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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2005
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) 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. Yes X No
Indicate by check mark whether the registrant is an
accelerated filer (as defined in Rule 12b-2 of the Exchange
Act). Yes X No
On March 31, 2005, the following numbers of shares of the
Company's common stock were outstanding:
Common Stock 100,696,832
Class A Common Stock 88,110,032
Class B Common Stock 94,255
Molex Incorporated
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements Page
Condensed Consolidated Balance Sheets
March 31, 2005 and June 30, 2004 3
Condensed Consolidated Statements of Income
Three and Nine Months Ended March 31, 2005 and 2004 4
Condensed Consolidated Statements of Cash Flows
Nine Months Ended March 31, 2005 and 2004 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosure About Market
Risk 21
Item 4. Controls and Procedures 22
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds 24
Item 6. Exhibits 25
SIGNATURES 26
2
PART I
Item 1. Financial Statements
Molex Incorporated
Condensed Consolidated Balance Sheets
(In thousands)
March 31, June 30,
2005 2004
----------- -----------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 323,786 $ 234,431
Marketable securities 123,449 104,223
Accounts receivable, less allowances
of $22,416 and $22,901, respectively 553,472 529,630
Inventories 294,014 265,344
Other current assets 40,637 35,016
----------- -----------
Total current assets 1,335,358 1,168,644
Property, plant and equipment, net 1,015,736 1,022,378
Goodwill 167,355 164,915
Other assets 213,739 216,409
----------- -----------
Total assets $2,732,188 $2,572,346
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 219,137 $ 234,823
Accrued expenses 150,103 143,160
Other current liabilities 57,064 50,481
----------- -----------
Total current liabilities 426,304 428,464
Other non-current liabilities 11,266 10,487
Accrued pension and postretirement benefits 54,183 52,151
Long-term debt 9,676 10,243
Obligations under capital leases 3,118 3,796
Minority interest in subsidiaries 3,074 1,211
----------- -----------
Total liabilities 507,621 506,352
----------- -----------
Shareholders' equity:
Common stock 10,775 10,734
Paid-in capital 384,254 369,660
Retained earnings 2,289,030 2,160,368
Treasury stock (534,207) (509,161)
Deferred unearned compensation (26,099) (32,180)
Accumulated other comprehensive income 100,814 66,573
Total shareholders' equity 2,224,567 2,065,994
---------- ----------
Total liabilities and shareholders' equity $2,732,188 $2,572,346
---------- ----------
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
Molex Incorporated
Condensed Consolidated Statements of Income
(Unaudited - in thousands, except per share data)
Three Months Ended Nine Months Ended
March 31, March 31,
-------------------- ------------------------
2005 2004 2005 2004
-------- -------- ---------- ----------
Net revenue $612,842 $569,153 $1,904,890 $1,614,898
Cost of sales 401,434 366,886 1,246,680 1,065,310
-------- -------- ---------- ----------
GROSS PROFIT 211,408 202,267 658,210 549,588
-------- -------- ---------- ----------
Selling, general and administrative expenses:
Selling 53,929 52,095 162,840 145,356
General and administrative 104,623 90,910 304,760 256,285
-------- -------- ---------- ----------
Total selling, general and administrative expenses 158,552 143,005 467,600 401,641
INCOME FROM OPERATIONS 52,856 59,262 190,610 147,947
Other (income) expense:
Gain on sale of affiliate stock - (30) (1,624) (10,393)
(Gain) loss on investments (4,569) - (1,587) 4,987
Equity income (2,399) (2,148) (7,579) (6,434)
Interest, net (1,579) (926) (3,903) (3,250)
-------- -------- ---------- ----------
Total other (income) expense (8,547) (3,104) (14,693) (15,090)
INCOME BEFORE INCOME TAXES
AND MINORITY INTEREST 61,403 62,366 205,303 163,037
Income taxes 16,587 16,832 55,471 44,020
Minority interest (6) 63 280 268
-------- -------- ---------- ----------
NET INCOME $ 44,822 $ 45,471 $ 149,552 $ 118,749
-------- -------- ---------- ----------
EARNINGS PER SHARE:
Basic $ 0.24 $ 0.24 $ 0.79 $ 0.62
Diluted $ 0.24 $ 0.24 $ 0.78 $ 0.62
DIVIDENDS PER SHARE $ 0.0375 $ 0.0250 $ 0.1125 $ 0.075
AVERAGE COMMON SHARES OUTSTANDING:
Basic 188,780 190,252 188,742 190,480
Diluted 190,509 192,417 190,694 192,450
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
Molex Incorporated
Condensed Consolidated Statements of Cash Flows
(Unaudited - in thousands)
Nine Months Ended
March 31,
-------------------
2005 2004
-------- --------
Cash and cash equivalents, beginning of period $234,431 $178,976
OPERATING ACTIVITIES
Net income 149,552 118,749
Add (deduct) non-cash items included in net income:
Depreciation and amortization 178,622 166,828
Amortization of deferred unearned compensation 10,525 10,061
Changes in assets and liabilities, excluding effects of
foreign currency adjustments:
Accounts receivable (4,816) (75,578)
Inventories (20,800) (59,629)
Accounts payable (21,213) 34,723
Other current assets and liabilities (4,722) 8,724
Other assets and liabilities (14,567) (10,611)
-------- --------
Cash provided from operating activities 272,581 193,267
INVESTING ACTIVITIES
Capital expenditures (155,190) (134,248)
Sales (purchases) of marketable securities (19,113) 80,849
Other investing activities 17,730 (5,223)
-------- --------
Cash used for investing activities (156,573) (58,622)
FINANCING ACTIVITIES
Net decrease in debt (463) (4,016)
Principal payments on capital leases (2,555) (3,677)
Cash dividends paid (18,878) (14,298)
Purchase of treasury stock (23,615) (50,222)
Reissuance of treasury stock 534 1,517
Exercise of stock options 7,530 6,975
-------- --------
Cash used for financing activities (37,447) (63,721)
Effect of exchange rate changes on cash and cash equivalents 10,794 10,227
Net increase (decrease) in cash and cash equivalents 89,355 81,151
-------- --------
Cash and cash equivalents, end of period $323,786 $260,127
-------- --------
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
Molex Incorporated
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
Molex Incorporated manufactures electronic components,
including electrical and fiber optic interconnection products and
systems, switches and integrated products in 55 plants in 19
countries throughout the world. As used herein the term "Molex"
or "Company" includes Molex Incorporated and its United States and
international subsidiaries.
The unaudited financial statements have been prepared from
the Company's books and records and reflect all adjustments
consisting only of normal recurring items, except as discussed in
Note 2 and Note 3, that in the opinion of management are necessary
for a fair presentation of information for the interim periods
presented. The condensed consolidated financial statements have
been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission and as permitted thereby, do
not include all information and footnote disclosures required in
the annual consolidated financial statements. These financial
statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Molex
Incorporated 2004 Annual Report on Form 10-K. The results of
operations for the interim periods should not be considered
indicative of results to be expected for the full year.
The preparation of the unaudited financial statements in
conformity with accounting principles generally accepted in the
United States 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,
allowances for accounts receivable and inventory and impairment
reviews for goodwill, other intangibles and long-lived assets.
Estimates are revised periodically. Actual results could differ
from these estimates.
2. Reclassification of Income Statement
Certain reclassifications have been made to the prior year's
income statement to conform to the Company's new classifications
effective June 30, 2004 as discussed in Note 2 of the Notes to
Consolidated Financial Statements of the Company's fiscal 2004
Annual Report on Form 10-K. For the three months ended March 31,
2004, these reclassifications consist of (a) $2.1 million of
selling, general and administrative expenses being reclassified as
a separate line item, equity income, under other (income) expense,
(b) a $0.1 million loss on the sale of property, plant and
equipment reclassified from selling, general and administrative
expenses to cost of sales and (c) a $0.2 million foreign currency
exchange gain being reclassified to cost of sales from other
(income) expense.
