as our customers’ increased production to meet demand after delaying many industrial automation projects in the prior year period due to uncertainties about the economic conditions. Sequentially, industrial market net revenue increased infrastructure spending, highermodestly as the backlog of demand for smartphones and our customers’ introduction of smartphone models that include our connector products. Revenue declined slightly against the sequential quarter as seasonal decline in mobile phone business was partially offsetcaused by increased infrastructure spending.delayed projects has been reduced.
Automotive market net revenue increased substantially against the comparable quarter as global car sales have increased, particularly in North America China and Europe,China, as improving global economic conditions led to our customers increasing vehicle builds to replenish inventory levels.levels and meet demand. The automotive market also benefited from our customers’ increasing electronic content in automobiles, such as rear view cameras, navigational systems, mobile communication and entertainment systems.
Data Automotive market revenue increased against the comparable quarter primarily because of depressed enterprise spending in the prior year and increased demand for notebook, networking and storage products in the current period. Data marketnet revenue declined modestlyslightly against the sequential quarter primarily due to a seasonal drop in revenue for server products, which also benefitted from the deferred enterprise spending increase in the second quarter. Seasonal decline against the sequential quarter was partially offset by increased contentseasonality and demand for notebook computers.
Industrial market revenue increased against both the comparable quarter and the sequential quarter asautomobile manufacturer’s leveling out inventory after global economic conditions improved and our customers increased production to meet demand after delaying many industrial automation projects in prior quarters due to uncertainties about the economic conditions.government incentive programs ended.
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The following table shows the percentage of our net revenue by geographic region:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | | Three Months Ended |
| | March 31, | | March 31, | | | September 30, |
| | 2010 | | 2009 | | 2010 | | 2009 | | | 2010 | | 2009 |
Americas | | | 26 | % | | | 27 | % | | | 24 | % | | | 27 | % | | | 24 | % | | | 23 | % |
Asia Pacific | | 58 | | 54 | | 60 | | 54 | | | 63 | | 61 | |
Europe | | 16 | | 19 | | 16 | | 19 | | | 13 | | 16 | |
| | | | | | | | | | | | | | |
Total | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % |
| | | | | | | | | | | | | | |
The following table provides an analysis of the change in net revenue compared with the prior fiscal year period (in thousands):
| | | | | | | | | | | | |
| | Three Months | | Nine Months | | | Three Months | |
| | Ended | | Ended | | | Ended | |
| | Mar. 31, 2010 | | Mar. 31, 2010 | | | Sept. 30, 2010 | |
Net revenue for prior year period | | $ | 505,539 | | $ | 2,011,252 | | | $ | 674,033 | |
Components of net revenue change: | | |
Organic net revenue increase | | 228,427 | | 88,694 | | | 214,614 | |
Currency translation | | 20,653 | | 46,790 | | | 7,033 | |
Acquisitions | | 1,675 | | 13,167 | | | 1,992 | |
| | | | | | | | |
Total change in net revenue from prior year period | | 250,755 | | 148,651 | | | 223,639 | |
| | | | | | | | |
Net revenue for current year period | | $ | 756,294 | | $ | 2,159,903 | | | $ | 897,672 | |
| | | | | | | | |
| | |
Organic net revenue increase as a percentage of net revenue from prior year period | | | 45.2 | % | | | 4.4 | % | | | 31.8 | % |
Organic revenue increased significantly during the three months ended March 31,September 30, 2010 compared with the prior year periodcomparable quarter as customer demand improved in all of our primary markets. Revenue decreased during fiscal 2009 across all of our primary markets due to deterioration in global economic conditions and subsequent inventory reductions in the supply chain. This decrease in demand for our products began during the second quarter of fiscal 2009, resulting in the smaller increase in organic revenue for the nine months ended March 31, 2010 compared with the prior year period. We also completed an asset purchase of a company in Japan during the second quarter of fiscal 2009 and a company in China during the second quarter of fiscal 2010.
