e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended September 30, 2010
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 0-7491
MOLEX INCORPORATED
(Exact name of registrant as specified in its charter)
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Delaware
(State or other jurisdiction of
incorporation or organization)
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36-2369491
(I.R.S. Employer
Identification No.) |
2222 Wellington Court, Lisle, Illinois 60532
(Address of principal executive offices)
Registrants telephone number, including area code: (630) 969-4550
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
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 o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer þ |
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Accelerated filer o |
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Non-accelerated filer o |
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
On October 21, 2010, the following numbers of shares of the Companys common stock were outstanding:
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Common Stock |
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95,560,076 |
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Class A Common Stock |
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79,225,200 |
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Class B Common Stock |
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94,255 |
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Molex Incorporated
INDEX
Section 302 Certification of Chief Executive Officer
Section 302 Certification of Chief Financial Officer
Section 906 Certification of Chief Executive Officer
Section 906 Certification of Chief Financial Officer
2
PART I
Item 1. Financial Statements
Molex Incorporated
Condensed Consolidated Balance Sheets
(in thousands)
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Sept. 30, |
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June 30, |
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2010 |
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2010 |
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(Unaudited) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
340,644 |
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$ |
376,352 |
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Marketable securities |
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18,261 |
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18,508 |
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Accounts receivable, less allowances of $49,831 and $43,650 respectively |
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790,101 |
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734,932 |
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Inventories |
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546,808 |
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469,369 |
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Deferred income taxes |
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113,455 |
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112,531 |
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Other current assets |
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41,963 |
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64,129 |
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Total current assets |
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1,851,232 |
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1,775,821 |
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Property, plant and equipment, net |
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1,111,292 |
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1,055,144 |
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Goodwill |
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132,848 |
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131,910 |
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Non-current deferred income taxes |
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90,318 |
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94,191 |
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Other assets |
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181,831 |
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179,512 |
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Total assets |
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$ |
3,367,521 |
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$ |
3,236,578 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Current portion of long-term debt and short-term borrowings |
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$ |
116,200 |
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$ |
110,070 |
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Accounts payable |
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385,271 |
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395,474 |
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Accrued expenses: |
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Accrual for unauthorized activities in Japan |
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175,076 |
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165,815 |
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Income taxes payable |
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37,374 |
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21,505 |
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Other |
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214,599 |
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219,832 |
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Total current liabilities |
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928,520 |
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912,696 |
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Other non-current liabilities |
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18,672 |
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19,869 |
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Accrued pension and postretirement benefits |
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140,889 |
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135,448 |
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Long-term debt |
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171,907 |
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183,434 |
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Total liabilities |
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1,259,988 |
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1,251,447 |
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Commitments and contingencies |
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Stockholders equity: |
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Common stock |
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11,232 |
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11,207 |
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Paid-in capital |
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644,944 |
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638,796 |
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Retained earnings |
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2,280,685 |
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2,232,445 |
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Treasury stock |
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(1,100,402 |
) |
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(1,098,087 |
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Accumulated other comprehensive income |
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271,074 |
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200,770 |
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Total stockholders equity |
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2,107,533 |
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1,985,131 |
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Total liabilities and stockholders equity |
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$ |
3,367,521 |
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$ |
3,236,578 |
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See accompanying notes to condensed consolidated financial statements.
3
Molex Incorporated
Condensed Consolidated Statements of Operations
(Unaudited)
(in thousands, except per share data)
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Three Months Ended |
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September 30, |
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2010 |
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2009 |
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Net revenue |
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$ |
897,672 |
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$ |
674,033 |
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Cost of sales |
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622,596 |
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482,614 |
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Gross profit |
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275,076 |
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191,419 |
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Selling, general and administrative |
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157,056 |
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145,628 |
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Restructuring costs and asset impairments |
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55,894 |
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Unauthorized activities in Japan |
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5,542 |
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5,554 |
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Total operating expenses |
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162,598 |
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207,076 |
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Income (loss) from operations |
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112,478 |
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(15,657 |
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Interest (expense) income, net |
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(1,335 |
) |
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(1,000 |
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Other (expense) income |
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(351 |
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3,484 |
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Total other (expense) income |
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(1,686 |
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2,484 |
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Income (loss) before income taxes |
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110,792 |
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(13,173 |
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Income taxes |
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35,688 |
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1,963 |
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Net income (loss) |
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$ |
75,104 |
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$ |
(15,136 |
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Earnings (loss) per share: |
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Basic |
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$ |
0.43 |
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$ |
(0.09 |
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Diluted |
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$ |
0.43 |
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$ |
(0.09 |
) |
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Dividends declared per share |
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$ |
0.1525 |
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$ |
0.1525 |
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Average common shares outstanding: |
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Basic |
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174,370 |
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173,486 |
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Diluted |
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175,156 |
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173,486 |
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See accompanying notes to condensed consolidated financial statements.
