UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| | |
þ | | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended September 30, 20102011
| | |
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)
| | |
|
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). Yesþ 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):
| | | | | | |
|
Large accelerated filerþ | | 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 October 21, 2010,19, 2011, the following numbers of shares of the Company’s common stock were outstanding:
| | | | |
|
Common Stock | | | 95,560,076 | |
Class A Common Stock | | | 79,225,20080,142,915 | |
Class B Common Stock | | | 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 | | |
Item 1. | | Financial Statements |
Molex Incorporated
Condensed Consolidated Balance Sheets
(in thousands)
| | | | | | | | | | | | | | | | |
| | Sept. 30, | | June 30, | | | Sept. 30, | | June 30, | |
| | 2010 | | 2010 | | | 2011 | | 2011 | |
| | (Unaudited) | | | (Unaudited) | |
ASSETS | | |
Current assets: | | |
Cash and cash equivalents | | $ | 340,644 | | $ | 376,352 | | | $ | 557,376 | | $ | 532,599 | |
Marketable securities | | 18,261 | | 18,508 | | | 11,150 | | 13,947 | |
Accounts receivable, less allowances of $49,831 and $43,650 respectively | | 790,101 | | 734,932 | | |
Accounts receivable, less allowances of $40,685 and $42,297 respectively | | | 782,833 | | 811,449 | |
Inventories | | 546,808 | | 469,369 | | | 547,209 | | 535,953 | |
Deferred income taxes | | 113,455 | | 112,531 | | | 131,819 | | 129,158 | |
Other current assets | | 41,963 | | 64,129 | | | 40,917 | | 32,239 | |
| | | | | | | | | | |
Total current assets | | 1,851,232 | | 1,775,821 | | | 2,071,304 | | 2,055,345 | |
Property, plant and equipment, net | | 1,111,292 | | 1,055,144 | | | 1,144,023 | | 1,168,448 | |
Goodwill | | 132,848 | | 131,910 | | | 148,349 | | 149,452 | |
Non-current deferred income taxes | | 90,318 | | 94,191 | | | 39,404 | | 38,178 | |
Other assets | | 181,831 | | 179,512 | | | 177,498 | | 186,429 | |
| | | | | | | | | | |
Total assets | | $ | 3,367,521 | | $ | 3,236,578 | | | $ | 3,580,578 | | $ | 3,597,852 | |
| | | | | | |
| | | | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | |
Current liabilities: | | |
Current portion of long-term debt and short-term borrowings | | $ | 116,200 | | $ | 110,070 | | | $ | 129,781 | | $ | 119,764 | |
Accounts payable | | 385,271 | | 395,474 | | | 349,657 | | 359,812 | |
Accrued expenses: | | |
Accrual for unauthorized activities in Japan | | 175,076 | | 165,815 | | | 191,873 | | 182,460 | |
Income taxes payable | | 37,374 | | 21,505 | | | 32,349 | | 2,383 | |
Other | | 214,599 | | 219,832 | | | 222,930 | | 217,628 | |
| | | | | | | | | | |
Total current liabilities | | 928,520 | | 912,696 | | | 926,590 | | 882,047 | |
Other non-current liabilities | | 18,672 | | 19,869 | | | 22,253 | | 23,879 | |
Accrued pension and postretirement benefits | | 140,889 | | 135,448 | | | 96,232 | | 100,866 | |
Long-term debt | | 171,907 | | 183,434 | | | 176,925 | | 222,794 | |
| | | | | | | | | | |
Total liabilities | | 1,259,988 | | 1,251,447 | | | 1,222,000 | | 1,229,586 | |
| | | | | | | | | | |
| | |
Commitments and contingencies | | |
| | |
Stockholders’ equity: | | |
Commitments and contingencies Stockholders’ equity: | | |
Common stock | | 11,232 | | 11,207 | | | 11,302 | | 11,285 | |
Paid-in capital | | 644,944 | | 638,796 | | |
Additional paid-in capital | | | 680,869 | | 674,494 | |
Retained earnings | | 2,280,685 | | 2,232,445 | | | 2,453,482 | | 2,408,083 | |
Treasury stock | | | (1,100,402 | ) | | | (1,098,087 | ) | | | (1,107,670 | ) | | | (1,106,039 | ) |
Accumulated other comprehensive income | | 271,074 | | 200,770 | | | 320,595 | | 380,443 | |
| | | | | | | | | | |
Total stockholders’ equity | | 2,107,533 | | 1,985,131 | | | 2,358,578 | | 2,368,266 | |
| | | | | | | | | | |
Total liabilities and stockholders’ equity | | $ | 3,367,521 | | $ | 3,236,578 | | | $ | 3,580,578 | | $ | 3,597,852 | |
| | | | | | | | | | |
See accompanying notes to condensed consolidated financial statements.
3
Molex Incorporated
Condensed Consolidated Statements of Operations
Income
(Unaudited)
(in thousands, except per share data)
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | | Three Months Ended | |
| | September 30, | | | September 30, | |
| | 2010 | | 2009 | | | 2011 | | 2010 | |
Net revenue | | $ | 897,672 | | $ | 674,033 | | | $ | 935,985 | | $ | 897,672 | |
Cost of sales | | 622,596 | | 482,614 | | | 643,257 | | 622,596 | |
| | | | | | | | | | |
Gross profit | | 275,076 | | 191,419 | | | 292,728 | | 275,076 | |
| | | | | | | | | | |
| |
Selling, general and administrative | | 157,056 | | 145,628 | | | 169,225 | | 157,056 | |
Restructuring costs and asset impairments | | — | | 55,894 | | |
Unauthorized activities in Japan | | 5,542 | | 5,554 | | | 2,922 | | 5,542 | |
| | | | | | | | | | |
Total operating expenses | | 162,598 | | 207,076 | | | 172,147 | | 162,598 | |
| | | | | | | | | | |
| |
Income (loss) from operations | | 112,478 | | | (15,657 | ) | |
Income from operations | | | 120,581 | | 112,478 | |
| |
Interest (expense) income, net | | | (1,335 | ) | | | (1,000 | ) | |
Other (expense) income | | | (351 | ) | | 3,484 | | |
Interest expense, net | | | 1,391 | | 1,335 | |
Other (income) expense | | | | (276 | ) | | 351 | |
| | | | | | | | | | |
Total other (expense) income | | | (1,686 | ) | | 2,484 | | |
Total other expense, net | | | 1,115 | | 1,686 | |
| | | | | | | | | | |
| |
Income (loss) before income taxes | | 110,792 | | | (13,173 | ) | |
Income before income taxes | | | 119,466 | | 110,792 | |
| |
Income taxes | | 35,688 | | 1,963 | | | 38,949 | | 35,688 | |
| | | | | | | | | | |
| |
Net income (loss) | | $ | 75,104 | | $ | (15,136 | ) | |
Net income | | | $ | 80,517 | | $ | 75,104 | |
| | | | | | | | | | |
| |
Earnings (loss) per share: | | |
Earnings per share: | | |
Basic | | $ | 0.43 | | $ | (0.09 | ) | | $ | 0.46 | | $ | 0.43 | |
Diluted | | $ | 0.43 | | $ | (0.09 | ) | | $ | 0.46 | | $ | 0.43 | |
| |
Dividends declared per share | | $ | 0.1525 | | $ | 0.1525 | | | $ | 0.2000 | | $ | 0.1525 | |
| |
Average common shares outstanding: | | |
Basic | | 174,370 | | 173,486 | | | 175,466 | | 174,370 | |
Diluted | | 175,156 | | 173,486 | | | 176,585 | | 175,156 | |
See accompanying notes to condensed consolidated financial statements.