The general weakening of the U.S. dollar against the euro and Japanese yenForeign currency translation increased net revenue by approximately $20.7 million and $46.8$7.0 million for the three and nine months ended March 31,September 30, 2010 respectively.compared with the comparable quarter principally due to a stronger Japanese yen,
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partially offset by a weaker euro against the dollar. The following tables show the effect on the change in geographic net revenue from foreign currency translations to the U.S. dollar (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2010 | | Nine Months Ended March 31, 2010 | | | Three Months Ended September 30, 2010 | |
| | Local | | Currency | | Net | | Local | | Currency | | Net | | | Local | | Currency | | Net | |
| | Currency | | Translation | | Change | | Currency | | Translation | | Change | | | Currency | | Translation | | Change | |
Americas | | $ | 56,098 | | $ | 837 | | $ | 56,935 | | $ | (30,433 | ) | | $ | 878 | | $ | (29,555 | ) | | $ | 61,323 | | $ | 266 | | $ | 61,589 | |
Asia Pacific | | 155,839 | | 13,364 | | 169,203 | | 172,206 | | 41,018 | | 213,224 | | | 133,659 | | 20,570 | | 154,229 | |
Europe | | 15,604 | | 6,452 | | 22,056 | | | (32,187 | ) | | 4,894 | | | (27,293 | ) | | 22,921 | | | (13,803 | ) | | 9,118 | |
Corporate & other | | 2,561 | | — | | 2,561 | | | (7,725 | ) | | — | | | (7,725 | ) | | | (1,297 | ) | | — | | | (1,297 | ) |
| | | | | | | | | | | | | | | | | | | | |
Net change | | $ | 230,102 | | $ | 20,653 | | $ | 250,755 | | $ | 101,861 | | $ | 46,790 | | $ | 148,651 | | | $ | 216,606 | | $ | 7,033 | | $ | 223,639 | |
| | | | | | | | | | | | | | | | | | | | |
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The change in revenue on a local currency basis compared with the comparable quarter was as follows:
| | | | | | | | |
| | Three Months | | Nine Months |
| | Ended | | Ended |
| | Mar. 31, 2010 | | Mar. 31, 2010 |
Americas | | | 40.4 | % | | | (5.5 | )% |
Asia Pacific | | | 57.8 | | | | 16.0 | |
Europe | | | 16.0 | | | | (8.7 | ) |
|
Total | | | 45.5 | % | | | 5.1 | % |
| | | | |
| | Three Months |
| | Ended |
| | Sept. 30, 2010 |
Americas | | | 39.3 | % |
Asia Pacific | | | 32.7 | |
Europe | | | 21.0 | |
Total | | | 32.1 | % |
Gross Profit
The following table provides a summary of gross profit and gross margin for the three and nine months ended March 31September 30 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | Three Months Ended |
| | March 31, | | March 31, | | September 30, |
| | 2010 | | 2009 | | 2010 | | 2009 | | 2010 | | 2009 |
Gross profit | | $ | 235,730 | | $ | 93,396 | | $ | 639,685 | | $ | 518,940 | | | $ | 275,076 | | $ | 191,419 | |
Gross margin | | | 31.2 | % | | | 18.5 | % | | | 29.6 | % | | | 25.8 | % | | | 30.6 | % | | | 28.4 | % |
The increase in gross profit for the three and nine month periodsperiod ended March 31,September 30, 2010 was primarily due to higher revenue. The increase in gross margin was primarily due to higher absorption from increased production and lower costs resulting from our restructuring program, which has improved margins over time. The improvements in gross profit were partially offset by the impact of price erosion and material price increases.
A significant portion of our material cost is comprised of copper and gold. We purchased approximately 166.8 million pounds of copper and approximately 81,00040,600 troy ounces of gold during the first three quartersquarter of fiscal 2010.2011. The following table shows the change in average prices related to our purchases of copper and gold for the three months and nine months ended March 31September 30 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | Three Months Ended |
| | March 31, | | March 31, | | September 30, |
| | 2010 | | 2009 | | 2010 | | 2009 | | 2010 | | 2009 |
Copper (price per pound) | | $ | 3.28 | | $ | 1.56 | | $ | 3.00 | | $ | 2.96 | | | $ | 3.30 | | $ | 2.71 | |
Gold (price per troy ounce) | | 1,110.10 | | 908.00 | | 1,057.30 | | 854.30 | | | 1,228.00 | | 960.00 | |
Generally, we are able to pass through to our customers only a small portion of changes in the cost of copper and gold. However, we mitigate the impact of any significant increases in gold and copper prices by hedging with call options a portion of our projected net global purchases of gold and copper. The hedges reduced cost of sales by $2.5 million and $3.0$2.2 million for the three and nine months ended March 31,September 30, 2010. The spot priceshedges did not materially affect operating results for gold and copper were below our strike price during the three and nine months ended March 31,September 30, 2009.
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The effect of certain significant impacts on gross profit compared with the prior year periodscomparable quarter was as follows for the three and nine months ended March 31September 30 (in thousands):
| | | | | | | | | | | | |
| | Three Months | | Nine Months | | Three Months |
| | Ended | | Ended | | Ended |
| | Mar. 31, 2010 | | Mar. 31, 2010 | | Sept. 30, 2010 |
Price erosion | | $ | (34,354 | ) | | $ | (106,856 | ) | | $ | (27,695 | ) |
Currency translation | | 5,834 | | 13,185 | | | 7,896 | |
Currency transaction | | | (3,826 | ) | | | (15,451 | ) | | | (13,251 | ) |
Price erosion is measured as the reduction in prices of our products year over year, which reduces our gross profit, particularly in our Connector segment, where we have the largest impacts of price erosion. A significant portion of our price erosion occurred in our mobile phone connector products, which are part of our telecommunications and consumer markets.
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The increase in gross profit due to currency translation was primarily due to a generally weakerstronger Japanese yen against other currencies and a general weakening of the U.S. dollar against other currencies, except the euro, during the three and nine months ended March 31,September 30, 2010.
