XNAS:MOLXA Annual Report 10-K Filing - 6/30/2012

Effective Date 6/30/2012

Table of Contents

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

 

  þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended June 30, 2012

OR

 

  ¨ 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 0-07491

 

 

MOLEX INCORPORATED

(Exact name of registrant as specified in its charter)

 

Delaware   36-2369491

(State or other jurisdiction of

incorporation or organization)

 

(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

 

 

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT

 

Title of each class

 

Name of each exchange on which registered

Common Stock, par value $0.05

Class A Common Stock, par value $0.05

 

The Nasdaq Stock Market, LLC

The Nasdaq Stock Market, LLC

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes   þ        No   ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes   ¨        No   þ

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   þ        No   ¨

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).    Yes  þ        No   ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    þ

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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  þ   Accelerated filer   ¨    Non-accelerated filer  ¨   Smaller reporting company  ¨
     (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 Act).    Yes   ¨        No   þ

The aggregate market value of the voting and non-voting shares held by non-affiliates as of the last business day of the registrant’s most recently completed second fiscal quarter was approximately $2.6 billion (based on the closing price of these shares on the NASDAQ Global Select Market on December 31, 2011).

On July 25, 2012, the following numbers of shares of the Company’s common stock were outstanding:

 

Common Stock

     95,560,076   

Class A Common Stock

     80,873,472   

Class B Common Stock

     94,255   

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the Annual Meeting of Stockholders, to be held on October 26, 2012, are incorporated by reference into Part III of this annual report on Form 10-K.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

          Page  

Part I

  

Item 1.

   Business      3   

Item 1A.

   Risk Factors      13   

Item 1B.

   Unresolved Staff Comments      22   

Item 2.

   Properties      22   

Item 3.

   Legal Proceedings      22   

Item 4.

   Mining Safety Disclosures — Not Applicable      22   

Part II

  

Item 5.

   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities      23   

Item 6.

   Selected Financial Data      26   

Item 7.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      27   

Item 7A.

   Quantitative and Qualitative Disclosures About Market Risk      45   

Item 8.

   Consolidated Financial Statements and Supplementary Data      47   

Item 9.

   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure      86   

Item 9A.

   Controls and Procedures      86   

Item 9B.

   Other Information      87   

Part III

  

Item 10.

   Directors, Executive Officers and Corporate Governance      88   

Item 11.

   Executive Compensation      88   

Item 12.

   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters      88   

Item 13.

   Certain Relationships and Related Transactions, and Director Independence      89   

Item 14.

   Principal Accountant Fees and Services      89   

Part IV

  

Item 15.

   Exhibits and Financial Statement Schedules      90   
   Schedule II — Valuation and Qualifying Accounts      91   
   Index of Exhibits      92   
   Signatures      95   

Molex Web Site

We make available through our web site at www.molex.com our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with the Securities and Exchange Commission (SEC).

Information relating to corporate governance at Molex, including our Code of Business Conduct and Ethics, information concerning executive officers, directors and Board committees (including committee charters), and transactions in Molex securities by directors and officers, is available on or through our web site at www.molex.com under the “Investors” caption.

We are not including the information on our web site as a part of, or incorporating it by reference into, this annual report on Form 10-K.

 

2


Table of Contents

PART I

 

Item 1. Business

Molex Incorporated (together with its subsidiaries, except where the context otherwise requires, “we,” “us” and “our”) was incorporated in the state of Delaware in 1972 and originated from an enterprise established in 1938.

We are one of the world’s largest manufacturers of electronic connectors in terms of net revenue. Our net revenue was $3.5 billion for fiscal 2012. We operated 40 manufacturing locations in 16 countries, and employed 34,226 people in 42 countries as of June 30, 2012.

Our core business is the manufacture and sale of electronic 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.

The Connector Industry

The global connector industry is competitive and estimated to represent approximately $48 billion in net revenue for calendar year 2011. The industry has grown at a compounded annual rate of 5.4% over the past 20 years.

The connector industry is characterized by rapid advances in technology and new product development. These advances have been substantially driven by the increased functionality of applications in which our products are used. There is a constant demand for new product solutions and innovations in the technology industry. Our product life cycles tend to mirror the life span of our customers’ products although many of our products are designed into subsequent applications. Consumer and mobile products have relatively short product life cycles while automotive and industrial products are typically longer.

Industry trends that we deem particularly relevant include:

 

   

Globalization.    Synergistic opportunities exist for the industry to design, manufacture and sell electronic products in different countries around the world in an efficient and seamless process. For example, our customers’ products may be designed in Japan, manufactured in China and sold in multiple geographies.

 

   

Convergence of products.    Traditionally separate products developed for consumer electronics, infotech and telecommunications markets are converging, resulting in electronic devices offering broad-based functionality.

 

   

Increasing electronics content.    Consumer demand for advanced product features, convenience and connectivity is increasing electronic content in end devices. For example, electronic content in automobiles is increasing due to proliferation in infotainment, telematics and safety systems.

 

   

Increasing storage and bandwidth requirements.    The global demand and use of streaming information such as audio and video require electronic components to have increased storage capacity and high-speed retrieval capabilities. Increasing internet traffic is taxing existing network infrastructure, resulting in equipment upgrades and capacity additions.

 

   

Product size reduction.    High-density, micro-miniature technologies originally developed for consumer product applications are expanding to markets such as infotech and telecommunications, leading to smaller devices and greater mobility.

 

   

Consolidating supply base.    Generally, global OEMs are consolidating their supply chain by selecting global companies possessing broad product lines for the majority of their connector requirements.

 

3


Table of Contents
   

Price erosion.    Due to rapidly evolving innovation in the technology industry, our customers’ experience pressure to reduce their prices to meet customer expectations. As a result, component suppliers are generally expected to lower prices.

 

   

Competitive market.    There are a large number of competitors in the connector industry increasing the level of competition worldwide. We believe that the 10 largest connector suppliers, as measured by net revenue, represent approximately 54% of the worldwide market and exhibit a faster growth rate than their smaller competitors.

 

   

Rising input costs.    Input costs, including commodity prices and employee costs in developing countries continue to increase and affect gross margin.

Markets and Products

The approximate percentage of our net revenue by market for fiscal 2012 is summarized below:

 

Markets  

Percentage of Fiscal 2012

Net Revenue

 

Primary End Use Products

Supported by Molex

Telecommunications

  23%   Mobile phones, networking equipment, switches and transmission equipment

Infotech

  26%   Desktop, tablet and notebook computers, peripheral equipment, servers and storage

Consumer

  18%   Digital electronics, cameras, televisions, gaming systems, acoustics and major appliances

Industrial

  13%   Factory automation, food and beverage equipment, alternative energy and electrical lighting and cables

Automotive

  17%   Powertrain, body electronics, safety electronics, sensors, infotainment, telematics and lighting

Other (includes Medical, Military and Aerospace)

    3%   Electronic and electrical devices for a variety of products

Telecommunications.    In the telecommunications market, we believe our key strengths include high-speed optical signal product lines, backplane connector systems and power distribution products. For mobile phones, we provide micro-miniature connectors, SIM and SD card sockets, keypads, electromechanical subassemblies and internal antennas.

We released several new products for the telecommunications market in fiscal 2012 including:

 

   

NeoScale™ High-Speed Mezzanine System delivers the market’s cleanest signal integrity at 28+ Gbps and features a high-speed triad wafer design with Solder-Charge Technology™ for customized printed circuit boards routing in high-density system applications;

 

   

SC, SC/APC and Duplex Connectors, Adapters and Cable Assemblies were developed to meet the challenges of the infotech and telecommunications’ industries, including compatibility with many standard cable sizes and fiber types, adhering to industry mechanical and environmental standards;

 

   

DDR3 DIMM Sockets, DDR3 DIMM Memory Module Sockets increase data bandwidth and performance for demanding memory applications in desktop, personal and notebook computers, and servers; and

 

4


Table of Contents
   

Milli-Grid™ is based on a 2.00mm by 2.00mm (.079” by .079”) grid pattern offering complete design flexibility for wire-to-board, board-to-board and cable-to-board connections in personal computers, entertainment, telecommunications and other electronic industries.

Infotech.    In the infotech market, our key strengths include our high-speed signal product line, storage input/output (I/O) products, standards committee leadership, global coordination and strong relationships with OEMs and contract manufacturers.

We manufacture power, optical and signal connectors and cables for fast end-to-end data transfer, linking disk drives, controllers, servers, switches and storage enclosures. For example, our family of small form-factor pluggable products offers end-users both fiber optic and copper connectivity and more efficient storage area network management. Our ongoing involvement in industry committees contributes to the development of new standards for the connectors and cables that transport data.

We hold a strong position in the infotech market with respect to the connectors used in servers, the segment of this market that accounts for the largest volume of our connector purchases. We offer a large variety of products for power distribution, signal integrity, processor and memory applications. We are also a leading designer in the industry for storage devices.

We participate in the tablet market with a wide range of customers, largely using wire-to-board, board-to-board and flexible printed circuit connectors developed for mobile phones and smartphones.

We released several new products for the infotech market in fiscal 2012 including:

 

   

ZXP® zSFP+™ Interconnect System is the first complete ZXP® zSFP+™ Interconnect System for 25 Gbps serial channels, delivering signal integrity with electromagnetic interference protection for next-generation ethernet and Fibre Channel applications;

 

   

VersaBeam™ POD Cable Assemblies mates to Avago parallel optical modules, optimizing airflow and cable management for next generation applications in emerging high-speed data and computer markets and meets Telcordia GR-1435 specifications;

 

   

Impact™ 100 Ohm Orthogonal (Direct) Backplane Connector System improves system airflow and reduces performance constraints by eliminating backplane and midplane connections with our Impact™ Orthogonal Direct connector system, ideal for next-generation data and telecommunication equipment with rates up to 25 Gbps; and

 

   

Premo-Flex™ FFC and Etched Polyimide Jumpers, Premo-Flex™ FFC and etched polyimide jumpers, available in a variety of pitches, cable lengths and thicknesses and high-temperature ratings up to +105°C deliver durable, ultra flexible, competitively priced solutions for PCB connections in virtually any industry.

Consumer.    In the consumer market, we believe our key strengths include micro-miniature connector engineering and manufacturing capabilities, breadth of our high wattage product line and cable and wire application equipment.

We design and manufacture many of the world’s smallest connectors for home and portable audio, digital still and video cameras, DVD players and recorders, as well as devices that combine multiple functions. Our micro-miniature products support customer needs for increased power, speed and functionality, but with decreased weight and space requirements. We provide industry leadership with advanced interconnection products that help enhance the performance of video and still cameras, DVD players, portable music players, PDAs and hybrid devices that combine multiple capabilities into a single unit.

We are a leading connector source and preferred supplier to computer game makers. In addition, we provide components for gaming machines.

 

5


Table of Contents

We released several new products for the consumer market in fiscal 2012 including:

 

   

MobliquA™ antenna technology supports small-volume antenna designs without compromising efficiency and provides standard or custom solutions for an unlimited range of wireless applications and includes with superior bandwidth enhancing capability;

 

   

FFC-FPC (SMT), our microminiature SMT FFC/FPC connectors include features to meet a wide variety of space and application-specific needs;

 

   

micro-SIM Card Sockets, operate in push-push and push-pull styles that offer excellent electrical reliability and maximum space savings; and

 

   

SlimStack™ 0.40mm Pitch Board-to-Board Connectors, are low profile, ultra-narrow-width connectors manufactured in various stack heights for space savings and design flexibility, ideal for tight packaging applications such as mobile phones.

Industrial.    In the industrial market, we believe our key strengths include our industrial communications and networking technology, breadth of our power and signal product lines, distribution partnerships and global presence.

Our extensive industrial product line includes network interface cards, software for industrial networks and custom or industry standard cord sets. We offer a complete line of Woodhead® electrical solutions designed to support optimal worker safety and performance for today’s harsh duty environments. Our industry-leading solutions support the needs of industries such as factory automation, commercial construction, utility, petrochemical and food and beverage. In addition, we offer I/O connectors deployed in a variety of industrial production equipment on the factory floor, including:

 

   

automated assembly equipment;

 

   

conveyors and material handling equipment;

 

   

packaging equipment; and

 

   

pick-and-place robots.

We released several new products for the industrial market in fiscal 2012 including:

 

   

Brad® Ultra-Lock® (M12) EX Connection System for Zone 2 Hazardous Locations achieve non-arcing connections in a one-step installation process with the Brad ® Ultra-Lock® (M12) EX Connection System, designed for industrial automation use in Class I, Division 2 and Zone 2 hazardous areas;

 

   

Brad® Micro-Change® (M12) Connectors, Rugged Micro-Change® connectors and receptacles provide a high-pin-density M12 solution and can be used in harsh commercial and industrial environments; and

 

   

SolarSpec™ Junction Box and Cable Assemblies, Innovative SolarSpec™ products deliver solutions to the solar market and provide value to module manufacturers, installers and distributors.

Automotive.    In the automotive market, we believe our strengths include our wide range of products and extensive research and development capabilities that include rapid prototyping and high volume production support. Our automotive products are designed for every system in today’s connected vehicle: infotainment and navigation, powertrain, safety and chassis and body electronics. In addition to advanced electronics, we provide standard product offerings such as HSAutoLinkTM, MX150TM, STAC64TM, CMC, MX123TM and Squib.

We released several new products for the automotive market in fiscal 2012 including:

 

   

Mini50™ Unsealed Connection Systems achieve space savings over traditional USCAR 0.64mm connectors with smaller terminals to fit more low-current electrical circuits in interior, unsealed, transportation-vehicle environments;

 

6


Table of Contents
   

Mizu-P25™ Miniature Waterproof Connectors provides superior levels of dustproof and waterproof protection along with space savings;

 

   

Automotive Sensor Interconnects reduce the package size in automotive sensor applications which allow automakers to achieve greater competitive advantage; and

 

   

S8 Automotive Bulb Sockets simplify assembly and include a patented individual wire seal design that provides easy attachment during the crimping process.

Other.    Medical electronics is a growing market for our connectors, switch and assembly products. We provide both connectors and custom integrated systems for diagnostic and therapeutic equipment used in hospitals, including x-ray, magnetic resonance imaging and dialysis machines. Military electronics is also one of our focus markets. There is a range of electronic applications for our products in the commercial-off-the-shelf segment of this market. Products originally developed for the infotech, telecommunications and automotive markets are used in an increasing number of military applications. We are also expanding into non-connector markets, such as Solid State Lighting. Our Solid State Lighting business focuses on producing solutions that accelerate the adoption of LED lighting in general illumination, including LED holders and packaged LED/electronics products.

We released several new products for these other markets in fiscal 2012 including:

 

   

MediSpec™ Hybrid Circular MT Cable Assemblies and Receptacles provide high-performance, mixed optical and electrical signaling to streamline the amount of connectors required in medical systems;

 

   

Tight-Jacketed Cable LC and SC Connectors reduce optical micro bends and fiber breakage and are designed for synchronized plug-and-cable movement in tight, outer-jacket cable commonly deployed in rugged military and industrial applications; and

 

   

LED Array Holder for Sharp Zenigata (COB) Arrays simplify the installation process for small-fixture applications and reduce installation time with compression contacts that eliminate hand soldering.

Business Objectives and Strategies

One of our business objectives is to develop or improve our leadership position in each of our primary markets by increasing our overall position as a preferred supplier and improving our competitiveness on a global scale.

We believe that our success in achieving net revenue growth exceeding the connector market growth rate throughout our history is the result of the following key strengths:

 

   

broad and deep technological knowledge of microelectronic devices and techniques, power sources, coatings and materials;

 

   

strong intellectual property portfolio that underlies many key products;

 

   

high product quality standards, backed with stringent systems designed to ensure consistent performance, that meet or surpass customers’ expectations;

 

   

strong technical collaboration with customers;

 

   

extensive experience with advanced development, engineering, and new product development processes;

 

   

broad geographical presence in developed and developing markets;

 

   

continuous effort to develop an efficient, low-cost manufacturing footprint; and

 

   

a broad range of products both for specific and standard applications.

 

7


Table of Contents

We serve our customers by continuing to focus on the following strategies:

 

   

Concentrate on core markets.    We focus on markets where we have the expertise, qualifications and leadership position to sustain a competitive advantage. We have been an established supplier of interconnect solutions for 73 years. We are a principal supplier of connector components to the telecommunications, infotech, consumer, industrial and automotive electronics markets.

 

   

Grow through the development and release of new products.    We invest strategically in the tools and resources to develop and market new products and to expand existing product lines through innovation. New products are essential to enable our customers to advance their solutions and their market leadership positions.

 

   

Strategic investments in selected adjacencies.    We continuously review and prioritize opportunities for adjacent markets for our technologies. A subset of these are becoming priorities for us and are pursued to expand our available market.

 

   

Optimize manufacturing and supply chain.    We analyze the design and manufacturing patterns of our customers along with our own supply chain economics to help ensure that our manufacturing operations are of sufficient scale and are located strategically to minimize production costs and maximize customer service.

 

   

Leverage financial strength.    We use our expected cash flow from operations and strong balance sheet to invest aggressively in new product development, to pursue synergistic acquisitions, to align manufacturing capacity with customer requirements and to pursue productivity improvements. We invested approximately 6.5% and 5.2% of fiscal 2012 net revenue in capital expenditures and research and development activities, respectively.

Our global organizational structure consists of three product-focused divisions and one worldwide sales and marketing organization. The structure enables us to work effectively as a global team to meet customer needs as well as leverage our design expertise and our low-cost production centers around the world. The worldwide sales and marketing organization structure enhances our ability to sell any product, to any customer, anywhere in the world.

Competition

We compete with many companies in each of our product categories and global industries. These competitors include Amphenol Corporation, Delphi Automotive PLC, Hirose Electronic Co., Ltd, Hon Hai Precision Industry Co., Ltd., Japan Aviation Electronics Industry, Ltd., Japan Solderless Terminal Ltd. and TE Connectivity Ltd. We also compete with a significant number of smaller competitors who compete in specific geographies and industries. The identity and significance of competitors may change over time. We believe that the 10 largest connector suppliers, as measured by net revenue, represent approximately 54% of the worldwide market. Many of these companies offer products in some, but not all, of the markets and regions we serve.

Our products compete to varying degrees on the basis of quality, price, availability, performance and brand recognition. We also compete on the basis of customer service. Our ability to compete also depends on continually providing innovative new product solutions and worldwide support for our customers.

Customers and Sales Channels

We sell products directly to OEMs, contract manufacturers and distributors. Our customer base includes global companies and no single customer accounted for more than 10% of our net revenue in fiscal 2012, 2011 or 2010.

Many of our customers operate in more than one geographic region of the world and we have developed a global footprint to service these customers. We are engaged in significant operations in foreign countries. Our net revenue originating outside the United States was approximately 74% in fiscal 2012.