For the nine months ended March 31, 2004, these
reclassifications consist of (a) $6.4 million of selling, general
and administrative expenses being reclassified as a separate line
item, equity income, under other (income) expense, (b) a $2.0
million loss on the sale of property, plant and equipment
reclassified from selling, general and administrative expenses to
cost of sales and (c) a $0.8 million foreign currency exchange
loss being reclassified to cost of sales from other (income)
expense.
6
Following is a summary of the effect of these
reclassifications on previously reported amounts for the three and
nine months ended March 31, 2004 (in thousands):
Three Months Ended Nine Months Ended
March 31, 2004 March 31, 2004
--------------------------------- -----------------------------------
Previously Previously
Reported Reclass Reclassified Reported Reclass Reclassified
---------- ------- ------------ ---------- -------- ------------
Net revenue $569,153 $ - $569,153 $1,614,898 $ - $1,614,898
Cost of sales 367,021 (135) 366,886 1,062,532 2,778 1,065,310
-------- ------ -------- ---------- -------- ----------
Gross profit 202,132 135 202,267 552,366 (2,778) 549,588
Selling, general & admin expenses 140,961 2,044 143,005 397,207 4,434 401,641
-------- ------ -------- ---------- -------- ----------
Income from operations 61,171 (1,909) 59,262 155,159 7,212 147,947
Gain on sale of affiliate stock (30) - (30) (10,393) - (10,393)
(Gain) loss on investments - - - 4,986 1 4,987
Equity income - (2,148) (2,148) - (6,434) (6,434)
Interest, net (926) - (926) (3,250) - (3,250)
Other (239) (239) - 779 (779) -
-------- ------ -------- ---------- -------- ----------
Total other (income) expense (1,195) (1,909) (3,104) (7,878) (7,212) (15,090)
Income before income taxes 62,366 - 62,366 163,037 - 163,037
Income taxes and minority interest 16,895 - 16,895 44,288 - 44,288
-------- ------ -------- ---------- -------- ----------
Net income $ 45,471 $ - $ 45,471 $ 118,749 $ - $ 118,749
-------- ------ -------- ---------- -------- ----------
The Company has concluded that the amounts reclassified are
not material, either individually or in the aggregate, to the
financial trends for the periods affected or to a fair
presentation of the Company's results of operations and financial
statements.
3. Correction of Prior Years' Errors
In the first fiscal quarter of 2005 the Company recorded the
adjustments discussed below to correct errors in prior years'
financial statements.
Included in cost of sales for the nine months ended March 31,
2005 is a charge of $9.1 million ($6.6 million after-tax or $0.03
per share) for the cumulative effect of an error in prior years.
This error related to the inadvertent omission of in-transit
intercompany inventory in the Company's calculation of profit-in-
inventory elimination. The Company recorded this profit-in-
inventory adjustment as a reduction to inventories and a charge to
cost of sales.
Also included in the results for the nine months ended March
31, 2005 is a charge of $4.8 million ($3.5 million after-tax or
$0.02 per share) for the cumulative effect of an error in prior
years related to the Company's vacation accrual calculation. Of
the charge for this error, $2.1 million was recorded in cost of
sales and $2.7 million was recorded in selling, general and
administrative expenses. Also included is a charge for the
correction of an error of the prior year bonus accrual of $0.5
million ($0.4 million after-tax) recorded in selling, general and
administrative expenses.
In addition, included in the results for the nine months
ended March 31, 2005 are the correction of an error related to a
prior year inventory allowance of $1.1 million ($0.8 million after-
tax), the correction of an error of a prior year insurance accrual
of $2.7 million ($2.0 million after-tax or $0.01 per share), and
the cumulative effect of an error related to prior years
receivable allowance of $3.2 million ($2.3 million after-tax or
$0.01 per share). These three items had a positive impact on
income. The inventory allowance and insurance accrual were
recorded in cost of sales. The receivable allowance was recorded
in selling, general and administrative expenses.
7
The aggregate effect of these corrections of errors,
identified prior to filing the Form 10-Q/A for the first fiscal
quarter of 2005, was a reduction of pretax income of $7.4 million
($5.4 million after-tax or $0.03 per share). Of that cumulative
amount, the Company estimates that approximately $4.9 million
($3.6 million after-tax or $0.02 per share) was an expense that
should have been recorded in fiscal 2004, $1.3 million ($0.9
million after-tax) was an expense that should have been recorded
in fiscal 2003, $0.5 million ($0.3 million after-tax) was an
expense that should have been recorded in fiscal 2002, $2.7
million ($2.0 million after-tax or $0.01 per share) was income
that should have been recorded in fiscal 2001, $1.9 million ($1.4
million after-tax or $0.01 per share) was an expense that should
have been recorded in fiscal 2000 and $1.5 million ($1.2 million
after-tax or $0.01 per share) was an expense that should have been
recorded in fiscal 1999 and prior.
The table below summarizes the estimated pretax effect, by
fiscal year, of the errors identified and corrected in the first
fiscal quarter of 2005 (in thousands):
1999 &
2004 2003 2002 2001 2000 Earlier Total
Increase (Decrease) ------- ------- ------ ------ ------- ------- -------
- --------------------
Profit-in-inventory elimination $(3,200) $(1,200) $(400) $2,200 $(1,100) $(5,400) $(9,100)
Inventory allowance - - - - - 1,142 1,142
Insurance accrual - 2,200 500 - - - 2,700
Receivable allowance (625) (710) (12) (48) (315) 4,879 3,169
Vacation accrual (604) (1,590) (556) 584 (473) (2,186) (4,825)
Bonus accrual (500) - - - - - (500)
------- ------- ------ ------ ------- ------- -------
Total pretax effect of errors $(4,929) $(1,300) $(468) $2,736 $(1,888) $(1,565) $(7,414)
------- ------- ------ ------ ------- ------- -------
Income before income taxes $239,892 $110,042 $93,221 $291,416 $323,694
Error percentage of income
before income taxes (2.1)% (1.2)% (0.5)% 0.9% (0.6)%
The Company has concluded that the amounts related to fiscal
2004 and prior years are not material, either individually or in
the aggregate, to the financial trends for those periods affected
or to a fair presentation of the Company's results of operations
and financial statements. Accordingly, results for fiscal 2004
and prior years have not been restated.
8
4. Stock Option Plans
As permitted by Statement of Financial Accounting Standards
(SFAS) No. 123, "Accounting for Stock-Based Compensation," the
Company has elected to account for its stock-based compensation
programs according to the provisions of Accounting Principles
Board Opinion (APB) No. 25, "Accounting for Stock Issued to
Employees." Had the Company elected to apply the provisions of
SFAS No. 123 regarding recognition of compensation expense to the
extent of the calculated fair value of stock options granted, the
effects on reported net income and earnings per share for the
three and nine months ended March 31 would have been as follows
(in thousands, except per share data):
Three Months Ended Nine Months Ended
March 31, March 31,
------------------ -------------------
2005 2004 2005 2004
------- ------- -------- --------
Net income as reported $44,822 $45,471 $149,552 $118,749
Add: Stock-based compensation included in
reported net income, net of related tax effects 2,153 2,833 7,683 7,367
Deduct: Stock-based compensation determined
under fair value method, net of related tax effects (4,443) (4,575) (14,397) (12,670)
------- ------- -------- --------
Pro forma net income $42,532 $43,729 $142,838 $113,446
------- ------- -------- --------
Earnings per share:
Basic $ 0.24 $ 0.24 $ 0.79 $ 0.62
Diluted $ 0.24 $ 0.24 $ 0.78 $ 0.62
Pro forma earnings per share:
Basic $ 0.23 $ 0.23 $ 0.76 $ 0.60
Diluted $ 0.22 $ 0.23 $ 0.75 $ 0.59
For purposes of computing pro forma net income and earnings
per share, the fair value of each option grant is estimated as of
the date of grant using the Black-Scholes option pricing model.