Certain products that we manufacture in Japan and Europe are sold in other regions of the world at selling prices primarily denominated in or closely linked to the U.S. dollar. As a result, changes in currency exchange rates may affect our cost of sales reported in U.S. dollars without a corresponding effect on net revenue. The decrease in gross profit due to currency transactions was primarily due to a stronger Japanese yen, partially offset by a weaker euro against the weakening U.S. dollar against the Japanese yen and euro during the three and nine months ended March 31,September 30, 2010.
Operating Expenses
Operating expenses were as follows as of March 31September 30 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | | Three Months Ended |
| | March 31, | | March 31, | | | September 30, |
| | 2010 | | 2009 | | 2010 | | 2009 | | | 2010 | | 2009 |
Selling, general and administrative | | $ | 156,374 | | $ | 139,071 | | $ | 452,108 | | $ | 450,034 | | | $ | 157,056 | | $ | 145,628 | |
Restructuring costs and asset impairments | | 9,068 | | 44,344 | | 90,596 | | 105,904 | | | — | | 55,894 | |
Loss on unauthorized activities in Molex Japan | | 30,967 | | — | | 30,967 | | — | | |
Goodwill impairment | | — | | — | | — | | 93,140 | | |
| | | | | | | | | | |
Total operating expenses | | $ | 196,409 | | $ | 183,415 | | $ | 573,671 | | $ | 647,078 | | |
| | | | | | | | | | |
Unauthorized activities in Japan | | | 5,542 | | 5,554 | |
| | |
Selling, general and administrative as a percentage of revenue | | | 20.7 | % | | | 27.5 | % | | | 20.9 | % | | | 22.4 | % | | | 17.5 | % | | | 21.6 | % |
Selling, general and administrative expenses decreased as a percent of net revenue for the three months ended March 31,September 30, 2010 overfrom the prior year period primarilycomparable quarter due to the increased revenue and our lower cost structure resulting from our restructuring efforts and specific cost containment activities. Selling, general and administrative expenses in fiscal 2010 increased for certain employee benefits that were suspended during fiscal 2009. The impact of currency translation increaseddecreased selling, general, and administrative expenses by approximately $4.6 million and $11.1$2.6 million for the three and nine months ended March 31,September 30, 2010 and decreased selling, general and administrative expenses by $1.7 million and $9.9 million, respectively, foras compared to the same prior year periods.comparable quarter.
Research and development expenditures, which are classified as selling, general and administrative expense, were approximately $39.9$40.5 million, or 5.3% of net revenue, and $113.1 million, or 5.2%4.5% of net revenue, for the three and nine months ended March 31,September 30, 2010, respectively, compared to $34.9$36.5 million, or 6.9% of net revenue, and $119.6 million, or 5.9%5.4% of net revenue, for the same prior year periods.comparable quarter.
Net restructuring costs decreased $35.3$55.9 million during the three months ended March 31,September 30, 2010, compared to the prior year period,comparable quarter, as we concludeconcluded our planned actions under the restructuring plan.program. Net restructuring costs during the ninethree months ended March 31, 2010 were $90.6 million, consisting of $20.1 million of asset impairments and $70.5 million for severance costs. Net restructuring costs during the nine months ended March 31,September, 2009 included $22.5$13.2 million for asset impairments and $83.4$42.7 million for severance costs.employee termination benefits. The cumulative expense since we announced theof our restructuring plan totals $288.5program was $314.8 million with estimated annual savings of approximately $205.0 million.
18
We recorded a $31.0 million loss on unauthorizedUnauthorized activities in Molex Japan duringfor the third quarter of fiscal 2010.three months ended September 30, 2010 represent investigative and legal fees. See Note 2 of the “Notes to the Condensed Consolidated Financial Statements”.
We recorded a $93.1 million goodwill impairment charge during the second quarter of fiscal 2009 to write-off goodwill based on lower projected future revenue growth in our Transportation business unit. During the second quarter of fiscal 2009, we determined that there were indicators of impairment in our Transportation business unit resulting from the sudden economic downturn and potential liquidity risk in the automotive industry. The economic downturn had a negative impact on the business unit’s operating results and the potential liquidity risk extended our estimate for the industry’s economic recovery. These factors resulted in lower growth and profit expectations for the segment, which resulted in the goodwill impairment charge.
22
Other Income (Expense)
Other income (expense) consists primarily of net interest income, investment income and currency exchange gains or losses. We recorded net expenses of $5.0 and $4.5$1.7 million for the three and nine months ended March 31,September 30, 2010, respectively, compared with net gains of $3.5 million and $26.5$2.5 million for the same prior year periods.comparable quarter. The net expenses for the month ended September 30, 2010 were primarily due to a general weakening of the U.S. dollar against other currencies, partially offset by investment income and a stronger Japanese yen against other currencies. The gains during the ninethree months ended March 31,September 30, 2009 primarily related to foreign currency exchange gains during the second quarter of fiscal 2009 resulting from strengthening of the U.S. dollar against most currencies.