 

8


Table of Contents

In fiscal 2012, the approximate share of net revenue by geographic region follows:

 

   

60% of net revenue originated in Asia-Pacific (China, including Hong Kong and Taiwan, India, Indonesia, Japan, Korea, Malaysia, the Philippines, Singapore and Thailand). Approximately 32% and 14% of net revenue in fiscal 2012 was derived from operations in China and Japan, respectively.

 

   

26% of net revenue originated in the Americas.

 

   

14% of net revenue originated in Europe.

Most of our sales in international markets are made by foreign sales subsidiaries. In countries with low sales volumes, sales are made through various representatives and distributors. A discussion of market risk associated with changes in foreign currency exchange rates can be found in Management’s Discussion and Analysis of Financial Condition and Results of Operations and Risk Factors.

We sell our products primarily through our own sales organization with a presence in most major connector markets worldwide. To complement our own sales force, we work with a network of distributors to serve a broader customer base and provide a wide variety of supply chain tools and capabilities. Sales through distributors represented approximately 25% of our net revenue in fiscal 2012.

We seek to provide each customer one-to-one service tailored to their business needs. Our engineers work collaboratively with customers to develop products for specific applications. We provide customers the benefit of state-of-the-art technology for engineering, design and prototyping, supported by development centers throughout the world. In addition, most customers have a single Molex customer service contact and a specific field salesperson to provide technical product and application expertise.

Our sales force around the world has access to our global information systems to provide 24/7 visibility on orders, pricing, contracts, shipping, inventory and customer programs. We offer a self-service environment for our customers through our web site at www.molex.com, so that customers can access our entire product line, download drawings or 3D models, obtain price quotes, order samples and track delivery.

Information regarding our operations by reporting segment appears in Note 21 of the Notes to Consolidated Financial Statements.

Research and Development

We remain committed to investing in world-class technology development, particularly in the design and manufacture of connectors and interconnect systems. Our research and development activities are directed toward developing technology innovations, primarily high-speed signal integrity, miniaturization, higher power delivery, optical signal delivery and sealed harsh environment connectors that we believe will deliver the next generation of products. We continue to invest in new manufacturing processes, improve existing products and reduce costs. We believe that we are well positioned in the technology industry to help drive innovation and promote industry standards that will yield innovative and improved products for customers.

We incurred total research and development costs of $181.1 million in fiscal 2012, $170.1 million in fiscal 2011 and $154.0 million in fiscal 2010. We believe this investment, approximating 5.2% of net revenue, is among the highest levels relative to the largest participants in the industry and helps us achieve a competitive advantage.

We strive to provide customers with the most advanced interconnection products through intellectual property development and participation in industry standards committees. Our engineers are active in many of these committees, helping to give us a voice in shaping the technologies of the future. In fiscal 2012, we commercialized 229 new products and received 319 patents.

 

9


Table of Contents

We perform a majority of our design and development of connector products in the United States and Japan, but have additional product development capabilities in various locations, including China, Germany, Ireland, Korea and Singapore.

Manufacturing

Our core manufacturing expertise includes molding, stamping, plating and assembly operations. We use state of the art plastic injection molding machines and metal stamping and forming presses. We have created new processes to meet the ongoing challenge of manufacturing smaller connectors. We continue to utilize our proprietary plated plastic technology, which provides excellent shielding performance while eliminating secondary manufacturing processes in applications such as mobile phone antennas.

We also have expertise in printed circuit card, flexible circuit and harness assembly for our integrated products operations, which build devices that leverage our connector content. We operate low-cost manufacturing centers in China, India, Malaysia, Mexico, Poland, the Philippines, Thailand and Vietnam to reduce our manufacturing costs and align our footprint with our customers’ needs.

Continuous improvements achieved through a global lean/six sigma program have reduced our manufacturing costs and improved our quality and delivery. Our trend of fewer but larger factories, such as our one million square foot facility in Chengdu, China, provides increasing economies of scale and efficiencies.

Raw Materials

The principal raw materials that we purchase for the manufacture of our products include plastic resins for molding, metal alloys (primarily copper based) for stamping and gold and palladium salts for use in the plating process. We also purchase molded and stamped components and connector assemblies. Most materials and components used in our products are available from several sources. To achieve economies of scale, we concentrate purchases from a limited number of suppliers, and therefore in the short term may be dependent upon certain suppliers to meet performance and quality specifications and delivery schedules. We use financial instruments to hedge the volatility of commodity material costs. We anticipate that our raw material expenditures as a percentage of sales may increase due to growth in our integrated products business and increases in certain commodity costs.

Backlog

The backlog of unfilled orders as of June 30, 2012 was approximately $416.4 million compared with backlog of $418.5 million as of June 30, 2011. Substantially all of these orders are scheduled for delivery within 12 months. The majority of orders are shipped within 30 days of acceptance.

Employees

As of June 30, 2012, we had 34,226 people working for us worldwide. Approximately 70% of these people were located in low labor cost countries. We believe that we have strong relations with our employees.

Acquisitions and Investments

Our strategy to provide a broad range of connectors requires a wide variety of technologies, products and capabilities. The rapid pace of technological development in the connector industry and the specialized expertise required in different markets make it difficult for a single company to organically develop all of the required products. Though a significant majority of our growth has come from internally developed products, we will seek to make future acquisitions or investments where we believe we can stimulate the development of, or acquire, new technologies and products to further our strategic objectives and strengthen our existing businesses. Information regarding our acquisitions appears in Note 5 of the Notes to Consolidated Financial Statements.

 

10


Table of Contents

Intellectual Property

Patents, trade secrets and trademarks and other proprietary rights (collectively, Intellectual Property) are important to our business. We own an extensive portfolio of U.S. and foreign patents and trademarks. In addition, we are a licensee of various third-party patents and trademarks. We review third-party Intellectual Property in an effort to avoid infringements of third-party Intellectual Property rights and to identify desirable third-party Intellectual Property rights to license to advance our business objectives. We also review our competitors’ products to identify infringements of our Intellectual Property rights and to identify licensing opportunities for our Intellectual Property rights. We believe that our Intellectual Property is important to our business, but do not consider ourselves materially dependent upon any particular piece of Intellectual Property.

Environmental, Health & Safety (EHS) Matters

We are committed to achieving high standards of environmental quality and product safety, and strive to provide a safe and healthy workplace for our employees, contractors and the communities in which we do business. We have EHS policies and disciplines that are applied to our operations. We closely monitor the environmental laws and regulations in the countries in which we operate and believe we are in compliance in all material respects with federal, state and local regulations pertaining to environmental protection.

All major Molex manufacturing sites are certified to the International Organization for Standardization 14001 environmental management system standard, which requires that a broad range of environmental processes and policies be in place to minimize environmental impact, maintain compliance with environmental regulations and communicate effectively with interested stakeholders. In addition, many sites globally are Occupational Health and Safety Assessment Series 18001 certified Occupational Health and Safety Management Systems, which is intended to manage occupational health and safety risks and drive continual health and safety improvement within our operations. Our corporate social responsibility auditing program includes not only compliance components, but also modules on business risk, environmental excellence and management systems. We have internal processes that focus on minimizing and properly managing hazardous materials used in our facilities and products. We monitor regulatory and resource trends and set short and long-term targets to continually improve our environmental performance.

The manufacture, assembly and testing of our products are subject to a broad array of laws and regulations, including restrictions on the use of hazardous materials. We have a program for compliance with the European Union Restriction on Certain Hazardous Substances Directive (RoHS) and similar laws.

 

11


Table of Contents

Executive Officers

Our executive officers as of July 27, 2012 are set forth in the table below.

 

Name

 

Positions Held with Registrant

During the Last Five Years

   Age      Year
Employed
 

Frederick A. Krehbiel(a)

  Co-Chairman (1999-present); Chief Executive Officer (2004-2005); Co-Chief Executive Officer (1999-2001).      71         1965(b

John H. Krehbiel, Jr.(a)

  Co-Chairman (1999-present); Co-Chief Executive Officer (1999-2001).      75         1959(b

Martin P. Slark

  Vice-Chairman and Chief Executive Officer (2005-present); President and Chief Operating Officer (2001-2005).      57         1976   

Liam McCarthy

  President and Chief Operating Officer (2005-present); Vice President of Operations, Europe (2000-2005).      56         1976   

David D. Johnson

  Executive Vice President, Treasurer and Chief Financial Officer (2005-present).      56         2005   

Graham C. Brock

  Executive Vice President (2005-present) and President, Global Sales & Marketing (2006-present) and Regional President, Europe (2005).      58         1976   

James E. Fleischhacker

  Executive Vice President (2001-present), Technology & Innovation (2012-present); President, Global Commercial Products Division (2009-2012); President Global Transportation Products Division
(2007-2009).
     68         1984   

Katsumi Hirokawa

  Executive Vice President (2005-present) and President, Global Micro Products Division (2007-present); Vice President and President, Asia-Pacific North
(2005-2007).
     65         1995   

J. Michael Nauman

  Executive Vice President and President, Global Integrated Products Division (2009-present); Senior Vice President and President, Global Integrated Products Division (2007-2009); President, Integrated Products Division, Americas Region (2005-2007).      50         1994   

Joseph Nelligan

  Senior Vice President, (2011-present); President, Commercial Products Division (2012-present); Vice President, Product Development and Commercialization, Commercial Products Division (2009-2011); Vice President, Global Industry Group — Datacom (2007-2009).      48         1984   

Gary J. Matula

  Senior Vice President, Information Systems and Chief Information Officer (2008-present); Vice President, Information Systems and Chief Information Officer (2004-2008).      57         1984   

Timothy I. Ruff

  Senior Vice President, Business Development and Corporate Strategy (2012-present); Vice President Sales and Marketing, Americas (2006-2011).      47         1988   

Ana G. Rodriguez

  Senior Vice President, Global Human Resources (2008-present); Vice President, Co-General Counsel and Secretary (2007-2008).      44         2005   

 

12


Table of Contents

 

 

(a) John H. Krehbiel, Jr. and Frederick A. Krehbiel (the Krehbiel Family) are brothers. The members of the Krehbiel Family may be considered to be “control persons” of Molex. The other executive officers listed above have no relationship, family or otherwise, to the Krehbiel Family, Molex or each other.

 

(b) Includes period employed by our predecessor company.

Code of Business Conduct and Ethics

We have adopted a Code of Business Conduct and Ethics applicable to all employees, officers and directors. The Code of Business Conduct incorporates our policies and guidelines designed to deter wrongdoing and to promote honest and ethical conduct and compliance with applicable laws and regulations. We have also adopted a Code of Ethics for Senior Financial Management applicable to our Chief Executive Officer, Chief Financial Officer, Chief Accounting Officer and other senior financial managers. The Code of Ethics sets out our expectations that financial management produce full, fair, accurate, timely and understandable disclosure in our filings with the Securities and Exchange Commission (the SEC) and other public communications. We intend to post any amendments to or waivers from these codes of conduct on our web site.

The full text of these codes of conduct is published on the investor relations page of our web site at www.molex.com.

Available Information

We file with the SEC our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports, proxy statements and registration statements. You may read and copy any material we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. You may also obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an internet site at http://www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers, including us, that file electronically. We make available free of charge on or through our website at www.molex.com our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we file these materials with the SEC.

 

Item 1A. Risk Factors

Cautionary Statement Regarding Forward-Looking Statements

This Annual Report on Form 10-K and other documents we file with the SEC contain forward-looking statements that are based on current expectations, estimates, forecasts and projections about our future performance, business, beliefs, and 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,” “potential,” 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 below.

We have based our forward-looking statements on our management’s beliefs and assumptions based on information available to 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 regard-

 

13


Table of Contents

ing growth strategies, industry trends, global economic conditions, success of customers, cost of raw materials, value of inventory, availability of credit, currency exchange rates, labor costs, protection of intellectual property, cost reduction initiatives, acquisition synergies, manufacturing strategies, product development introduction and sales, regulatory changes, competitive strengths, natural disasters, unauthorized access to data, government investigations and outcomes of legal proceedings. Except as required under the federal securities laws, we do not have any intention or obligation to update publicly any forward-looking statements after the distribution of this report, whether as a result of new information, future events, changes in assumptions, or otherwise.

Risk Factors

You should carefully consider the risks described below. These risks are not the only ones facing our company. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also impair our business operations. If any of the following risks occur, our business, financial condition or operating results could be materially adversely affected.

Risks Relating to Our Business

We may be adversely affected by a prolonged economic downturn or economic uncertainty.

Our business and operating results have been and will continue to be affected by global economic conditions. When global economic conditions deteriorate or economic uncertainty increases, our customers or potential customers may experience deterioration of their businesses, which may result in the delay or cancellation of plans to purchase our products. Our sensitivity to economic cycles and any related fluctuation in the businesses of our customers or potential customers may have a material adverse effect on our financial condition, results of operations or cash flows.

We may see a negative effect on our business due to disruptions in financial markets.

Economic downturns and economic uncertainty generally affect global credit markets. Financial markets in the United States, Europe and Asia have been experiencing volatility in security prices, limited liquidity and credit availability, rating downgrades of certain investments and declining valuation of others. While these conditions have not yet impaired our ability to access credit markets and finance our operations, there is no assurance that there will not be deterioration in financial markets and confidence in developed economies. The tightening of credit in financial markets may adversely affect the ability of our customers and suppliers to obtain financing of significant purchases and operations and this can in turn have a material adverse effect on our business and results of operations.

We are dependent on the success of our customers.

We are dependent on the continued growth, viability and financial stability of our customers. Our customers generally are OEMs in the telecommunications, infotech, automotive, consumer and industrial markets. These markets are subject to rapid technological change, vigorous competition and short product life cycles and cyclical and reduced consumer demand patterns. When our customers are adversely affected by these factors, we may be similarly affected.

For example, the telecommunications market, which accounted for approximately 23% of our net revenue in fiscal 2012, has historically experienced periods of robust capital expenditure followed by periods of retrenchment and consolidation. The infotech market, which accounted for 26% of our net revenue in fiscal 2012, has fluctuated seasonally and is subject to variations in enterprise spending depending on current economic and credit conditions. Periodic downturns in our customers’ industries can significantly reduce demand for certain of our products, which could have a material adverse effect on our financial condition, results of operations and cash flows.

 

14


Table of Contents

We are subject to continuing pressure to lower our prices.

Over the past several years, we have experienced, and we expect to continue to experience, pressure to lower our prices. In the last two years, we have experienced annual price erosion averaging from 2% to 3% of net revenue. In order to maintain our margins, we must continue to reduce our costs by similar amounts. Continuing pressure to reduce our prices could have a material adverse effect on our financial condition, results of operations and cash flows.

We face rising costs of commodity materials.

The cost and availability of certain commodity materials used to manufacture our products, such as plastic resins, copper-based metal alloys, gold and palladium salts, molded and stamped components and connector assemblies, are critical to our success. The prices of many of these raw materials, including copper and gold, has increased in recent years, and continues to fluctuate. Gold, which made up approximately 16% of our material cost in fiscal 2012, has increased in price approximately 52% since fiscal 2010. In addition, many of these commodity materials are produced in a limited number of regions around the world or are only available from a limited number of suppliers. Volatility in the prices and shortages of such materials may result in increased costs and lower operating margins if we are unable to pass such increased costs through to our customers. Some of our competitors may be less dependent on these commodity materials and have less exposure to these volatile commodity costs. Our results of operations, financial condition and cash flows may be materially and adversely affected if we have difficulty obtaining these commodity materials, the quality of available commodity materials deteriorates, or there are continued significant price increases for these commodity materials. We use financial instruments to hedge the volatility of commodity material costs. The success of our hedging program depends on accurate forecasting of transaction activity in the various commodity materials. We could experience unanticipated commodity materials or hedge gains or losses if these forecasts are inaccurate during periods of volatility.

We face intense competition in our markets.

Our markets are highly competitive and we expect that both direct and indirect competition will increase in the future. Our overall competitive position depends on a number of factors including the price, quality and performance of our products, the level of customer service, the development of new technology and our ability to participate in emerging markets. A relative decline in our competitive position in these areas could have a material adverse effect on our financial condition. Within each of our markets, we encounter direct competition from other electronic components manufacturers and suppliers ranging in size from large, diversified manufacturers to small, highly specialized manufacturers. Competition may intensify from various U.S. and non-U.S. competitors and new market entrants, some of which may be our current customers. Our markets have continued to become increasingly concentrated and globalized in recent years, and our major competitors have significant financial resources and technological capabilities. Moreover, our competitive position is increasingly dependent upon being a socially responsible citizen and any inability to meet our customers’ expectations may result in a loss of business and market share to competitors. Increased competition may result in price reductions, reduced margins or loss of market share, any of which could materially and adversely affect our business, operating results and financial condition.

We are dependent on new products.

We expect that a significant portion of our future net revenue will continue to be derived from sales of newly introduced products. Rapidly changing technology, evolving industry standards and changes in customer needs characterize the market for our products. If we fail to modify or improve our products in response to changes in technology, industry standards or customer needs, our products could rapidly become less competitive or obsolete. We must continue to make investments in research and development in order to timely develop new products, enhance existing products and achieve market acceptance for such products. As a result of our need to make these investments in research and

 

15


Table of Contents

development, our operating results could be materially affected if our net revenue falls below expectations. Moreover, there is no assurance that development stage products will be successfully completed or, if developed, will achieve significant customer acceptance.

We may need to license new technologies to respond to technological change and these licenses may not be available to us on terms that we can accept or may materially change the gross profit margin that we are able to obtain on our products. We may not succeed in adapting our products to new technologies as they emerge. Development and manufacturing schedules for technology products are difficult to predict, and there is no assurance that we will achieve timely initial customer shipments of new products. The timely availability of these products in volume and their acceptance by customers are important to our future success.

We face manufacturing challenges.

The volume and timing of sales to our customers may vary due to: variation in demand for our customers’ products; our customers’ attempts to manage their inventory; design changes; changes in our customers’ manufacturing strategy; and consolidations among or acquisitions of customers. Due in part to these factors, many of our customers do not commit to long-term production schedules. Our inability to forecast the level of customer orders with certainty makes it difficult to schedule production and maximize utilization of manufacturing capacity.

Our industry must provide increasingly rapid product turnaround for its customers. We generally do not obtain firm, long-term purchase commitments from our customers and we continue to experience reduced lead-times in customer orders. Customers may cancel their orders, change production quantities or delay production for a number of reasons and such actions could negatively affect our operating results. In addition, we make significant operating decisions based on our estimate of customer requirements. The short-term nature of our customers’ commitments and the possibility of rapid changes in demand for their products reduce our ability to accurately estimate the future requirements of those customers.

We rely on third-party suppliers for the components used in our products, and we rely on third-party manufacturers to manufacture certain of our assemblies and finished products. Our results of operations, financial condition, and cash flows could be adversely affected if our third-party suppliers lack sufficient quality control or if there are significant changes in their financial or business condition. If our third-party suppliers fail to deliver products, parts, and components of sufficient quality on time and at reasonable prices, we could have difficulties fulfilling our orders, sales and profits could decline, and our commercial reputation could be damaged.