5. Earnings Per Share
A reconciliation of the basic average common shares
outstanding to dilutive average common shares outstanding is as
follows (in thousands):
Three Months Ended Nine Months Ended
March 31, March 31,
------------------ ------------------
2005 2004 2005 2004
-------- -------- -------- --------
Basic average common shares outstanding 188,780 190,252 188,742 190,480
Effect of dilutive stock options 1,729 2,165 1,952 1,970
-------- -------- -------- --------
Diluted average common shares outstanding 190,509 192,417 190,694 192,450
-------- -------- -------- --------
6. Comprehensive Income
Total comprehensive income is summarized as follows (in thousands):
Three Months Ended Nine Months Ended
March 31, March 31,
------------------ ------------------
2005 2004 2005 2004
------- ------- -------- --------
Net income $44,822 $45,471 $149,552 $118,749
Translation adjustments (28,086) (473) 34,333 66,459
Unrealized investment gain (loss) (101) 12 (92) 323
------- ------- -------- --------
Total comprehensive income $16,635 $45,010 $183,793 $185,531
------- ------- -------- --------
9
7. Inventories
Inventories are valued at the lower of first-in, first-out
cost or market. Inventories, less allowances of $38,965 at March
31, 2005 and $41,327 at June 30, 2004, consist of the following
(in thousands):
March 31, June 30,
2005 2004
-------- --------
Raw materials $ 45,299 $ 39,743
Work in process 92,095 91,168
Finished goods 156,620 134,433
-------- --------
Total inventories $294,014 $265,344
-------- --------
8. Pensions and Other Postretirement Benefits
The components of pension and retiree health care benefit
expense are as follows for the three and nine months ended March
31, 2005 and 2004 (in thousands):
Three months ended March 31, Pension Retiree Health Care
-------------- -------------------
2005 2004 2005 2004
------ ------ -------- --------
Service cost $2,247 $1,832 $ 470 $ 487
Interest cost 1,326 980 471 486
Expected return on plan assets (1,372) (957) - -
Amortization of prior service cost 51 58 (66) (66)
Recognized actuarial losses 255 260 159 198
Amortization of transition obligation 17 14 - -
------ ------ -------- --------
Benefit expense $2,524 $2,187 $1,034 $1,105
------ ------ -------- --------
Nine months ended March 31, Pension Retiree Health Care
-------------- -------------------
2005 2004 2005 2004
------ ------ -------- --------
Service cost $6,486 $5,496 $1,409 $1,461
Interest cost 3,856 2,940 1,413 1,458
Expected return on plan assets (4,011) (2,870) - -
Amortization of prior service cost 153 174 (197) (197)
Recognized actuarial losses 749 780 476 594
Amortization of transition obligation 49 40 - -
------ ------ -------- --------
Benefit expense $7,282 $6,560 $3,101 $3,316
------ ------ -------- --------
10
9. Segments and Related Information
The Company operates in one product segment, the manufacture
and sale of electronic components. Revenue is recognized based on
the location of the selling entity. Management operates the
business through four regions. Information by region is
summarized as follows (in thousands):
Inter-
Customer Company Total Net
Three months ended: Revenue Revenue Revenue Income
March 31, 2005 -------- -------- -------- --------
Americas $166,235 $ 42,986 $209,221 $ 5,739
Far East South 182,615 30,203 212,818 25,288
Far East North 127,330 80,644 207,974 30,135
Europe 121,989 11,973 133,962 (2,323)
Corporate and other 14,673 27,988 42,661 (14,017)
Eliminations - (193,794) (193,794) -
-------- -------- -------- --------
Total $612,842 $ - $612,842 $ 44,822
-------- -------- -------- --------
March 31, 2004
Americas $181,628 $ 47,199 $228,827 $ 16,333
Far East South 151,917 30,168 182,085 17,730
Far East North 122,559 62,286 184,845 20,415
Europe 99,374 10,410 109,784 (1,523)
Corporate and other 13,675 24,104 37,779 (7,484)
Eliminations - (174,167) (174,167) -
-------- -------- -------- --------
Total $569,153 $ - $569,153 $ 45,471
-------- -------- -------- --------
Inter-
Customer Company Total Net
Nine months ended: Revenue Revenue Revenue Income
March 31, 2005 ---------- -------- ---------- --------
Americas $ 513,718 $141,870 $ 655,588 $ 25,675
Far East South 577,173 98,453 675,626 70,003
Far East North 392,746 243,936 636,682 83,924
Europe 379,156 33,887 413,043 (693)
Corporate and other 42,097 83,811 125,908 (29,357)
Eliminations - (601,957) (601,957) -
---------- -------- ---------- --------
Total $1,904,890 $ - $1,904,890 $149,552
---------- -------- ---------- --------
March 31, 2004
Americas $ 500,597 $127,859 $ 628,456 $ 38,262
Far East South 447,454 71,703 519,157 48,245
Far East North 370,155 168,667 538,822 55,666
Europe 259,176 28,947 288,123 (8,905)
Corporate and other 37,516 70,400 107,916 (14,519)
Eliminations - (467,576) (467,576) -
---------- -------- ---------- --------
Total $1,614,898 $ - $1,614,898 $118,749
---------- -------- ---------- --------
11
10. Recent Accounting Pronouncements
The American Jobs Creation Act of 2004 (the Act), which was
signed into law on October 22, 2004, introduces a special one-time
dividends received deduction on the repatriation of certain
foreign earnings to a U.S. taxpayer (Repatriation Provision),
provided certain criteria are met. The Financial Accounting
Standards Board (FASB) issued Staff Position No. FAS 109-2 in
December 2004, which requires the recording of tax expense if and
when an entity decides to repatriate foreign earnings subject to
the Act.
The Company is considering the implications of the Act on the
repatriation of certain foreign earnings, which reduces the
Federal income tax rate on dividends from non-U.S. subsidiaries.
The one-time repatriation provision is elective, and is applicable
to Molex Incorporated on certain foreign profit distributions
received during either fiscal 2005 or 2006. Management has not
decided whether, and to what extent, the Company would repatriate
foreign earnings under the Act, and accordingly, the financial
statements do not reflect any provision for tax on undistributed
foreign earnings for which deferred income taxes have not been
provided because they have been considered permanently reinvested,
which may be repatriated subject to the provisions of the Act.
The Company currently estimates it could receive distributions in
a range of $0 to $120 million under the repatriation provision.
The related income tax effect from such repatriation is dependent
upon a number of factors that are being analyzed, including the
issuance of additional guidance from the U.S. Treasury Department.
Accordingly, the income tax effect of such distributions cannot be
reasonably estimated at this time. The Company will continue to
analyze the effect of this provision and expects to complete this
analysis during fiscal 2005.
In November 2004, the FASB issued SFAS No. 151, Inventory
Costs, an amendment of ARB No. 43, Chapter 4 (SFAS 151). SFAS 151
clarifies that abnormal inventory costs such as costs of idle
facilities, excess freight and handling costs, and wasted
materials (spoilage) are required to be recognized as current
period charges. The provisions of SFAS 151 are effective for
fiscal years beginning after June 15, 2005. The adoption of SFAS
151 is not expected to have a significant impact on the Company's
consolidated financial position or results of operations.