Effective Tax Rate
The effective tax rate was 30.5%32.2% for the three months ended March 31,September 30, 2010. The effective tax rate forDuring the three and nine months ended March 31,September 30, 2010, was impacted bywe recorded income tax expense recognizedof $2.3 million due primarily to the passagereversal of the Federal health care legislation, which includes a provision that reduces the deductibility, for Federal incomeestimated tax purposes,benefits resulting from expirations of retiree prescription drug benefits to the extent they are reimbursed under Medicare Part D.employee stock options and vesting of restricted stock at amounts less than recorded book value.
The effective tax rate was 32.3%(14.9)% for the three months ended March 31,September 30, 2009.
Backlog
Our order backlog on March 31,September 30, 2010 was approximately $422.2$445.5 million, an increase of 68.2%46.5% compared with order backlog of $251.0$304.2 million at March 31,September 30, 2009. Orders for the third quarter of fiscalthree months ended September 30, 2010 were $838.0$868.4 million compared with $474.5$724.4 million for the prior year period,comparable quarter, representing the significant increase in customer demand during fiscal 2010 as economic conditions in key geographies improved over the prior year.three months ended September 30, 2010. Orders during the third quarter of fiscalthree months ended September 30, 2010 improved in all of our primary markets compared with the prior year period.comparable quarter.
Segments
The following table sets forth information on net revenue by segment as of the three months ended March 31September 30 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Percentage | | Percentage | | | Percentage | | Percentage | |
| | 2010 | | of Revenue | | 2009 | | of Revenue | | | 2010 | | of Revenue | | 2009 | | of Revenue | |
Connector | | $ | 540,822 | | | 71.5 | % | | $ | 349,834 | | | 69.2 | % | | $ | 661,136 | | | 73.6 | % | | $ | 489,141 | | | 72.5 | % |
Custom & Electrical | | 215,103 | | 28.4 | | 155,178 | | 30.7 | | | 236,031 | | 26.3 | | 184,771 | | 27.4 | |
Corporate & Other | | 369 | | 0.1 | | 527 | | 0.1 | | | 505 | | 0.1 | | 121 | | 0.1 | |
| | | | | | | | | | | | | | | | | | |
Total | | $ | 756,294 | | | 100.0 | % | | $ | 505,539 | | | 100.0 | % | | $ | 897,672 | | | 100.0 | % | | $ | 674,033 | | | 100.0 | % |
| | | | | | | | | | | | | | | | | | |
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The following table sets forth information on revenue by segment as of the nine months ended March 31 (in thousands):
| | | | | | | | | | | | | | | | |
| | | | | | Percentage | | | | | | | Percentage | |
| | 2010 | | | of Revenue | | | 2009 | | | of Revenue | |
Connector | | $ | 1,564,960 | | | | 72.4 | % | | $ | 1,382,550 | | | | 68.7 | % |
Custom & Electrical | | | 594,011 | | | | 27.5 | | | | 626,706 | | | | 31.2 | |
Corporate & Other | | | 932 | | | | 0.1 | | | | 1,996 | | | | 0.1 | |
| | | | | | | | | | | | |
Total | | $ | 2,159,903 | | | | 100.0 | % | | $ | 2,011,252 | | | | 100.0 | % |
| | | | | | | | | | | | |
Connector
The following table provides an analysis of the change in net revenue compared with the prior fiscal year (in thousands):
| | | | | | | | | | | | |
| | Three Months | | Nine Months | | | Three Months | |
| | Ended | | Ended | | | Ended | |
| | Mar. 31, 2010 | | Mar. 31, 2010 | | | Sept. 30, 2010 | |
Net revenue for prior year period | | $ | 349,834 | | $ | 1,382,550 | | | $ | 489,141 | |
| |
Components of net revenue change: | | |
Organic net revenue increase | | 175,867 | | 162,172 | | | 162,667 | |
Currency translation | | 15,121 | | 10,279 | | | 9,328 | |
Acquisitions | | — | | 9,959 | | |
| | | | | | |
| | | |
Total change in net revenue from prior year period | | 190,988 | | 182,410 | | | 171,995 | |
| | | | | | |
| | | |
Net revenue for current year period | | $ | 540,822 | | $ | 1,564,960 | | | $ | 661,136 | |
| | | | | | | | |
| | |
Organic net revenue increase as a percentage of net revenue for prior year period | | | 50.3 | % | | | 11.7 | % | |
Organic net revenue change as a percentage of net revenue for prior year period | | | | 33.3 | % |
The Connector segment sells primarily to the telecommunication, data productsinfotech, consumer markets, and consumer markets,automotive, which are discussed above. Segment net revenue increased in the three and nine months ended March 31,September 30, 2010 compared with the prior year periods due to increased demand in all of the Connector segment’s primary markets, partially offset by price erosion, which is generally higher in the Connector segment compared with our other segment. Currency translation favorably impacted net revenue $9.3 million for the three and nine months ended March 31,September 30, 2010. We also completed an asset purchase of a company in Japan during the second quarter of fiscal 2009.