From time to time, we have underutilized our manufacturing lines. This excess capacity means we incur increased fixed costs in our products relative to the net revenue we generate, which could have an adverse effect on our results of operations, particularly during economic downturns. If we are unable to improve utilization levels for these manufacturing lines and correctly manage capacity, the increased expense levels will have an adverse effect on our business, financial condition and results of operations. In addition, some of our manufacturing lines are located in China or other foreign countries that are subject to a number of additional risks and uncertainties, including increasing labor costs and political, social and economic instability.

We are dependent on independent distributors to sell and market our products.

Sales through independent distributors accounted for approximately 25% of our net revenue in fiscal 2012. Although we have entered into written agreements with most of the distributors, the agreements are nonexclusive and generally may be terminated by either party upon written notice. The distributors are not within our control, are not obligated to purchase products from us, and may also sell other lines of products. We do not assure you that these distributors will continue their current relationships with us or that they will not give higher priority to the sale of other products, which could include products of competitors. A reduction in sales efforts or discontinuance of sales of our products

 

16


Table of Contents

by the distributors would lead to reduced sales and could materially adversely affect our financial condition, results of operations and business. Selling through indirect channels such as distributors may limit our contact with the ultimate customers and our ability to assure customer satisfaction.

We face industry consolidation.

Many of the industries to which we sell our products, as well as many of the industries from which we buy materials, have become increasingly concentrated in recent years, including the telecommunications, infotech, automotive and consumer electronics industries. Consolidation of customers may lead to decreased product purchases from us. In addition, as our customers buy in larger volumes, their volume buying power has increased, and they may be able to negotiate more favorable pricing and find alternative sources from which to purchase. Our materials suppliers similarly have increased their ability to negotiate favorable pricing. These trends may adversely affect the profit margins of our products, particularly for commodity components.

We face the possibility that our gross margins may decline.

In response to changes in product mix, competitive pricing pressures, increased sales discounts, introductions of new competitive products, product enhancements by our competitors, increases in manufacturing or labor costs or other operating expenses, we may experience declines in prices, gross margins and profitability. To maintain our gross margins we must maintain or increase current shipment volumes, develop and introduce new products and product enhancements and reduce the costs to produce our products. If we are unable to accomplish this, our net revenue, gross profit and operating results may be below our expectations and those of investors and analysts.

We face risks associated with inventory.

The value of our inventory may decline as a result of surplus inventory, price reductions or technological obsolescence. The life cycles of some of our products can be very short compared with the development cycle, which may result in excess or obsolete inventory or equipment that we may need to write off. We must identify the right product mix and maintain sufficient inventory on hand to meet customer orders. Failure to do so could adversely affect our net revenue and operating results. However, if circumstances change (for example, an unexpected shift in market demand, pricing or customer defaults) there could be a material effect on the net realizable value of our inventory. We maintain an inventory valuation reserve account against diminution in the value or salability of our inventory. However, there is no guaranty that these arrangements will be sufficient to avoid write-offs in excess of our reserves in all circumstances.

We may encounter problems associated with our global operations.

For fiscal year 2012, approximately 74% of our net revenue came from international sales, including 32% and 14% in China and Japan, respectively. In addition, a significant portion of our operations consists of manufacturing activities outside of the United States, including approximately 21% and 30% in China and Japan, respectively. Our ability to sell our products and conduct our operations globally is subject to a number of risks. Local economic, political and labor conditions in each country could adversely affect demand for our products and services or disrupt our operations in these markets. We may also experience reduced intellectual property protection or longer and more challenging collection cycles as a result of different customary business practices in certain countries, including China where we do business. Additionally, we face the following risks:

 

   

international business conditions including the relationships between the United States and other governments;

 

   

unexpected changes in laws, regulations, trade, monetary or fiscal policy, including interest rates, foreign currency exchange rates and changes in the rate of inflation in the United States and other foreign countries;

 

17


Table of Contents
   

tariffs, quotas, customs and other import or export restrictions and other trade barriers;

 

   

difficulties in staffing and management;

 

   

language and cultural barriers, including those related to employment regulation;

 

   

disruption of our supply chain as a result of natural disasters; and

 

   

potentially adverse tax consequences.

We are exposed to fluctuations in currency exchange rates.

We face substantial exposure to movements in non-U.S. currency exchange rates because a significant portion of our business is conducted outside the United States. This may harm our results of operations, and any measures that we may implement to reduce the effect of volatile currencies and other risks of our global operations may not be effective. Approximately 64% of our net revenue for fiscal year 2012 was invoiced in currencies other than the U.S. dollar, and we expect net revenue and manufacturing costs from non-U.S. markets to continue to represent a significant portion of our operating results. Price increases caused by currency exchange rate fluctuations may make our products less competitive or have an adverse effect on our margins. Our international net revenue and expenses generally are derived from sales and operations in currencies other than the U.S. dollar. Accordingly, when the U.S. dollar strengthens in relation to the currencies of the countries in which we sell our products, our U.S. dollar reported net revenue and income will decrease. Currency exchange rate fluctuations may also disrupt the business of our suppliers by making their purchases of raw materials more expensive and more difficult to finance. We mitigate a portion of 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, as compared with offsets that need to be hedged by foreign exchange contracts, will vary from country to country. To reduce our exposure to fluctuations in currency exchange rates when natural hedges are not effective, we may use financial instruments to hedge U.S. dollar and other currency commitments and cash flows arising from trade accounts receivable, trade accounts payable and fixed purchase obligations.

If these hedging activities are not successful or we change or reduce these hedging activities in the future, we may experience significant unexpected expenses from fluctuations in exchange rates or financial instruments which become ineffective. The success of our hedging program depends on accurate forecasts of transaction activity in the various currencies. To the extent that these forecasts are over or understated during periods of currency volatility, we could experience unanticipated currency or hedge gains or losses.

We may find that our products have quality issues.

The fabrication of the products we manufacture is a complex and precise process. Our customers specify quality, performance and reliability standards. If flaws in either the design or manufacture of our products were to occur, we could experience a rate of failure in our products that could result in significant delays in shipment and product re-work or replacement costs. Although we engage in extensive product quality programs and processes, these may not be sufficient to avoid product failures, which could cause any of the following to occur and negatively affect our financial condition and results of operations:

 

   

lose net revenue;

 

   

incur increased costs such as warranty expense and costs associated with customer support;

 

   

experience delays, cancellations or rescheduling of orders for our products;

 

18


Table of Contents
   

experience increased product returns or discounts; or

 

   

damage our reputation.

If we fail to manage our growth effectively or to integrate successfully any future acquisition, our business could be harmed.

We expect to continue to make investments in companies, products and technologies through acquisitions. While we believe that such acquisitions are an integral part of our long-term strategy, there are risks and uncertainties related to acquiring companies. Such risks and uncertainties include:

 

   

successfully identifying and completing transactions;

 

   

difficulty in integrating acquired operations, technology and products or realizing cost savings or other anticipated benefits from integration;

 

   

retaining customers and existing contracts;

 

   

retaining the key employees of the acquired operation;

 

   

potential disruption of our or the acquired company’s ongoing business;

 

   

charges for impairment of long-term assets;

 

   

unanticipated expenses related to integration; and

 

   

potential unknown liabilities associated with the acquired company.

In addition, if we were to undertake a substantial acquisition for cash, the acquisition would likely need to be financed in part through additional financing from banks, through public offerings or private placements of debt or equity securities, or other arrangements. This acquisition financing might decrease our ratio of earnings to fixed charges and adversely affect other leverage measures. Any necessary acquisition financing may not be available to us on acceptable terms if and when required. If we undertake an acquisition by issuing equity securities or equity-linked securities, the issued securities would have a dilutive effect on the interests of the holders of our stock.

We depend on our key employees and face competition in hiring and retaining qualified employees.

Our future success depends partly on the continued contribution of our key employees, including executive, engineering, sales, marketing, manufacturing and administrative personnel. We face intense competition for key personnel in several of our product and geographic markets. Our future success depends in large part on our continued ability to hire, assimilate and retain key employees, including qualified engineers and other highly skilled personnel needed to compete and develop successful new products. We may not be as successful as competitors at recruiting, assimilating and retaining highly skilled personnel.

We are subject to various laws and government regulations.

We are subject to a wide and ever-changing variety of U.S. and foreign laws and regulations, compliance with which may require substantial expense. Of particular note are laws and regulations restricting the use of certain chemical substances in the production of electronic equipment. Failure to comply with these requirements could result in fines or suspension of sales.

In addition, some environmental laws impose liability, sometimes without fault, for investigating or cleaning up contamination on or emanating from our currently or formerly owned, leased or operated property, as well as for damages to property or natural resources and for personal injury arising out of such contamination.

 

19


Table of Contents

We rely on our intellectual property rights.

We rely on a combination of patents, copyrights, trademarks and trade secrets and confidentiality provisions to establish and protect our proprietary rights. To this end, we hold rights to a number of patents and registered trademarks and regularly file applications to attempt to protect our rights in new technology and trademarks. Even if approved, our patents or trademarks may be successfully challenged by others or otherwise become invalidated for a variety of reasons. Also, to the extent a competitor is able to reproduce or otherwise capitalize on our intellectual property, it may be difficult, expensive or impossible for us to obtain necessary legal protection.

Third parties may claim that we are infringing their intellectual property rights. Such claims could have an adverse effect on our business and financial condition. From time to time we receive letters alleging infringement of patents. Litigation concerning patents or other intellectual property is costly and time consuming. We may seek licenses from such parties, but they could refuse to grant us a license or demand commercially unreasonable terms. Such infringement claims could also cause us to incur substantial liabilities and to suspend or permanently cease the manufacture and sale of affected products.

Our Information Technology (“IT”) systems could be breached.

We face certain security threats relating to the confidentiality and integrity of our IT systems. Despite implementation of security measures, our IT systems may be vulnerable to damage from computer viruses, cyber attacks and other unauthorized access and these security breaches could result in a disruption to our operations. A material network breach of our IT systems could involve the theft of our and our customers’ intellectual property or trade secrets which may be used by competitors to develop competing products. To the extent that any security breach results in a loss or damage to data, or inappropriate disclosure of confidential or proprietary information, it could cause significant damage to our reputation, affect our customer relations, lead to claims against us, increase our costs to protect against future damage and could result in a material adverse effect on our business and financial position.

We could suffer significant business interruptions.

Our operations and those of our suppliers and customers may be vulnerable to interruption by natural disasters such as earthquakes, tsunamis, typhoons, or floods, or other disasters such as fires, explosions, acts of terrorism or war, disease or failures of our management information or other systems due to internal or external causes. If a business interruption occurs, our business could be materially and adversely affected.

A decline in the market value of our pension plans’ investment portfolios could adversely affect our results of operations, financial condition and cash flows.

Concerns about deterioration in the global economy, together with the credit crisis, have caused significant volatility in interest rates and equity prices, which could decrease the value of our pension plans’ investment portfolios. A decrease in the value of our pension plans’ investment portfolios could have an adverse effect on our results of operations, financial condition and cash flows.

We may have exposure to income tax rate fluctuations and to additional tax liabilities, which could negatively affect our financial position.

As a corporation with operations both in the United States and abroad, we are subject to income taxes in the United States and various foreign jurisdictions. Our effective tax rate is subject to significant fluctuation from one period to the next because the income tax rates for each year are a function of a number of factors, including the following:

 

   

the effects of a mix of earnings among countries with a broad range of statutory tax rates;

 

   

changes in the valuation of deferred tax assets and liabilities;

 

20


Table of Contents
   

changes in assessment of tax exposures; and

 

   

changes in tax laws or the interpretation of these laws.

Changes in the mix of these items and other items may cause our effective tax rate to fluctuate between periods, which could have a material adverse effect on our results of operations and financial condition.

In addition, if we encounter a significant need for liquidity domestically or at a particular location that we cannot fulfill through borrowings, equity offerings, or other internal or external sources, we may experience unfavorable tax and earnings consequences due to cash transfers. These adverse consequences would occur, for example, if the transfer of cash into the United States is taxed and no offsetting foreign tax credit is available to offset the U.S. tax liability, resulting in lower earnings. Foreign exchange ceilings imposed by local governments and the sometimes lengthy approval processes that foreign governments require for international cash transfers may delay our internal cash transfers from time to time.

We are also subject to non-income taxes, such as payroll, sales, use, value-added, net worth, property and goods and services taxes, in both the United States and various foreign jurisdictions.

Significant judgment is required in determining our provision for income taxes and other tax liabilities. Although we believe our tax estimates are reasonable, we are regularly under audit by tax authorities with respect to both income and non-income taxes and may have exposure to additional tax liabilities as a result of these audits. Unfavorable audit findings and tax rulings may result in payment of taxes, fines and penalties for prior periods and higher tax rates in future periods, which may have a material adverse effect on our results of operations and financial condition.

An adverse outcome in a litigation proceeding may result in a material adverse effect on our financial position.

We are currently a party to various legal proceedings which may divert financial and management resources. If one or more unfavorable final outcomes were to occur, our financial position could be materially and adversely affected.

Covenants in our debt instruments may adversely affect us if we are determined not to be in compliance.

Our unregistered, private placement of debt (the Private Placement) and three-year revolving credit facility in the United States (the U.S. Credit Facility) contain representations and covenants with which we are required to be in compliance. Although we believe none of these covenants are restrictive to our operations, our ability to meet these representations and/or covenants can be affected by events beyond our control, and we do not assure you that we will continue to comply. A breach of any of these representations and/or covenants could result in a default giving the lender(s) the right to declare all amounts outstanding thereunder to be immediately due and payable and our lender(s) could terminate commitments to extend further credit. If the lender(s) accelerate the repayment of borrowings, we do not assure you that we will have sufficient assets to repay our affected indebtedness. In addition, acceleration of any debt obligation under any of our material debt instruments may permit the lender(s) under other material debt instruments to accelerate payment of amounts outstanding.

Our certificate of incorporation and bylaws include antitakeover provisions, which may deter or prevent a takeover attempt.

Some provisions of our certificate of incorporation and bylaws may deter or prevent a takeover attempt, including a takeover that might result in a premium over the market price for our Common Stock and Class A Common Stock. Our governing documents establish a classified board, require stockholders to give advance notice prior to the annual meeting if they want to nominate a candidate

 

21


Table of Contents

for director or present a proposal, and contain a number of provisions subject to supermajority vote. In addition, the Board may issue up to 25,000,000 shares of preferred stock without action by our stockholders, which could be used to make it more difficult and costly to acquire our company.

 

Item 1B. Unresolved Staff Comments

None.

 

Item 2. Properties

We own and lease manufacturing, design, warehousing, sales and administrative space in locations around the world. The leases are of varying terms with expirations ranging from fiscal 2012 through fiscal 2021. The leases in aggregate are not considered material to the financial position of Molex.

As of June 30, 2012, we owned or leased a total of approximately 9.7 million square feet of facility space worldwide. We have vacated several buildings in France, Germany and Slovakia and are holding these buildings and related assets for sale. We own 91% of our manufacturing, design, warehouse and office space and lease the remaining 9%. Our manufacturing plants are equipped with machinery, most of which we own and which, in part, we developed to meet the special requirements of our manufacturing processes. We believe that our buildings, machinery and equipment are well maintained and adequate for our current needs.

Our principal executive offices are located at 2222 Wellington Court, Lisle, Illinois, United States of America. We own 40 manufacturing locations, of which 15 are located in North America and 25 are located in other countries. A listing of the locations of our principal manufacturing facilities by geographic region is presented below:

 

   

Americas: Mexico and United States

 

   

Asia-Pacific: China, India, Japan, Korea, Malaysia, the Philippines, Singapore, Taiwan, Thailand and Vietnam

 

   

Europe: Ireland, Italy and Poland

 

Item 3. Legal Proceedings

Currently, we are involved in a number of legal proceedings. For a discussion of contingencies related to legal proceedings, see Note 20 of the Notes to Consolidated Financial Statements, which is hereby incorporated by reference.

 

Item 4. Mining Safety Disclosures — Not Applicable

 

22


Table of Contents

PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Molex Incorporated is traded on the NASDAQ Global Select Market and on the London Stock Exchange and trades under the symbols MOLX for Common Stock and MOLXA for Class A Common Stock. Molex Class B Common Stock is not publicly traded.

The number of stockholders of record at June 30, 2012 was 1,883 for Common Stock, 5,150 for Class A Common Stock and 13 for Class B Common Stock.

The following table presents quarterly stock prices for the fiscal years ended June 30:

 

            2012      2011  
     Quarter      Low — High      Low — High  

Common Stock

     1st       $ 18.62       $ 26.63       $ 17.65       $ 21.10   
     2nd         19.09         25.88         20.18         23.02   
     3rd         24.35         28.38         23.01         28.22   
     4th         22.19         28.28         24.22         27.95   
            2012      2011  
     Quarter      Low — High      Low — High  

Class A Common Stock

     1st       $ 15.83       $ 22.18       $ 15.03       $ 17.79   
     2nd         15.85         21.39         16.87         19.08   
     3rd         20.10         23.62         19.20         23.47   
     4th         18.96         23.55         20.22         23.32   

Cash dividends on common stock have been paid every year since 1977. The following table presents quarterly dividends declared per share of Common Stock, Class A Common Stock and Class B Common Stock for the fiscal years ended June 30:

 

     2012      2011  

Quarter ended:

     

September 30

   $ 0.2000       $ 0.1525   

December 31

     0.2000         0.1750   

March 31

     0.2000         0.1750   

June 30

     0.2200         0.2000   
  

 

 

    

 

 

 

Total

   $ 0.8200       $ 0.7025   
  

 

 

    

 

 

 

 

23


Table of Contents

During the quarter ended June 30, 2012, 24,020 shares of Class A Common Stock were transferred to us from certain employees to pay either the purchase price and/or withholding taxes on the vesting of restricted stock or the exercise of stock options. The aggregate market value of the shares transferred totaled $0.5 million. Share purchases of Molex Common and/or Class A Common Stock for the quarter ended June 30, 2012 were as follows (in thousands, except price per share data):

 

     Total Number
of Shares
Purchased*
     Average Price
Paid per Share
     Total Number
of Shares
Purchased as
Part of Publicly
Announced Plan
 

April 1 — April 30

        

Common Stock

     —         $         —       

Class A Common Stock

     516         $ 22.37         —       

May 1 — May 31

        

Common Stock

     —         $         —       

Class A Common Stock

     —         $         —       

June 1 — June 30

        

Common Stock

     —         $         —       

Class A Common Stock

     18         $ 18.97         —       
  

 

 

    

 

 

    

 

 

 

Total

       534         $ 22.24             —       
  

 

 

    

 

 

    

 

 

 

 

 

* The shares purchased represent shares withheld to pay taxes due upon vesting of restricted stock or exercise of employee stock options.