4
Molex Incorporated
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
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Three Months Ended |
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September 30, |
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2010 |
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2009 |
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Operating activities: |
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Net income (loss) |
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$ |
75,104 |
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$ |
(15,136 |
) |
Add non-cash items included in net income (loss): |
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Depreciation and amortization |
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59,108 |
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60,589 |
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Share-based compensation |
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5,149 |
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7,092 |
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Non-cash restructuring and other costs, net |
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13,191 |
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Other non-cash items |
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8,634 |
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6,625 |
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Changes in assets and liabilities: |
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Accounts receivable |
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(29,343 |
) |
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(72,586 |
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Inventories |
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(57,988 |
) |
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1,482 |
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Accounts payable |
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(24,876 |
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32,131 |
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Other current assets and liabilities |
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27,886 |
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39,092 |
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Other assets and liabilities |
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(1,079 |
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(1,862 |
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Cash provided from operating activities |
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62,595 |
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70,618 |
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Investing activities: |
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Capital expenditures |
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(71,192 |
) |
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(45,634 |
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Proceeds from sales of property, plant and equipment |
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643 |
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3,192 |
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Proceeds from sales or maturities of marketable securities |
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2,184 |
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35,303 |
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Purchases of marketable securities |
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(1,257 |
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(958 |
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Other investing activities |
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(355 |
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Cash used for investing activities |
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(69,622 |
) |
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(8,452 |
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Financing activities: |
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Proceeds from revolving credit facility and short term loans |
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20,000 |
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90,000 |
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Payments on revolving credit facility |
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(10,000 |
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(40,000 |
) |
Proceeds from issuance of long-term debt |
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797 |
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Payments of long-term debt |
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(24,840 |
) |
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(196 |
) |
Cash dividends paid |
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(26,565 |
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(26,486 |
) |
Exercise of stock options |
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358 |
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266 |
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Other financing activities |
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(967 |
) |
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(700 |
) |
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Cash (used for) provided from financing activities |
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(41,217 |
) |
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22,884 |
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Effect of exchange rate changes on cash |
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12,536 |
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11,242 |
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Net (decrease) increase in cash and cash equivalents |
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(35,708 |
) |
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96,292 |
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Cash and cash equivalents, beginning of period |
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376,352 |
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424,707 |
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Cash and cash equivalents, end of period |
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$ |
340,644 |
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$ |
520,999 |
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|
See accompanying notes to condensed consolidated financial statements.
5
Molex Incorporated
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
Molex Incorporated (together with its subsidiaries, except where the context otherwise
requires, we, us, and our) manufactures electronic components, including electrical and fiber
optic interconnection products and systems, switches and integrated products in 39 manufacturing
locations in 16 countries.
The accompanying Condensed Consolidated Financial Statements have been prepared in accordance
with accounting principles generally accepted in the United States (GAAP) for interim financial
information and with instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by GAAP for complete financial
statements. In the opinion of management, all adjustments consisting of normal recurring accruals
considered necessary for a fair statement of results for the interim period have been included.
Operating results for the three months ended September 30, 2010 are not necessarily an indication
of the results that may be expected for the year ending June 30, 2011. The Condensed Consolidated
Balance Sheet as of June 30, 2010 was derived from our audited consolidated financial statements
for the year ended June 30, 2010. These financial statements and related notes should be read in
conjunction with the financial statements and notes thereto included in our Annual Report on Form
10-K for the year ended June 30, 2010.
The preparation of the unaudited financial statements in conformity with GAAP requires the use
of estimates and assumptions related to the reporting of assets, liabilities, revenues, expenses
and related disclosures. Significant estimates and assumptions are used in the estimation of
income taxes, pension and retiree health care benefit obligations, stock options, accrual for
unauthorized activities in Japan, allowances for accounts receivable and inventory and impairment
reviews for goodwill, intangible and other long-lived assets. Estimates are revised periodically.
Actual results could differ from these estimates. Material subsequent events are evaluated and
disclosed through the report issuance date.
2. Unauthorized Activities in Japan
As we previously reported, in April 2010, we launched an investigation into unauthorized
activities in Japan. We learned that an individual working in Molex Japans 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 Japans name that were used to
cover losses resulting from unauthorized trading, including margin trading, in Molex Japans name.