In December 2004, the FASB issued SFAS No. 123 (revised
2004), Share-Based Payment (Statement 123(R)), which is a revision
of FASB SFAS No. 123, Accounting for Stock-Based Compensation
(Statement 123). Statement 123(R) supersedes Accounting
Principles Board Opinion No. 25 (APB 25), Accounting for Stock
Issued to Employees, and amends FASB SFAS No. 95, Statement of
Cash Flows. Generally, the approach in Statement 123(R) is
similar to the approach described in Statement 123. Statement
123(R) requires that all share-based payments to employees,
including grants of employee stock options, be recognized in the
income statement based on their fair values. Pro forma disclosure
is no longer an option. The provisions of Statement 123(R) are
effective for fiscal years beginning after June 15, 2005.
As permitted by Statement 123, the Company currently accounts
for share-based payments to employees using APB 25's intrinsic
value method. The Company expects to adopt Statement 123(R) on
July 1, 2005 using the modified prospective method. The impact of
adoption of Statement 123(R) cannot be predicted at this time
because it will depend in part on the level of share based
payments granted in the future. However, had the Company adopted
Statement 123(R) in prior periods, the impact of that standard
would have approximated the impact of Statement 123 as described
in Note 4.
11. Subsequent Events
On April 25, 2005 the Company announced that it plans to
realign part of its manufacturing capacity in order to reduce
costs and better optimize its plant utilization and to reduce its
selling, general and administrative expenses. Molex expects to
take an estimated pretax charge of $25 million to $30 million in
the fiscal 2005 fourth quarter and an additional estimated pretax
charge of $20 million to $30 million during fiscal 2006 in
connection with this plan. The expected pre-tax charge for the
fiscal 2005 fourth quarter includes estimated cash expenditures of
$17 million to $20 million, which consists primarily of estimated
12
severance and other employee-related costs. The expected pre-tax
charge for fiscal 2006 includes estimated cash expenditures of $12
million to $15 million, which consists primarily of estimated
severance and other employee-related costs.
The timing of the cash expenditures associated with these
charges does not necessarily correspond to the period in which the
accounting charge is taken. The actual timing of the facility
closures and related headcount reductions and the resulting
charges and cash expenditures will be dependent upon a number of
factors including the Company's efforts to achieve a phased and
efficient transfer of production.
The Company also announced that its Board of Directors has
authorized the purchase of Molex shares on a discretionary basis.
The authorization allows the purchase of the Company's outstanding
Common Stock and/or Class A Common Stock during the period ending
December 31, 2006 up to an aggregate value of $250 million. This
authorization replaced the Company's previous authorization to
purchase shares up to an aggregate value of $100 million during
the fiscal year ending June 30, 2005.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The following discussion and analysis should be read in
conjunction with the Company's condensed consolidated financial
statements and accompanying notes contained herein and the
Company's consolidated financial statements and accompanying notes
and management's discussion and analysis of financial condition
and results of operations contained in the Company's Annual
Report on Form 10-K for the fiscal year ended June 30, 2004. This
discussion and analysis contains forward-looking statements that
involve risks, uncertainties and assumptions. The Company's 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 "Cautionary
Statement Regarding Forward-Looking Statements."
Overview
Molex's core business is the manufacture and sale of
electronic components. The Company designs, manufactures and
distributes more than 100,000 products including terminals,
connectors, planar cables, cable assemblies, interconnection
systems, fiber optic interconnection systems, backplanes,
mechanical and electronic switches and other products. Molex also
provides manufacturing services that help customers integrate the
use of specific components into the customer's products.
Molex connectors, interconnecting devices and assemblies are
used in the computer, telecommunications, consumer products,
automotive, and industrial markets. The Company's products are
used in a wide range of applications including desktop and
notebook computers, computer peripheral equipment, mobile phones,
digital electronics such as cameras and plasma televisions,
automobile engine control units and adaptive braking systems,
factory robotics and diagnostic equipment.
Molex sells its products to Original Equipment Manufactures
(OEMs) directly, as well as to their subcontractors and suppliers,
and through distributors throughout the world. Molex engineers
work collaboratively with customers to develop products that meet
their specific needs. The Company's connector products help
manufacturers assemble their own products more efficiently.
Molex's electronic components help enable manufacturers to break
down their production into sub-assemblies that can be built on
different production lines, in different factories or by
subcontractors. The Company's connectors allow these sub-
assemblies to be readily plugged together before selling the end
product to a customer. Molex connectors also enable users to
connect together related electronic items such as mobile phones
and battery chargers; and computers and printers. Many Molex
customers are multi-national corporations who manufacture their
products in multiple operations in several countries.
Molex is able to service its customers through its global
manufacturing footprint. As of March 31, 2005, the Company
operated 55 manufacturing plants, located in 19 countries on six
13
continents. Molex operates the business through four geographic
regions. During the third fiscal quarter 51% of the Company's
revenue was derived from sales in Asia.
The market in which the Company operates is highly fragmented
with a significant number of smaller companies making electronic
connectors. Molex is currently the world's second-largest
manufacturer of electronic connectors. Molex believes that its
global presence and its ability to design and manufacture its
products throughout the world and to service its customers
globally is a key advantage for the Company. The Company's growth
comes primarily from new products that it develops, often in
collaboration with its customers.
The Company's financial results are influenced by factors in
the markets in which it operates and by the Company's ability to
successfully execute its business strategy. Marketplace factors
include competition for customers, raw material prices, product
and price competition, economic conditions in various geographic
regions, foreign currency exchange rates, interest rates, changes
in technology, fluctuations in customer demand, patent and
intellectual property issues, litigation results and legal and
regulatory developments.
The Company expects that the marketplace environment will
remain highly competitive. The Company's ability to execute its
business strategy successfully will require that it meets a number
of challenges, including its ability to accurately forecast sales
demand and calibrate manufacturing to such demand, develop,
manufacture and successfully market new and enhanced products and
product lines, control overhead, and attract, motivate and retain
key personnel to manage its operational, financial and management
information systems.
Results of Operations
Third Quarter Results
Revenue
Revenue was $612.8 million for the three months ended March
31, 2005, an increase of $43.6 million, or 7.7 percent, over last
year's third quarter of $569.2 million. Included in revenue for
the third quarter of fiscal 2005 are incremental sales of $18.6
million from the Cinch acquisition that was completed on April 2,
2004. The strengthening of certain foreign currencies,
principally the euro and the yen, compared with the U.S. dollar
also increased revenue by approximately $17 million over the prior
year quarter. The Company estimates that the impact of price
erosion reduced revenue by approximately $18 million in the third
quarter of fiscal 2005, compared with last year's third quarter.
Revenue derived from the sale of new products released by the
Company within the last 36 months was $195 million, or 32 percent
of revenue, in the third quarter ended March 31, 2005 compared
with $142 million, or 25 percent of revenue, in the third quarter
of fiscal 2004.
Revenue for the third quarter of fiscal 2005 declined
sequentially from the second quarter of fiscal 2005 by $39.0
million, primarily due to the lower sales of mobile phone products
in the telecommunications market and products in the computer
market. The Company estimates that revenues from these markets
were down approximately $22 million and $10 million, respectively,
due to a combination of model changeovers, slower production after
a significant holiday ramp, and inventory adjustments by the
Company's customers.
In the Far East South region, customer revenue was $182.6
million, an increase of $30.7 million, or 20.2 percent, compared
with $151.9 million in the prior year quarter. This region
represents 30 percent of the Company's customer revenue. Foreign
currency translation increased revenue in this region by
approximately $3 million. The revenue growth in this region,
compared with the third quarter of fiscal 2004, was driven by
higher demand for mobile phone products in the telecommunications
market and products in the computer market. This region,
14
particularly in China, continues to benefit from business
transfers out of the Americas, Europe and Far East North regions,
where manufacturing costs are generally higher.