Descriptions of our Common Stock appear under the caption “Molex Stock” in our 2012 Proxy Statement and in Note 17 of the Notes to Consolidated Financial Statements.

 

24


Table of Contents

Performance Graph

The performance graph set forth below shows the value of an investment of $100 on June 30, 2007 in each of Molex Common Stock, Molex Class A Common Stock, the S&P 500 Index and a Peer Group Index. The Peer Group Index includes 50 companies (including Molex) classified in the Global Sub-industry Classifications “Electronic Equipment and Instruments,” “Electronic Manufacturing Services” and “Technology Distributors.” All values assume reinvestment of the pre-tax value of dividends paid by Molex and the companies included in these indices, and are calculated as of June 30 each year. The historical stock price performance of Molex’s Common Stock and Class A Common Stock is not necessarily indicative of future stock price performance.

Comparison of Five-Year Cumulative Total Return

(Value of Investment of $100 on June 30, 2007)

Among Molex Incorporated, the S&P 500 Index

and a Peer Group

 

LOGO

 

      06/30/07      06/30/08      06/30/09      06/30/10      06/30/11      06/30/12  

Molex Incorporated Common

     100.00         82.78         54.78         66.17         96.33         92.61   

Molex Incorporated Class A

     100.00         87.91         57.55         63.96         92.18         90.45   

S&P 500

     100.00         86.88         64.10         73.35         95.87         101.09   

Peer Group

     100.00         89.85         58.65         72.21         101.31         90.58   

 

25


Table of Contents
Item 6. Selected Financial Data

Molex Incorporated

Five-Year Financial Highlights Summary

(in thousands, except per share data)

 

     2012     2011     2010     2009     2008  

Operations:

          

Net revenue

   $ 3,489,189      $ 3,587,334      $ 3,007,207      $ 2,581,841      $ 3,328,347   

Gross profit

     1,068,463        1,088,137        892,623        656,177        1,014,235   

Income (loss) from operations

     399,472        430,199        137,802        (348,881     313,233   

Income (loss) before income taxes

     400,267        429,939        131,489        (321,573     333,931   

Net income (loss)(1)

     281,377        298,808        76,930        (322,036     215,720   

Earnings (loss) per share:

          

Basic

   $ 1.60      $ 1.71      $ 0.44      $ (1.84   $ 1.20   

Diluted

     1.59        1.70        0.44        (1.84     1.19   

Net income (loss) percent of net revenue

     8.1     8.3     2.6     (12.5 )%      6.5

Capital expenditures

   $ 227,101      $ 262,246      $ 229,477      $ 177,943      $ 234,626   

Financial Position:

          

Current assets

   $ 2,079,238      $ 2,055,345      $ 1,775,821      $ 1,507,058      $ 1,841,472   

Current liabilities

     886,857        882,047        912,696        884,893        817,803   

Working capital(2)

     1,192,381        1,173,298        863,125        622,165        1,023,669   

Current ratio(3)

     2.3        2.3        1.9        1.7        2.3   

Property, plant and equipment, net

   $ 1,150,549      $ 1,168,448      $ 1,055,144      $ 1,080,417      $ 1,172,395   

Total assets

     3,611,503        3,597,852        3,236,578        3,011,586        3,667,272   

Long-term debt

     150,032        222,794        183,434        30,311        146,333   

Stockholders’ equity

     2,441,264        2,368,266        1,985,131        1,961,252        2,576,216   

Dividends declared per share

   $ 0.82      $ 0.70      $ 0.61      $ 0.61      $ 0.45   

Average common shares outstanding:

          

Basic

     175,980        174,812        173,803        174,598        180,474   

Diluted

     177,382        175,943        174,660        174,598        181,395   

 

 

(1) Operating results include the following by year (in thousands):

 

     2012      2011      2010      2009      2008  

After-tax restructuring costs and asset impairments

   $       $       $ 92,835       $ 111,798       $ 20,988   

Goodwill impairments

                             264,140           

After-tax net unauthorized activities in Japan

     7,172         9,221         17,128         1,712         3,007   

See Notes 3 and 6 of the Notes to Consolidated Financial Statements for a discussion of unauthorized activities in Japan, restructuring costs and asset impairments, respectively.

 

(2) Working capital is defined as current assets minus current liabilities.

 

(3) Current ratio is defined as current assets divided by current liabilities.

 

26


Table of Contents
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements relating to future events or the future financial performance of Molex, which involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements. Please see the discussion regarding forward-looking statements included under Item 1A, “Risk Factors” for a discussion of the uncertainties, risks and assumptions associated with these statements.

The following discussion should be read in conjunction with our consolidated financial statements and the related notes and other financial information appearing elsewhere in this Annual Report on Form 10-K. All references to fiscal years relate to the fiscal year ended June 30.

Overview

Our Business

Our core business is the manufacture and sale of electronic 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 different products including terminals, connectors, planar cables, cable assemblies, interconnection systems, backplanes, integrated products and mechanical and electronic switches in 40 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 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.

We sell our products in five primary markets. Our connectors, interconnecting devices and assemblies are used principally in the telecommunications, infotech, 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 televisions, gaming systems, automobile engine control units and adaptive braking systems, factory automation and diagnostic equipment.

 

27


Table of Contents

Net revenue by market can fluctuate based on various factors including economic conditions, new technologies within the industry, composition of customers and changes in their net revenue or inventory levels and new products or model changes that we or our customers introduce. The following table sets forth, for fiscal 2012, 2011 and 2010, the percentage relationship to net revenue of our sales by primary markets:

 

     2012     2011     2010  

Telecommunications

     23     25     25

Infotech

     26        23        22   

Consumer

     18        19        20   

Industrial

     13        15        14   

Automotive

     17        15        16   

Other

     3        3        3   
  

 

 

   

 

 

   

 

 

 

Total

     100     100     100
  

 

 

   

 

 

   

 

 

 

The following table sets forth, for fiscal 2012, 2011 and 2010, the percentage relationship to net revenue of our sales by geographic region:

 

     2012     2011     2010  

Americas

     26.2     24.3     24.4

Asia-Pacific

     60.0        61.3        59.8   

Europe

     13.8        14.4        15.8   
  

 

 

   

 

 

   

 

 

 

Total

     100.0     100.0     100.0
  

 

 

   

 

 

   

 

 

 

The following table sets forth, for fiscal 2012, 2011 and 2010, the percentage relationship to net revenue of our sales by reporting segment:

 

     2012     2011     2010  

Connector

     70.5     72.5     72.4

Custom & Electrical

     29.5        27.5        27.5   

Corporate & Other

                   0.1   
  

 

 

   

 

 

   

 

 

 

Total

     100.0     100.0     100.0
  

 

 

   

 

 

   

 

 

 

We sell our products directly to OEMs and to their contract manufacturers and suppliers and, to a lesser extent, through distributors worldwide. Many of our customers are multi-national corporations that manufacture their products in multiple operations in several countries.

In fiscal 2012, 60.0% of our net revenue was derived from sales in the Asia-Pacific region, representing slower net revenue growth in the Asia-Pacific region and a decrease from 61.3% of net revenue in fiscal 2011. In prior years, we experienced faster net revenue growth in Asia, particularly in China, than in the Americas and Europe. We continue to expand our manufacturing operations in lower cost regions. Approximately 56.9% of our manufacturing capacity is in lower cost areas such as China, Eastern Europe and Mexico. In addition, reduced trade barriers and improved supply chain logistics have reduced our need to duplicate regional manufacturing capabilities. For these reasons, we have consolidated multiple plants of modest size and established a strategy of operating fewer, larger and more integrated facilities in select locations. We believe that our business is positioned to benefit from this strategy.

Business Environment

The market in which we operate is highly fragmented with a limited number of large companies and a significant number of smaller companies making electronic connectors. We are one of the

 

28


Table of Contents

world’s largest manufacturers of electronic connectors. We believe that our global presence and our ability to design and manufacture our products throughout the world and to service our customers globally is a key advantage for us. Our growth has come primarily from new products that we develop, often in collaboration with our customers.

The markets in which we compete are highly competitive. Our financial results may be influenced by the following factors: our ability to successfully execute our business strategy; competition for customers; raw material prices; product and price competition; economic conditions in various geographic regions; foreign currency exchange rates; interest rates; changes in technology; fluctuations in customer demand; patent and intellectual property issues; availability of credit and general market liquidity; natural disasters; litigation results; investigations and legal proceedings and regulatory developments. Our ability to execute our business strategy successfully will require that we meet a number of challenges, including our ability to accurately forecast sales demand and calibrate manufacturing to such demand, manage volatile raw material costs, develop, manufacture and successfully market new and enhanced products and product lines, control operating costs, and attract, motivate and retain key personnel to manage our operational, financial and management information systems. Our sales are also dependent on end markets impacted by consumer, industrial and infrastructure spending, and our operating results can be adversely affected by reduced demand in these end markets.

Non-GAAP Financial Measures

Organic net revenue growth, which is included in Management’s Discussion and Analysis, is a non-GAAP financial measure. The tables presented in Results of Operations provide reconciliations of U.S. GAAP reported net revenue growth (the most directly comparable GAAP financial measure) to organic net revenue growth.

We believe organic net revenue growth provides useful information to investors because it reflects the underlying growth from the ongoing activities of our business and provides investors with a view of our operations from management’s perspective. We use organic net revenue growth to monitor and evaluate performance, since 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 and operating income in its decision making processes related to the operations of our reporting segments and our overall company. Because organic net revenue growth calculations may vary among other companies, organic net sales growth amounts presented below may not be comparable with similar measures of other companies.

Unauthorized Activities in Japan

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. Based on our consultation with legal counsel in Japan and the information learned from the investigation, we intend to vigorously contest the enforceability of the outstanding unauthorized loans and any attempt by the lender to obtain payment.

As previously reported in our Annual Report on Form 10-K for the year ended June 30, 2010, based on the results of the completed investigation, we recorded for accounting purposes an accrued

 

29


Table of Contents

liability for the effect of unauthorized activities pending the resolution of these matters including the legal proceedings reported in Note 20 of the Notes to Consolidated Financial Statements.

We believe these unauthorized activities and related losses occurred from at least as early as 1988 through 2010. The accrued liability for these unauthorized activities was $184.2 million as of June 30, 2012, including $18.4 million in cumulative foreign currency translation, which was recorded as a component of accumulated other comprehensive income. To the extent we prevail in not having to pay all or any portion of the unauthorized loans ($165.8 million), we would recognize a gain. In addition, we have a contingent liability of $58.1 million for other loan-related expenses, interest expense and delay damages on the outstanding unauthorized loans.

Unauthorized activities in Japan for fiscal years ended June 30, 2012 and 2011 represent investigative and legal fees.

Financial Highlights

Net revenue and income from operations for fiscal 2012 decreased slightly compared with fiscal 2011 due primarily to global economic uncertainty and lower end customer demand. Net revenue for fiscal 2012 of $3.5 billion decreased $98.1 million, or 2.8%, from fiscal 2011. Organic net revenue decreased $168.4 million, or 4.7%, in fiscal 2012 compared with fiscal 2011. Income from operations for fiscal 2012 of $399.5 million decreased $30.7 million, or 7.1%, compared with fiscal 2011. We recognized net income of $281.4 million in fiscal 2012 compared with net income of $298.8 million in fiscal 2011. Fiscal 2012 results include a net loss on unauthorized activities in Japan of $11.3 million ($7.2 million after-tax). Fiscal 2011 results include a net loss on unauthorized activities in Japan of $14.5 million ($9.2 million after-tax).

Results of Operations

The following table sets forth, for fiscal 2012, 2011 and 2010, certain consolidated statements of operations data as a percentage of net revenue (dollars in thousands):

 

    2012     Percentage of
Net Revenue
    2011     Percentage of
Net Revenue
    2010     Percentage of
Net Revenue
 

Net revenue

  $ 3,489,189        100.0   $ 3,587,334        100.0   $ 3,007,207        100.0

Cost of sales

    2,420,726        69.4     2,499,197        69.7     2,114,584        70.3
 

 

 

     

 

 

     

 

 

   

Gross profit

    1,068,463        30.6     1,088,137        30.3     892,623        29.7

Selling, general & administrative

    657,732        18.9     643,462        17.9     610,784        20.3

Restructuring costs and asset impairments

                          117,139        3.9

Unauthorized activities in Japan

    11,259        0.3     14,476        0.4     26,898        0.9

Goodwill impairments

                                
 

 

 

     

 

 

     

 

 

   

Income from operations

    399,472        11.4     430,199        12.0     137,802        4.6

Other income (expense), net

    795            (260         (6,313     (0.2 )% 
 

 

 

     

 

 

     

 

 

   

Income before income taxes

    400,267        11.5     429,939        12.0     131,489        4.4

Income taxes

    118,890        3.4     131,131        3.7     54,559        1.8
 

 

 

     

 

 

     

 

 

   

Net income

  $ 281,377        8.1   $ 298,808        8.3   $ 76,930        2.6
 

 

 

     

 

 

     

 

 

   

 

30


Table of Contents

Net Revenue

The following table provides an analysis of the change in net revenue compared with the prior fiscal year (in thousands):

 

     2012     2011  

Net revenue for prior year

   $ 3,587,334      $ 3,007,207   

Components of net revenue increase:

    

Organic net revenue change

     (168,385     488,123   

Currency translation

     57,777        82,742   

Acquisitions

     12,463        9,262   
  

 

 

   

 

 

 

Total change in net revenue from prior year

     (98,145     580,127   
  

 

 

   

 

 

 

Net revenue for current year

   $ 3,489,189      $ 3,587,334   
  

 

 

   

 

 

 

Organic net revenue change as a percentage of net revenue for prior year

     (4.7 )%      16.2

Net revenue decreased during fiscal 2012 compared with fiscal 2011 as end customer demand slowed due to global economic uncertainties. The decrease in net revenue was partially offset by currency translation due to a general weakening of the U.S. dollar against most currencies except the euro. We completed asset acquisitions of a specialty wire and cable company during the second quarter of fiscal 2012 and an active optical cable business during the third quarter of fiscal 2011.

The increase in net revenue attributed to currency translation in fiscal 2011 compared with fiscal 2010 was principally due to a stronger Japanese yen and weaker U.S. dollar against most currencies except the euro. The following tables show the effect on the change in geographic net revenue from foreign currency translations to the U.S. dollar (in thousands):

 

     June 30, 2012     June 30, 2011  
     Local
Currency
    Currency
Translation
    Net
Change
    Local
Currency
    Currency
Translation
    Net
Change
 

Americas

   $ 40,202      $ 157      $ 40,359      $ 136,321      $ 1,073      $ 137,394   

Asia-Pacific

     (160,831     58,963        (101,868     301,824        96,776        398,600   

Europe

     (34,758     (1,343     (36,101     59,427        (15,107     44,320   

Corporate & Other

     (535            (535     (187            (187
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net change

   $ (155,922   $ 57,777      $ (98,145   $ 497,385      $ 82,742      $ 580,127   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The change in net revenue by geographic region on a local currency basis as of June 30 follows:

 

     2012     2011  

Americas

     4.6     18.5

Asia-Pacific

     (7.3     21.0   

Europe

     (6.7     12.5   
  

 

 

   

 

 

 

Total

     (4.3 )%      16.5
  

 

 

   

 

 

 

Net revenue declined in fiscal 2012 compared with fiscal 2011 primarily due to the Asia-Pacific and Europe regions. Slower economic growth in China and uncertainties about economic stability in Europe led to net revenue declines in those regions during fiscal 2012. In prior years, we experienced faster net revenue growth in Asia, particularly China, than the other regions. Net revenue in fiscal 2011 increased in all three regions compared with fiscal 2010 as overall customer demand improved over the prior year.

Net revenue in fiscal 2012 declined compared with fiscal 2011 as global economic uncertainty affected end demand, particularly in our consumer, telecommunications and industrial markets, and

 

31


Table of Contents

our customers managed inventory lower. The decline in net revenue in fiscal 2012 was partially offset by increased demand in our infotech and automotive markets. Net revenue increased across all five primary markets in fiscal 2011 compared with fiscal 2010 as customer demand improved over the prior year. The following table sets forth, for fiscal 2012 and 2011, changes in net revenue from each of our five primary product markets from the prior fiscal year:

 

     2012     2011  

Telecommunications

     (10 )%      21

Infotech

     5        24   

Consumer

     (6     12   

Industrial

     (9     23   

Automotive

     7        16   

Telecommunications market net revenue decreased in fiscal 2012 compared with fiscal 2011 due to decreases in demand for certain mobile products, partially offset by increased infrastructure spending on networking. Telecommunications market net revenue increased in fiscal 2011 compared with fiscal 2010 due to higher infrastructure spending and increased demand for mobile products, including higher demand for smartphones and our customers’ introduction of smartphone models with higher connector content.

Infotech market net revenue increased in fiscal 2012 compared with fiscal 2011 due to increased content and demand for tablet devices and servers, partially offset by slower demand for notebook computers. Infotech market net revenue increased in fiscal 2011 compared with fiscal 2010 primarily due to increased content and demand for servers, data storage, notebook computers and tablet devices.

Consumer market net revenue decreased in fiscal 2012 compared with fiscal 2011 due to economic uncertainty leading to lower demand in home entertainment, including lower demand for our components in televisions, and supply chain disruptions caused by the floods in Thailand during the second quarter of fiscal 2012. Decreases in consumer market net revenue were partially offset by increased net revenue in gaming equipment. Consumer market net revenue increased in fiscal 2011 compared with fiscal 2010 primarily due to increased demand for our components in televisions, digital cameras and home appliances, as well as expansion into the non-connector audio accessories market, partially offset by reduced demand in gaming equipment.

Industrial market net revenue decreased in fiscal 2012 compared with fiscal 2011 due to softening demand for semiconductor and production equipment from our customers’ decreased production, companies’ reluctance to invest in automation projects or deferral of projects in the current economic environment and relatively high levels of inventory in the distribution channel. Industrial market net revenue in fiscal 2011 increased compared with fiscal 2010 due to higher demand for our connectors in semiconductor and other production equipment as our customers increased production to meet demand.

Automotive market net revenue increased in fiscal 2012 compared with fiscal 2011 due to higher global automobile production, particularly in North America and Japan, and increasing electronic content in automobiles, such as navigational and entertainment systems, mobile communication and products to improve fuel efficiency. Automotive market net revenue for fiscal 2011 increased compared with fiscal 2010 due to increased automobile production levels in the United States and China.

Gross Profit

We measure gross profit as net revenue less cost of sales. Cost of sales includes manufacturing costs, such as materials, direct and indirect labor, and factory overhead. Our gross margins are primarily affected by the following factors: product mix; volume; cost reduction efforts; competitive pricing pressure; commodity costs and currency fluctuations.