We also learned that the individual misappropriated funds from Molex Japans 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 the results of the completed investigation, we recorded for accounting purposes an accrued
liability for the effect of unauthorized activities pending the resolution of these matters
including the legal proceedings reported in Note 12. Cumulative investigative and legal costs
through September 30, 2010 were $10.3 million, including $5.5 million in the first quarter of
fiscal 2011. We believe these unauthorized activities and related losses occurred from at least as
early as 1988 through 2010, with approximately $167.4 million of losses occurring prior to June 30,
2007. The accrued liability for these potential net losses was $175.1 million as of September 30,
2010, including $9.3 million in foreign currency translation, which was recorded as a component of
other comprehensive income. To the extent we prevail in not having to pay all or any portion of the
outstanding unauthorized loans, we would recognize a gain in that amount.
In addition, we have a contingent liability of $11.2 million for other loan-related expenses,
interest expense and delay damages on the outstanding unauthorized loans.
6
3. Restructuring Costs and Asset Impairments
On June 30, 2010 we completed a multi-year restructuring plan designed to reduce costs
and to improve return on invested capital in connection with a new global organization that was
effective July 1, 2007. A majority of the plan related to facilities located in North America,
Europe and Japan and, in general, the movement of manufacturing activities from these plants to
lower-cost facilities.
Changes in the accrued severance balance are summarized as follows (in thousands):
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Balance at June 30, 2010 |
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$ |
26,898 |
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Cash payments |
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(9,390 |
) |
Non-cash related costs |
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1,519 |
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Balance at September 30, 2010 |
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$ |
19,027 |
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4. Earnings (Loss) Per Share
A reconciliation of the basic average common shares outstanding to diluted average common
shares outstanding is as follows (in thousands):
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Three Months Ended |
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|
September 30, |
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|
|
2010 |
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|
2009 |
|
Net income (loss) |
|
$ |
75,104 |
|
|
$ |
(15,136 |
) |
|
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Basic weighted average common shares outstanding |
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|
174,370 |
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|
173,486 |
|
Effect of dilutive stock options |
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|
786 |
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Diluted weighted average common shares outstanding |
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|
175,156 |
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|
173,486 |
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|
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Earnings (loss) per share: |
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|
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|
|
|
|
Basic |
|
$ |
0.43 |
|
|
$ |
(0.09 |
) |
Diluted |
|
$ |
0.43 |
|
|
$ |
(0.09 |
) |
Excluded from the computations above were anti-dilutive shares of 6.1 million as of September
30, 2010.
5. Comprehensive Income
Total comprehensive income is summarized as follows (in thousands):
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Three Months Ended |
|
|
|
September 30, |
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|
|
2010 |
|
|
2009 |
|
Net income (loss) |
|
$ |
75,104 |
|
|
$ |
(15,136 |
) |
Translation adjustments |
|
|
70,255 |
|
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|
42,836 |
|
Accumulated actuarial loss |
|
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|
(5,831 |
) |
Unrealized investment gain |
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|
49 |
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|
354 |
|
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|
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Total comprehensive income |
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$ |
145,408 |
|
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$ |
22,223 |
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|
7
6. Inventories
Inventories are valued at the lower of first-in, first-out cost or market. Inventories, net
of allowances, consist of the following (in thousands):
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Sept. 30, |
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June 30, |
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2010 |
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|
2010 |
|
Raw materials |
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$ |
99,418 |
|
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$ |
86,338 |
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Work in process |
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|
157,299 |
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|
139,922 |
|
Finished goods |
|
|
290,091 |
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|