4
Molex Incorporated
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | | Three Months Ended | |
| | September 30, | | | September 30, | |
| | 2010 | | 2009 | | | 2011 | | 2010 | |
Operating activities: | | |
Net income (loss) | | $ | 75,104 | | $ | (15,136 | ) | |
Add non-cash items included in net income (loss): | | |
Net income | | | $ | 80,517 | | $ | 75,104 | |
Add non-cash items included in net income: | | |
Depreciation and amortization | | 59,108 | | 60,589 | | | 61,239 | | 59,108 | |
Share-based compensation | | 5,149 | | 7,092 | | | 5,135 | | 5,149 | |
Non-cash restructuring and other costs, net | | — | | 13,191 | | |
Other non-cash items | | 8,634 | | 6,625 | | | 5,991 | | 8,634 | |
Changes in assets and liabilities: | | |
Accounts receivable | | | (29,343 | ) | | | (72,586 | ) | | 22,927 | | | (29,343 | ) |
Inventories | | | (57,988 | ) | | 1,482 | | | | (18,260 | ) | | | (57,988 | ) |
Accounts payable | | | (24,876 | ) | | 32,131 | | | | (10,702 | ) | | | (24,876 | ) |
Other current assets and liabilities | | 27,886 | | 39,092 | | | 28,890 | | 27,886 | |
Other assets and liabilities | | | (1,079 | ) | | | (1,862 | ) | | | (25,188 | ) | | | (1,079 | ) |
| | | | | | | | | | |
Cash provided from operating activities | | 62,595 | | 70,618 | | | 150,549 | | 62,595 | |
| | |
Investing activities: | | |
Capital expenditures | | | (71,192 | ) | | | (45,634 | ) | | | (42,804 | ) | | | (71,192 | ) |
Proceeds from sales of property, plant and equipment | | 643 | | 3,192 | | | 1,396 | | 643 | |
Proceeds from sales or maturities of marketable securities | | 2,184 | | 35,303 | | | 4,868 | | 2,184 | |
Purchases of marketable securities | | | (1,257 | ) | | | (958 | ) | | | (2,777 | ) | | | (1,257 | ) |
Other investing activities | | — | | | (355 | ) | |
| | | | | | | | | | |
Cash used for investing activities | | | (69,622 | ) | | | (8,452 | ) | | | (39,317 | ) | | | (69,622 | ) |
| | |
Financing activities: | | |
Proceeds from revolving credit facility and short term loans | | 20,000 | | 90,000 | | |
Proceeds from revolving credit facility | | | 30,000 | | 20,000 | |
Payments on revolving credit facility | | | (10,000 | ) | | | (40,000 | ) | | | (195,000 | ) | | | (10,000 | ) |
Payments on short-term loans | | | | (27,266 | ) | | — | |
Proceeds from issuance of long-term debt | | 797 | | — | | | 150,000 | | 797 | |
Payments of long-term debt | | | (24,840 | ) | | | (196 | ) | | | (143 | ) | | | (24,840 | ) |
Cash dividends paid | | | (26,565 | ) | | | (26,486 | ) | | | (35,068 | ) | | | (26,565 | ) |
Exercise of stock options | | 358 | | 266 | | | 620 | | 358 | |
Other financing activities | | | (967 | ) | | | (700 | ) | | | (1,014 | ) | | | (967 | ) |
| | | | | | | | | | |
Cash (used for) provided from financing activities | | | (41,217 | ) | | 22,884 | | |
| | |
Cash used for financing activities | | | | (77,871 | ) | | | (41,217 | ) |
Effect of exchange rate changes on cash | | 12,536 | | 11,242 | | | | (8,584 | ) | | 12,536 | |
| | | | | | | | | | |
Net (decrease) increase in cash and cash equivalents | | | (35,708 | ) | | 96,292 | | |
Net increase (decrease) in cash and cash equivalents | | | 24,777 | | | (35,708 | ) |
Cash and cash equivalents, beginning of period | | 376,352 | | 424,707 | | | 532,599 | | 376,352 | |
| | | | | | | | | | |
Cash and cash equivalents, end of period | | $ | 340,644 | | $ | 520,999 | | | $ | 557,376 | | $ | 340,644 | |
| | | | | | | | | | |
See accompanying notes to condensed consolidated financial statements.
5
Molex Incorporated
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 39 manufacturing locations in 16 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 months ended September 30, 20102011 are not necessarily an indication of the results that may be expected for the year ending June 30, 2011.2012. The Condensed Consolidated Balance Sheet as of June 30, 20102011 was derived from our audited consolidated financial statements for the year ended June 30, 2010.2011. 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, 2010.2011.
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. Unauthorized Activities in Japan
As we previously reported in April 2010,our Annual Report on Form 10-K for the year ended June 30, 2011, we launched an investigation intoinvestigated unauthorized activities in 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 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.
Ltd. Based on the results of the completed investigation, we recorded for accounting purposes an accrued liability for 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 in14 of the first quarter of fiscal 2011.Notes to the Condensed Consolidated Financial Statements.
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$191.9 million as of September 30, 2010,2011, including $9.3$26.1 million in cumulative 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$39.8 million for other loan-related expenses, interest expense and delay damages on the outstanding unauthorized loans.
6
3. Restructuring Costs and Asset Impairments
On June 30, 2010 we completed 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 related to facilities located in North America, Europe and Japan and, in general, the movement of manufacturing activities from these plants to lower-cost facilities.
6
Changes in the accrued severancerestructuring accrual balance are summarized as follows (in thousands):
| | | | | | | | |
|
Balance at June 30, 2010 | | $ | 26,898 | | |
Balance at June 30, 2011 | | | $ | 14,049 | |
Cash payments | | | (9,390 | ) | | | (752 | ) |
Non-cash related costs | | 1,519 | | | | (569 | ) |
| | | | | | |
Balance at September 30, 2010 | | $ | 19,027 | | |
Balance at September 30, 2011 | | | $ | 12,728 | |
| | | | | | |
4. Acquisitions
During the third quarter of fiscal 2011, we completed an asset acquisition of an active optical cable business for $24.6 million and recorded goodwill of $14.6 million. The purchase price includes contingent consideration up to $5.8 million payable through fiscal 2013 upon the seller meeting certain criteria. The purchase price allocation for this acquisition is complete.
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 | | | Three Months Ended | |
| | September 30, | | | September 30, | |
| | 2010 | | 2009 | | | 2011 | | 2010 | |
Net income (loss) | | $ | 75,104 | | $ | (15,136 | ) | |
Net income | | | $ | 80,517 | | $ | 75,104 | |
| | | | | | | | | | |
Basic weighted average common shares outstanding | | 174,370 | | 173,486 | | | 175,466 | | 174,370 | |
Effect of dilutive stock options | | 786 | | — | | | 1,119 | | 786 | |
| | | | | | | | | | |
Diluted weighted average common shares outstanding | | 175,156 | | 173,486 | | | 176,585 | | 175,156 | |
| | | | | | | | | | |
| | |
Earnings (loss) per share: | | |
Earnings per share: | | |
Basic | | $ | 0.43 | | $ | (0.09 | ) | | $ | 0.46 | | $ | 0.43 | |
Diluted | | $ | 0.43 | | $ | (0.09 | ) | | $ | 0.46 | | $ | 0.43 | |
Excluded from the computations above were anti-dilutive shares of 5.6 million and 6.1 million as offor the three months ended September 30, 2010.2011 and 2010, respectively.
5.6. Comprehensive Income
Total comprehensive income is summarized as follows (in thousands):
| | | | | | | | |
| | Three Months Ended | |
| | September 30, | |
| | 2010 | | | 2009 | |
Net income (loss) | | $ | 75,104 | | | $ | (15,136 | ) |
Translation adjustments | | | 70,255 | | | | 42,836 | |
Accumulated actuarial loss | | | — | | | | (5,831 | ) |
Unrealized investment gain | | | 49 | | | | 354 | |
| | | | | | |
Total comprehensive income | | $ | 145,408 | | | $ | 22,223 | |
| | | | | | |
| | | | | | | | |
| | Three Months Ended | |
| | September 30, | |
| | 2011 | | | 2010 | |
Net income | | $ | 80,517 | | | $ | 75,104 | |
Translation adjustments | | | (58,724 | ) | | | 70,255 | |
Unrealized investment (loss) gain | | | (1,124 | ) | | | 49 | |
| | | | | | |
Total comprehensive income | | $ | 20,669 | | | $ | 145,408 | |
| | | | | | |
7
6.7. 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):
| | | | | | | | | | | | | | | | |
| | Sept. 30, | | June 30, | | | Sept. 30, | | June 30, | |
| | 2010 | | 2010 | | | 2011 | | 2011 | |
Raw materials | | $ | 99,418 | | $ | 86,338 | | | $ | 96,839 | | $ | 91,362 | |
Work in process | | 157,299 | | 139,922 | | | 151,132 | | 143,888 | |
Finished goods | | 290,091 | | 243,109 | | | 299,238 | | 300,703 | |
| | | | | | | | | | |
Total inventories | | $ | 546,808 | | $ | 469,369 | | | $ | 547,209 | | $ | 535,953 | |
| | | | | | | | | | |
7.8. Pensions and Other Postretirement Benefits
The components of pension benefit cost are as follows (in thousands):
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | | Three Months Ended | |
| | September 30, | | | September 30, | |
| | 2010 | | 2009 | | | 2011 | | 2010 | |
Service cost | | $ | 2,197 | | $ | 1,990 | | | $ | 1,381 | | $ | 2,197 | |
Interest cost | | 1,967 | | 2,041 | | | 2,123 | | 1,967 | |
Expected return on plan assets | | | (1,812 | ) | | | (1,696 | ) | | | (2,166 | ) | | | (1,812 | ) |
Amortization of prior service cost | | 53 | | 10 | | | 65 | | 53 | |
Recognized actuarial losses | | 893 | | 57 | | | 290 | | 893 | |
Amortization of transition obligation | | 9 | | 624 | | | 10 | | 9 | |
Curtailment adjustment | | — | | | (3,849 | ) | |
| | | | | | | | | | |
Benefit cost | | $ | 3,307 | | $ | (823 | ) | | $ | 1,703 | | $ | 3,307 | |
| | | | | | | | | | |
The components of retiree health care benefit cost are as follows (in thousands):
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | | Three Months Ended | |
| | September 30, | | | September 30, | |