Customer revenue in the Americas region was $166.2 million,
or 27 percent of the Company's customer revenue, down 8.5 percent
from last year's third quarter revenue of $181.6 million. The
decline primarily resulted from reductions in the computer and
automotive markets when compared with the prior year quarter.
Customer revenue in the Far East North region was $127.3
million, or 21 percent of the Company's customer revenue, an
increase of $4.7 million, compared with $122.6 million in the
prior year quarter. This improvement reflects favorable foreign
currency translation of approximately $6 million.
In Europe, customer revenue was $122.0 million, or 20 percent
of the Company's customer revenue, up $22.6 million, or 22.8
percent, from last year's third quarter revenue of $99.4 million.
The Company's Cinch acquisition added revenue of $18.6 million and
foreign currency translation had a favorable impact of
approximately $6 million. Excluding these items, revenue in
Europe was down slightly from last year's third quarter.
Gross Profit
Gross profit was $211.4 million for the three months ended
March 31, 2005, up $9.1 million, or 4.5 percent over the prior
year quarter. Gross profit margin was 34.5 percent of net
revenue, down from 35.5 percent in last year's third quarter. The
Company was not able to fully offset the negative impact of price
erosion disclosed above with the leverage on the higher sales
volume. The gross profit margin for the third quarter of fiscal
2005 was also negatively impacted by higher raw material costs.
The Company estimates that it paid approximately $4 million more
for metal alloys (primarily copper), gold and plastic resins in
the third quarter of fiscal 2005 compared with last year's third
quarter. The Company has experienced some success in passing these
cost increases to customers in its distribution sales channel.
Sales through distributors represented approximately 20 percent of
the Company's revenue in the three months ended March 31, 2005.
However, any price increases in the remaining sales channels have
not fully recovered the higher costs.
In addition, the gross profit margin was also negatively
impacted by the increased strength of the yen and euro relative to
the U.S. dollar, as products manufactured by Molex 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.
The Company estimates this effect to be approximately $2.5 million
compared with the prior year third quarter.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $158.6
million for the three months ended March 31, 2005, as compared
with $143.0 million in the prior year quarter. The Cinch
acquisition added fixed expenses of approximately $4 million and
the currency translation impact was approximately $4 million in
the third quarter of fiscal 2005. The Company also incurred $2.5
million in higher legal and accounting costs arising from the
previously announced resignation of the Company's former auditors
and subsequent related events. As a percent of net revenue,
selling, general and administrative expenses increased to 25.9
percent in the current quarter from 25.1 percent in last year's
third quarter. Research and development expenditures for the
three months ended March 31, 2005 were $32.8 million, or 5.4
percent of net revenue, up modestly from 5.3 percent of net
revenue in the same period last year.
Other Income
Total other income was $8.5 million in the third quarter
ended March 31, 2005, compared with $3.1 million in the prior year
quarter. The current quarter included a $4.9 million pretax gain
from additional consideration earned attributable to the previous
sale of an investment in an affiliate.
15
Effective Tax Rate
The effective tax rate was 27 percent for the third quarter
of fiscal 2005, the same rate as last year's third quarter.
Net Income
Net income for the three months ended March 31, 2005 was
$44.8 million, down slightly from $45.5 million in last year's
third quarter. Foreign currency translation increased net income
by $1.3 million when compared with last year's third quarter.
Earnings per share was $0.24 for the three months ended March 31,
2005 and 2004.
Nine-Month Results
Revenue
Revenue for the nine months ended March 31, 2005 was $1.905
billion, an increase of $290 million, or 18.0 percent, compared
with $1.615 billion in the first nine months of fiscal 2004. The
Cinch acquisition added revenue of $54 million to the current
fiscal year results. The strengthening of certain foreign
currencies, principally the euro and the yen, compared with the
U.S. dollar increased revenue by approximately $51 million over
the prior year period. The Company estimates that the impact of
price erosion reduced revenue by approximately $59 million in the
nine months ended March 31, 2005, compared with the same period
last year.
Revenue derived from the sale of new products released by the
Company within the last 36 months was $576 million, or 30 percent
of revenue, in the nine months ended March 31, 2005, compared with
$408 million, or 25 percent of revenue, in the prior year period.
Consistent with the migration of business from the Americas,
Europe and Far East North regions to the Far East South region,
customer revenue in the Far East South region was $577.2 million
in the first nine months of fiscal 2005, an increase of $129.7
million, or 29.0 percent, compared with the prior year period.
Favorable foreign currency translation of approximately $6 million
had a modest impact on revenue. The revenue growth in this
region, which represents 30 percent of the Company's customer
revenue, was driven by strong demand across the consumer products
and computer markets, as well as the mobile phone sector of the
telecommunications market.
Customer revenue in the Americas region for the nine months
ended March 31, 2005 was $513.7 million, up 2.6 percent from last
year's revenue of $500.6 million, due to a slightly stronger
demand for electronic connector products. This region represents
27 percent of the Company's customer revenue.
Customer revenue in the Far East North region increased by
$22.5 million to $392.7 million for the nine months ended March
31, 2005, compared with $370.2 million in the prior year period.
Foreign currency translation contributed approximately $20 million
to the revenue increase. This region represents 21 percent of the
Company's customer revenue.
In Europe, customer revenue for the nine months ended March
31, 2005 was $379.2 million, or 20 percent of the Company's
customer revenue, an increase of $120.0 million from last year's
revenue of $259.2 million. The Company's Cinch acquisition added
revenue of $54.2 million for the first nine months of fiscal 2005.
Foreign currency translation, led by the strong euro, also
favorably impacted customer revenue in Europe by approximately $23
million. The remaining revenue growth in this region was
primarily driven by demand for mobile phones in the
telecommunications market and products in the industrial market.
16
Gross Profit
Gross profit was $658.2 million for the nine months ended
March 31, 2005, up $108.6 million, or 19.8 percent over the prior
year period. Gross profit margin was 34.6 percent of net revenue,
up from 34.0 percent in last year's first nine months. The
improvement in gross profit margin was primarily due to leverage
from the higher sales volumes. This volume improvement was
partially offset by the price erosion mentioned earlier, higher
raw material costs and a negative currency transaction impact.
The Company estimates that it paid approximately $15
million more for metal alloys (primarily copper), gold and plastic
resins in the first nine months of fiscal 2005 compared with the
same period last year. Certain products manufactured by Molex 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. The gross profit margin has been negatively impacted as
the yen and euro have strengthened relative to the U.S. dollar.
The Company estimates this currency transaction impact to be
approximately $7 million compared with the first nine months of
fiscal 2004. See below under Planned Restructuring Actions for a
discussion of the Company's planned manufacturing realignment
program designed to reduce long-term costs and better optimize
plant utilization.
Also included in the results for the nine months ended March
31, 2005 is a charge of $7.3 million ($5.4 million after-tax)
related to correction of prior years' errors. These errors
related to the inadvertent omission of in-transit intercompany
inventory in the Company's calculation of the profit-in-inventory
elimination, correction of a prior year insurance accrual,
correction of an inventory allowance, as well as a vacation
accrual. See Note 3 to the Notes to Condensed Consolidated
Financial Statements for further discussion.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $467.6
million for the first nine months of fiscal 2005, as compared with
$401.6 million in the prior year period. The Cinch acquisition
added selling, general and administrative expenses of
approximately $12 million and the currency translation impact was
approximately $12 million for the first nine months of fiscal
2005. Research and development expenditures for the nine months
ended March 31, 2005 were $100.7 million, or 5.3 percent of net
revenue, compared with 5.2 percent of net revenue for the same
period last year. As a percentage of net revenue, selling,
general and administrative expenses decreased to 24.5 percent in
this year's first nine months from 24.9 percent in the prior year
period as a result of positive sales growth leverage on fixed
expenses in the first half of the year. See below under Planned
Restructuring Actions for a discussion on the Company's planned
administrative cost reduction initiatives.