 

32


Table of Contents

The following table sets forth gross profit and gross margin for fiscal 2012, 2011 and 2010 (dollars in thousands):

 

     2012     2011     2010  

Gross profit

   $ 1,068,463      $ 1,088,137      $ 892,623   

Gross margin

     30.6     30.3     29.7

The decrease in gross profit during fiscal 2012 was due to lower net revenue. Despite the lower net revenue, gross margin improved during fiscal 2012 due to a favorable mix of product sales and rigorous control over costs, including reduced freight expense.

The increase in gross profit and gross margin during fiscal 2011 was primarily due to increased net revenue. Gross margins have improved over time due to lower costs resulting from our restructuring program. The improvements in gross margin were partially offset by the impact of price erosion and material price increases.

A significant portion of our material cost consists of copper and gold costs. We purchased approximately 20 million pounds of copper and 108,000 troy ounces of gold in fiscal 2012 compared with approximately 22 million pounds of copper and 125,000 troy ounces of gold in fiscal 2011 and approximately 23 million pounds of copper and 112,000 troy ounces of gold in fiscal 2010.

The following table sets forth the average prices of copper and gold we purchased in fiscal 2012, 2011 and 2010:

 

     2012      2011      2010  

Copper (price per pound)

   $ 3.73       $ 3.88       $ 3.04   

Gold (price per troy ounce)

     1,670.00         1,363.00         1,096.00   

Generally, we are able to pass through to our customers only a small a portion of the changes in the cost of copper and gold. However, we mitigated the impact of the change in copper and gold prices by hedging with call options a portion of our projected net global purchases of copper and gold. The hedges reduced cost of sales by $6.7 million, $7.1 million and $5.1 million in fiscal 2012, 2011 and 2010, respectively.

In addition to commodity costs, the following table sets forth, for fiscal 2012, 2011 and 2010 the effects of certain significant impacts on gross profit from the prior year (in thousands):

 

     2012     2011     2010  

Price erosion

   $ (66,270   $ (102,563   $ (139,232

Currency translation

     21,951        37,958        23,928   

Currency transaction

     (35,099     (57,763     (22,076

Price erosion measures the reduction in prices of our products year over year, which reduces our gross profit. Price erosion as a percent of net revenue was 1.9%, 2.8% and 4.5% in fiscal 2012, 2011 and 2010, respectively. Price erosion decreased in fiscal 2012 and 2011 compared with the prior year periods due primarily to the implementation of pricing software that provides enhanced visibility to recoverable costs and improved detail of profit margin by product.

The increase in gross profit due to currency translation gains in fiscal 2012 was primarily due to a general weakening of the U.S. dollar against most currencies except the euro. The increase in gross profit due to currency translation gains in fiscal 2011 was primarily due to a stronger Japanese yen against other currencies and a weaker U.S. dollar against most currencies except the euro. The increase in gross profit due to currency translation gains in fiscal 2010 was primarily due to stronger Asian currencies.

Certain products we manufacture in Japan and Europe are sold in other regions of the world at selling prices primarily denominated in or closely linked to the U.S. dollar. As a result, changes in currency exchange rates may affect our cost of sales reported in U.S. dollars without a corresponding

 

33


Table of Contents

effect on net revenue. The decrease in gross profit due to currency transactions in fiscal 2012 and 2011 was primarily due to a stronger Japanese yen and a weaker U.S. dollar against most currencies. The decrease in gross profit due to currency transactions in fiscal 2010 was primarily due to a general weakening of the U.S. dollar against other currencies except the euro.

Operating Expenses

The following table sets forth our operating expenses for fiscal 2012, 2011 and 2010 (dollars in thousands):

 

     2012     2011     2010  

Selling, general & administrative

   $ 657,732      $ 643,462      $ 610,784   

Selling, general & administrative as a percentage of net revenue

     18.9     17.9     20.3

Restructuring costs and asset impairments

                   117,139   

Unauthorized activities in Japan

     11,259        14,476        26,898   

Selling, General & Administrative Expenses

Selling, general and administrative expenses increased $14.3 million and $32.7 million in fiscal 2012 and fiscal 2011 compared with the prior year periods, respectively. Selling, general and administrative expenses increased primarily due to foreign currency translation and investments in research and development to penetrate new markets, acquire new customers and drive future growth. The impact of currency translation increased selling, general and administrative expenses by approximately $9.0 million for fiscal 2012 compared with fiscal 2011 and increased selling, general and administrative expenses by approximately $12.7 million for fiscal 2011 compared with fiscal 2010. Selling, general, and administrative expenses in fiscal 2012 were reduced by $8.0 million for property insurance proceeds for damages from the earthquake and tsunami in Japan that occurred during the third quarter of fiscal 2011. Selling, general and administrative expenses decreased as a percentage of net revenue in fiscal 2011 compared with fiscal 2010 primarily due to efforts to control spending as net revenue increased from the prior year.

Research and development expenditures, which are classified as selling, general and administrative expenses, were $181.1 million, or 5.2% of net revenue, for fiscal 2012 compared with $170.1 million, or 4.7% of net revenue, for fiscal 2011 and $154.0 million, or 5.1% of net revenue, for fiscal 2010. Research and development expense increased in fiscal 2012 and 2011 compared with the prior year periods as we made strategic investments in developing future technology innovations.

Restructuring Costs and Asset Impairments

Restructuring costs and asset impairments consist of the following (in thousands):

 

     2010  

Severance costs

   $ 79,609   

Asset impairments

     37,296   
  

 

 

 

Restructuring costs

     116,905   

Intangible asset impairments

     234   
  

 

 

 

Total restructuring charges and asset impairments

   $ 117,139   
  

 

 

 

During fiscal 2007, we undertook 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 at these plants to other lower-cost facilities. We completed our restructuring program on June 30, 2010.

 

34


Table of Contents

In fiscal 2010, we recognized net restructuring costs related to employee severance and benefit arrangements for approximately 1,000 employees, resulting in a charge of $79.6 million. A large part of these employee terminations resulted from plant closings in Europe. We recognized asset impairment charges of $37.3 million to write-down assets to fair value less the cost to sell.

The timing of the cash expenditures associated with these charges does not necessarily correspond to the period in which the accounting charge is taken. For additional information concerning the status of our restructuring programs see Note 6 of the Notes to Consolidated Financial Statements.

Unauthorized Activities in Japan

Unauthorized activities in Japan for fiscal 2012 and 2011 represent investigative and legal fees. See Note 3 of the Notes to Consolidated Financial Statements for accounting treatment of the accrual for unauthorized activities in Japan.

Other Income (Expense), net

Other income (expense) consists primarily of net interest expense, investment income, and currency exchange gains or losses. We recorded other income of $0.8 million during fiscal 2012 compared with $0.3 million of other expense during fiscal 2011. Fluctuations in other income (expense) are primarily due to changes in currency gains and losses.

Effective Tax Rate

The effective tax rate for the fiscal years ended June 30, follows:

 

     2012     2011     2010  

Effective tax rate

     29.7     30.5     41.5

The effective tax rate was 29.7%, 30.5% and 41.5% for fiscal 2012, 2011 and 2010, respectively. The effective tax rate for fiscal 2010 was higher than fiscal 2012 and 2011 due to (1) income tax expense recorded during the year of $7.7 million, due primarily to the reversal of an estimated tax benefit resulting from a significant number of employee stock options that expired unexercised, (2) a charge due to legislation passed during fiscal 2010 which includes a provision that reduces the deductibility, for Federal income tax purposes, of retiree prescription drug benefits to the extent they are reimbursed under Medicare Part D, (3) tax losses generated in non-U.S. jurisdictions for which no tax benefit has been recognized, and (4) additional U.S. tax cost to repatriate earnings from non-US subsidiaries during the year.

Deferred tax assets and liabilities are recognized based on differences between the financial statement and tax bases of assets and liabilities using presently enacted tax rates. We had net deferred tax assets of $160.8 million at June 30, 2012.

Results by Product Segment

Connector.    The following table sets forth the change in net revenue for the Connector segment for fiscal 2012 and 2011 (dollars in thousands):

 

     2012     2011  

Net revenue for prior year

   $ 2,600,469      $ 2,177,014   

Components of net revenue increase:

    

Organic net revenue change

     (194,483     350,905   

Currency translation

     53,983        72,550   
  

 

 

   

 

 

 

Total change in net revenue from prior year

     (140,500     423,455   
  

 

 

   

 

 

 

Net revenue for current year

   $ 2,459,969      $ 2,600,469   
  

 

 

   

 

 

 

Organic net revenue change as a percentage of net revenue for prior year

     (7.5 )%      16.1

 

35


Table of Contents

The Connector segment sells primarily to the telecommunications, infotech, consumer and automotive markets, which are discussed above. Segment organic net revenue decreased during fiscal 2012 compared with the prior year period due to slower customer demand, particularly in the telecommunications and consumer markets, partially offset by increased net revenue in the automotive market. Segment organic net revenue increased in fiscal 2011 compared with the prior year periods due to increased demand in all of the Connector segment’s primary markets, partially offset by price erosion. Price erosion, which is generally higher in the Connector segment compared with our other segments, was 2.9% and 3.3% in fiscal 2012 and 2011, respectively.

The following table sets forth information on income from operations and operating margins for the Connector segment for fiscal 2012, 2011 and 2010 (dollars in thousands):

 

     2012     2011     2010  

Income from operations

   $ 344,387      $ 396,233      $ 123,980   

Operating margin

     14.0     15.2     5.7

Connector segment income from operations declined in fiscal 2012 compared with fiscal 2011 primarily due to lower net revenue and higher gold and resin costs. We adjusted prices to partially offset rising material costs and minimize the impact of price erosion on gross profit and gross margin. Lower production levels due to decreasing customer demand also led to lower absorption of our fixed costs. Selling, general and administrative expenses for fiscal 2012 were consistent with fiscal 2011 as insurance proceeds for damages related to the earthquake and tsunami in Japan principally offset increases in investments in research and development and foreign currency translation. Foreign currency translation increased selling, general and administrative expenses $14.6 million during fiscal 2012 compared with fiscal 2011 primarily due to a weakening of the U.S. dollar against most currencies except the euro.

Connector segment income from operations increased in fiscal 2011 compared with fiscal 2010 primarily due to increased net revenue and completion of our restructuring program on June 30, 2010. Gross margins were positively impacted from lower costs from our restructuring program, which has improved margins over time. Connector segment income from operations also improved in fiscal 2011 due to controlled selling, general and administrative costs in a period of increased net revenue. Selling, general and administrative expenses were $368.4 million, or 14.2% of net revenue, for fiscal 2011 compared with $347.6 million, or 16.0% of net revenue, for fiscal 2010, due to efficiencies gained from restructuring and specific cost-containment actions.

Custom & Electrical.    The following table sets forth net revenue for fiscal 2012 and 2011 (dollars in thousands):

 

     2012     2011  

Net revenue for prior year

   $ 985,120      $ 828,905   

Components of net revenue increase:

    

Organic net revenue change

     26,774        136,757   

Currency translation

     3,783        10,196   

Acquisitions

     12,463        9,262   
  

 

 

   

 

 

 

Total change in net revenue from prior year

     43,020        156,215   
  

 

 

   

 

 

 

Net revenue for current year

   $ 1,028,140      $ 985,120   
  

 

 

   

 

 

 

Organic net revenue change growth as a percentage of net revenue for prior year

     2.7     16.5

The Custom & Electrical segment sells primarily to the industrial, telecommunications and infotech markets. Custom & Electrical segment net revenue exceeded $1.0 billion in fiscal 2012 and organic net revenue increased in fiscal 2012 compared with fiscal 2011 due to increased demand in the infotech market. Segment organic net revenue increased in fiscal 2011 compared with fiscal 2010 due to

 

36


Table of Contents

increased demand in all of the segment’s primary markets. We completed asset acquisitions of a specialty wire and cable company during the second quarter of fiscal 2012 and an active optical cable business during the third quarter of fiscal 2011.

The following table sets forth income from operations and operating margins for the Custom & Electrical segment for fiscal 2012, 2011 and 2010 (dollars in thousands):

 

     2012     2011     2010  

Income from operations

   $ 172,803      $ 154,370      $ 111,083   

Operating margin

     16.8     15.7     13.4

Custom & Electrical segment income from operations increased during fiscal 2012 compared with fiscal 2011 due to increased net revenue, favorable mix of product sales and higher absorption, partially offset by increased investments in our global sales and marketing organization and research and development to penetrate new markets, acquire customers and drive future growth. Selling, general and administrative expenses decreased as a percent of net revenue in fiscal 2012 compared with fiscal 2011 as costs were controlled despite the increase in net revenue.

Custom & Electrical segment income from operations increased in fiscal 2011 compared with fiscal 2010 primarily due to increased net revenue and completion of our restructuring program on June 30, 2010. Gross margins were positively impacted from lower costs from our restructuring program, which has improved margins over time. Income from operations also improved in fiscal 2011 due to controlled selling, general and administrative costs in a period of increased net revenue. Selling, general and administrative expenses were $169.6 million, or 17.2% of net revenue, for fiscal 2011 compared with $168.5 million, or 20.2% of net revenue, for fiscal 2010, due to efficiencies gained from restructuring and specific cost-containment actions.

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 $652.2 million and $546.5 million at June 30, 2012 and 2011, respectively. Cash, cash equivalents and marketable securities as of June 30, 2012 included approximately $617.9 million in non-U.S. accounts, including $209.1 million in countries where we may experience administrative delays in withdrawing and transferring cash to U.S. accounts. 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 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.

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 requires us to maintain financial covenants pertaining to, among other things, our consolidated leverage and interest rate coverage. As of June 30, 2012, 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 that was initially scheduled to mature in June 2012 (the “U.S. Credit Facility”). We amended the U.S. Credit Facility in January 2010, September 2010 and March 2011. 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 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 $255.0 million and $342.6 million at June 30, 2012 and 2011, respectively. We had available lines of credit totaling $444.4 million at

 

37


Table of Contents

June 30, 2012, including $350.0 million available under the U.S. Credit Facility as of June 30, 2012. The U.S. Credit Facility also requires us to maintain financial covenants pertaining to, among other things, our consolidated leverage and fixed charge coverage. As of June 30, 2012, we were in compliance with these covenants. Additionally, we have three unsecured borrowing agreements in Japan totaling ¥8.0 billion ($100.2 million) as of June 30, 2012, with weighted average fixed interest rates of 1.8%. See Note 13 of the Notes to Consolidated Financial Statements.

Cash Flows

Below is a table setting forth the key lines of our Consolidated Statements of Cash Flows (in thousands):

 

     2012     2011     2010  

Cash provided from operating activities

   $ 573,719      $ 466,151      $ 250,579   

Cash used for investing activities

     (227,695     (270,709     (216,871

Cash used for financing activities

     (226,282     (77,191     (83,236

Effect of exchange rate changes on cash

     (14,924     37,996        1,173   
  

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

   $ 104,818      $ 156,247      $ (48,355
  

 

 

   

 

 

   

 

 

 

Operating Activities

Cash provided from operating activities in fiscal 2012 increased by $107.6 million from the prior year due primarily to a $144.5 million decrease in working capital needs in fiscal 2012 as receivables decreased due to improved collections and lower net revenue. Working capital is defined as current assets minus current liabilities. Net inventory levels were controlled, but increased slightly from fiscal 2011 excluding the impact of foreign currency exchange.

Cash provided from operating activities in fiscal 2011 increased $215.6 million from fiscal 2010 due primarily to an increase in net income in fiscal 2011 compared with fiscal 2010 and completion of our restructuring program on June 30, 2010.

Investing Activities

Cash used for investing activities decreased by $43.0 million due to decreased investment in capital expenditures in fiscal 2012 compared with fiscal 2011, $11.0 million of proceeds from the sale of an investment during fiscal 2012 and $8.0 million of insurance proceeds for damages from the earthquake and tsunami in Japan. The decrease was partially offset by net purchases of marketable securities in fiscal 2012 compared with net sales of marketable securities in fiscal 2011.

Capital expenditures decreased $35.1 million during fiscal 2012 due to project delays related to lower demand and production. Capital expenditures increased $32.8 million during fiscal 2011 compared with fiscal 2010 as demand and production increased.

We had $2.4 million in net purchases of marketable securities during fiscal 2012 compared with $3.6 million in net sales of marketable securities during fiscal 2011. We had $25.5 million net purchases of marketable securities in fiscal 2010. Our marketable securities generally have a term of less than one year. Our investments in marketable securities are primarily based on our uses of cash in operating, other investing and financing activities.

Financing Activities

Cash used for financing activities increased $149.1 million during fiscal 2012 compared with fiscal 2011 primarily due to net payments on the revolving credit facility and long-term debt compared with net borrowings in fiscal 2011 and an increase in quarterly cash dividends paid during fiscal 2012.

 

38


Table of Contents

We issued senior notes totaling $150.0 million in fiscal 2012. Proceeds were used to pay down a portion of our $350.0 million unsecured, five-year revolving U.S. Credit Facility. Net payments against the U.S. Credit Facility during the twelve months ended June 30, 2012 were $185.0 million compared to net borrowings of $85.0 million in the prior year period. There were no outstanding borrowings against the U.S. Credit Facility as of June 30, 2012.

We increased our cash dividend during the fourth quarter of fiscal 2011 to $0.20 per share, an increase of 14.3% from the previous quarterly cash dividend of $0.175 per share. The increase was effective to shareholders of record on June 30, 2011. During fiscal 2011, we increased our quarterly cash dividend to $0.175 per share, an increase of 14.8% from the previous quarterly cash dividend of $0.1525 per share in fiscal 2010. The increase was effective to shareholders of record on December 31, 2010.

Additionally, we increased our cash dividend again during the fourth quarter of fiscal 2012 to $0.22 per share, which was effective to shareholders of record on June 30, 2012.

Sources of Liquidity

We believe we have sufficient cash balances, cash flow and available credit lines to support our planned growth. As part of our growth strategy, we may, in the future, 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 affect our cash requirements and debt balances. To the extent we are required to pay all or any portion of the unauthorized loans in Molex Japan, our cash requirements may also be affected.

Total debt consisted of the following at June 30:

 

     Average
Interest
Rate
    Calendar
Year
Maturity
     2012      2011  

Long-term debt:

          

Private Placement

     2.91 - 4.28     2016 - 2021       $ 150,000       $   

U.S. Credit Facility

     1.75     2016                 185,000   

Unsecured bonds and term loans

     1.31 - 1.65     2012 - 2013         37,556         89,342   

Mortgages, industrial development bonds and other debt

     Varies        2012 - 2013         1,091         1,528   
       

 

 

    

 

 

 

Total long-term debt

          188,647         275,870   

Less current portion of long-term debt:

          

Unsecured bonds and term loans

     1.31 - 1.65        37,556         52,156   

Mortgages, industrial development bonds and other debt

     Varies           1,059         920   
       

 

 

    

 

 

 

Long-term debt, less current portion

          150,032         222,794   

Short-term borrowings

          

Overdraft loan

     1.98     2012         62,645         62,060   

Other short-term borrowings

     Varies           3,673         4,628   
       

 

 

    

 

 

 

Total short-term borrowings

          66,318         66,688   
       

 

 

    

 

 

 

Total debt

        $ 254,965       $ 342,558   
       

 

 

    

 

 

 

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 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 contains customary covenants regarding

 

39


Table of Contents

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 June 30, 2012, we were in compliance with these covenants and the balance of the senior notes was $150.0 million.