243,109 |
|
|
|
|
|
|
|
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Total inventories |
|
$ |
546,808 |
|
|
$ |
469,369 |
|
|
|
|
|
|
|
|
7. Pensions and Other Postretirement Benefits
The components of pension benefit cost are as follows (in thousands):
|
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|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
Service cost |
|
$ |
2,197 |
|
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$ |
1,990 |
|
Interest cost |
|
|
1,967 |
|
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|
2,041 |
|
Expected return on plan assets |
|
|
(1,812 |
) |
|
|
(1,696 |
) |
Amortization of prior service cost |
|
|
53 |
|
|
|
10 |
|
Recognized actuarial losses |
|
|
893 |
|
|
|
57 |
|
Amortization of transition obligation |
|
|
9 |
|
|
|
624 |
|
Curtailment adjustment |
|
|
|
|
|
|
(3,849 |
) |
|
|
|
|
|
|
|
Benefit cost |
|
$ |
3,307 |
|
|
$ |
(823 |
) |
|
|
|
|
|
|
|
The components of retiree health care benefit cost are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
Service cost |
|
$ |
342 |
|
|
$ |
271 |
|
Interest cost |
|
|
617 |
|
|
|
621 |
|
Amortization of prior service cost |
|
|
(516 |
) |
|
|
(516 |
) |
Recognized actuarial losses |
|
|
333 |
|
|
|
175 |
|
|
|
|
|
|
|
|
Benefit cost |
|
$ |
776 |
|
|
$ |
551 |
|
|
|
|
|
|
|
|
8
8. Debt
Total debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
|
|
|
|
|
September 30, |
|
|
June 30, |
|
|
|
Rate |
|
|
Maturity |
|
|
2010 |
|
|
2010 |
|
Long-term debt: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Credit Facility |
|
|
2.76 |
% |
|
|
2012 |
|
|
$ |
110,000 |
|
|
$ |
100,000 |
|
Unsecured bonds and term loans |
|
|
1.31 1.65 |
% |
|
|
2012 2013 |
|
|
|
60,705 |
|
|
|
81,431 |
|
Mortgages, industrial development bonds and other debt |
|
|
5.92 |
% |
|
|
2013 |
|
|
|
1,202 |
|
|
|
2,003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt |
|
|
|
|
|
|
|
|
|
|
171,907 |
|
|
|
183,434 |
|
Current portion of long-term debt and short-term borrowings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured bonds, term loans and short-term credit line |
|
|
1.31 2.48 |
% |
|
|
|
|
|
|
109,876 |
|
|
|
104,359 |
|
Other short-term borrowings, including capital leases |
|
|
4.86 |
% |
|
|
|
|
|
|
6,324 |
|
|
|
5,711 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current portion of long-term debt and short-term
borrowings |
|
|
|
|
|
|
|
|
|
|
116,200 |
|
|
|
110,070 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt |
|
|
|
|
|
|
|
|
|
$ |
288,107 |
|
|
$ |
293,504 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In September 2010, Molex Japan renewed a ¥5.0 billion overdraft loan, with a six month
term and an interest rate of approximately 2.48%. At September 30, 2010, the balance of the
overdraft loan, which requires full repayment by the end of the term, approximated $59.6 million.
In March 2010, Molex Japan entered into a ¥3.0 billion syndicated term loan for three years,
with interest rates equivalent to six month Tokyo Interbank Offered Rate (TIBOR) plus 75 basis
points and scheduled principal payments of ¥0.5 billion every six months. At September 30, 2010,
the balance of the syndicated term loan approximated $30.0 million, of which $12.0 million was
current.
In September 2009, Molex Japan issued unsecured bonds totaling ¥10 billion with a term of
three years, an interest rate of approximately 1.65% and scheduled principal payments of ¥1.6
billion every six months. At September 30, 2010, the outstanding balance of the unsecured bonds
approximated $81.0 million, of which $38.3 million was current.
In June 2009, we entered into a $195.0 million unsecured, three-year revolving credit facility
in the United States, amended in January 2010, that matures in June 2012 (the U.S. Credit
Facility). Borrowings under the U.S. Credit Facility bear interest at a fluctuating interest rate
(based on London InterBank Offered Rate) plus an applicable percentage based on our consolidated
leverage. The applicable percentage was 250 basis points as of September 30, 2010. In September
2010, we exercised the feature to increase the credit line to $270.0 million and added three
lenders. The instrument governing the U.S. Credit Facility contains customary covenants regarding
liens, debt, substantial asset sales and mergers, dividends and investments. The U.S. Credit
Facility also requires us to maintain financial covenants pertaining to, among other things, our
consolidated leverage, fixed charge coverage and liquidity. As of September 30, 2010, we were in
compliance with these covenants and had outstanding borrowings of $110.0 million. We obtained
waiver letters from the participating banks for any default of the U.S. Credit Facility arising
from the unauthorized activities in Japan.
Certain assets, including land, buildings and equipment, secure a portion of our long-term
debt. Principal payments on long-term debt obligations are due as follows: fiscal 2012, $132.9
million; fiscal 2013, $35.9 million; fiscal 2014, $3.1 million.
We had available lines of credit totaling $258.1 million at September 30, 2010 expiring
between 2010 and 2013.
9. Income Taxes
The effective tax rate was 32.2% for the three months ended September 30, 2010 and (14.9)% for
the three months ended September 30, 2009. Changes in the amount of unrecognized tax benefits in
the three months ended September 30, 2010 were not significant.
9
We are subject to tax in U.S. Federal, State and foreign tax jurisdictions. We have
substantially completed all U.S. federal income tax matters for tax years through 2006. The tax
years 2007 through 2009 remain open to examination by all major taxing jurisdictions to which we
are subject.