Also included in the results is a charge of $0.1 million
related to correction of errors in prior years. These errors
related to the correction of a prior year receivable allowance, a
bonus accrual, as well as a vacation accrual. See Note 3 to the
Notes to Condensed Consolidated Financial Statements for further
discussion.
Other Income
Total other income was $14.7 million for the nine months
ended March 31, 2005, compared with $15.1 million in the prior
year period. Fiscal 2005 results include one-time gains on the
sale of affiliate stock and investments of $3.2 million. Fiscal
2004 results included a $10.4 million gain resulting from an IPO
completed by an affiliate and the sale of stock of this affiliate,
as well as a loss on investment of $4.9 million.
Effective Tax Rate
The effective tax rate was 27 percent for both the first nine
months of fiscal 2005 and 2004.
17
Net Income
Net income for the nine months ended March 31, 2005 was
$149.6 million, up 25.9 percent from $118.7 million in last year's
first nine months. Foreign currency translation increased net
income by approximately $4.3 million. Earnings per share was
$0.78 for the first nine months of fiscal 2005 compared with $0.62
in the prior year period.
Backlog
The Company's order backlog on March 31, 2005 was
approximately $264.1 million, a slight increase of $0.9 million
compared with $263.2 million as of March 31, 2004. Excluding the
currency translation impact and the Cinch acquisition, backlog on
March 31, 2005 declined by $8.2 million compared to the backlog on
March 31, 2004.
New orders for the third quarter of fiscal 2005 were $608.0
million, comparable with $606.2 million in last year's third
quarter. Excluding the currency translation impact and the Cinch
acquisition, orders for the third quarter were down $36.8 million
from last year's third quarter.
Financial Condition and Liquidity
The Company's long-term financing strategy is to rely on
internal sources of funds for investing in plant, equipment and
acquisitions. Management remains confident that the Company's
liquidity and financial flexibility are adequate to support both
current, as well as future growth. Molex has historically used
external borrowings only when a clear financial advantage exists.
At March 31, 2005, Molex had cash, cash equivalents and marketable
securities of $447.2 million and long-term debt of $9.7 million.
Cash provided from operating activities for the nine months
ended March 31, 2005 was $272.6 million, up from $193.3 million in
the prior year period. The increase in cash provided from
operations was primarily driven by higher net income in the first
nine months of fiscal 2005 and a reduction in working capital
requirements as revenue growth moderated. Working capital, defined
as Current Assets minus Current Liabilities, at March 31, 2005 was
$909.1 million compared with $740.2 million at June 30, 2004.
Cash used for investing activities was $156.6 million and
$58.6 million for the nine months ended March 31, 2005 and 2004,
respectively. Capital expenditures were $155.2 million in the
current period, an increase of $21.0 million over the prior year's
capital spending of $134.2 million. During the first quarter of
fiscal 2005, the Company sold its investment in an affiliate and
generated cash from this transaction of $14.1 million.
Cash used for financing activities was $37.4 million in the
first nine months of fiscal 2005 compared with $63.7 million in
the prior year period. Cash was used primarily for the purchase
of treasury stock and the payment of dividends. The Company's
Board of Directors previously authorized the discretionary
purchase of up to $100 million of Common Stock and/or Class A
Common Stock during fiscal 2005. During the nine months ended
March 31, 2005, the Company purchased 940,000 shares of Class A
Common Stock at an aggregate cost of $23.6 million. On April 25,
2005 the Company's Board of Directors replaced this $100 million
authorization with a new authorization of a discretionary purchase
program that expires December 31, 2006 and increased the aggregate
value of purchase to $250 million.
Because Molex has a strong cash balance, cash flow and very
little debt, the Company currently believes that share purchases
are a good investment compared with investing cash in short-term
money instruments or marketable securities, particularly with the
current low interest rates. The Company also uses shares
repurchased to replenish stock used for exercises of employee
stock options, employee stock awards and the employee stock
purchase plan.
18
As part of its growth strategy, the Company may, in the
future, acquire other companies in the same or complementary lines
of business, and pursue other business ventures. The pace and
size of any new business ventures or acquisitions the Company
completes may impact its cash requirements.
Planned Restructuring Actions
Molex's manufacturing footprint historically has been based
on having a large number of relatively smaller facilities located
close to its customer's worldwide operations. However, as our
customers continue to concentrate more of their manufacturing in
the Far East South region, and as worldwide supply chain
integration and logistics have become more reliable, having
multiple smaller facilities, especially in Europe and the Americas
regions, is no longer cost advantageous. In addition, competitive
pressures and customer pricing demands have compromised the
Company's current gross margin objective of approximately 36
percent to 37 percent. For these reasons, it is necessary for the
Company to continue to expand operations in the Far East South
region while consolidating manufacturing in Europe and the
Americas regions.
Molex's selling, general and administrative expenses are
currently 24 percent to 25 percent of revenue. To remain
competitive the Company's goal is to reduce this, over time, to
approximately 20 percent to 22 percent of revenue. The combination
of the gross margin improvements and selling, general and
administrative expense improvements will move the Company closer
to its stated goal of consistently achieving a net income return
of 10 percent of sales.
On April 25, 2005 the Company announced that it plans to
realign part of its manufacturing capacity in order to reduce
costs and better optimize its plant utilization and to reduce its
selling, general and administrative expenses. Molex expects to
take an estimated pretax charge of $25 million to $30 million in
the fiscal 2005 fourth quarter and an additional estimated pretax
charge of $20 million to $30 million during fiscal 2006 in
connection with this plan. The expected pre-tax charge for the
fiscal 2005 fourth quarter includes estimated cash expenditures of
$17 million to $20 million, which consists primarily of estimated
severance and other employee-related costs. The expected pre-tax
charge for fiscal 2006 includes estimated cash expenditures of $12
million to $15 million, which consists primarily of estimated
severance and other employee-related costs.
The timing of the cash expenditures associated with these
charges does not necessarily correspond to the period in which the
accounting charge is taken. The actual timing of the facility
closures and related headcount reductions and the resulting
charges and cash expenditures will be dependent upon a number of
factors including the Company's efforts to achieve a phased and
efficient transfer of production.
The facility closures involve the Company's operations in the
Americas and Europe regions. In the Americas region, the Company
will close an industrial manufacturing facility in New England and
cease manufacturing in its Detroit area automotive facility. The
automotive development center also located in the Detroit area
will continue in operation. Production from these facilities will
be transferred to existing plants within the region. In Europe,
the Company will close manufacturing facilities in Ireland and
Portugal, and reduce the size of a development center in Germany.
Production from these manufacturing facilities will be transferred
to existing plants within the region. Included in the charge is
an amount to expense certain product related tooling in the Far
East South and Europe. Included in the restructuring charge will
be costs to reduce the Company's selling, general and
administrative costs in the Americas, Europe, and at the corporate
office. The Company estimates that it will reduce headcount by
approximately 1,200 people partially offset by additions at the
facilities where production is being transferred.
Implementation of this restructuring program will begin in
the fiscal 2005 fourth quarter and will continue through fiscal
2006. Total savings from the planned restructuring actions have
not yet been finalized.
19
Outlook
The Company expects net revenue in the fourth fiscal quarter
ending June 30, 2005 to be in a range of $625 million to $640
million. This estimate includes a sequential increase in both the
telecommunications and computer markets, but not to the levels
seen in the 2005 second fiscal quarter.