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 U.S. 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 150 basis points as of June 30, 2012. The instrument governing the U.S. Credit Facility contains customary covenants regarding liens, debt, substantial asset sales and mergers, dividends and investments. The U.S. Credit Facility also requires us to maintain financial covenants pertaining to, among other things, our consolidated leverage and fixed charge coverage. As of June 30, 2012, we were in compliance with these covenants and had no outstanding borrowings.

In March 2012, Molex Japan renewed a ¥5.0 billion overdraft loan, with a six month term and an interest rate of approximately 1.98%. At June 30, 2012, the balance of the overdraft loan, which requires full repayment by the end of the term if not renewed, approximated $62.6 million.

In March 2010, Molex Japan entered into a ¥3.0 billion syndicated term loan for three years, with interest rates equivalent to six month Tokyo InterBank Offered Rate (TIBOR) plus 75 basis points and scheduled principal payments of ¥0.5 billion every six months (Syndicated Term Loan). At June 30, 2012, the balance of the syndicated term loan approximated $12.5 million, which is classified as 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 June 30, 2012, the outstanding balance of the unsecured bonds approximated $25.1 million, which is classified as current.

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 as of June 30, 2012 (in thousands):

 

Year one

   $ 38,615   

Year two

     32   

Year three

       

Year four

       

Year five

     50,000   

Thereafter

     100,000   
  

 

 

 

Total long-term debt obligations

   $ 188,647   
  

 

 

 

We had available lines of credit totaling $444.4 million at June 30, 2012, including $350.0 million available on the U.S. Credit Facility. The lines of credit expire between 2012 and 2016.

 

40


Table of Contents

Contractual Obligations and Commercial Commitments

The following table summarizes our significant contractual obligations at June 30, 2012, and the effect such obligations are expected to have on liquidity and cash flows in future periods (in thousands):

 

     Total      Less Than
1 Year
     1-3
Years
     4-5
Years
     More Than
5 Years
 

Operating lease obligations

   $ 40,711       $ 16,017       $ 15,452       $ 7,384       $ 1,858   

Capital lease obligations

     7,990         4,156         3,764         70           

Other long-term liabilities

     15,879         3,370         3,944         9         8,556   

Debt obligations(1)

     250,809         100,777         32         50,000         100,000   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 315,389       $ 124,320       $ 23,192       $ 57,463       $ 110,414   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

(1) Total does not include contractual obligations recorded on the balance sheet as current liabilities for certain purchase obligations, as discussed below. Debt obligations do not include interest payments.

Contractual obligations for purchases of goods or services are defined as agreements that are enforceable and legally binding on us and that specify all significant terms, including fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Our purchase orders are based on current manufacturing needs and are fulfilled by vendors within short time horizons. In addition, some purchase orders represent authorizations to purchase rather than binding agreements. We do not generally have significant agreements for the purchase of raw materials or other goods specifying minimum quantities and set prices that exceed expected requirements for three months. Agreements for outsourced services generally contain clauses allowing for cancellation without significant penalty, and are therefore not included in the table above.

The expected timing of payments of the obligations above is estimated based on current information. Timing of payments and actual amounts paid may be different, depending on the time of receipt of goods or services, or changes to agreed-upon amounts for some obligations.

Off-Balance Sheet Arrangements

We do not have material exposure to any off-balance sheet arrangements. We do not have any unconsolidated special purpose entities.

Critical Accounting Estimates

Our accounting and financial reporting policies are in conformity with U.S. generally accepted accounting principles (GAAP). The preparation of financial statements in conformity with GAAP requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of net revenue and expenses during the reporting period.

Significant accounting policies are summarized in Note 2 of the Notes to Consolidated Financial Statements. Noted here are a number of policies that require significant judgments or estimates.

Revenue Recognition

Our revenue recognition policies are in accordance with Accounting Standards Codification (ASC) 605-10, Revenue Recognition, as issued by the SEC and other applicable guidance.

We recognize net revenue upon shipment of product and transfer of ownership to the customer. Contracts and customer purchase orders generally are used to determine the existence of an

 

41


Table of Contents

arrangement. Shipping documents, proof of delivery and customer acceptance (when applicable) are used to verify delivery. We assess whether an amount due from a customer is fixed and determinable based on the terms of the agreement with the customer, including, but not limited to, the payment terms associated with the transaction. The impact of judgments and estimates on net revenue recognition is minimal. A reserve for estimated returns is established at the time of sale based on historical return experience to cover returns of defective product and is recorded as a reduction of net revenue.

Income Taxes

We recognize liabilities for uncertain tax positions based on the two-step process prescribed within ASC 740-10, Accounting for Income Taxes. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step requires us to estimate and measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. It is inherently difficult and subjective to estimate such amounts, as this requires us to determine the probability of various possible outcomes. We re-evaluate these uncertain tax positions on a quarterly basis. This evaluation is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit and new audit activity. Such a change in recognition or measurement would result in the recognition of a tax benefit or an additional charge to the tax provision in the period.

Deferred tax assets and liabilities are recognized based on differences between the financial statement and tax bases of assets and liabilities using presently enacted tax rates. We have net deferred tax assets of $160.8 million at June 30, 2012.

We periodically assess the carrying value of our deferred tax assets based upon our ability to generate sufficient future taxable income in certain tax jurisdictions. If we determine that we will not be able to realize all or part of our deferred tax assets in the future, a valuation allowance is established in the period such determination is made. We have determined that it is unlikely that we will realize a net deferred asset in the future relating to certain non-U.S. net operating losses. The cumulative valuation allowance relating to net operating losses is approximately $50.3 million at June 30, 2012.

We have operations in countries around the world that are subject to income and other similar taxes in these countries. The estimation of the income tax amounts that we record involves the interpretation of complex tax laws and regulations, evaluation of tax audit findings and assessment of how foreign taxes may affect domestic taxes. Although we believe our tax accruals are adequate, differences may occur in the future depending on the resolution of pending and new tax matters. Subsidiaries with historical net operating losses were able to utilize $23.5 million of these losses during fiscal 2012.

Provision is made for U.S. taxes on undistributed earnings of foreign subsidiaries and related companies to the extent that such earnings are not deemed to be permanently invested.

Inventory

Inventories are valued at the lower of first-in, first-out (FIFO) cost or market value. FIFO inventories recorded in our consolidated balance sheet are adjusted for an allowance covering inventories determined to be slow-moving or excess. The allowance for slow-moving and excess inventories is maintained at an amount management considers appropriate based on factors such as historical usage of the product, open sales orders and future sales forecasts. If our sales forecast for specific products is greater than actual demand and we fail to reduce manufacturing output accordingly, we could be required to write down additional inventory, which would have a negative impact on gross margin and operating results. Such factors require judgment, and changes in any of these factors could result in changes to this allowance.

 

42


Table of Contents

Pension Plans

The costs and obligations of our defined benefit pension plans are dependent on actuarial assumptions. The three critical assumptions used, all of which impact the net periodic pension expense (income) and two of which impact the pension benefit obligation (PBO), are the discount rate, expected return on plan assets and rate of compensation increase. The discount rate is determined based on high-quality fixed income investments that match the duration of expected benefit payments. The discount rate used to determine the present value of our future U.S. pension obligations is based on a yield curve constructed from a portfolio of high quality corporate debt securities with various maturities. Each year’s expected future benefit payments are discounted to their present value at the appropriate yield curve rate, thereby generating the overall discount rate for U.S. pension obligations. The discount rates for our foreign pension plans are selected by using a yield curve approach or by reference to high quality corporate bond rates in those countries that have developed corporate bond markets. In those countries where developed corporate bond markets do not exist, the discount rates are selected by reference to local government bond rates with a premium added to reflect the additional risk for corporate bonds. The expected return on plan assets represents a forward projection of the average rate of earnings expected on the pension assets. We have estimated this rate based on historical returns of similarly diversified portfolios. The rate of compensation increase represents the long-term assumption for expected increases to salaries for pay-related plans. These key assumptions are evaluated annually. Changes in these assumptions can result in different expense and liability amounts. For additional information concerning the assumptions see Note 12 of the Notes to Consolidated Financial Statements.

The effects of the indicated increase and decrease in selected assumptions for our pension plans as of June 30, 2012, assuming no changes in benefit levels and no amortization of gains or losses, is shown below (in thousands):

 

     Increase (Decrease)
in PBO
    Increase (Decrease)
in Pension  Expense
 
     U.S. Plan     Int’l Plans     U.S. Plan     Int’l Plans  

Discount rate change:

        

Increase 50 basis points

   $ (6,510   $ (11,684   $ 17      $ (143

Decrease 50 basis points

     7,343        13,211        (35     114   

Expected rate of return change:

        

Increase 100 basis points

     N/A        N/A        704        753   

Decrease 100 basis points

     N/A        N/A        (704     (753

Other Postretirement Benefits

We have retiree health care plans that cover the majority of our U.S. employees. There are no significant postretirement health care benefit plans outside of the US. The health care cost trend rate assumption has a significant effect on the amount of the accumulated postretirement benefit obligation (APBO) and retiree health care benefit expense. The effects of the indicated increase and decrease in the assumed healthcare cost trend rates for our retiree healthcare plans as of June 30, 2012, assuming no change in benefit levels is shown below (in thousands):

 

     Increase (Decrease)
Total Annual Service
and Interest Cost
    Increase (Decrease)
in APBO
 

Increase 100 basis points:

   $ 589      $ 4,534   

Decrease 100 basis points:

     (481     (3,736

Stock Options

We use the Black-Scholes option-pricing model to estimate the fair value of each option grant as of the date of grant. Expected volatilities are based on historical volatility of our common stock. We

 

43


Table of Contents

estimate the expected life of the option using historical data pertaining to option exercises. Separate groups of employees that have similar historical exercise behavior are considered separately for estimating the expected life. The risk-free interest rate is based on U.S. Treasury yields in effect at the time of grant.

Fair Value of Financial Assets and Liabilities

The following table summarizes our financial assets and liabilities which are measured at fair value on a recurring basis and subject to the disclosure requirements of ASC 820-10, Fair Value Measurements and Disclosures, as of June 30, 2012 (in thousands):

 

     Total
Measured
at Fair
Value
     Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

Available for sale and trading securities

   $ 29,651       $ 29,651       $       $   

Derivative financial instruments, net

     7,029                 7,029           

We determine the fair value of our available for sale securities based on quoted market prices (Level 1). We generally use derivatives for hedging purposes pursuant to ASC 815-10, which are valued based on Level 2 inputs in the ASC 820-10 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.

Goodwill

Goodwill is recorded when the purchase price paid for an acquisition exceeds the estimated fair value of the net identified tangible and intangible assets acquired.

We perform an annual goodwill impairment analysis as of May 31, or earlier if indicators of potential impairment exist. In assessing the recoverability of goodwill, we review both quantitative as well as qualitative factors to support our assumptions with regard to fair value. Our impairment review process compares the estimated fair value of the reporting unit in which goodwill resides to our carrying value. Reporting units may be operating segments as a whole or an operation one level below an operating segment, referred to as a component. Components are defined as operations for which discrete financial information is available and reviewed by segment management.

The fair value of a reporting unit is estimated using a discounted cash flow model for the evaluation of impairment. The expected future cash flows are generally based on management’s estimates and are determined by looking at numerous factors including projected economic conditions and customer demand, net revenue and margins, changes in competition, operating costs and new products introduced. In determining fair value, we make certain judgments. If these estimates or their related assumptions change in the future as a result of changes in strategy or market conditions, we may be required to record an impairment charge.

Although we believe our assumptions in determining the projected cash flows are reasonable, changes in those estimates could affect the evaluation.

Other-Than-Temporary Impairments (OTTI)

For available-for-sale securities, we presume an OTTI decline in value if the quoted market price of the security is 20% or more below the investment’s cost basis for a continuous period of six months or more. However, the presumption of an OTTI decline in value may be overcome if there is persuasive evidence indicating that the decline is temporary in nature. For investments accounted for under the equity method, we evaluate all known quantitative and qualitative factors in addition to quoted market

 

44


Table of Contents

prices in determining whether an OTTI decline in value exists. Factors that we consider important in evaluating for a potential OTTI, include historical operating performance, future financial projections, business plans for new products or concepts and strength of balance sheet.

Impairment of Long-Lived Assets

In accordance with ASC 360, Accounting for the Impairment or Disposal of Long-Lived Assets, we assess the impairment of long-lived assets, other than goodwill and trade names, including property and equipment, and identifiable intangible assets subject to amortization, whenever events or changes in circumstances indicate the carrying value may not be recoverable. Factors we consider important, which could trigger an impairment review, include significant changes in the manner of our use of the asset, changes in historical trends in operating performance, changes in projected operating performance, and significant negative economic trends.

Contingencies

In accordance with ASC 450, Contingencies, we analyze whether it is probable that an asset has been impaired or a liability has been incurred, and whether the amount of loss can be reasonably estimated. If the loss contingency is both probable and reasonably estimable, we accrue for costs associated with the loss contingency. We expense associated legal fees as incurred. If no accrual is made but the loss contingency is reasonably possible, we disclose the nature of the contingency and the related estimate of possible loss or range of loss if such an estimate can be made. Loss contingencies include, but are not limited to, possible losses related to legal proceedings and regulatory compliance matters. Liabilities established to provide for contingencies are adjusted as further information develops, circumstances change, or contingencies are resolved.

New Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board (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 September 30, 2012 and will amend our presentation of the components of comprehensive income.

In July 2012, the FASB issued updated guidance on the periodic testing of intangible assets for impairment. This guidance will allow companies to assess qualitative factors to determine if it is more-likely-than-not that the indefinite-lived intangible asset might be impaired and whether it is necessary to perform the quantitative impairment test as required under current guidance. This new guidance is effective for us beginning July 1, 2013, with early adoption permitted. This new guidance will not have a material impact on our consolidated financial statements.

 

Item 7A. 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.

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 limiting the need to hedge with a

 

45


Table of Contents

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, as 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, development of natural hedges and use of foreign exchange contracts to protect or preserve the value of cash flows. See Note 16 of the Notes to Consolidated Financial Statements for discussion of the foreign exchange contracts in use at June 30, 2012, 2011 and 2010.

We have implemented a formalized treasury risk management policy that describes the 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. See Note 16 of the Notes to Consolidated Financial Statements for discussion of the derivative instruments in use at June 30, 2012, 2011 and 2010.

The translation of the financial statements of the non-North American operations is impacted by fluctuations in foreign currency exchange rates. Consolidated net revenue and income from operations were impacted by the translation of our international financial statements into U.S. dollars resulting in increased net revenue of $57.8 million and increased income from operations of $12.9 million for fiscal 2012, compared with the estimated results for fiscal 2011 using the average rates for 2011.

Our $14.8 million of marketable securities at June 30, 2012 are principally invested in time deposits.

Interest rate exposure is generally limited to our marketable securities, U.S. Credit 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 no outstanding borrowings on the U.S. Credit Facility with an interest rate of approximately 1.75% at June 30, 2012. The balance of our Syndicated Term Loan was approximately $12.5 million with an interest rate of approximately 1.31% at June 30, 2012.

Due to the nature of our operations, net revenue from specific customers or products fluctuates over time, but our broad base of customers in several markets mitigates the concentration risk relating to any one customer or product. Approximately 32% and 14% of net revenue in fiscal 2012 was derived from operations from China and Japan, respectively.

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.

 

46


Table of Contents
Item 8. Consolidated Financial Statements and Supplementary Data

Molex Incorporated

Index to Consolidated Financial Statements

 

     Page  

Consolidated Balance Sheets

     48   

Consolidated Statements of Income

     49   

Consolidated Statements of Cash Flows

     50   

Consolidated Statements of Stockholders’ Equity

     51   

Notes to Consolidated Financial Statements

     52   

Report of Independent Registered Public Accounting Firm

     84   

Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting

     85   

 

47


Table of Contents

Molex Incorporated

Consolidated Balance Sheets

(in thousands)

 

     June 30,  
     2012     2011  
ASSETS   

Current assets:

    

Cash and cash equivalents

   $ 637,417      $ 532,599   

Marketable securities

     14,830        13,947   

Accounts receivable, less allowances of $37,876 at June 30, 2012 and $42,297 at June 30, 2011

     751,279        811,449   

Inventories

     531,825        535,953   

Deferred income taxes

     110,789        129,158   

Other current assets

     33,098        32,239   
  

 

 

   

 

 

 

Total current assets

     2,079,238        2,055,345   

Property, plant and equipment, net

     1,150,549        1,168,448   

Goodwill

     160,986        149,452   

Non-current deferred income taxes

     50,038        38,178   

Other assets

     170,692        186,429   
  

 

 

   

 

 

 

Total assets

   $ 3,611,503      $ 3,597,852   
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY   

Current liabilities:

    

Current portion of long-term debt and short-term borrowings

   $ 104,933      $ 119,764   

Accounts payable

     355,491        359,812   

Accrued expenses:

    

Salaries, commissions and bonuses

     89,404        90,913   

Restructuring

     10,250        14,049   

Accrual for unauthorized activities in Japan

     184,177        182,460   

Other

     112,381        112,666   

Income taxes payable

     30,221        2,383   
  

 

 

   

 

 

 

Total current liabilities

     886,857        882,047   

Other non-current liabilities

     18,174        23,879   

Accrued pension and other postretirement benefits

     115,176        100,866   

Long-term debt

     150,032        222,794   
  

 

 

   

 

 

 

Total liabilities

     1,170,239        1,229,586   

Commitments and contingencies

    

Stockholders’ equity:

    

Common Stock, $0.05 par value; 200,000 shares authorized; 112,204 shares issued at June 30, 2012 and 2011

     5,610        5,610   

Class A Common Stock, $0.05 par value; 200,000 shares authorized; 114,910 shares issued at June 30, 2012 and 113,400 shares issued at June 30, 2011

     5,746        5,670   

Class B Common Stock, $0.05 par value; 146 shares authorized; 94 shares issued at June 30, 2012 and 2011

     5        5   

Paid-in capital

     711,394        674,494   

Retained earnings

     2,545,070        2,408,083   

Treasury stock (Common Stock, 16,644 shares at June 30, 2012 and 2011; Class A Common Stock, 34,074 shares at June 30, 2012 and 33,712 shares at June 30, 2011), at cost

     (1,112,956     (1,106,039

Accumulated other comprehensive income

     286,395        380,443   
  

 

 

   

 

 

 

Total stockholders’ equity

     2,441,264        2,368,266   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 3,611,503      $ 3,597,852   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

48


Table of Contents

Molex Incorporated

Consolidated Statements of Income

(in thousands, except per share data)

 

     Years Ended June 30,  
     2012     2011     2010  

Net revenue

   $ 3,489,189      $ 3,587,334      $ 3,007,207   

Cost of sales

     2,420,726        2,499,197        2,114,584   
  

 

 

   

 

 

   

 

 

 

Gross profit

     1,068,463        1,088,137        892,623   

Selling, general and administrative

     657,732        643,462        610,784   

Restructuring costs and asset impairments

                   117,139   

Unauthorized activities in Japan

     11,259        14,476        26,898   
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     668,991        657,938        754,821   
  

 

 

   

 

 

   

 

 

 

Income from operations

     399,472        430,199        137,802   

Interest (expense) income, net

     (5,360     (5,708     (5,416

Other income (expense)

     6,155        5,448        (897
  

 

 

   

 

 

   

 

 

 

Total other income (expense)

     795        (260     (6,313
  

 

 

   

 

 

   

 

 

 

Income before income taxes

     400,267        429,939        131,489   

Income taxes

     118,890        131,131        54,559   
  

 

 

   

 

 

   

 

 

 

Net income

   $ 281,377      $ 298,808      $ 76,930   
  

 

 

   

 

 

   

 

 

 

Earnings per share:

      

Basic

   $ 1.60      $ 1.71      $ 0.44   

Diluted

   $ 1.59      $ 1.70      $ 0.44   

Average common shares outstanding:

      

Basic

     175,980        174,812        173,803   

Diluted

     177,382        175,943        174,660   

 

See accompanying notes to consolidated financial statements.