It is our practice to recognize interest and/or penalties related to income tax matters in tax
expense. As of September 30, 2010, there were no material interest or penalty amounts to accrue.
10. Fair Value Measurements
The following table summarizes our financial assets and liabilities as of September 30, 2010,
which are measured at fair value on a recurring basis (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices |
|
|
|
|
|
|
|
|
|
|
in Active |
|
Significant |
|
|
|
|
Total |
|
Markets for |
|
Other |
|
Significant |
|
|
Measured |
|
Identical |
|
Observable |
|
Unobservable |
|
|
at Fair |
|
Assets |
|
Inputs |
|
Inputs |
|
|
Value |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
Available for sale and trading securities |
|
$ |
29,605 |
|
|
$ |
29,605 |
|
|
$ |
|
|
|
$ |
|
|
Derivative financial instruments, net |
|
|
6,401 |
|
|
|
|
|
|
|
6,401 |
|
|
|
|
|
We determine the fair value of our marketable and available for sale securities based
on quoted market prices (Level 1). We generally use derivatives for hedging purposes, which are
valued based on Level 2 inputs in the fair value hierarchy. The fair value of our financial
instruments is determined by a mark-to-market valuation based on forward curves using observable
market prices.
The carrying value of our long-term debt approximates fair value.
11. New Accounting Pronouncements
In January 2010, the Financial Accounting Standards Board (the FASB) issued new guidance to
enhance disclosure requirements related to fair value measurements by requiring certain new
disclosures and clarifying certain existing disclosures. The new guidance requires additional
information related to activities in the reconciliation of Level 3 fair value measurements. The new
guidance also expands the disclosures related to the disaggregation of assets and liabilities and
information about inputs and valuation techniques. The new guidance related to Level 3 fair value
measurements will be effective for us on January 1, 2011. We are currently evaluating the
requirements of this new guidance, but do not expect it to have a material impact on our financial
statements.
12. Contingencies
We are currently a party to various legal proceedings, claims and investigations including
those disclosed in this note. While management presently believes that the ultimate outcome of
these proceedings, individually and in the aggregate, will not materially adversely impact our
financial position, cash flows, or overall trends in operations, legal proceedings are subject to
inherent uncertainties, and unfavorable rulings or other events could occur. If unfavorable final
outcomes were to occur, then there exists the possibility of a material adverse impact.
Employment and Benefits Litigation
In 2009, a French subsidiary of Molex, Molex Automotive SARL, decided to close a facility it
operated in Villemur-sur-Tarn, France. Molex Automotive SARL submitted a social plan to Molex
Automotive SARLs labor representatives providing for payments to terminated employees. This social
plan was adopted by Molex Automotive SARL on September 15, 2009. On September 24, 2010, 188 former
employees of Molex Automotive SARL filed suit against Molex Automotive SARL in the Toulouse Labor
Court, requesting additional compensation on the basis that
10
their dismissal was not economically justified. The total amount sought by the 188 employees
is approximately 25 million ($34.9 million). Molex has initiated liquidation of Molex
Automotive SARL, and is assessing the impact of this action on the pending lawsuits.
Molex Japan Co., Ltd.
As we previously reported in our Annual Report on Form 10-K, we launched an investigation into
unauthorized activities at Molex Japan Co., Ltd. in April 2010. We learned that an individual
working in Molex Japans 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 Japans name that were used to cover losses resulting from unauthorized trading,
including margin trading, in Molex Japans name. We also learned that the individual
misappropriated funds from Molex Japans accounts to cover losses from unauthorized trading. The
individual admitted to forging documentation in arranging and concealing the transactions. We
retained outside legal counsel, and they retained forensic accountants, to investigate the matter.
The investigation has been completed.
On August 31, 2010, Mizuho Bank, which holds the unauthorized loans, filed a complaint in
Tokyo District Court requesting the court to find Molex Japan liable for the payment of the
outstanding unauthorized loans and to enter a judgment for such payment. Mizuho is claiming
payment of outstanding principal borrowings of ¥3 billion ($35.7 million), ¥5 billion ($59.6
million), ¥5 billion ($59.6 million) and ¥2 billion ($23.8 million), other loan-related expenses of
approximately ¥106 million ($1.3 million) and interest and delay damages of approximately ¥832
million yen ($9.9 million) as of September 30, 2010. On October 13, 2010, Molex Japan filed a
written answer requesting the court to dismiss the complaint. We intend to vigorously contest the
enforceability of the outstanding unauthorized loans and any attempt by the lender to obtain
payment. See Note 2 of the Notes to the Condensed Consolidated Financial Statements for
accounting treatment of the accrual for unauthorized activities in Japan.