The following table provides information on income from operations and operating margins for the periods indicated (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | Three Months Ended |
| | March 31, | | March 31, | | September 30, |
| | 2010 | | 2009 | | 2010 | | 2009 | | 2010 | | 2009 |
Income (loss) from operations | | $ | 26,934 | | $ | (51,477 | ) | | $ | 76,996 | | $ | (112,362 | ) | |
Income from operations | | | $ | 98,647 | | $ | 4,675 | |
Operating margin | | | 5.0 | % | | | (14.7 | )% | | | 5.0 | % | | | (8.1 | )% | | | 14.9 | % | | | 1.0 | % |
Connector segment income from operations increased compared with the prior year periods primarily due to increased revenue and the $93.1 million goodwill impairment charge duringcompletion of our restructuring program on June 30, 2010. Restructuring charges for the second quarter of fiscalthree months ended September 30, 2009 to write-off goodwill based on lower projected future revenue and profit growth in our Transportation business unit.were $50.6 million. Gross margins were positively affected by higher absorption from increased production and restructuring.lower costs from our restructuring program, which has improved margins over time. Connector segment income from operations also improved due to lower selling, general and administrative costs in fiscal 2010.2010 due to savings from restructuring and specific cost containment actions. Selling, general and administrative expenses as a percent of net revenue were 16.7% and 16.5%13.7% for the three and nine months ended March 31,September 30, 2010, respectively, compared with 22.8% and 19.9%16.8% for the same prior year periods,period, due primarily to savings from restructuringincreased revenue and specific cost-containmentcost containment actions. Income from operations was also unfavorably impacted by restructuring costs of $6.6 million and $75.6 million for the three and nine months ended March 31, 2010, respectively, compared with $30.6 million and $72.7 million for the same prior year periods.
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Custom & Electrical
The following table provides an analysis of the change in net revenue compared with the prior fiscal year (in thousands):
| | | | | | | | | | | | |
| | Three Months | | Nine Months | | | Three Months | |
| | Ended | | Ended | | | Ended | |
| | Mar. 31, 2010 | | Mar. 31, 2010 | | | Sept. 30, 2010 | |
Net revenue for prior year period | | $ | 155,178 | | $ | 626,706 | | | $ | 184,771 | |
| |
Components of net revenue change: | | |
Organic net revenue change | | 52,702 | | | (39,579 | ) | | 51,567 | |
Currency translation | | 5,548 | | 3,676 | | | | (2,299 | ) |
Acquisitions | | 1,675 | | 3,208 | | | 1,992 | |
| | | | | | | | |
| |
Total change in net revenue from prior year period | | 59,925 | | | (32,695 | ) | | 51,260 | |
| | | | | | |
| | | |
Net revenue for current year period | | $ | 215,103 | | $ | 594,011 | | | $ | 236,031 | |
| | | | | | | | |
| | |
Organic net revenue change as a percentage of net revenue for prior year period | | | 34.0 | % | | | (6.3 | )% | | | 27.9 | % |
The sale of Custom and& Electrical segment’s products is concentrated in the industrial, telecommunications and datainfotech markets. Custom and& Electrical segment revenue increased in the three months ended March 31,September 30, 2010 due to increased demand in all of the segment’s primary markets. We also completed an asset purchase of a company in China during the second quarter of fiscal 2010. Segment revenue declined in the nine months ended March 31, 2010 due to the delayed recovery from the economic recession in the industrial market.
The following table provides information on income from operations and operating margins for the periods indicated (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | Three Months Ended |
| | March 31, | | March 31, | | September 30, |
| | 2010 | | 2009 | | 2010 | | 2009 | | 2010 | | 2009 |
Income from operations | | $ | 34,668 | | $ | 586 | | $ | 65,548 | | $ | 36,749 | | | $ | 42,566 | | $ | 11,151 | |
Operating margin | | | 16.1 | % | | | 0.4 | % | | | 11.0 | % | | | 5.9 | % | | | 18.0 | % | | | 6.0 | % |
Custom & Electrical segment income from operations increased compared with the prior year periods primarily due to increased revenue and lower selling, general and administrative costs in fiscalthe completion of our restructuring program on June 30, 2010. Restructuring charges for the three months ended September 30, 2009 were $4.6 million. Gross margins were positively affected by higher absorption and restructuring.lower costs from our restructuring program, which has improved margins over time. Selling, general and administrative expenses as a percent of net revenue were 19.8% and 20.7%17.4% for the three and nine months ended March 31,September 30, 2010, respectively, compared with 26.0% and 23.1%22.2% for the same prior year periods,period, due to increased revenue, savings from restructuring and specific cost-containmentcost containment actions. Income from operations was also unfavorably impacted by restructuring costs of $2.5 million and $10.7 million for the three and nine months ended March 31, 2010, respectively, compared with $7.5 million and $17.6 million for the same prior year periods.