| | 2010 | | 2009 | | | 2011 | | 2010 | |
Service cost | | $ | 342 | | $ | 271 | | | $ | 274 | | $ | 342 | |
Interest cost | | 617 | | 621 | | | 586 | | 617 | |
Amortization of prior service cost | | | (516 | ) | | | (516 | ) | | | (516 | ) | | | (516 | ) |
Recognized actuarial losses | | 333 | | 175 | | | 82 | | 333 | |
| | | | | | | | | | |
Benefit cost | | $ | 776 | | $ | 551 | | | $ | 426 | | $ | 776 | |
| | | | | | | | | | |
8
8.9. Debt
Total debt consisted of the following:following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Average | | | | | | | Average | | | | | |
| | Interest | | September 30, | | June 30, | | | Interest | | September 30, | | June 30, | |
| | Rate | | Maturity | | 2010 | | 2010 | | | Rate | | Maturity | | 2011 | | 2011 | |
Long-term debt: | | |
Private Placement | | | | 2.91 — 4.28 | % | | 2016 — 2021 | | $ | 150,000 | | $ | — | |
U.S. Credit Facility | | | 2.76 | % | | 2012 | | $ | 110,000 | | $ | 100,000 | | | | 1.74 | % | | 2016 | | 20,000 | | 185,000 | |
Unsecured bonds and term loans | | | 1.31 – 1.65 | % | | 2012 – 2013 | | 60,705 | | 81,431 | | | | 0.77 — 1.31 | % | | 2012 — 2013 | | 66,531 | | 89,342 | |
Mortgages, industrial development bonds and other debt | | | 5.92 | % | | 2013 | | 1,202 | | 2,003 | | |
Other debt | | | | 5.92 | % | | 2012 — 2013 | | 1,498 | | 1,528 | |
| | | | | | | | | | |
Total long-term debt | | 171,907 | | 183,434 | | | 238,029 | | 275,870 | |
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 | | |
Less current portion of long-term debt: | | |
Unsecured bonds and term loans | | | | 0.77 — 1.31 | % | | 60,070 | | 52,156 | |
Other debt | | | Varies | | 1,034 | | 920 | |
| | | | | | | | | | |
Total current portion of long-term debt and short-term borrowings | | 116,200 | | 110,070 | | |
Long-term debt, less current portion | | | 176,925 | | 222,794 | |
| | |
Short-term borrowings | | |
Overdraft loan | | | | 2.48 | % | | 2012 | | 65,265 | | 62,060 | |
Other short-term borrowings | | | | 5.92 | % | | 3,412 | | 4,628 | |
| | | | | | |
Total short-term borrowings | | | 68,677 | | 66,688 | |
| | | | | | | | | | |
Total debt | | $ | 288,107 | | $ | 293,504 | | | $ | 306,706 | | $ | 342,558 | |
| | �� | | | | | | | | | | |
In September 2010, Molex Japan renewed a ¥5.0 billion overdraft loan,On August 18, 2011, we issued senior notes totaling $150.0 million through an unregistered, private placement of debt (the Private Placement). The Private Placement consists of three $50.0 million series notes: Series A with a six month term and an interest rate of approximately 2.48%. At2.91% matures on August 18, 2016; Series B with an interest rate of 3.59% matures on August 18, 2018; and Series C with an interest rate of 4.28% matures on August 18, 2021. The Note Purchase Agreement contains customary covenants regarding liens, debt, substantial asset sales and mergers. The Note Purchase Agreement also requires us to maintain financial covenants pertaining to, among other things, our consolidated leverage and interest rate coverage. As of September 30, 2010,2011, we were in compliance with these covenants and the balance of the overdraft loan, which requires full repayment by the end of the term, approximated $59.6senior notes was $150.0 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 ¥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, of which $38.3 million was current.
In June 2009, we entered into a $195.0 million unsecured, three-year revolving credit facility in the United States, amended in January 2010, September 2010 and March 2011, that matureswas initially scheduled to mature in June 2012 (the “U.S.U.S. Credit Facility”)Facility). In connection with the September 2010 amendment, we increased the credit line on the U.S. Credit Facility to $270.0 million. In March 2011, we further amended the credit facility to increase the credit line to $350.0 million and extend the term to March 2016. 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 250150 basis points as of September 30, 2010. In September 2010, we exercised the feature to increase the credit line to $270.0 million and added three lenders.2011. The instrument governing the U.S. Credit FacilityAgreement contains customary covenants regarding liens, debt, substantial asset sales and mergers, dividends and investments. The U.S. Credit FacilityAgreement also requires us to maintain financial covenants pertaining to, among other things, our consolidated leverage and fixed charge coverage and liquidity.coverage. As of September 30, 2010,2011, we were in compliance with these covenants and had outstanding borrowings of $110.0$20.0 million. We obtained waiver letters from
In September 2011, 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, 2011, the participating banks for any defaultbalance of the U.S. Credit Facility arising fromoverdraft loan, which requires full repayment by the unauthorized activities in Japan.end of the term if not renewed, approximated $65.3 million.
In March 2010, Molex Japan entered into a ¥3.0 billion syndicated term loan for three years, with interest rates equivalent to the six month Tokyo Interbank Offered Rate plus 75 basis points and scheduled principal payments of ¥0.5 billion every six months. At September 30, 2011, the balance of the syndicated term loan approximated $19.5 million, of which $13.1 million was current.
In September 2009, Molex Japan issued unsecured bonds totaling ¥10.0 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, 2011, the outstanding balance of the unsecured bonds approximated $47.0 million which is classified as current.
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Certain assets, including land, buildings and equipment, secure a portion of our long-term debt. Principal payments on long-term debt obligations are due as follows: fiscal 2012, $132.9 million; fiscal 2013, $35.9 million; fiscal 2014, $3.1 million.follows (in thousands):
| | | | |
|
2012 | | $ | 61,104 | |
2013 | | | 6,925 | |
2014 | | | — | |
2015 | | | — | |
2016 | | | 70,000 | |
Thereafter | | $ | 100,000 | |
| | | |
Total long-term debt obligations | | $ | 238,029 | |
| | | |
We had available lines of credit totaling $258.1$406.4 million at September 30, 2010 expiring2011, including a $350.0 million unsecured, five-year revolving credit facility with $330.0 million available as of September 30, 2011. The lines of credit expire between 20102011 and 2013.2021.
9.10. Income Taxes
The effective tax rate was 32.6% for the three months ended September 30, 2011 and 32.2% for the three months ended September 30, 2010 and (14.9)% for the three months ended September 30, 2009. Changes in the amount of unrecognized tax benefits in the three months ended September 30, 2010 were not significant.2010.
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We are subject to tax in U.S. Federal, Statestate and foreign tax jurisdictions. We have substantially completed all U.S. federal income tax matters for tax years through 2006.2007. The tax years 20072008 through 20092010 remain open to examination by all major taxing jurisdictions to which we are subject.
It is our practice to recognize interest and/orand penalties related to income tax matters in tax expense. As of September 30, 2010,2011, there were no material interest or penalty amounts to accrue.
10.11. Fair Value Measurements
The following table summarizes our financial assets and liabilities as of September 30, 2010,2011, which are measured at fair value on a recurring basis (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Quoted Prices | | | | | | Quoted Prices | | | | | |
| | in Active | | Significant | | | | in Active | | Significant | | | |
| | Total | | Markets for | | Other | | Significant | | Total | | Markets for | | Other | | Significant | |
| | Measured | | Identical | | Observable | | Unobservable | | Measured | | Identical | | Observable | | Unobservable | |
| | at Fair | | Assets | | Inputs | | Inputs | | at Fair | | Assets | | Inputs | | Inputs | |
| | Value | | (Level 1) | | (Level 2) | | (Level 3) | | Value | | (Level 1) | | (Level 2) | | (Level 3) | |
Available for sale and trading securities | | $ | 29,605 | | $ | 29,605 | | $ | — | | $ | — | | | $ | 23,142 | | $ | 23,142 | | $ | — | | $ | — | |
Derivative financial instruments, net | | 6,401 | | — | | 6,401 | | — | | | 4,861 | | — | | 4,861 | | — | |
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.
11.12. Derivative Instruments and Hedging Activities
We use derivative instruments to manage our foreign exchange and commodity cost exposures. All derivative instruments are recognized at fair value in other current assets or liabilities.
Derivatives Not Designated as Hedging Instruments
We use one-month foreign currency forward contracts (forward contracts) to offset the impact of exchange rate volatility on certain assets and liabilities, including intercompany receivables and payables denominated in non-
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functional currencies. These forward contracts have not been designated as hedges, and the gains or losses on these forward contracts, along with the offsetting losses or gains due to the fluctuation of exchange rates on the underlying foreign currency denominated assets and liabilities, are recognized in other income (expense). The notional amounts of the forward contracts were $155.9 million and $175.6 million at September 30, 2011 and June 30, 2011, respectively, with corresponding fair values of a $5.0 million liability at September 30, 2011 and a $2.7 million asset at June 30, 2011.