Earnings per share, after the charge for the planned
restructuring actions described above, are expected to be in a
range of $0.13 to $0.15. The estimated reduction in earnings per
share from the planned restructuring charge, assuming the mid-
range, is expected to be $0.11.
In addition, in May 2005 the Company will conduct its annual
impairment review for goodwill, other intangibles and long-lived
assets. Charges may be taken once the review is completed.
Short-term market indicators for the Company are mixed.
Orders have strengthened in March and early April, but lead times
are short and it is difficult to forecast expected results.
However, the Company believes it is well positioned for profitable
growth from global market opportunities. Molex's competitive
advantages include a strong balance sheet, its emphasis on growth
via new products, and its ability to design, manufacture and
service customers anywhere in the world. As one of the first in
the industry to manufacture in the Far East, the Company has
important customer relationships and significant technical
resources making it a leader in this fast growing region of the
world. Molex has four integrated design centers and 24 factories
in the Far East. The Company currently has six factories in
China, is completing additions to two, and finalizing plans to
build a seventh.
Due to the uncertainty of the foreign currency exchange
markets, Molex cannot reasonably predict future trends related to
foreign currency fluctuations. Foreign currency fluctuations have
impacted the Company's results in the past and may impact results
in the future.
Cautionary Statement Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking
statements. Forward-looking statements, in general, predict,
forecast, indicate or imply future results, performance or
achievements and are typically identified by words or phases such
as "may," "will," "should," "expect," "anticipate," "intend,"
"plan," "believe," "estimate," "potential," or "continue," the
negative of these terms or other similar expressions. Forward-
looking statements include, among others, the Company's assessment
of its cash position and cash flow and the discussion under
"Planned Restructuring Actions" and "Outlook."
These forward-looking statements are based on currently
available information and involve certain risks, uncertainties and
assumptions. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect,
actual results may differ materially from those expected. These
risks include the possibility that customer demand will decrease
either temporarily or permanently, whether due to the Company's
actions or the demand for the Company's products, and that the
Company will not be able to respond through cost reductions in a
timely and effective manner; price cutting, new product
introductions and other actions by our competitors; fluctuations
in the costs of raw materials that the Company is not able to pass
through to customers either because of existing contracts or
market factors; and the challenges attendant to plant closings and
restructurings including the difficulty of predicting plant
closing and relocation costs, the difficulty of commencing or
increasing production at existing facilities, and the reactions of
customers, governmental units, employees and other groups.
Certain of these risks and uncertainties are set forth in
this and other documents filed with the Securities and Exchange
Commission and include, but are not limited to, changes in key
personnel, economic conditions in various regions, product and
price competition, raw material prices, foreign currency exchange
rates, interest rates, changes in technology, patent issues,
securities litigation and other litigation results, legal and
regulatory developments, the effectiveness, timing and cost of our
plant realignment and cost reduction efforts, and the
20
implementation costs attendant to the internal control
requirements of Section 404 of the Sarbanes-Oxley Act.
Accordingly, Molex cannot guarantee future results, levels of
activity, performance or achievements. Recognize these forward-
looking statements for what they are and do not rely on them as
facts. Molex undertakes no obligation to update or revise these
forward-looking statements, whether as a result of new
information, future events or otherwise, except as required by
law.
Contractual Obligations and Commercial Commitments
The Company has 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 the
Company's 2004 Annual Report on Form 10-K. In addition, the
Company has obligations under open purchase orders and the long-
term liabilities reflected in its consolidated balance sheet,
which principally consist of pension and retiree health care
benefit obligations. There have been no material changes in the
Company's contractual obligations and commercial commitments since
June 30, 2004 arising outside of the ordinary course of the
Company's business.
Critical Accounting Policies
The preparation of 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, management has made its best
estimates and judgments of certain amounts included in the
financial statements. Estimates are revised periodically. Actual
results could differ from these estimates.
For information concerning the Company's critical accounting
policies, see the discussion included under Management's
Discussion and Analysis of Financial Condition and Results of
Operations in the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 2004.
Item 3. Quantitative and Qualitative Disclosures About Market
Risk
The Company is subject to market risk associated with changes
in foreign currency exchange rates, interest rates and certain
commodity prices. The Company mitigates its foreign currency
exchange rate risk principally through the establishment of local
production facilities in the markets it serves and invoicing of
customers in the same currency as the source of the products.
Molex also monitors its foreign currency exposure in each country
and implements 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, development of natural hedges and
occasional use of foreign exchange contracts to protect or
preserve the value of intercompany cash flows. No material foreign
exchange contracts were in use at March 31, 2005 and June 30,
2004.
The Company has implemented a formalized treasury risk
management policy that describes the procedures and controls over
derivative financial and commodity instruments. Under the policy,
the Company does not use derivative financial or commodity
instruments for speculative 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.
The Company's $123.4 million of marketable securities at
March 31, 2005 are principally debt instruments that generate
interest income for the Company on temporary excess cash balances.
These instruments contain embedded derivative features that
enhance the liquidity of the portfolio by enabling the Company to
liquidate the instrument prior to the stated maturity date. The
Company's exposure related to derivative instrument transactions
is, in the aggregate, not material to the Company's financial
position, results of operations or cash flows.
21
Interest rate exposure is limited to marketable securities
owned by the Company and long-term debt. The Company does not
actively manage the risk of interest rate fluctuations. However,
such risk is mitigated by the relatively short-term nature of its
investments, less than twelve months, and the fixed-rate nature of
its long-term debt.
Molex does not have exposure to any off-balance-sheet
arrangements with the exception of certain operating leases. Due
to the nature of its operations, Molex is not subject to
significant concentration risks relating to customers, products or
geographic locations.
The Company monitors the environmental laws and regulations
in the countries in which it operates. Molex has implemented an
environmental program to reduce the generation of potentially
hazardous materials during its manufacturing process and believes
it continues to meet or exceed local government regulations.
Item 4. Controls and Procedures
As of the end of the period covered by this report, Molex
conducted an evaluation, under the supervision and with the
participation of its principal executive officer and principal
financial officer, of Molex's disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934 (the "Exchange Act")). Molex's disclosure
controls and procedures are designed to provide reasonable
assurance of achieving their objectives. Based on that
evaluation, the principal executive officer and principal
financial officer concluded that, Molex's disclosure controls and
procedures are effective at a reasonable assurance level to ensure
that information required to be disclosed by Molex in reports that
it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in
Securities and Exchange Commission's rules and forms.
Prior to the end of the period covered by this Form 10-Q,
Molex reviewed certain accounting matters and practices in
connection with its Sarbanes-Oxley compliance program. As
previously disclosed, in its Form 10-Q for the second fiscal
quarter and in its Form 10-Q/A for the first fiscal quarter filed
with the Commission on March 21, 2005, as a result of its review,
Molex's management identified errors in its reserve for accounts
receivable, accrual for vacation pay and in the recording of the
first quarter profit-in-inventory adjustment (as described in Note
3 of the Notes to Condensed Consolidated Financial Statements in
this Form 10-Q). Additionally, Molex determined that potential
earn-out payments related to the sale of an investment should not
have been classified as a contingent gain as previously recorded.
The correction in the Company's reserve for accounts receivable
resulted in a reduction of such reserve by approximately $4.1
million ($3.0 million after tax), which change had a positive
impact on pre-tax income for the 2005 first fiscal quarter. The
other corrections, which had a negative impact on pre-tax income
for the 2005 first fiscal quarter, resulted in an increase in the
Company's vacation accrual of approximately $5.5 million ($4.0
million after tax), the reversal of a contingent gain previously
recorded in the 2005 first fiscal quarter of $1.9 million ($1.4
million after tax) on the sale of an investment that provides for
potential earn-out payments, and an adjustment to the previously
disclosed profit-in-inventory charge of $1.1 million ($0.8 million
after tax). Subsequent to the discovery of these errors and prior
to the end of the period covered by this Form 10-Q, Molex modified
the design and operation of its internal control process to more
frequently update factors considered in determining its accounts
receivable reserve including formal reconciliation of earned
versus accrued vacation pay as part of the its regular SFAS 5
review and implement a policy of strict adherence to SFAS 5
criteria for loss recognition of gains and losses. Molex also
completed the modification to the software logic used to calculate
slow and excess inventory reserves, which it began in the first
fiscal quarter of 2005.