Non-GAAP Financial Measures
Organic net revenue growth, which is included in the discussion above, is a non-GAAP financial measure. The tables presented in Results of Operations above provide reconciliations of U.S. GAAP reported net revenue growth (the most directly comparable GAAP financial measure) to organic net revenue growth.
We believe organic net revenue growth provides useful information to investors because it reflects the underlying growth from the ongoing activities of our business and provides investors with a view of our operations from management’s perspective. We use organic net revenue growth to monitor and evaluate performance, as it is an important measure of the underlying results of our operations. It excludes items that are not completely under management’s control, such as the impact of changes in foreign currency exchange rates, and items that do not reflect the underlying growth of the company, such as acquisition activity. Management uses organic net revenue growth together with GAAP measures such as net revenue growth and operating income in its decision making processes related to the operations of our reporting segments and our overall company.
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Financial Condition and Liquidity
We fund capital projects and working capital needs principally out of operating cash flows and cash reserves. Cash, cash equivalents and marketable securities totaled $443.4$358.9 million and $467.9$394.9 million at March 31,September 30, 2010 and June 30, 2009,2010, respectively, of which $417.0$326.4 million was in non-U.S. accounts as of March 31,September 30, 2010. The primary source of our cash flow is cash generated by operations. Principal uses of cash are capital expenditures, dividend payments and business investments.
Our long-term financing strategy is to primarily rely on internal sources of funds for investing in plant, equipment and acquisitions. Long-term debt and obligations under capital leases totaled $184.0$227.7 million and $30.3$236.3 million at March 31,September 30, 2010 and June 30, 2009,2010, respectively. We had available lines of credit totaling $197.2$258.1 million at March 31,September 30, 2010, including a $195.0$270.0 million committed, unsecured, three-year revolving credit facility with $95.0$160.0 million available as of March 31,September 30, 2010. The credit facility also requires us to maintain financial covenants pertaining to, among other things, our consolidated leverage, fixed charge coverage and liquidity. As of March 31,September 30, 2010, we were in compliance with these covenants. Additionally, we have three unsecured borrowing agreements totaling ¥18¥18.0 billion ($194.7214.4 million) with weighted average fixed rates of 1.53%1.5%. As of March 31,September 30, 2010, we had a remaining balance on these agreements of ¥16.4¥14.3 billion ($177.4170.6 million). See Note 28 of the “Notes to the Condensed Consolidated Financial Statements”.
Cash Flows
Our cash balance increased $7.0decreased $35.7 million during the ninethree months ended March 31,September 30, 2010. Operating cash flow was $181.9 million, of which we used $150.0 million to fund capital expenditures. Our primary sources of cash were operating cash flows of $62.6 million and $75.0$10.0 million in net borrowings against the credit facility. We used capital during the period to fund capital expenditures of $71.2 million and pay dividends of $79.5$26.6 million. The translation of our cash to U.S. dollars reduced our cash balance by $7.8$12.5 million as compared with the balance as of June 30, 2009.2010.
| | Below is a table setting forth the key lines of our Consolidated Statements of Cash Flows (in thousands): |
| | | | | | | | | | | | | | | | |
| | Nine Months Ended | | | Three Months Ended | |
| | March 31, | | | September 30, | |
| | 2010 | | 2009 | | | 2010 | | 2009 | |
Cash provided from operating activities | | $ | 181,926 | | $ | 311,585 | | | $ | 62,595 | | $ | 70,618 | |
Cash used for investing activities | | | (125,244 | ) | | | (214,624 | ) | | | (69,622 | ) | | | (8,452 | ) |
Cash used for financing activities | | | (57,413 | ) | | | (91,901 | ) | |
Cash (used for) provided from financing activities | | | | (41,217 | ) | | 22,884 | |
Effect of exchange rate changes on cash | | 7,778 | | | (23,019 | ) | | 12,536 | | 11,242 | |
| | | | | | | | | | |
Net increase (decrease) in cash | | $ | 7,047 | | $ | (17,959 | ) | |
Net (decrease) increase in cash | | | $ | (35,708 | ) | | $ | 96,292 | |
| | | | | | | | | | |
Operating Activities
Cash provided from operating activities declined by $129.7$8.0 million from the prior year period due mainly to an $84.4 million increase in working capital needs in the current year period compared with the prior year.year, partially offset by a net loss in the prior year period. Working capital increased in the three months ended September 30, 2010 as inventory production increased due to customer demand. Working capital is defined as current assets minus current liabilities. Our restructuring accrual as of March 31,September 30, 2010 was $56.7$19.0 million, which we expect to reduce through cash outlays during fiscal 2010 and 2011.