Cash Flow Hedges
We use derivatives in the form of call options to hedge the variability of gold and copper costs. These derivative instruments are designated as cash flow hedges and hedge approximately 60% of our planned gold and copper purchases. Gains and losses of the effective hedges are recorded as a component of accumulated other comprehensive income and reclassified to cost of sales during the period the product containing the commodity is sold. The fair values of the call options were $9.9 million and $7.8 million at September 30, 2011 and June 30, 2011, respectively. These call options have maturities of 12 months or less.
For the three months ended September 30, 2011 and 2010, the impact to accumulated other comprehensive income and earnings from cash flow hedges follows (in thousands):
| | | | | | | | |
| | Three Months Ended | |
| | September 30, | |
| | 2011 | | | 2010 | |
Unrealized gain (loss) recognized in accumulated other comprehensive income | | $ | 1,502 | | | $ | (722 | ) |
Gain reclassified into earnings | | | 1,845 | | | | 2,136 | |
13. New Accounting Pronouncements
In January 2010,September 2011, the Financial Accounting Standards Board (the FASB) issued updated guidance on the periodic testing of goodwill for impairment. This guidance will allow companies to assess qualitative factors to determine if it is more-likely-than-not that goodwill might be impaired and whether it is necessary to perform the two-step goodwill impairment test required under current accounting standards. This new guidance to enhance disclosure requirements related to fair value measurements by requiring certain new disclosures and clarifying certain existing disclosures. The new guidance requires additional information related to activities in the reconciliation of Level 3 fair value measurements. The new guidance also expands the disclosures related to the disaggregation of assets and liabilities and information about inputs and valuation techniques. The new guidance related to Level 3 fair value measurements will beis effective for us on Januarybeginning July 1, 2011. We are currently evaluating the requirements of this2012, with early adoption permitted. This new guidance but dowill not expect it to have a material impact on our consolidated financial statements.
In June 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-05, Comprehensive Income (Topic 220). This new guidance requires the components of net income and other comprehensive income to be either presented in one continuous statement, referred to as the statement of comprehensive income, or in two separate, but consecutive statements. This new guidance eliminates the current option to report other comprehensive income and its components in the statement of stockholders’ equity. While the new guidance changes the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income under current accounting guidance. This new guidance is effective for us for the quarter ended March 31, 2012 and will amend our presentation of the components of comprehensive income.
12.14. Contingencies
We are currently a party to various legal proceedings, claims and investigations including those disclosed in this note. While management presently believes that the ultimate 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.
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Employment and Benefits Litigation
In 2009, a French subsidiary of Molex, Molex Automotive SARL (MAS), decided to close a facility it operated in Villemur-sur-Tarn, France. Molex Automotive SARLMAS submitted a social plan to Molex Automotive SARL’sMAS’s labor representatives providing for payments to approximately 280 terminated employees. This social plan was adopted by Molex Automotive SARL onMAS in 2009 and payments were made to those employees until September 15, 2009. On2010. In September 24, 2010, 188 former employees of Molex Automotive SARLMAS who were covered under the social plan filed suit against Molex Automotive SARLMAS and AGS (a state fund for wage guarantee) in the Toulouse Labor Court, requesting additional compensation on the basis that
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their dismissal was not economically justified.compensation. The total amount sought by the 188former employees is approximately €25€24 million ($34.932.5 million). Molex hasInternational initiated liquidation of MAS, and pursuant to a court proceeding, a liquidator was appointed in November 2010. One of the liquidator’s responsibilities is to assess and respond to the lawsuits involving MAS. In June 2011, the former employees of MAS noticed Molex Automotive SARL,Incorporated (Molex) as a defendant to the Toulouse Labor Court proceedings. In their court submission, the former employees claim that Molex was a co-employer of the former employees and is assessingthus jointly liable for any additional compensation the impactcourt awards. The former employees also claim that there was no economic justification for their dismissal, that MAS decided to close the facility before it consulted with the employees and their representatives and that MAS did not adequately comply with its obligation to assist the terminated employees in obtaining alternative employment. The liquidator has filed a submission on behalf of this actionMAS and argues that the dismissal was economically justified, that the former employees have not proven the damages they are seeking but nonetheless Molex was co-employer and thus liable for any additional payments that may be awarded to the former employees. AGS filed its submission, adopting essentially the same substantive position as the liquidator on the pending lawsuits.dismissal of the former employees but arguing that Molex was the employer. Molex shall file its necessary submission in advance of the court hearings. The Toulouse Labor Court has scheduled two hearings, one on March 5, 2012 for employees who fall within the executives section and another on April 5, 2012 for all other employees. We intend to vigorously contest the attempt by the former employees to seek additional compensation from Molex.
Molex Japan Co., Ltd.Ltd
As we previously reported in our fiscal 2010 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 (Mizuho), 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 outstanding unauthorized loans and to enter a judgment for such payment. Mizuho is claiming payment of outstanding principal borrowings of ¥3 billion ($35.739.2 million), ¥5 billion ($59.665.3 million), ¥5 billion ($59.665.3 million) and ¥2 billion ($23.826.1 million), other loan-related expenses of approximately ¥106 million ($1.31.4 million) and interest and delay damages of approximately ¥832 million yen¥2.9 billion ($9.938.4 million) as of September 30, 2010.2011. On October 13, 2010, Molex Japan filed a written answer requesting the court to dismiss the complaint.complaint and subsequently both parties have submitted additional briefs to the court. The next court hearing is scheduled for November 16, 2011. 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 “NotesNotes to the Condensed Consolidated Financial Statements”Statements for accounting treatment of the accrual for unauthorized activities in Japan.
As we reported on April 29, 2011, the Securities and Exchange Commission (the SEC) has informed us that the SEC has issued a formal order of private investigation in connection with the activities in Molex Japan. We are fully cooperating with the SEC’s investigation.
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13.15. 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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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. 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: | | |
September 30, 2011: | | |
Revenues from external customers | | | $ | 678,780 | | $ | 256,794 | | $ | 411 | | $ | 935,985 | |
Income (loss) from operations | | | 106,262 | | 41,908 | | | (27,589 | ) | | 120,581 | |
Depreciation & amortization | | | 50,075 | | 7,127 | | 4,037 | | 61,239 | |
Capital expenditures | | | 34,701 | | 6,914 | | 1,189 | | 42,804 | |
| | |
September 30, 2010: | | |
Revenues from external customers | | $ | 661,136 | | $ | 236,031 | | $ | 505 | | $ | 897,672 | | | $ | 661,136 | | $ | 236,031 | | $ | 505 | | $ | 897,672 | |
Income (loss) from operations | | 98,647 | | 42,566 | | | (28,735 | ) | | 112,478 | | | 98,647 | | 42,566 | | | (28,735 | ) | | 112,478 | |
Depreciation & amortization | | 47,536 | | 7,523 | | 4,049 | | 59,108 | | | 47,536 | | 7,523 | | 4,049 | | 59,108 | |
Capital expenditures | | 58,757 | | 7,254 | | 5,181 | | 71,192 | | | 58,757 | | 7,254 | | 5,181 | | 71,192 | |
| | |
September 30, 2009: | | |
Revenues from external customers | | $ | 489,141 | | $ | 184,771 | | $ | 121 | | $ | 674,033 | | |
Income (loss) from operations | | 4,675 | | 11,151 | | | (31,483 | ) | | | (15,657 | ) | |
Depreciation & amortization | | 48,513 | | 8,383 | | 3,693 | | 60,589 | | |
Capital expenditures | | 40,591 | | 2,599 | | 2,444 | | 45,634 | | |
Corporate & Other 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 investigative and legal costs related to the unauthorized activities in Japan and the assets of certain facilitiesplants that are not specific to a particular division.
Segment assets, which are comprised of accounts receivable, inventory and fixed assets, are summarized as follows (in thousands):
| | | | | | | | | | | | | | | | |
| | | | | | 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 | |
| | | | | | | | | | | | | | | | |
| | | | | | Custom & | | | Corporate | | | | |
| | Connector | | | Electrical | | | & Other | | | Total | |
September 30, 2011 | | $ | 1,899,592 | | | $ | 479,216 | | | $ | 95,257 | | | $ | 2,474,065 | |
June 30, 2011 | | | 1,913,675 | | | | 503,443 | | | | 98,732 | | | | 2,515,850 | |
The reconciliation of segment assets to consolidated total assets is as follows (in thousands):
| | | | | | | | | | | | | | | | |
| | Sept. 30, | | June 30, | | | Sept. 30, | | June 30, | |
| | 2010 | | 2010 | | | 2011 | | 2011 | |
Segment net assets | | $ | 2,448,201 | | $ | 2,259,445 | | |
Segment assets | | | $ | 2,474,065 | | $ | 2,515,850 | |
Other current assets | | 514,323 | | 571,520 | | | 741,262 | | 707,943 | |
Non current assets | | 404,997 | | 405,613 | | |
Other non-current assets | | | 365,251 | | 374,059 | |
| | | | | | | | | | |
Consolidated total assets | | $ | 3,367,521 | | $ | 3,236,578 | | | $ | 3,580,578 | | $ | 3,597,852 | |
| | | | | | | | | | |
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Molex Incorporated
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, 2010.2011. 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.”