Molex's management analyzed the materiality of the effect of
these changes made during the period covered by the report, on
Molex's internal control over financial reporting by considering
the effect in light of the materiality standards provided by the
relevant case law in accordance with guidance issued by the staff
of the SEC. Management took into consideration that even well
designed controls operating as designed cannot provide absolute
assurance and that internal control over financial reporting has
inherent limitations because the process is subject to human error
resulting from lapses in judgment and breakdowns resulting from
22
human failure. Management also considered Molex's response
subsequent to discovery of the deficiencies, including the
promptness with which the underlying deficiencies were brought to
the attention of the Audit Committee and the scrutiny under which
Molex's internal control environment was reviewed. Additionally,
management considered the fact that substantially all of these
deficiencies were identified by management and not by Molex's
independent public accountant. Management also considered the
materiality of the recorded adjustments on Molex's earnings trends
and projected results of operations for fiscal year 2005.
The requirements of the Sarbanes-Oxley Act that management
and the Company's independent public accountant report on the
effectiveness of the Company's internal controls over financial
reporting apply to the Company as of its June 30, 2005 fiscal year
end. In connection with its ongoing review of controls and
procedures as part of its preparation for compliance with these
requirements of the Sarbanes-Oxley Act, the Company has identified
a number of deficiencies that it does not consider to be "material
weaknesses" but which it nevertheless believes should be remedied
and with respect to which remedial action has been and is being
taken. The Company will continue to review, evaluate, document,
test and refine its internal controls and procedures as it
prepares for compliance with these requirements of the Sarbanes-
Oxley Act.
As a result of the foregoing considerations, management
concluded that there have been no changes in our internal control
over financial reporting during the fiscal quarter covered by this
report that have materially affected, or are reasonably likely to
materially affect, internal control over financial reporting. The
matters described above have been discussed with Molex's Audit
Committee and independent public accountant.
23
PART II - Other Information
Items 3, 4 and 5 of this Part II are either inapplicable or
are answered in the negative and are omitted pursuant to the
instructions to Part II.
Item 1. Legal Proceedings
Between March 2, 2005 and April 22, 2005 seven separate
complaints were filed, each purporting to be on behalf of a class
of Molex shareholders, against Molex, and some or all of the
following Molex officers and employees: J. Joseph King, Diane S.
Bullock, John H. Krehbiel Jr., Frederick A. Krehbiel, Louis A.
Hecht, Ronald L. Schubel and Martin P. Slark, in the United States
District Court for the Northern District of Illinois Eastern
Division entitled The Takara Trust v. Molex Incorporated, et. al.,
Case No. 05C 1245; BDM, LLC v. Molex Incorporated, et. al., Case
No. 05C 1372; James Baker v. Molex Incorporated, Et. Al., Case No.
05C 1467; Drywall Acoustic Lathing and Insulation Local 675
Pension Fund v. Molex Incorporated, et. al., Case No. 05C 1461;
Jorgenson v. Molex Incorporated, et. al. Case No. 05C 1851; Quade
v. Molex Incorporated, et al., Case No. 05C 2301; and Lewis, et
al. v. Molex Incorporated, et al., Case No. 05C 2399
(collectively, the "Shareholder Actions"). The first four of the
Shareholder Actions listed above have been assigned to Judge Ruben
Castillo for consolidated proceedings, and Molex anticipates that
the remaining cases will be assigned to Judge Castillo in the
future. The complaints in the Shareholder Actions generally
allege, among other things, that during the period from April 15,
2004 (or July 27, 2004 in the case of the complaints filed by The
Takara Trust, the Drywall Acoustic Lathing and Insulation Local
675 Pension Fund, Quade and Lewis) to February 14, 2005 the named
defendants made or caused to be made a series of materially false
or misleading statements about Molex's business, prospects,
operations, and financial statements which constituted violations
of Section 10(b) of the Exchange Act of 1934, as amended, and Rule
10b-5 promulgated hereunder and Section 20(a) of the Exchange Act.
The complaint filed by BDM, LLC also alleges that certain of the
named defendants engaged in insider trading in violation of
Section 10(b) and Rule 10b-5. As relief, the complaints seek,
among other things, declaration that the action be certified as a
proper class action, unspecified compensatory damages (including
interest) and payment of costs and expenses (including fees for
legal counsel and experts). The complaint filed by BDM, LLC also
seeks, as relief, an accounting of the proceeds received by
certain of the named defendants from the sale of Molex stock
during the period from April 15, 2004 to February 14, 2005 and the
imposition of a constructive trust on such proceeds. Molex
intends to vigorously contest the Shareholder Actions.
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds
The following table contains information about purchases of
equity securities by Molex during the fiscal quarter ended March
31, 2005:
Total
Number of
Shares Dollar Value
Total Average Purchased of Shares
Number of Price as Part of that May Yet
Shares Paid Per Publicly Be Purchased
Purchased Share Announced Under the
Period (1) (1) Plan Plan (2)
------ ----------- ------- --------- -----------
January 1 to - - - $76,385,357
January 31
February 1 to - - - $76,385,357
February 28
March 1 to 1,537 $23.25 - $76,385,357
March 31
Total 1,537 $23.25 - (2)
(1) Represents seven shares of Common Stock and 1,530 shares
of Class A Common Stock transferred to the Company from an
employee to pay the option exercise price in a stock-for-
stock option exercise. The aggregate fair market value of
the shares transferred totaled $35,737.
24
(2) Subsequent to the end of the fiscal third quarter,
Molex's Board of Directors authorized the purchase of Molex
shares on a discretionary basis. The authorization allows
the purchase of the Company's outstanding Common Stock and/or
Class A Common Stock during the period ending December 31,
2006 up to an aggregate value of $250 million. This
authorization replaced the Company's previous authorization
to purchase shares up to an aggregate value of $100 million
during the fiscal year ending June 30, 2005. As of April 30,
2005, the dollar value of shares that may yet be purchased
under this plan was $250 million.
Item 6. Exhibits
Number Description
10
10.9 Form of Stock Option Agreement under the
2000 Molex Incorporated Incentive Stock Option
Plan *
10.10 Form of Option/Stock Award Agreement
under the 2000 Molex Incorporated Long-Term
Stock Plan *
10.11 Form of memoranda with respect to bonus
incentive arrangements *
10.12 Deferred Compensation Agreement between
Molex Incorporated and F.A. Krehbiel *
10.13 Deferred Compensation Agreement between
Molex Incorporated and J.H. Krehbiel, Jr. *
10.14 Summary of Non-Employee Director
Compensation *
10.15 Summary of Officer Relocation and
Expatriate assignment arrangements *
10.16 Summary of Arrangements with Certain
Executives *
10.17 Summary of Employment Arrangement of
Molex Incorporated with Goro Tokuyama *
10.18 Employment offer letter from Molex
Incorporated to David D. Johnson *
* This exhibit is a management contract or compensatory
plan or arrangement.
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
25
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: May 10, 2005 /S/ ROBERT B. MAHONEY
________________________
Robert B. Mahoney
Executive Vice President and
Chief Financial Officer
Date: May 10, 2005 /S/ LOUIS A. HECHT
___________________
Louis A. Hecht
Corporate Secretary and
General Counsel
26