 

49


Table of Contents

Molex Incorporated

Consolidated Statements of Cash Flows

(in thousands)

 

     Years Ended June 30,  
     2012     2011     2010  

Operating activities:

      

Net income

   $ 281,377      $ 298,808      $ 76,930   

Add (deduct) non-cash items included in net income:

      

Depreciation and amortization

     236,974        242,171        238,666   

Asset write-downs included in restructuring costs

                   37,296   

Loss on investments

                   558   

Deferred income taxes

     10,236        37,514        (16,965

Loss on sale of property, plant and equipment

     2,580        4,843        4,092   

Share-based compensation

     23,335        22,461        27,034   

Other non-cash items

     (20,561     (22,554     20,577   

Changes in assets and liabilities:

      

Accounts receivable

     44,161        (16,401     (208,051

Inventories

     (5,338     (25,916     (117,701

Accounts payable

     312        (63,984     115,869   

Other current assets and liabilities

     (10,246     (9,298     14,559   

Other assets and liabilities

     10,889        (1,493     57,715   
  

 

 

   

 

 

   

 

 

 

Cash provided from operating activities

     573,719        466,151        250,579   
  

 

 

   

 

 

   

 

 

 

Investing activities:

      

Capital expenditures

     (227,101     (262,246     (229,477

Proceeds from sales of property, plant and equipment

     3,444        1,804        3,014   

Proceeds from sales or maturities of marketable securities

     12,496        11,936        44,373   

Purchases of marketable securities

     (14,934     (8,328     (18,890

Acquisitions

     (24,000     (18,847     (10,097

Other investing activities

     22,400        4,972        (5,794
  

 

 

   

 

 

   

 

 

 

Cash used for investing activities

     (227,695     (270,709     (216,871
  

 

 

   

 

 

   

 

 

 

Financing activities:

      

Proceeds from revolving credit facility

     75,000        105,000        154,000   

Payments on revolving credit facility

     (260,000     (20,000     (79,000

Proceeds from short-term loans and current portion of long-term debt

            57,620          

Payments on short-term loans and current portion of long-term debt

     (53,748     (60,270       

Proceeds from issuance of long-term debt

     150,000               32,647   

Payments on long-term debt

     (575     (48,356     (87,787

Cash dividends paid

     (140,638     (114,410     (105,984

Exercise of stock options

     7,873        7,269        4,008   

Other financing activities

     (4,194     (4,044     (1,120
  

 

 

   

 

 

   

 

 

 

Cash used for financing activities

     (226,282     (77,191     (83,236

Effect of exchange rate changes on cash

     (14,924     37,996        1,173   
  

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     104,818        156,247        (48,355

Cash and cash equivalents, beginning of year

     532,599        376,352        424,707   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of year

   $ 637,417      $ 532,599      $ 376,352   
  

 

 

   

 

 

   

 

 

 

Supplemental cash flow information:

      

Interest paid

   $ 6,272      $ 5,830      $ 6,262   

Income taxes paid

   $ 77,787      $ 98,117      $ 43,319   

See accompanying notes to consolidated financial statements.

 

50


Table of Contents

Molex Incorporated

Consolidated Statements of Stockholders’ Equity

(in thousands)

 

     Years Ended June 30,  
     2012     2011     2010  

Common stock

   $ 11,361      $ 11,285      $ 11,207   
  

 

 

   

 

 

   

 

 

 

Paid-in capital:

      

Beginning balance

   $ 674,494      $ 638,796      $ 601,459   

Stock-based compensation

     23,335        22,461        27,034   

Exercise of stock options

     10,598        11,372        9,012   

Issuance of stock awards

     2,143        1,865        1,291   

Other

     824                 
  

 

 

   

 

 

   

 

 

 

Ending balance

   $ 711,394      $ 674,494      $ 638,796   
  

 

 

   

 

 

   

 

 

 

Retained earnings:

      

Beginning balance

   $ 2,408,083      $ 2,232,445      $ 2,261,594   

Net income

     281,377        298,808        76,930   

Dividends

     (144,398     (122,913     (106,079

Other

     8        (257       
  

 

 

   

 

 

   

 

 

 

Ending balance

   $ 2,545,070      $ 2,408,083      $ 2,232,445   
  

 

 

   

 

 

   

 

 

 

Treasury stock:

      

Beginning balance

   $ (1,106,039   $ (1,098,087   $ (1,089,322

Exercise of stock options

     (6,917     (7,952     (8,765
  

 

 

   

 

 

   

 

 

 

Ending balance

   $ (1,112,956   $ (1,106,039   $ (1,098,087
  

 

 

   

 

 

   

 

 

 

Accumulated other comprehensive income:

      

Beginning balance

   $ 380,443      $ 200,770      $ 176,383   

Foreign currency translation adjustments

     (65,056     147,772        35,482   

Pension adjustments, net of tax

     (23,344     29,935        (12,459

Unrealized derivative instrument (loss) gain, net of tax

     (4,676     152        135   

Unrealized investment (loss) gain, net of tax

     (972     1,814        1,229   
  

 

 

   

 

 

   

 

 

 

Ending balance

   $ 286,395      $ 380,443      $ 200,770   
  

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

   $ 2,441,264      $ 2,368,266      $ 1,985,131   
  

 

 

   

 

 

   

 

 

 

Comprehensive income:

      

Net income

   $ 281,377      $ 298,808      $ 76,930   

Foreign currency translation adjustments

     (65,056     147,772        35,482   

Pension adjustments, net of tax

     (23,344     29,935        (12,459

Unrealized derivative instrument (loss) gain, net of tax

     (4,676     152        135   

Unrealized investment (loss) gain, net of tax

     (972     1,814        1,229   
  

 

 

   

 

 

   

 

 

 

Total comprehensive income

   $ 187,329      $ 478,481      $ 101,317   
  

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

51


Table of Contents

Molex Incorporated

Notes to Consolidated Financial Statements

 

1. Organization and 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 40 manufacturing locations in 16 countries.

 

2. Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of Molex Incorporated and our majority-owned subsidiaries. All material intercompany balances and transactions are eliminated in consolidation. Equity investments in which we exercise significant influence but do not control and are not the primary beneficiary are accounted for using the equity method. Investments in which we are not able to exercise significant influence over the investee are accounted for under the cost method.

Use of Estimates

The preparation of consolidated 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, net revenue, expenses and related disclosures. Actual results could differ from these estimates. Material subsequent events are evaluated and disclosed through the report issuance date.

Currency Translation

Assets and liabilities of international entities are translated at period-end exchange rates and income and expenses are translated using weighted-average exchange rates for the period. Translation adjustments are included as a component of accumulated other comprehensive income.

Cash and Cash Equivalents

We consider all liquid investments with original maturities of three months or less to be cash equivalents.

Marketable Securities

Marketable securities consist primarily of time deposits held at non-U.S. local banks. We generally hold these instruments for a period of greater than three months, but no longer than 12 months. Marketable securities are classified as available-for-sale securities.

No mark-to-market adjustments were required during fiscal 2012, 2011 or 2010 because the carrying value of the securities approximated market value. We did not liquidate any available-for-sale securities prior to maturity in fiscal 2012, 2011 or 2010.

Accounts Receivable

In the normal course of business, we extend credit to customers that satisfy pre-defined credit criteria. We believe that we have little concentration of credit risk due to the diversity of our customer base. Accounts receivable are shown net of allowances and anticipated discounts on the Consolidated Balance Sheets. An allowance for doubtful accounts is determined through analysis of the aging of accounts receivable at the date of the consolidated financial statements, assessments of collectability

 

52


Table of Contents

Molex Incorporated

Notes to Consolidated Financial Statements — (Continued)

 

based on historical trends and an evaluation of the impact of current and projected economic conditions. We monitor the collectability of our accounts receivable on an ongoing basis by analyzing the aging of our accounts receivable, assessing the credit worthiness of our customers and evaluating the impact of reasonably likely changes in economic conditions that may impact credit risks. Our accounts receivable are not collateralized.

Inventories

Inventories are valued at the lower of first-in, first-out cost or market value.

Property, Plant and Equipment

Property, plant and equipment are reported at cost less accumulated depreciation. Depreciation is primarily recorded on a straight-line basis for consolidated financial statement reporting purposes and using a combination of accelerated and straight-line methods for tax purposes.

The estimated useful lives are as follows:

 

Buildings

     25 — 40 years   

Machinery and equipment

     3 — 10 years   

Molds and dies

     3 — 4 years   

We perform reviews for impairment of long-lived assets whenever adverse events or circumstances indicate that the carrying value of an asset may not be recoverable. When indicators of impairment are present, we evaluate the carrying value of the long-lived assets in relation to the operating performance and future undiscounted cash flows of the underlying assets. We adjust the net book value of the underlying assets to fair value if the sum of the expected undiscounted future cash flows is less than book value.

Goodwill

Goodwill is recorded when the purchase price paid for an acquisition exceeds the estimated fair value of the net identified tangible and intangible assets acquired. We perform an annual review in the fourth quarter of each fiscal year, or more frequently if indicators of potential impairment exist, to determine if the carrying value of the recorded goodwill is impaired. The impairment review process compares the fair value of the reporting unit in which goodwill resides to its carrying value. Reporting units may be operating segments as a whole or an operation one level below an operating segment, referred to as a component.

Our goodwill impairment reviews require a two-step process. The first step of the review compares the estimated fair value of the reporting unit against its aggregate carrying value, including goodwill. We estimate the fair value of our reporting units using the income and market methods of valuation, which includes the use of estimated discounted cash flows. Based on this analysis, if we determine the carrying value of the segment exceeds its fair value, then we complete the second step to determine the fair value of net assets in the segment and quantify the amount of goodwill impairment.

Other-Than-Temporary Impairments (OTTI)

For available-for-sale securities, we presume an OTTI decline in value if the quoted market price of the security is 20% or more below the investment’s cost basis for a continuous period of six months or more. However, the presumption of an OTTI decline in value may be overcome if there is persuasive evidence indicating that the decline is temporary in nature. For investments accounted for under the

 

53


Table of Contents

Molex Incorporated

Notes to Consolidated Financial Statements — (Continued)

 

equity method, we evaluate all known quantitative and qualitative factors in addition to quoted market prices in determining whether an OTTI decline in value exists. Factors that we consider important in evaluating whether a potential OTTI exists, include historical operating performance, future financial projections, business plans for new products or concepts and strength of balance sheet.

Pension and Other Postretirement Plan Benefits

Pension and other postretirement plan benefits are expensed as employees earn such benefits. The recognition of expense is significantly impacted by estimates made by management such as discount rates used to value certain liabilities, expected return on assets and future healthcare costs. We use third-party specialists to assist management in appropriately measuring the expense associated with pension and other postretirement plan benefits.

Revenue Recognition

We recognize net revenue when in the normal course of our business the following conditions are met: (i) a purchase order has been received from the customer with a corresponding order acknowledgement sent to the customer confirming delivery, price and payment terms, (ii) product has been shipped (FOB origin) or delivered (FOB destination) and title has clearly transferred to the customer or customer carrier, (iii) the price to the buyer is fixed and determinable for sales with an estimate of allowances made based on historical experience and (iv) there is reasonable assurance of collectability.

We record net revenue on a consignment sale when a customer has taken title of product which is stored in either the customer’s warehouse or that of a third party.

From time to time, we will discontinue or obsolete products that we have formerly sold. When this is done, an accrual for estimated returns is established at the time of the announcement of product discontinuation or obsolescence.

We typically warrant that our products will conform to Molex specifications and that our products will be free from material defects in materials and manufacturing, and generally limit our liability to the replacement of defective parts or the cash value of replacement parts. We will not accept returned goods unless the customer makes a claim in writing and management authorizes the return. Returns result primarily from defective products or shipping discrepancies. A reserve for estimated returns is established at the time of sale based on historical return experience and is recorded as a reduction of net revenue.

We provide certain distributors with an inventory allowance for returns or scrap equal to a percentage of qualified purchases. At the time of sale, we record as a reduction of net revenue a reserve for estimated inventory allowances based on a fixed percentage of sales that we authorized to distributors.

From time to time we, in our sole discretion, will grant price allowances to customers. At the time of sale, we record as a reduction of net revenue a reserve for estimated price allowances based on historical allowances authorized and approved solely at our discretion.

Other allowances include customer quantity and price discrepancies. At the time of sale, we record as a reduction of net revenue a reserve for other allowances based on historical experience. We believe we can reasonably and reliably estimate the amounts of future allowances.

Shipping and Handling Costs

Shipping and handling costs are expensed as incurred and included in cost of sales.

 

54


Table of Contents

Molex Incorporated

Notes to Consolidated Financial Statements — (Continued)

 

Research and Development

Costs incurred in connection with the development of new products and applications are charged to operations as incurred. Research and development costs are included in selling, general and administrative expenses and totaled $181.1 million, $170.1 million and $154.0 million in fiscal 2012, 2011 and 2010, respectively.

Advertising

Advertising costs are charged to operations as incurred and are included in selling, general and administrative expenses.

Income Taxes

Deferred tax assets and liabilities are recognized based on differences between the financial statement and tax bases of assets and liabilities using presently enacted tax rates. We have operations that are subject to income and other similar taxes in foreign countries. The estimation of the income tax amounts that we record involves the interpretation of complex tax laws and regulations, evaluation of tax audit findings and assessment of the impact foreign taxes may have on domestic taxes. A valuation allowance is provided to offset deferred tax assets if, based on available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

Provision is made for taxes on undistributed earnings of foreign subsidiaries and related companies to the extent that such earnings are not deemed to be permanently invested.

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.

We use derivative instruments to offset the impact of exchange rate volatility on certain assets and liabilities, including intercompany receivables and payables denominated in non-functional currencies. These instruments have not been designated as hedges, and the gains or losses on these derivatives, 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).

We also use derivative instruments to hedge the variability of gold and copper costs. These instruments are designated as cash flow hedges. 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 commodity is used in production and the underlying product is sold.

Derivative instruments may give rise to counterparty credit risk. To mitigate this risk, our counterparties are required to have investment grade credit ratings.

Stock-Based Compensation

We have granted nonqualified and incentive stock options and restricted stock to our directors, officers and employees under our stock plans pursuant to the terms of such plans. We measure stock-based compensation expense based on the fair value of the award on the date of grant. We recognize compensation expense for the fair value of restricted stock grants issued based on the closing stock price on the date of grant. Compensation expense recognized on shares issued under our Employee Stock Purchase Plan is based on the value of an option to purchase shares of our stock at a 15 percent discount to the stock price.

 

55


Table of Contents

Molex Incorporated

Notes to Consolidated Financial Statements — (Continued)

 

Contingencies

In accordance with ASC 450, Contingencies, we analyze whether it is probable that an asset has been impaired or a liability has been incurred, and whether the amount of loss can be reasonably estimated. If the loss contingency is both probable and reasonably estimable, we accrue for costs associated with the loss contingency. We expense associated legal fees as incurred. If no accrual is made but the loss contingency is reasonably possible, we disclose the nature of the contingency and the related estimate of possible loss or range of loss if such an estimate can be made. Loss contingencies include, but are not limited to, possible losses related to legal proceedings and regulatory compliance matters. Liabilities established to provide for contingencies are adjusted as further information develops, circumstances change, or contingencies are resolved.

Accounting Changes

New Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board (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 September 30, 2012 and will amend our presentation of the components of comprehensive income.

In July 2012, the FASB issued updated guidance on the periodic testing of intangible assets for impairment. This guidance will allow companies to assess qualitative factors to determine if it is more-likely-than-not that the indefinite-lived intangible asset might be impaired and whether it is necessary to perform the quantitative impairment test as required under current guidance. This new guidance is effective for us beginning July 1, 2013, with early adoption permitted. This new guidance will not have a material impact on our consolidated financial statements.

 

3. Unauthorized Activities in Japan

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. Based on our consultation with legal counsel in Japan and the information learned from the investigation, we intend to vigorously contest the enforceability of the outstanding unauthorized loans and any attempt by the lender to obtain payment.

As previously reported in our Annual Report on Form 10-K for the year ended June 30, 2010, 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 20.

 

56


Table of Contents

Molex Incorporated

Notes to Consolidated Financial Statements — (Continued)

 

We believe these unauthorized activities and related losses occurred from at least as early as 1988 through 2010. The accrued liability for these unauthorized activities was $184.2 million as of June 30, 2012, including $18.4 million in cumulative foreign currency translation, which was recorded as a component of accumulated other comprehensive income. To the extent we prevail in not having to pay all or any portion of the unauthorized loans ($165.8 million), we would recognize a gain. In addition, we have a contingent liability of $58.1 million for other loan-related expenses, interest expense and delay damages on the outstanding unauthorized loans.

Unauthorized activities in Japan for fiscal years ended June 30, 2012 and 2011 represent investigative and legal fees.

 

4. Earnings Per Share

Basic earnings per share (EPS) is computed by dividing net income by the weighted-average number of common shares outstanding during the year. Diluted EPS is computed by dividing net income by the weighted-average number of common shares and dilutive common shares outstanding, which includes stock options, during the year. A reconciliation of the basic average common shares outstanding to diluted average common shares outstanding as of June 30 follows (in thousands, except per share data):

 

     2012      2011      2010  

Net income

   $ 281,377       $ 298,808       $ 76,930   
  

 

 

    

 

 

    

 

 

 

Basic average common shares outstanding

     175,980         174,812         173,803   

Effect of dilutive stock options

     1,402         1,131         857   
  

 

 

    

 

 

    

 

 

 

Diluted average common shares outstanding

     177,382         175,943         174,660   
  

 

 

    

 

 

    

 

 

 

Earnings per share:

        

Basic

   $ 1.60       $ 1.71       $ 0.44   

Diluted

   $ 1.59       $ 1.70       $ 0.44   

Excluded from the computations above were anti-dilutive shares of 2.7 million, 5.6 million and 7.2 million in fiscal 2012, 2011 and 2010, respectively.