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 39 manufacturing locations in 16 countries. We also provide manufacturing services to integrate specific components into a customer’s product.
We have two global product segments: Connector and Custom & 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. |
Customer demand andNet 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 months ended September 30, 20102011 compared with the prior year period primarily due to favorable foreign currency translation. Customer demand improved in the infotech and automotive markets with the release of new products, but was offset by decreases in the telecommunications, consumer and industrial markets. Gross profit improved due to higher net revenue, particularly in Japan, and higher absorption from increased production. We increased prices to partially offset rising input costs, which improved gross profit compared with the prior year period. Selling, generalThe improved gross profit and administrative expenses as a percent of revenue also decreasedcost control efforts improved our operating income during the three months ended September 30, 20102011 compared with the prior year period due to higher net revenue and our lower cost structure resulting from our restructuring program and specific cost containment activities.period.
On June 30, 2010 we completed 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 related to facilities located in North America, Europe and Japan and, in general, the movement of manufacturing activities from these plants to lower-cost facilities. Restructuring costs during fiscal 2010 were $116.9 million, consisting of $79.6 million of severance costs and $37.3 million for asset impairments.
Our financial results are influenced by factors in theThe markets in which we operate andcompete are highly competitive. Our financial results may be influenced by the following factors: our ability to successfully execute our business strategy. Marketplace factors includestrategy; competition for customers,customers; raw material prices,prices; product and price competition,competition; economic conditions in various geographic regions,regions; foreign currency exchange rates,rates; interest rates,rates; changes in technology,technology; fluctuations in customer demand,demand; patent and intellectual property issues,issues; availability of credit and general market liquidity,liquidity; natural disasters; litigation resultsresults; investigations and legal proceedings 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
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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.
Unauthorized Activities in Japan
As we previously reported in April 2010,our Annual Report on Form 10-K for the year ended June 30, 2011, we launched an investigation intoinvestigated unauthorized activities in 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 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.
Ltd. Based on the results of the completed investigation, we recorded for accounting purposes an accrued liability for 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 in14 of the first quarter of fiscal 2011.Notes to the Condensed Consolidated Financial Statements.
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$191.9 million as of September 30, 2010,2011, including $9.3$26.1 million in cumulative 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$39.8 million for other loan-related expenses, interest expense and delay damages on the 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, 20102011 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 September 30 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Percentage | | Percentage | | | Percentage | | Percentage | |
| | 2010 | | of Revenue | | 2009 | | of Revenue | | | 2011 | | of Revenue | | 2010 | | of Revenue | |
Net revenue | | $ | 897,672 | | | 100.0 | % | | $ | 674,033 | | | 100.0 | % | | $ | 935,985 | | | 100.0 | % | | $ | 897,672 | | | 100.0 | % |
Cost of sales | | 622,596 | | | 69.4 | % | | 482,614 | | | 71.6 | % | | 643,257 | | | 68.7 | % | | 622,596 | | | 69.4 | % |
| | | | | | | | | | | | | | | | | | |
Gross profit | | 275,076 | | | 30.6 | % | | 191,419 | | | 28.4 | % | | 292,728 | | | 31.3 | % | | 275,076 | | | 30.6 | % |
| | |
Selling, general & administrative | | 157,056 | | | 17.5 | % | | 145,628 | | | 21.6 | % | | 169,225 | | | 18.1 | % | | 157,056 | | | 17.5 | % |
Restructuring costs and asset impairments | | — | | | 0.0 | % | | 55,894 | | | 8.3 | % | |
Unauthorized activities in Japan | | 5,542 | | | 0.6 | % | | 5,554 | | | 0.8 | % | | 2,922 | | | 0.3 | % | | 5,542 | | | 0.6 | % |
| | | | | | | | | | | | | | | | | | |
Income (loss) from operations | | 112,478 | | | 12.5 | % | | | (15,657 | ) | | | (2.3 | )% | |
Income from operations | | | 120,581 | | | 12.9 | % | | 112,478 | | | 12.5 | % |
| | |
Other (expense) income, net | | | (1,686 | ) | | | (0.2 | )% | | 2,484 | | | 0.3 | % | |
Other expense, net | | | 1,115 | | | 0.1 | % | | 1,686 | | | 0.2 | % |
| | | | | | | | | | | | | | | | | | |
Income (loss) before income taxes | | 110,792 | | | 12.3 | % | | | (13,173 | ) | | | (2.0 | )% | |
Income before income taxes | | | 119,466 | | | 12.8 | % | | 110,792 | | | 12.3 | % |
Income taxes | | 35,688 | | | 3.9 | % | | 1,963 | | | 0.3 | % | | 38,949 | | | 4.2 | % | | 35,688 | | | 3.9 | % |
| | | | | | | | | | | | | | | | | | |
Net income (loss) | | $ | 75,104 | | | 8.4 | % | | $ | (15,136 | ) | | | (2.3 | )% | |
Net income | | | $ | 80,517 | | | 8.6 | % | | $ | 75,104 | | | 8.4 | % |
| | | | | | | | | | | | | | | | | | |
15
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 such as smartphones and tablets, digital electronics such as cameras and flat panel display televisions, automobile engine control units and adaptive braking systems, factory robotics and diagnostic equipment.
RevenueNet revenue increased significantly across allin the infotech and automotive markets during the first quarter of fiscal 20112012 compared with the first quarter of fiscal 20102011 (comparable quarter) as customer demand improved over the prior year. Revenueyear, but declined in the telecommunications, consumer and industrial markets. Net revenue increased in the telecommunications, infotech consumer and industrialconsumer markets during the first quarter of fiscal 20112012 compared with the fourth quarter of fiscal 20102011 (sequential quarter), but declined in the automotive market due to seasonal effect.telecommunications and industrial markets. The increase (decrease) in net revenue from each market during the first quarter of fiscal 20112012 compared with the comparable quarter and the sequential quarter follows:
| | | | | | | | | | | | | | | | |
| | Comparable | | Sequential | | Comparable | | Sequential | |
| | Quarter | | Quarter | | Quarter | | Quarter | |
Telecommunications | | | 33.3 | % | | | 10.0 | % | | | (5 | )% | | | (2 | )% |
Infotech | | 38.2 | | 5.8 | | | 20 | | 6 | |
Consumer | | 25.1 | | 12.2 | | | | (2 | ) | | 14 | |
Industrial | | 50.4 | | 3.4 | | | | (4 | ) | | | (6 | ) |
Automotive | | 20.7 | | | (4.1 | ) | | 17 | | — | |
Telecommunications market net revenue increaseddecreased against both the comparable quarter anddue to decreases in demand for certain mobile products partially offset by increased infrastructure spending on networking. Telecommunications market net revenue decreased against the sequential quarter primarily due to increaseddecreased infrastructure spending partially offset by improved 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 significantly against the comparable quarter primarily due to increased content and strong demand for notebook computers and tablet devices. Infotech market net revenue increased against the comparablesequential quarter primarily because of depressed enterprise spending in the prior year andon increased demand for networking and storage products in the current period. Infotech market net revenue increased modestly against the sequential quarter reflecting backlog reduction.tablet devices.
Consumer market net revenue increaseddecreased against both the comparable and sequential quartersquarter due to customers replenishing inventory levels and increasedlower demand for our components in flat panel display televisions, and digital cameras. Consumer market netpartially offset by increased demand in gaming equipment. Net revenue increased modestly against the sequential quarter primarily due to delayed pre-holiday production volumes based on our customers’ anticipation of consumer spending duringin home entertainment and gaming equipment from the holiday season.prior quarter.
Industrial market net revenue increased substantiallydecreased against the comparable quarter as global economic conditions improved over the prior year period. Demandand sequential quarters due to softening demand for industrial instrumentssemiconductor and production equipment improved asfrom our customers’ increaseddecreased production to meet demand after delaying many industrial automation projectsand relatively high levels of inventory in the prior year period due to uncertainties about the economic conditions. Sequentially, industrial market net revenue increased modestly as the backlog of demand caused by delayed projects has been reduced.distribution channel.
Automotive market net revenue increased substantially against the comparable quarter asdue to increased global car sales have increased, particularly in North Americaautomobile production and China, as improving global economic conditions led to our customers increasing vehicle builds to replenish inventory levels and meet demand. The automotive market also benefited from our customers’ increasing electronic content in automobiles, such as rear view cameras, navigational and entertainment systems, mobile communication and entertainment systems. Automotiveproducts to promote fuel efficiency. The automotive market net revenue declined slightlyremained unchanged against the sequential quarter due to seasonality and automobile manufacturer’s leveling out inventory after global government incentive programs ended.quarter.