13. Segments and Related Information
Our reportable segments consist of the Connector and Custom & Electrical segments:
|
|
|
The Connector segment designs and manufactures products for high-speed,
high-density, high signal-integrity applications as well as fine-pitch, low-profile
connectors for the consumer and commercial markets. It also designs and
manufactures products that withstand environments such as heat, cold, dust, dirt,
liquid and vibration for automotive and other transportation applications. |
|
|
|
|
The Custom & Electrical segment designs and manufactures integrated and
customizable electronic components, including connectors, across all industries
that provide original, differentiated solutions to customer requirements. It also
leverages expertise in the use of signal, power and interface technology in
industrial automation and other harsh environment applications. |
11
Information by segment is summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Custom & |
|
Corporate |
|
|
|
|
Connector |
|
Electrical |
|
& Other |
|
Total |
For the three months ended: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers |
|
$ |
661,136 |
|
|
$ |
236,031 |
|
|
$ |
505 |
|
|
$ |
897,672 |
|
Income (loss) from operations |
|
|
98,647 |
|
|
|
42,566 |
|
|
|
(28,735 |
) |
|
|
112,478 |
|
Depreciation & amortization |
|
|
47,536 |
|
|
|
7,523 |
|
|
|
4,049 |
|
|
|
59,108 |
|
Capital expenditures |
|
|
58,757 |
|
|
|
7,254 |
|
|
|
5,181 |
|
|
|
71,192 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers |
|
$ |
489,141 |
|
|
$ |
184,771 |
|
|
$ |
121 |
|
|
$ |
674,033 |
|
Income (loss) from operations |
|
|
4,675 |
|
|
|
11,151 |
|
|
|
(31,483 |
) |
|
|
(15,657 |
) |
Depreciation & amortization |
|
|
48,513 |
|
|
|
8,383 |
|
|
|
3,693 |
|
|
|
60,589 |
|
Capital expenditures |
|
|
40,591 |
|
|
|
2,599 |
|
|
|
2,444 |
|
|
|
45,634 |
|
Corporate & Other includes expenses primarily related to corporate operations that are not
allocated to segments such as executive management, human resources, legal, finance and information
technology. We also include in Corporate & Other the assets of certain facilities that are not
specific to a particular division.
Segment assets, which are comprised of accounts receivable, inventory and fixed assets, are
summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Custom & |
|
Corporate |
|
|
|
|
Connector |
|
Electrical |
|
& Other |
|
Total |
September 30, 2010 |
|
$ |
1,832,342 |
|
|
$ |
449,830 |
|
|
$ |
166,029 |
|
|
$ |
2,448,201 |
|
June 30, 2010 |
|
|
1,720,866 |
|
|
|
437,614 |
|
|
|
100,965 |
|
|
|
2,259,445 |
|
The reconciliation of segment assets to consolidated total assets is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Sept. 30, |
|
|
June 30, |
|
|
|
2010 |
|
|
2010 |
|
Segment net assets |
|
$ |
2,448,201 |
|
|
$ |
2,259,445 |
|
Other current assets |
|
|
514,323 |
|
|
|
571,520 |
|
Non current assets |
|
|
404,997 |
|
|
|
405,613 |
|
|
|
|
|
|
|
|
Consolidated total assets |
|
$ |
3,367,521 |
|
|
$ |
3,236,578 |
|
|
|
|
|
|
|
|
12
Molex Incorporated
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Unless otherwise indicated or the content otherwise requires, the terms we, us and our
and other similar terms in this Quarterly Report on Form 10-Q refer to Molex Incorporated and its
subsidiaries.
The following discussion and analysis should be read in conjunction with our condensed
consolidated financial statements and accompanying notes contained herein and our consolidated
financial statements and accompanying notes and managements discussion and analysis of results of
operations and financial condition contained in our Annual Report on Form 10-K for the fiscal year
ended June 30, 2010. This discussion and analysis contains forward-looking statements that involve
risks, uncertainties and assumptions. Our actual results may differ materially from those
anticipated in these forward-looking statements as a result of many factors, including but not
limited to those described below under the heading Cautionary Statement Regarding Forward-Looking
Information.
Overview
Our core business is the manufacture and sale of electromechanical components. Our products
are used by a large number of leading original equipment manufacturers (OEMs) throughout the world.
We design, manufacture and sell more than 100,000 products including terminals, connectors, planar
cables, cable assemblies, interconnection systems, backplanes, integrated products and mechanical
and electronic switches in 39 manufacturing locations in 16 countries. We also provide
manufacturing services to integrate specific components into a customers product.