Investing Activities
Capital expenditures were $150.0 million for the nine months ended March 31, 2010 compared with $127.7 million in the prior year period. Cash used for investing activities declinedincreased by $89.4$61.2 million from the prior year period due mainly to $10.1an increase in capital expenditures of $25.6 million. Capital expenditures were $71.2 million invested in acquisitions duringfor the first ninethree months of fiscalended September 30, 2010 compared to $73.4with $45.6 million in the prior year period. Additionally, in fiscal 2010,2011, we had $32.1$2.2 million in net salesproceeds of marketable securities which increased cash flow and we had $21.7compared to $35.3 million of net purchases induring fiscal 2009, which decreased cash flow.2010.
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Financing Activities
Cash used for financing activities decreased $34.5$64.1 million during the ninethree months ended March 31,September 30, 2010, as compared with the prior year period primarily due to a $54.1$24.6 million reduction of outstanding loans for Molex Japan.
We borrowed $154.0$20.0 million against our $195.0$270.0 million committed, unsecured, three-year revolving credit facility, which was used to pay down other uncommitted debt balances.facility. Total borrowings against the credit facility were $100.0$110.0 million as of March 31,September 30, 2010.
As part of our growth strategy, in the future we may acquire other companies in the same or complementary lines of business and pursue other business ventures. The timing and size of any new business ventures or acquisitions we complete may impact our cash requirements. Any liability forTo the extent we are required to pay all or any portion of the unauthorized loans in Molex Japan may also impact our cash requirements.
Contractual Obligations and Commercial Commitments
We have contractual obligations and commercial commitments as described in “Item 7. Management’sItem 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Contractual Obligations and Commercial Commitments” of our Annual Report on Form 10-K filed with the Securities and Exchange Commission (the Commission) for the year ended June 30, 2009.2010. In addition, we have obligations under open purchase orders and the long-term liabilities reflected in our consolidated balance sheet, which principally consist of pension and retiree health care benefit obligations. There have been no material changes in our contractual obligations and commercial commitments since June 30, 20092010 arising outside of the ordinary course of business.
Cautionary Statement Regarding Forward-Looking Information
This Quarterly Report contains forward-looking statements that are based on current expectations, estimates, forecasts and projections about our future performance, our business, our beliefs, and our management’s assumptions. In addition, we, or others on our behalf, may make forward-looking statements in press releases or written statements, or in our communications and discussions with investors and analysts in the normal course of business through meetings, web casts, phone calls, and conference calls. Words such as “expect,” “anticipate,” “outlook,” “forecast,” “could,” “project,” “intend,” “plan,” “continue,” “believe,” “seek,” “estimate,” “should,” “may,” “assume,” variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties, and assumptions that are difficult to predict. We describe our respective risks, uncertainties, and assumptions that could affect the outcome or results of operations in Part 1, Item 1A of our Annual Report on Form 10-K for the year ended June 30, 20092010 (Form 10-K) and in Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2010 (Form 10-Q). You should carefully consider the risks described in our Form 10-K and Form 10-Q. Such risks are not the only ones facing our Company. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also impair our business operations. If any of the risks occur, our business, financial condition or operating results could be materially adversely affected.
We have based our forward-looking statements on our management’s beliefs and assumptions based on information available to our management at the time the statements are made. We caution you that actual outcomes and results may differ materially from what is expressed, implied, or forecast by our forward-looking statements. Reference is made in particular to forward looking statements regarding growth strategies, industry trends, financial results, cost reduction initiatives, the ability to realize cost savings from restructuring activities, unauthorized activities in Molex Japan, acquisition synergies, manufacturing strategies, product development and sales, regulatory approvals, competitive strengths, and competitive strengths.legal proceedings. Except as required under the federal securities laws, we do not have any intention or obligation to update publicly any forward-looking statements after the distribution of this report, whether as a result of new information, future events, changes in assumptions, or otherwise.
| | |
Item 3. | | Quantitative and Qualitative Disclosures About Market Risk |
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are subject to market risk associated with changes in foreign currency exchange rates, interest rates and certain commodity prices.
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We mitigate our foreign currency exchange rate risk principally through the establishment of local production facilities in the markets we serve. This creates a “natural hedge” since purchases and sales within a specific country are both denominated in the same currency and therefore no exposure exists to hedge with a foreign exchange forward or option contract (collectively, “foreign exchange contracts”). Natural hedges exist in most countries in which we operate, although the percentage of natural offsets, compared with offsets that need to be hedged by foreign exchange contracts, will vary from country to country.
We also monitor our foreign currency exposure in each country and implement strategies to respond to changing economic and political environments. Examples of these strategies include the prompt payment of intercompany balances utilizing a global netting system, the establishment of contra-currency accounts in several international subsidiaries, and the development of natural hedges and use of foreign exchange contracts to protect or preserve the value of cash flows. No material foreign exchange contracts were in use at March 31,September 30, 2010 or June 30, 2009.2010.