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| | The following table shows the percentage of our net revenue by geographic region: |
The following table shows the percentage of our net revenue by geographic region:
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | Three Months Ended | |
| | September 30, | | September 30, | |
| | 2010 | | 2009 | | 2011 | | 2010 | |
Americas | | | 24 | % | | | 23 | % | | | 24 | % | | | 24 | % |
Asia Pacific | | 63 | | 61 | | | 63 | | 63 | |
Europe | | 13 | | 16 | | | 13 | | 13 | |
| | | | | | | | | | |
Total | | | 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 | | | Three Months | |
| | Ended | | | Ended | |
| | Sept. 30, 2010 | | | Sept. 30, 2011 | |
Net revenue for prior year period | | $ | 674,033 | | | $ | 897,672 | |
Components of net revenue change: | | |
Organic net revenue increase | | 214,614 | | |
Organic net revenue decline | | | | (18,595 | ) |
Currency translation | | 7,033 | | | 52,875 | |
Acquisitions | | 1,992 | | | 4,033 | |
| | | | | | |
Total change in net revenue from prior year period | | 223,639 | | | 38,313 | |
| | | | | | |
Net revenue for current year period | | $ | 897,672 | | | $ | 935,985 | |
| | | | | | |
| | |
Organic net revenue increase as a percentage of net revenue from prior year period | | | 31.8 | % | |
Organic net revenue decline as a percentage of net revenue from prior year period | | | | (2.1 | )% |
Organic net revenue increased significantlydecreased during the three months ended September 30, 20102011 compared with the comparable quarterprior year period as customer demand improveddecreased in all of ourcertain primary markets. We also completed an asset purchaseacquisition of a company in Chinaan active optical cable business during the secondthird quarter of fiscal 2010.2011.
Foreign currency translation increased net revenue by approximately $7.0$52.9 million for the three months ended September 30, 2010 compared with the comparable quarter2011 principally due to a stronger Japanese yen,
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partially offset by a weaker euro against the U.S. 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 September 30, 2010 | | | Three Months Ended September 30, 2011 | |
| | Local | | Currency | | Net | | | Local | | Currency | | Net | |
| | Currency | | Translation | | Change | | | Currency | | Translation | | Change | |
Americas | | $ | 61,323 | | $ | 266 | | $ | 61,589 | | | $ | 3,835 | | $ | 384 | | $ | 4,219 | |
Asia Pacific | | 133,659 | | 20,570 | | 154,229 | | | | (8,186 | ) | | 36,888 | | 28,702 | |
Europe | | 22,921 | | | (13,803 | ) | | 9,118 | | | | (9,010 | ) | | 15,603 | | 6,593 | |
Corporate & other | | | (1,297 | ) | | — | | | (1,297 | ) | |
Corporate & Other | | | | (1,201 | ) | | — | | | (1,201 | ) |
| | | | | | | | | | | | | | |
Net change | | $ | 216,606 | | $ | 7,033 | | $ | 223,639 | | | $ | (14,562 | ) | | $ | 52,875 | | $ | 38,313 | |
| | | | | | | | | | | | | | |
The change in net revenue on a local currency basis compared with the comparable quarter was as follows:
| | | | |
| | Three Months | |
| | Ended | |
| | Sept. 30, 20102011 | |
Americas | | | 39.31.8 | % |
Asia Pacific | | | 32.7(1.5 | ) |
Europe | | | 21.0(7.6 | ) |
| | | | |
Total | | | 32.1(1.6 | )% |
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Gross Profit
The following table provides a summary of gross profit and gross margin for the three months ended September 30 (in thousands):
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | Three Months Ended | |
| | September 30, | | September 30, | |
| | 2010 | | 2009 | | 2011 | | 2010 | |
Gross profit | | $ | 275,076 | | $ | 191,419 | | | $ | 292,728 | | $ | 275,076 | |
Gross margin | | | 30.6 | % | | | 28.4 | % | | | 31.3 | % | | | 30.6 | % |
The increase in gross profit and gross margin for the three month periodmonths ended September 30, 20102011 was primarily due to higher revenue. The increase in gross margin was primarily due tonet revenue and higher absorption from increased productionproduction. We also increased prices to partially offset rising input costs, which improved gross profit and lower costs resulting from our restructuring program, which has improved margins over time.gross margin. The improvements in gross profit and gross margin 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 6.86.0 million pounds of copper and approximately 40,60029,000 troy ounces of gold during the first quarter of fiscal 2011.2012. The following table shows the change in average prices related to our purchases of copper and gold for the three months ended September 30 (in thousands):
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | Three Months Ended | |
| | September 30, | | September 30, | |
| | 2010 | | 2009 | | 2011 | | 2010 | |
Copper (price per pound) | | $ | 3.30 | | $ | 2.71 | | | $ | 4.07 | | $ | 3.30 | |
Gold (price per troy ounce) | | 1,228.00 | | 960.00 | | | 1,702.00 | | 1,228.00 | |
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 $1.8 million for the three months ended September 30, 2011 and reduced cost of sales by $2.2 million for the three months ended September 30, 2010. The hedges did not materially affect operating results for the three months ended September 30, 2009.
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The effect of certain significant impacts on gross profit compared with the comparable quarterprior year periods was as follows for the three months ended September 30 (in thousands):
| | | | | | | | |
| | Three Months | | Three Months | |
| | Ended | | Ended | |
| | Sept. 30, 2010 | | Sept. 30, 2011 | |
Price erosion | | $ | (27,695 | ) | | $ | (24,018 | ) |
Currency translation | | 7,896 | | | 16,975 | |
Currency transaction | | | (13,251 | ) | | | (18,606 | ) |
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 whichas our customers introduced new versions of mobile products. Mobile phones and smartphones are part of our telecommunications and consumer markets.market.
The increase in gross profit due to currency translation was primarily due to a stronger Japanese yen against other currencies and a general weakening of the U.S. dollar against other currencies, except the euro, during the three months ended September 30, 2010.2011.
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
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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 and a general weakening of the U.S dollar against most currencies, partially offset by a weaker euro against the U.S. dollar during the three months ended September 30, 2010.2011.
Operating Expenses
Operating expenses were as follows as of September 30 (in thousands):
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | Three Months Ended | |
| | September 30, | | September 30, | |
| | 2010 | | 2009 | | 2011 | | 2010 | |
Selling, general and administrative | | $ | 157,056 | | $ | 145,628 | | | $ | 169,225 | | $ | 157,056 | |
Restructuring costs and asset impairments | | — | | 55,894 | | |
Unauthorized activities in Japan | | 5,542 | | 5,554 | | | 2,922 | | 5,542 | |
| |
Selling, general and administrative as a percentage of revenue | | | 17.5 | % | | | 21.6 | % | |
Selling, general and administrative as a percentage of net revenue | | | | 18.1 | % | | | 17.5 | % |
Selling, general and administrative expenses decreased as a percent of net revenue for the three months ended September 30, 2010 from the comparable quarter dueincreased $12.2 million compared to the increased revenue and our lower cost structure resulting from our restructuring efforts and specific cost containment activities.prior year period. The impact of currency translation decreasedincreased selling, general and administrative expenses by approximately $8.1 million and $2.6 million for the three months ended September 30, 2011 and 2010, as compared to the comparable quarter.respectively.
Research and development expenditures, which are classified as selling, general and administrative expense, were approximately $40.5$43.9 million, or 4.5%4.7% of net revenue for the three months ended September 30, 2010,2011, compared to $36.5with $40.5 million, or 5.4%4.5% of net revenue for the comparable quarter.prior year period.
Net restructuring costs decreased $55.9 million during the three months ended September 30, 2010, compared to the comparable quarter, as we concluded our restructuring program. Net restructuring costs during the three months ended September, 2009 included $13.2 million for asset impairments and $42.7 million for employee termination benefits. The cumulative expense of our restructuring program was $314.8 million with estimated annual savings of approximately $205.0 million.
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Unauthorized activities in Molex Japan for the three months ended September 30, 20102011 represent investigative and legal fees. See Note 2 of the “NotesNotes to the Condensed Consolidated Financial Statements”.Statements.
Other Income (Expense)Expense (Income)
Other income (expense)expense (income) consists primarily of net interest income, investment income and currency exchange gains or losses. We recordedNet expenses of $1.1 million for the three months ended September 30, 2011 compared with net expenses of $1.7 million for the three months ended September 30, 2010 respectively, compared with net gains of $2.5 million for the 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,as investment income partially offset by investment incomeinterest expense and a stronger Japanese yen against other currencies. The gains during the three months ended September 30, 2009 primarily related to foreign currency exchange gains resulting from strengthening of the U.S. dollar against most currencies.losses in both periods.
Effective Tax Rate
The effective tax rate was 32.2%32.6% for the three months ended September 30, 2010.2011. During the three months ended September 30, 2010,2011, we recorded income tax expense of $2.3$3.1 million due primarily to the reversal of estimated tax benefits resulting from expirations of employee stock options and vesting of restricted stock at amounts less than recorded book value.