We have two global product segments: Connector and Custom & Electrical.
|
|
|
The Connector segment manufactures and sells products for high-speed,
high-density, high signal-integrity applications as well as fine-pitch, low-profile
connectors for the consumer and commercial markets. It also designs and
manufactures products that withstand environments such as heat, cold, dust, dirt,
liquid and vibration for automotive and other transportation applicants. |
|
|
|
|
The Custom & Electrical segment designs and manufactures integrated and
customizable electronic components, including connectors, across all industries
that provide original, differentiated solutions to customer requirements. It also
leverages expertise in the use of signal, power and interface technology in
industrial automation and other harsh environment applications. |
Customer demand and revenue has improved significantly in fiscal 2010 and 2011 due to rapid
recovery in the worlds gross domestic product from the instability in the global economy in fiscal
2009, particularly in Asia. The stronger end market demand and release of new products increased
our net revenue and gross margins during the three months ended September 30, 2010 compared with
the prior year period. Selling, general and administrative expenses as a percent of revenue also
decreased during the three months ended September 30, 2010 compared with the prior year period due
to higher net revenue and our lower cost structure resulting from our restructuring program and
specific cost containment activities.
On June 30, 2010 we completed a multi-year restructuring plan designed to reduce costs and to
improve return on invested capital in connection with a new global organization that was effective
July 1, 2007. A majority of the plan related to facilities located in North America, Europe and
Japan and, in general, the movement of manufacturing activities from these plants to lower-cost
facilities. Restructuring costs during fiscal 2010 were $116.9 million, consisting of $79.6 million
of severance costs and $37.3 million for asset impairments.
Our financial results are influenced by factors in the markets in which we operate and by our
ability to successfully execute our business strategy. Marketplace factors include competition for
customers, raw material prices, product and price competition, economic conditions in various
geographic regions, foreign currency exchange rates, interest rates, changes in technology,
fluctuations in customer demand, patent and intellectual property issues, availability of credit
and general market liquidity, litigation results and legal and regulatory developments. We expect
that the marketplace environment will remain highly competitive. Our ability to execute
13
our business strategy successfully will require that we meet a number of challenges, including
our ability to accurately forecast sales demand and calibrate manufacturing to such demand, manage
volatile raw material costs, develop, manufacture and successfully market new and enhanced products
and product lines, control operating costs, and attract, motivate and retain key personnel to
manage our operational, financial and management information systems. Our sales are also dependent
on end markets impacted by consumer, industrial and infrastructure spending, and our operating
results can be adversely affected by reduced demand in those end markets.
Unauthorized Activities in Japan
As we previously reported, in April 2010, we launched an investigation into unauthorized
activities in Japan. We learned that an individual working in Molex Japans 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 Japans name that were used to
cover losses resulting from unauthorized trading, including margin trading, in Molex Japans name.
We also learned that the individual misappropriated funds from Molex Japans 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 the results of the completed investigation, we recorded for accounting purposes an accrued
liability for the effect of unauthorized activities pending the resolution of these matters
including the legal proceedings reported in Note 12. Cumulative investigative and legal costs
through September 30, 2010 were $10.3 million, including $5.5 million in the first quarter of
fiscal 2011. We believe these unauthorized activities and related losses occurred from at least as
early as 1988 through 2010, with approximately $167.4 million of losses occurring prior to June 30,
2007. The accrued liability for these potential net losses was $175.1 million as of September 30,
2010, including $9.3 million in foreign currency translation, which was recorded as a component of
other comprehensive income. To the extent we prevail in not having to pay all or any portion of the
outstanding unauthorized loans, we would recognize a gain in that amount.
In addition, we have a contingent liability of $11.2 million for other loan-related expenses,
interest expense and delay damages on the outstanding unauthorized loans.
Critical Accounting Policies and Estimates
This discussion and analysis of financial condition and results of operations is based on our
condensed consolidated financial statements, which have been prepared in conformity with accounting
principles generally accepted in the United States. The preparation of these financial statements
requires the use of estimates and assumptions related to the reporting of assets, liabilities,
revenues, expenses and related disclosures. In preparing these financial statements, we have made
our best estimates and judgments of certain amounts included in the financial statements. Estimates
are revised periodically. Actual results could differ from these estimates.
The information concerning our critical accounting policies can be found under Managements
Discussion of Financial Condition and Results of Operations in our Annual Report on Form 10-K for
the fiscal year ended June 30, 2010 filed with the Securities and Exchange Commission, which is
incorporated by reference in this Form 10-Q.