We have implemented a formalized treasury risk management policy that describes procedures and controls over derivative financial and commodity instruments. Under the policy, we do not use derivative financial or commodity instruments for speculative or trading purposes, and the use of such instruments is subject to strict approval levels by senior management. Typically, the use of derivative instruments is limited to hedging activities related to specific foreign currency cash flows, net receivable and payable balances and call options on certain commodities. No material derivative instruments were in use at March 31,September 30, 2010 or June 30, 2009.2010.
The translation of the financial statements of the non-North American operations is impacted by fluctuations in foreign currency exchange rates. Consolidated net revenue and income from operations was impacted by the translation of our international financial statements into U.S. dollars resulting in increased net revenue of $46.8$7.0 million and increased income from operations of $3.0$7.9 million for the ninethree months ended March 31,September 30, 2010, compared with the estimated results for the comparable period in the prior year.
Our $11.6$18.3 million of marketable securities at March 31,September 30, 2010 are principally invested in time deposits.
Interest rate exposure is generally limited to our marketable securities and three-year unsecured credit facility. We do not actively manage the risk of interest rate fluctuations. Our marketable securities mature in less than 12 months. We had $100$110.0 million outstanding on our $195$270.0 million credit facility with an interest rate of approximately 2.7%2.8% at March 31,September 30, 2010.
Due to the nature of our operations, we are not subject to significant concentration risks relating to customers or products.
We monitor the environmental laws and regulations in the countries in which we operate. We have implemented an environmental program to reduce the generation of potentially hazardous materials during our manufacturing process and believe we continue to meet or exceed local government regulations.
| | |
Item 4. | | Controls and Procedures |
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management has evaluated, under the supervision and with the participation of our chief executive officer and chief financial officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on that evaluation, our chief executive officer and chief financial officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective in ensuring that information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized and reported within the time periods specified in SEC’s rules and forms, and (2) accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
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Internal Control Over Financial Reporting
During the three months ended March 31,September 30, 2010, there were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) or in other factors that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Our management, including the CEO and CFO, do not expect that our disclosure controls or our internal control over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, will be detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by intentionally falsified documentation, by collusion of two or more individuals within Molex or third parties, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
PART II
Item 1A. Risk Factors1. Legal Proceedings
There have been no material changes from the risk factors disclosedCurrently, we are involved in Part 1, Item 1A,a number of legal proceedings. For a discussion of contingencies related to legal proceedings, see Note 12 to our Form 10-K for the year ended June 30, 2009.Condensed Consolidated Financial Statements, which is hereby incorporated by reference.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Share purchases of Molex Common and/or Class A Common Stock for the quarter ended March 31,September 30, 2010 were as follows (in thousands, except price per share data):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Total Number | | | Total Number | |
| | of Shares | | | of Shares | |
| | Total Number | | Purchased as | | | Total Number | | Purchased as | |
| | of Shares | | Average Price | | Part of Publicly | | | of Shares | | Average Price | | Part of Publicly | |
| | Purchased | | Paid per Share | | Announced Plan | | | Purchased | | Paid per Share | | Announced Plan | |
January 1 – January 31 | | | | | | | | | |
July 1 – July 31 | | |
Common Stock | | — | | $ | — | | — | | | 21 | | $ | 15.50 | | — | |
Class A Common Stock | | 3 | | $ | 16.71 | | — | | | — | | $ | — | | — | |
February 1 – February 28 | | | | | | | | | |
August 1 – August 31 | | |
Common Stock | | — | | $ | — | | — | | | 102 | | $ | 16.51 | | — | |
Class A Common Stock | | 274 | | $ | 18.16 | | — | | | — | | $ | — | | — | |
March 1 – March 31 | | | | | | | | | |
September 1 – September 30 | | |
Common Stock | | — | | $ | — | | — | | | 19 | | $ | 16.01 | | — | |
Class A Common Stock | | 4 | | $ | 17.70 | | — | | | — | | $ | — | | — | |
| | | | | | | | | | | | | | |
Total | | 281 | | $ | 18.14 | | — | | | 142 | | $ | 16.29 | | — | |
| | | | | | | | | | | | | | |
The shares purchased represent exercises of employee stock options.
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Item 6. Exhibits
| | |
Number | | Description |
|
31 | | Rule 13a-14(a)/15d-14(a) Certifications |
| | |
| | 31.1 Section 302 certification by Chief Executive Officer |
| | |
| | 31.2 Section 302 certification by Chief Financial Officer |
| | |
32 | | Section 1350 Certifications |
| | |
| | 32.1 Section 906 certification by Chief Executive Officer |
| | |
| | 32.2 Section 906 certification by Chief Financial Officer |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | |
| | MOLEX INCORPORATED |
|
| | (Registrant) | |
| | | | |
| | |
Date: April 27,October 29, 2010 | | /S/ DAVID D. JOHNSON | |
| | David D. Johnson | |
| | Executive Vice President, Treasurer and Chief Financial Officer
(Principal (Principal Financial Officer) | |
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