Our effective tax rate reflects tax benefits derived from significant operations outside the United States, which, other than Japan, are generally taxed at rates lower than the U.S. statutory rate of 35.0%. A change in the mix of income before income taxes from these various jurisdictions can have a significant impact on our periodic effective rate.
The effective tax rate was (14.9)%32.2% for the three months ended September 30, 2009.2010.
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Backlog
Our order backlog on September 30, 20102011 was approximately $445.5$387.2 million an increase of 46.5% compared with order backlog of $304.2$445.5 million at September 30, 2009.2010. Orders for the three months ended September 30, 20102011 were $868.4$910.0 million compared with $724.4$868.4 million for the comparable quarter,prior year period, representing the significant increase in customer demand during the three months ended September 30, 2010.fiscal 2012. Orders during the three months ended September 30, 2010 improved in all of our primary markets compared with the comparable quarter.prior year period, except for the industrial and telecom markets which decreased 5.4% and 8.4% respectively over the prior year period.
Segments
The following table sets forth information on net revenue by segment as of the three months ended September 30 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Percentage | | Percentage | | | Percentage | | Percentage | |
| | 2010 | | of Revenue | | 2009 | | of Revenue | | | 2011 | | of Revenue | | 2010 | | of Revenue | |
Connector | | $ | 661,136 | | | 73.6 | % | | $ | 489,141 | | | 72.5 | % | | $ | 678,780 | | | 72.5 | % | | $ | 661,136 | | | 73.6 | % |
Custom & Electrical | | 236,031 | | 26.3 | | 184,771 | | 27.4 | | | 256,794 | | 27.4 | | 236,031 | | 26.3 | |
Corporate & Other | | 505 | | 0.1 | | 121 | | 0.1 | | | 411 | | 0.1 | | 505 | | 0.1 | |
| | | | | | | | | | | | | | | | | | |
Total | | $ | 897,672 | | | 100.0 | % | | $ | 674,033 | | | 100.0 | % | | $ | 935,985 | | | 100.0 | % | | $ | 897,672 | | | 100.0 | % |
| | | | | | | | | | | | | | | | | | |
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Connector
The following table provides an analysis of the change in net revenue compared with the prior fiscal year (in thousands):
| | | | | | | | |
| | Three Months | | | Three Months | |
| | Ended | | | Ended | |
| | Sept. 30, 2010 | | | Sept. 30, 2011 | |
Net revenue for prior year period | | $ | 489,141 | | | $ | 661,136 | |
Components of net revenue change: | | |
Organic net revenue increase | | 162,667 | | |
Organic net revenue decrease | | | | (23,914 | ) |
Currency translation | | 9,328 | | | 41,558 | |
| | | | | | |
Total change in net revenue from prior year period | | 171,995 | | | 17,644 | |
| | | | | | |
Net revenue for current year period | | $ | 661,136 | | | $ | 678,780 | |
| | | | | | |
| | |
Organic net revenue change as a percentage of net revenue for prior year period | | | 33.3 | % | |
Organic net revenue decline as a percentage of net revenue for prior year period | | | | (3.6 | )% |
The Connector segment sells primarily to the telecommunication, infotech, consumer markets, and automotive which are discussed above.markets. Organic net revenue decreased during the three months ended September 30, 2011 compared with the prior year period as customer demand decreased in the telecommunications and consumer markets. Segment net revenue increased in the three months ended September 30, 20102011 compared with the prior year periodsperiod primarily due to increased demand in all of the Connector segment’s primary markets,foreign currency translation, partially offset by price erosion, which is generally higher in the Connector segment compared with our other segment. Currency translation favorably impacted net revenue $9.3by $41.6 million for the three months ended September 30, 2010.2011.
The following table provides information on income from operations and operating margins for the Connector segment for the periods indicated (in thousands):
| | | | | | | | |
| | Three Months Ended |
| | September 30, |
| | 2010 | | 2009 |
Income from operations | | $ | 98,647 | | | $ | 4,675 | |
Operating margin | | | 14.9 | % | | | 1.0 | % |
Connector segment income from operations increased compared with the prior year periods primarily due to increased revenue and the completion of our restructuring program on June 30, 2010. Restructuring charges for the three months ended September 30, 2009 were $50.6 million. Gross margins were positively affected by higher absorption from increased production and 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 due to savings from restructuring and specific cost containment actions. Selling, general and administrative expenses as a percent of net revenue were 13.7% for the three months ended September 30, 2010, compared with 16.8% for the same prior year period, due primarily to increased revenue and cost containment actions. | | | | | | | | |
| | Three Months Ended | |
| | September 30, | |
| | 2011 | | | 2010 | |
Income from operations | | $ | 106,262 | | | $ | 98,647 | |
Operating margin | | | 15.7 | % | | | 14.9 | % |
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Connector segment income from operations improved over the prior year period primarily due to higher net revenue and improved gross margins, partially offset by increased selling, general and administrative costs. The increase in gross margins was primarily due to higher absorption from increased production. We also increased prices to partially offset rising input costs, which improved gross profit and gross margin. Unfavorable currency translation increased selling, general and administrative expenses primarily due to a stronger Japanese yen against other currencies and a general weakening of the U.S. dollar against other currencies, during the three months ended September 30, 2011.
Custom & Electrical
The following table provides an analysis of the change in net revenue compared with the prior fiscal year (in thousands):
| | | | | | | | |
| | Three Months | | | Three Months | |
| | Ended | | | Ended | |
| | Sept. 30, 2010 | | | Sept. 30, 2011 | |
Net revenue for prior year period | | $ | 184,771 | | | $ | 236,031 | |
Components of net revenue change: | | |
Organic net revenue change | | 51,567 | | |
Components of net revenue increase: | | |
Organic net revenue increase | | | 5,395 | |
Currency translation | | | (2,299 | ) | | 11,335 | |
Acquisitions | | 1,992 | | | 4,033 | |
| | | | | | |
Total change in net revenue from prior year period | | 51,260 | | | 20,763 | |
| | | | | | |
Net revenue for current year period | | $ | 236,031 | | | $ | 256,794 | |
| | | | | | |
| | |
Organic net revenue change as a percentage of net revenue for prior year period | | | 27.9 | % | |
Organic net revenue increase as a percentage of net revenue for prior year period | | | | 2.3 | % |
The sale of Custom & Electrical segment’s products is concentrated insegment sells primarily to the industrial, telecommunications and infotech markets. Custom & Electrical segment net revenue increased in the three months ended September 30, 20102011 compared with the prior year period due to increased customer demand in all of the segment’s primary markets.and foreign currency translation. We also completed an asset purchaseacquisition of a company in Chinaan active optical cable business during the secondthird quarter of fiscal 2010.2011.
The following table provides information on income from operations and operating margins for the Custom & Electrical segment for the periods indicated (in thousands):
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | Three Months Ended | |
| | September 30, | | September 30, | |
| | 2010 | | 2009 | | 2011 | | 2010 | |
Income from operations | | $ | 42,566 | | $ | 11,151 | | | $ | 41,908 | | $ | 42,566 | |
Operating margin | | | 18.0 | % | | | 6.0 | % | | | 16.3 | % | | | 18.0 | % |
Custom & Electrical segment income from operations increaseddecreased slightly compared withto the prior year periodsperiod due to lower gross margin. Gross margin was lower primarily due to increased revenuechanges in customer mix and the 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 affectedforeign currency transaction. The decrease in gross margin was partially offset by higher absorption and lower costs from our restructuring program, which has improved margins over time.price changes to offset rising input costs. Selling, general and administrative expenses as a percent of net revenue were 17.4% for the three months ended September 30, 2010, compared with 22.2% for2011 improved over the same prior year period, due primarily to increased net revenue savings from restructuring and specific cost containment actions.
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
21
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 $358.9$568.5 million and $394.9$546.5 million at September 30, 20102011 and June 30, 2010,2011, respectively, of which $326.4$553.0 million was in non-U.S. accounts, including $189.0 million in China, as of September 30, 2010.2011. Transferring cash, cash equivalents, or marketable securities to U.S. accounts from non-U.S. accounts could subject us to additional U.S. repatriation income tax. 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
On August 18, 2011, we issued senior notes totaling $150.0 million through a private placement of debt (the Private Placement). The Private Placement consists of three $50.0 million series notes: Series A with an interest rate of 2.91% matures on August 18, 2016; Series B with an interest rate of 3.59% matures on August 18, 2018; and Series C with an interest rate of 4.28% matures on August 18, 2021. The Note Purchase Agreement also requires us to maintain financial covenants pertaining to, among other things, our consolidated leverage and interest rate coverage. As of September 30, 2011, we were in compliance with these covenants.
In June 2009, we entered into a $195.0 million unsecured, three-year revolving credit facility in the United States, amended in January 2010, September 2010 and March 2011, that was initially scheduled to mature in June 2012 (the U.S. Credit Facility). In connection with the September 2010 amendment, we increased the credit line on the U.S. Credit Facility to $270.0 million. In March 2011, we further amended the credit facility to increase the credit line to $350.0 million and extend the term to March 2016.