 

5. Acquisitions

During the second quarter of fiscal 2012, we completed an asset purchase of a specialty wire and cable company for $24.0 million and recorded goodwill of $12.3 million. The purchase price allocation for this acquisition is complete.

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 of up to $5.8 million payable through fiscal 2014 upon the seller meeting certain criteria.

During the second quarter of fiscal 2010, we completed an asset purchase of a company in China for $10.1 million and recorded goodwill of $2.2 million.

 

57


Table of Contents

Molex Incorporated

Notes to Consolidated Financial Statements — (Continued)

 

6. Restructuring Costs and Asset Impairments

Restructuring costs and asset impairments consist of the following at June 30, 2010 (in thousands):

 

Severance costs

   $ 79,609   

Asset impairments

     37,296   
  

 

 

 

Restructuring costs

     116,905   

Intangible asset impairments

     234   
  

 

 

 

Total restructuring charges and asset impairments

   $ 117,139   
  

 

 

 

Molex Restructuring Plans

During fiscal 2007, we undertook 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 at these plants to other lower-cost facilities. We completed our restructuring program on June 30, 2010.

In fiscal 2010, we recognized net restructuring costs related to employee severance and benefit arrangements for approximately 1,000 employees, resulting in a charge of $79.6 million. A large part of these employee terminations resulted from plant closings in Europe. We recognized asset impairment charges of $37.3 million to write-down assets to fair value less the cost to sell.

A summary of the restructuring charges and asset impairments by reportable segment for the fiscal year ended June 30, 2010 follows (in thousands):

 

Connector:

  

Severance costs

   $ 64,311   

Asset impairments

     35,962   

Other

       
  

 

 

 

Total

   $ 100,273   
  

 

 

 

Custom & Electrical:

  

Severance costs

   $ 11,233   

Asset impairments

     1,001   

Other

       
  

 

 

 

Total

   $ 12,234   
  

 

 

 

Corporate and Other:

  

Severance costs

   $ 4,065   

Asset impairments

     333   

Other

     234   
  

 

 

 

Total

   $ 4,632   
  

 

 

 

Total:

  

Severance costs

   $ 79,609   

Asset impairments

     37,296   

Other

     234   
  

 

 

 

Total

   $ 117,139   
  

 

 

 

 

58


Table of Contents

Molex Incorporated

Notes to Consolidated Financial Statements — (Continued)

 

Changes in the accrued severance balance are summarized as follows (in thousands):

 

Balance at June 30, 2009

   $ 69,884   

Charges to expense

     79,609   

Cash payments

     (117,911

Non-cash related costs

     (4,684
  

 

 

 

Balance at June 30, 2010

   $ 26,898   

Charges to expense

       

Cash payments

     (15,128

Non-cash related costs

     2,279   
  

 

 

 

Balance at June 30, 2011

   $ 14,049   

Charges to expense

       

Cash payments

     (2,590

Non-cash related costs

     (1,209
  

 

 

 

Balance at June 30, 2012

   $ 10,250   
  

 

 

 

 

7. Inventories

Inventories, less allowances of $38.1 million at June 30, 2012 and $41.4 million at June 30, 2011, consisted of the following (in thousands):

 

     2012      2011  

Raw materials

   $ 84,536       $ 91,362   

Work in progress

     145,610         143,888   

Finished goods

     301,679         300,703   
  

 

 

    

 

 

 

Total inventories

   $ 531,825       $ 535,953   
  

 

 

    

 

 

 

 

8. Property, Plant and Equipment

At June 30, property, plant and equipment consisted of the following (in thousands):

 

     2012     2011  

Land and improvements

   $ 74,116      $ 73,755   

Buildings and leasehold improvements

     821,068        787,092   

Machinery and equipment

     1,834,835        1,833,221   

Molds and dies

     781,009        807,179   

Construction in progress

     105,798        86,832   
  

 

 

   

 

 

 

Total

     3,616,826        3,588,079   

Accumulated depreciation

     (2,466,277     (2,419,631
  

 

 

   

 

 

 

Net property, plant and equipment

   $ 1,150,549      $ 1,168,448   
  

 

 

   

 

 

 

Depreciation expense for property, plant and equipment was $231.3 million, $236.6 million and $232.6 million in fiscal 2012, 2011 and 2010, respectively.

 

59


Table of Contents

Molex Incorporated

Notes to Consolidated Financial Statements — (Continued)

 

9. Goodwill

At June 30, changes to goodwill were as follows (in thousands):

 

     2012     2011  

Beginning balance

   $ 413,592      $ 396,050   

Additions

     12,256        14,615   

Foreign currency translation

     (722     2,927   
  

 

 

   

 

 

 

Goodwill

     425,126        413,592   

Accumulated impairment losses

     (264,140     (264,140
  

 

 

   

 

 

 

Goodwill, net of impairment losses

   $ 160,986      $ 149,452   
  

 

 

   

 

 

 

 

10. Other Intangible Assets

All of our intangible assets other than goodwill are included in other assets. Assets with indefinite lives represent acquired trade names. The value of these indefinite-lived intangible assets was $4.3 million at June 30, 2012 and June 30, 2011.

The components of finite-lived intangible assets at June 30 are summarized as follows (in thousands):

 

     2012      2011  
     Gross
Carrying
Amount
     Accumulated
Amortization
    Net
Carrying
Amount
     Gross
Carrying
Amount
     Accumulated
Amortization
    Net
Carrying
Amount
 

Customer-related

   $ 34,532       $ (9,681   $ 24,851       $ 32,555       $ (7,731   $ 24,824   

Technology-based

     27,041         (18,086     8,955         26,795         (15,697     11,098   

License fees

     10,036         (7,989     2,047         8,491         (6,597     1,894   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 71,609       $ (35,756   $ 35,853       $ 67,841       $ (30,025   $ 37,816   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

We estimate that we have no significant residual value related to our intangible assets.

During fiscal year 2012 and 2011, we recorded additions to intangible assets of $3.8 million and $4.0 million, respectively. The components of intangible assets acquired during fiscal 2012 and 2011 were as follows (in thousands):

 

     2012      2011  
     Gross
Carrying
Amount
     Weighted
Average

Life
     Gross
Carrying
Amount
     Weighted
Average
Life
 

Customer-related

   $ 2,200         10.0 years       $ 900         7.0 years   

Technology-based

     1,600         8.0 years         3,114         9.0 years   
  

 

 

       

 

 

    

Total

   $ 3,800          $ 4,014      
  

 

 

       

 

 

    

 

60


Table of Contents

Molex Incorporated

Notes to Consolidated Financial Statements — (Continued)

 

Acquired intangibles are generally amortized on a straight-line basis over weighted average lives. Intangible assets amortization expense was $5.7 million for fiscal year 2012, $5.3 million for fiscal year 2011 and $6.3 million for fiscal year 2010. The estimated future amortization expense related to intangible assets as of June 30, 2012 is as follows (in thousands):

 

2013

   $ 5,199   

2014

     4,181   

2015

     4,033   

2016

     3,399   

2017

     3,133   

Thereafter

     15,908   
  

 

 

 

Total

   $ 35,853   
  

 

 

 

 

11. Income Taxes

Income before income taxes for fiscal years ended June 30, is summarized as follows (in thousands):

 

     2012      2011      2010  

United States

   $ 158,993       $ 198,349       $ 21,985   

International

     241,274         231,590         109,504   
  

 

 

    

 

 

    

 

 

 

Income before income taxes

   $ 400,267       $ 429,939       $ 131,489   
  

 

 

    

 

 

    

 

 

 

The components of income tax expense (benefit) for fiscal years ended June 30, follows (in thousands):

 

     2012      2011      2010  

Current:

        

U.S. federal

   $ 51,081       $ 63,630       $ 13,658   

State

     2,773         4,501         1,553   

International

     54,800         25,486         41,053   
  

 

 

    

 

 

    

 

 

 

Total current

   $ 108,654       $ 93,617       $ 56,264   
  

 

 

    

 

 

    

 

 

 

Deferred:

        

U.S. federal

   $ 4,489       $ 14,764       $ (6,499

State

                     (1,460

International

     5,747         22,750         6,254   
  

 

 

    

 

 

    

 

 

 

Total deferred

     10,236         37,514         (1,705
  

 

 

    

 

 

    

 

 

 

Total income tax expense

   $ 118,890       $ 131,131       $ 54,559   
  

 

 

    

 

 

    

 

 

 

 

61


Table of Contents

Molex Incorporated

Notes to Consolidated Financial Statements — (Continued)

 

Our effective tax rate differs from the U.S. federal income tax rate for the years ended June 30, as follows:

 

     2012     2011     2010  

U.S. federal income tax rate

     35.0     35.0     35.0

Permanent tax exemptions

     (1.8     (2.0     (11.9

U.S. tax on foreign earnings

     (0.2     1.2        4.4   

Provision for tax contingencies

            (0.4     (2.6

Valuation allowance

     (2.9     (1.6     11.0   

Reduction of benefit from share-based payments

     0.8        1.1        5.9   

Change in health care legislation

                   2.7   

State income taxes, net of federal tax benefit

     0.5        0.7        0.3   

Foreign tax rates less than U.S. federal tax rate (net)

     (1.8     (4.7     (3.2

Other

     0.1        1.2        (0.1
  

 

 

   

 

 

   

 

 

 

Effective tax rate

     29.7     30.5     41.5
  

 

 

   

 

 

   

 

 

 

The effective tax rate was 29.7%, 30.5% and 41.5% for fiscal 2012, 2011 and 2010, respectively. The effective tax rate for fiscal 2010 was higher than fiscal 2011 and 2012 due to: (1) income tax expense recorded during fiscal 2010 of $7.7 million, due primarily to the reversal of an estimated tax benefit resulting from a significant number of employee stock options that expired unexercised, (2) a charge due to legislation passed during the year which includes a provision that reduces the deductibility, for Federal income tax purposes, of retiree prescription drug benefits to the extent they are reimbursed under Medicare Part D, (3) tax losses generated in non-U.S. jurisdictions for which no tax benefit has been recognized, and (4) additional U.S. tax cost to repatriate earning from non-U.S. subsidiaries during the year.

At June 30, 2012, we had approximately $175.0 million of non-U.S. net operating loss carryforwards. Approximately 81.6% of the non-U.S. net operating losses can be carried forward indefinitely. The remaining losses have expiration dates over the next five to ten years.

A valuation allowance is provided when it is more likely than not that some portion of the deferred tax asset will not be realized. As of June 30, 2012 and 2011, we recorded valuation allowances of $50.3 million and $67.3 million, respectively, against the non-U.S. net operating loss carryforward deferred tax assets.

During the year, we recorded a capital loss deferred tax asset of $44.0 million. As of June 30, 2012, we recorded a valuation allowance of $44.0 million as it is more likely than not the deferred tax asset will not be realized.

 

62


Table of Contents

Molex Incorporated

Notes to Consolidated Financial Statements — (Continued)

 

The components of net deferred tax assets and liabilities as of June 30 are as follows (in thousands):

 

     2012     2011  

Deferred tax assets:

    

Pension and other postretirement liabilities

   $ 25,028      $ 26,242   

Stock option and other benefits

     23,001        19,099   

Capitalized research and development

     1,007        3,942   

Foreign tax credits

     6,612        4,111   

Net operating loss carryforwards

     52,505        70,916   

Depreciation and amortization

            4,265   

Inventory

     20,161        10,143   

Restructuring

     3,652        4,625   

Accrual for unauthorized activities in Japan

     78,182        77,559   

Allowance for doubtful accounts

     7,842        9,540   

Patents

     5,488        5,701   

Severance

     2,088        7,725   

Capital loss

     44,040          

Other, net

     34,321        33,665   
  

 

 

   

 

 

 

Total deferred tax assets before valuation allowance

     303,927        277,533   

Valuation allowance

     (102,878     (71,858
  

 

 

   

 

 

 

Total deferred tax assets

     201,049        205,675   

Deferred tax liabilities:

    

Investments

     (32,182     (35,206

Depreciation and amortization

     (7,972       

Other, net

     (68     (3,133
  

 

 

   

 

 

 

Total deferred tax liabilities

     (40,222     (38,339
  

 

 

   

 

 

 

Total net deferred tax assets

   $ 160,827      $ 167,336   
  

 

 

   

 

 

 

The net deferred tax amounts reported in the consolidated balance sheet as of June 30 are as follows (in thousands):

 

     2012      2011  

Net deferred taxes:

     

Current asset

   $ 110,789       $ 129,158   

Non-current asset

     50,038         38,178   
  

 

 

    

 

 

 

Total

   $ 160,827       $ 167,336   
  

 

 

    

 

 

 

We have not provided for U.S. deferred income taxes or foreign withholding taxes on approximately $1.2 billion of undistributed earnings of certain non-U.S. subsidiaries as of June 30, 2012. These earnings are intended to be permanently invested. It is not practicable to estimate the additional income taxes that would be paid if the permanently reinvested earnings were distributed.

We are currently benefitting from preferential income tax treatment in jurisdictions including Singapore, China, Thailand, the Philippines, Mexico, Poland and Vietnam. As a result of such tax incentives, our tax expense was reduced by approximately $7.3 million during fiscal 2012. The expiration of various

 

63


Table of Contents

Molex Incorporated

Notes to Consolidated Financial Statements — (Continued)

 

tax holidays is scheduled in whole or in part during fiscal 2013 through fiscal 2019. Many of these holidays may be extended when certain conditions are met or terminated if we fail to satisfy certain requirements, which could have an unfavorable tax rate impact.

We are subject to tax in U.S. federal, state and foreign tax jurisdictions. It is reasonably possible that the amount of unrecognized tax benefits, that is, the aggregate tax effect of differences between tax return positions and the benefits recognized in our financial statements, will change over the next twelve months; however, we do not expect significant changes during that time. The balance of unrecognized tax benefits as of June 30 follows (in thousands):

 

     2012      2011      2010  

Unrecognized tax benefits

   $ 16,987       $ 18,375       $ 20,142   

Portion that, if recognized, would reduce tax expense and effective tax rate

     16,987         18,375         20,142   

A reconciliation of the beginning and ending amounts of unrecognized tax benefits follows (in thousands):

 

Balance as of June 30, 2010

   $ 20,142   

Additions based on tax positions related to the current year

       

Additions for tax positions of prior years

     3,111   

Reductions for tax positions of prior years

     (1,080

Reductions due to lapse of applicable statute of limitations

     (3,798
  

 

 

 

Balance as of June 30, 2011

   $ 18,375   

Additions based on tax positions related to the current year

     1,764   

Additions for tax positions of prior years

       

Reductions for tax positions of prior years

     (2,874

Reductions due to lapse of applicable statute of limitations

     (278
  

 

 

 

Balance at June 30, 2012

   $ 16,987   
  

 

 

 

The examination of U.S. federal income tax returns for 2007, 2008 and 2009 were completed during fiscal 2012. The tax years 2010 through 2012 remain open to examination by all major taxing jurisdictions to which we are subject.

It is our practice to recognize interest or penalties related to income tax matters in tax expense. As of June 30, 2012, there were no material interest or penalty amounts to accrue.

 

12. Profit Sharing, Pension and Post Retirement Medical Benefit Plans

Profit Sharing Plans

We provide discretionary savings and other defined contribution plans covering substantially all of our U.S. employees and certain employees in international subsidiaries. Employer contributions to these plans of $24.7 million, $16.4 million and $9.4 million were charged to operations during fiscal 2012, 2011 and 2010, respectively. Effective January 1, 2011, U.S. defined contribution plans were merged into a 401(k) plan with a non-discretionary base company contribution and the opportunity for discretionary savings and employer matching contributions.

 

64


Table of Contents

Molex Incorporated

Notes to Consolidated Financial Statements — (Continued)

 

Pension Plans

We sponsor and/or contribute to pension plans, including defined benefit plans, covering substantially all U.S. plant hourly employees and certain employees in non-U.S. subsidiaries. The benefits are primarily based on years of service and the employees’ compensation for certain periods during their last years of employment. Our pension obligations are measured as of June 30 for all plans. We amended a defined benefit pension plan in the U.S. to close participation and freeze benefit accruals under the plan, effective December 31, 2010, reducing the pension liability by $11.8 million. Non-U.S. plans are primarily in Germany, Ireland, Japan, Korea and Taiwan.

Post Retirement Medical Benefit Plans

We have retiree health care plans that cover the majority of our U.S. employees. Employees hired before January 1, 1994 may become eligible for these benefits if they reach age 55, with age plus years of service equal to 70. Employees hired after January 1, 1994 may become eligible for these benefits if they reach age 60, with age plus years of service equal to 80. The cost of retiree health care is accrued over the period in which the employees become eligible for such benefits. We continue to fund benefit costs primarily as claims are paid. We discontinued the plans in January 2009 for all employees who were not within 10 years of qualifying. There are no significant postretirement health care benefit plans outside of the United States.

The postretirement medical benefit plan includes an actuarial gain for fiscal 2012 which resulted from our decision to enroll in an Employee Group Waiver Plan (EGWP) beginning January 1, 2013. Participation in the EGWP allows us to offer substantially the same postretirement benefits to eligible participants while increasing subsidy reimbursements we receive from the U.S. government. This reduced the postretirement medical benefit liability by approximately $12.0 million as of June 30, 2012.

Benefit Obligation and Plan Assets

The accumulated benefit obligations as of June 30, were as follows (in thousands):

 

     U.S. Pension
Benefits
     Non-U.S. Pension
Benefits
     Postretirement
Medical Benefits
 
     2012      2011      2012      2011      2012      2011  

Accumulated benefit obligation

   $ 80,826       $ 66,028       $ 141,225       $ 119,740       $ 29,083       $ 41,168   

 

65


Table of Contents

Molex Incorporated

Notes to Consolidated Financial Statements — (Continued)

 

The changes in the benefit obligations and plan assets for the plans described above were as follows (in thousands):

 

    U.S. Pension
Benefits
    Non-U.S. Pension
Benefits
    Postretirement
Medical Benefits
 
    2012     2011     2012     2011     2012     2011  

Change in projected benefit obligation:

           

Beginning benefit obligation

  $ 71,429      $ 71,775      $ 130,897      $ 127,140      $ 41,168      $ 45,402   

Service cost

           1,487        7,008        6,075        1,094        1,369   

Interest cost

    4,130        3,934        4,377        4,198        2,344        2,469   

Plan participants’ contributions