Total debt including obligations under capital leases totaled $227.7$306.7 million and $236.3$342.6 million at September 30, 20102011 and June 30, 2010,2011, respectively. We had available lines of credit totaling $258.1$406.4 million at September 30, 2010,2011, including a $270.0$350.0 million unsecured, three-yearfive-year revolving credit facility with $160.0$330.0 million available as of September 30, 2010.2011. The credit facility also requires us to maintain financial covenants pertaining to, among other things, our consolidated leverage and fixed charge coverage and liquidity.coverage. As of September 30, 2010,2011, we were in compliance with these covenants. Additionally, we have three unsecured borrowing agreements in Japan totaling ¥18.0¥10.1 billion ($214.4131.8 million) as of September 30, 2011, with weighted average fixed interest rates of 1.5%. As of September 30, 2010, we had a remaining balance on these agreements of ¥14.3 billion ($170.6 million)1.56%. See Note 89 of the “NotesNotes to the Condensed Consolidated Financial Statements”.Statements.
Cash Flows
Our cash balance decreased $35.7increased $24.8 million during the three months ended September 30, 2010.2011. Our primary sourcessource of cash werewas operating cash flows of $62.6$150.5 million, and $10.0 million in net borrowings against the credit facility.majority of which is generated outside the United States. We used capitalcash during the period to fund capital expenditures of $71.2$42.8 million and pay dividends of $26.6$35.1 million. The translation of our cash to U.S. dollars reduceddecreased our cash balance by $12.5$8.6 million as compared with the balance as of June 30, 2010.2011.
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Below is a table setting forth the key lines of our Consolidated Statements of Cash Flows (in thousands):
| | Below is a table setting forth the key lines of our Consolidated Statements of Cash Flows (in thousands): |
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | | Three Months Ended | |
| | September 30, | | | September 30, | |
| | 2010 | | 2009 | | | 2011 | | 2010 | |
Cash provided from operating activities | | $ | 62,595 | | $ | 70,618 | | | $ | 150,549 | | $ | 62,595 | |
Cash used for investing activities | | | (69,622 | ) | | | (8,452 | ) | | | (39,317 | ) | | | (69,622 | ) |
Cash (used for) provided from financing activities | | | (41,217 | ) | | 22,884 | | |
Cash used for financing activities | | | | (77,871 | ) | | | (41,217 | ) |
Effect of exchange rate changes on cash | | 12,536 | | 11,242 | | | | (8,584 | ) | | 12,536 | |
| | | | | | | | | | |
Net (decrease) increase in cash | | $ | (35,708 | ) | | $ | 96,292 | | |
Net increase (decrease) cash | | | $ | 24,777 | | $ | (35,708 | ) |
| | | | | | | | | | |
Operating Activities
Cash provided from operating activities declinedincreased by $8.0$88.0 million from the prior year period due mainly to an $84.4a $107.2 million increasedecrease in working capital needs in the current year period compared with the prior year, partially offset by a net loss in the prior year period.year. Working capital increased inneeds decreased during the three months ended September 30, 20102011 compared with the prior year period as we collected outstanding receivable balances and maintained inventory production increasedlevels after increasing inventory in the prior year due to customer demand.demand and the conversion from air shipment to sea shipment. Working capital is defined as current assets minus current liabilities. Our restructuring accrual as of September 30, 2010 was $19.0 million, which we expect to reduce through cash outlays during fiscal 2011.
Investing Activities
Cash used for investing activities increaseddecreased by $61.2$30.3 million from the prior year period due mainly to an increasea $28.4 million decrease in capital expenditures of $25.6 million.expenditures. Capital expenditures were $71.2$42.8 million for the three months ended September 30, 20102011 compared with $45.6$71.2 million in the prior year period. Additionally, in fiscal 2011, we had $2.2 million in net proceeds of marketable securities compared to $35.3 million during fiscal 2010.
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Financing Activities
Cash used for financing activities decreased $64.1increased $36.7 million during the three months ended September 30, 2010,2011, as compared with the prior year period primarily due to a $24.6 million reduction of outstanding loans for Molex Japan.the increase in our quarterly cash dividend and net payments on debt.
We borrowed $20.0increased our quarterly cash dividend to $0.2000 per share, an increase of 14.3% from the previous cash dividend of $0.1750 per share. The increase was effective to shareholders of record on June 30, 2011.
We issued senior notes totaling $150.0 million against our $270.0 million unsecured, three-yearon August 18, 2011. Proceeds were used to pay down a portion of the U.S. Credit Facility. Net payments on the revolving credit facility. Total borrowings against the credit facility were $110.0$165.0 million as offor the three months ended September 30, 2010.2011 compared to net borrowings of $10.0 million in the prior year period.
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. To the extent we are required to pay all or any portion of the unauthorized loans in Molex Japan our cash requirements may also impact our cash requirements.be impacted.
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Contractual Obligations and Commercial Commitments
We have contractual obligations and commercial commitments as described in Item 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, 2010.2011. 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. ThereSince June 30, 2011, there have been no material changes in our contractual obligations and commercial commitments since June 30, 2010 arising outside of the ordinary course of business.business other than the Private Placement. The Private Placement consists of three $50.0 million series notes: Series A that matures on August 18, 2016; Series B that matures on August 18, 2018; and Series C that matures on August 18, 2021. See Note 9 of the Notes to the Condensed Consolidated Financial Statements.
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, 20102011 (Form 10-K). You should carefully consider the risks described in our Form 10-K and Form 10-Q.10-K. Such risks are not the only ones facing our Company. Additionalwe are facing; 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, natural disasters and investigations and 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 quarterly report, whether as a result of new information, future events, changes in assumptions, or otherwise.
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
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preserve the value of cash flows. No materialSee Note 12 of the Notes to the Condensed Consolidated Financial Statements for discussion of foreign exchange contracts were in use at September 30, 2010 or2011 and June 30, 2010.2011.
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 materialSee Note 12 of the Notes to the Condensed Consolidated Financial Statements for discussion of derivative instruments were in use at September 30, 2010 or2011 and June 30, 2010.2011.
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 $7.0$52.9 million and increased income from operations of $7.9$6.0 million for the three months ended September 30, 2010,2011, compared with the estimated results for the comparable period in the prior year.
Our $18.3$11.2 million of marketable securities at September 30, 20102011 are principally invested in time deposits.
Interest rate exposure is generally limited to our marketable securities, and three-yearfive-year unsecured credit facility.facility and syndicated term loan. We do not actively manage the risk of interest rate fluctuations. Our marketable securities mature in less than 12 months. We had $110.0$20.0 million outstanding on our $270.0$350.0 million credit facility with an interest rate of approximately 2.8%1.74% at September 30, 2010.2011.
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
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”))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 September 30, 2010,2011, 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
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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 1. Legal Proceedings
Currently, we are involved in a number of legal proceedings. For a discussion of contingencies related to legal proceedings, see Note 1214 of the Notes to ourthe 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 September 30, 20102011 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 | |
July 1 – July 31 | | |
July 1 — July 31 | | |
Common Stock | | 21 | | $ | 15.50 | | — | | | — | | $ | — | | — | |
Class A Common Stock | | — | | $ | — | | — | | | 2 | | $ | 21.74 | | — | |
August 1 – August 31 | | |
August 1 — August 31 | | |
Common Stock | | 102 | | $ | 16.51 | | — | | | — | | $ | — | | — | |
Class A Common Stock | | — | | $ | — | | — | | | 92 | | $ | 16.79 | | — | |
September 1 – September 30 | | |
September 1 — September 30 | | |
Common Stock | | 19 | | $ | 16.01 | | — | | | — | | $ | — | | — | |
Class A Common Stock | | — | | $ | — | | — | | | 1 | | $ | 16.98 | | — | |
| | | | | | | | | | | | | | |
Total | | 142 | | $ | 16.29 | | — | | | 95 | | $ | 16.92 | | — | |
| | | | | | | | | | | | | | |
The shares purchased represent exercises of employee stock options.
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Item 6. Exhibits
| | |
Number | | Description |
4.1 | | Note Purchase Agreement dated August 18, 2011 among Molex Incorporated and the Purchasers named therein. Incorporated by reference to Exhibit 4.1 to our Form 8-K filed on August 24, 2011 (File No. 000-07491). |
| | |
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 |
| | |
101.INS | | XBRL Instance Document |
| | |
101.SCH | | XBRL Taxonomy Extension Schema Document |
| | |
101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document |
| | |
101.LAB | | XBRL Taxonomy Extension Label Linkbase Document |
| | |
101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document |
| | |
101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document |
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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: October 29, 2010 | 27, 2011 | /S/ DAVID D. JOHNSON | |
| | David D. Johnson | |
| | Executive Vice President, Treasurer and Chief Financial Officer (Principal (Principal Financial Officer) | |
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