14
Results of Operations
The following table sets forth consolidated statements of operations data as a percentage of
net revenue for the three months ended September 30 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage |
|
|
|
|
|
|
Percentage |
|
|
|
2010 |
|
|
of Revenue |
|
|
2009 |
|
|
of Revenue |
|
Net revenue |
|
$ |
897,672 |
|
|
|
100.0 |
% |
|
$ |
674,033 |
|
|
|
100.0 |
% |
Cost of sales |
|
|
622,596 |
|
|
|
69.4 |
% |
|
|
482,614 |
|
|
|
71.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
275,076 |
|
|
|
30.6 |
% |
|
|
191,419 |
|
|
|
28.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general & administrative |
|
|
157,056 |
|
|
|
17.5 |
% |
|
|
145,628 |
|
|
|
21.6 |
% |
Restructuring costs and asset impairments |
|
|
|
|
|
|
0.0 |
% |
|
|
55,894 |
|
|
|
8.3 |
% |
Unauthorized activities in Japan |
|
|
5,542 |
|
|
|
0.6 |
% |
|
|
5,554 |
|
|
|
0.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
112,478 |
|
|
|
12.5 |
% |
|
|
(15,657 |
) |
|
|
(2.3 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (expense) income, net |
|
|
(1,686 |
) |
|
|
(0.2 |
)% |
|
|
2,484 |
|
|
|
0.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
110,792 |
|
|
|
12.3 |
% |
|
|
(13,173 |
) |
|
|
(2.0 |
)% |
Income taxes |
|
|
35,688 |
|
|
|
3.9 |
% |
|
|
1,963 |
|
|
|
0.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
75,104 |
|
|
|
8.4 |
% |
|
$ |
(15,136 |
) |
|
|
(2.3 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenue
We sell our products in five primary markets. Our connectors, interconnecting devices and
assemblies are used principally in the telecommunications, infotech (formally referred to as data),
consumer, industrial and automotive markets. Our products are used in a wide range of applications
including notebook computers, computer peripheral equipment, mobile products, digital electronics
such as cameras and flat panel display televisions, automobile engine control units and adaptive
braking systems, factory robotics and diagnostic equipment.
Revenue increased significantly across all markets during the first quarter of fiscal 2011
compared with the first quarter of fiscal 2010 (comparable quarter) as customer demand improved
over the prior year. Revenue increased in the telecommunications, infotech, consumer and industrial
markets during the first quarter of fiscal 2011 compared with the fourth quarter of fiscal 2010
(sequential quarter), but declined in the automotive market due to seasonal effect. The increase
(decrease) in revenue from each market during the first quarter of fiscal 2011 compared with the
comparable quarter and the sequential quarter follows:
|
|
|
|
|
|
|
|
|
|
|
Comparable |
|
Sequential |
|
|
Quarter |
|
Quarter |
Telecommunications |
|
|
33.3 |
% |
|
|
10.0 |
% |
Infotech |
|
|
38.2 |
|
|
|
5.8 |
|
Consumer |
|
|
25.1 |
|
|
|
12.2 |
|
Industrial |
|
|
50.4 |
|
|
|
3.4 |
|
Automotive |
|
|
20.7 |
|
|
|
(4.1 |
) |
Telecommunications market net revenue increased against both the comparable quarter and
sequential quarter due to increased demand for mobile products, including higher demand for
smartphones and our customers introduction of smartphone models.
15
Infotech market net revenue increased against the comparable quarter primarily because of
depressed enterprise spending in the prior year and increased demand for networking and storage
products in the current period. Infotech market net revenue increased modestly against the
sequential quarter reflecting backlog reduction.
Consumer market net revenue increased against both the comparable and sequential quarters due
to customers replenishing inventory levels and increased demand for our components in flat panel
display televisions and digital cameras. Consumer market net revenue increased modestly against the
sequential quarter due to pre-holiday production volumes based on our customers anticipation of
consumer spending during the holiday season.
Industrial market net revenue increased substantially against the comparable quarter as global
economic conditions improved over the prior year period. Demand for industrial instruments and
production equipment improved as our customers increased production to meet demand after delaying
many industrial automation projects in the prior year period due to uncertainties about the
economic conditions. Sequentially, industrial market net revenue increased modestly as the backlog
of demand caused by delayed projects has been reduced.
Automotive market net revenue increased substantially against the comparable quarter as global
car sales have increased, particularly in North America and China, as improving global economic
conditions led to our customers increasing vehicle builds to replenish inventory levels and meet
demand. The automotive market also benefited from our customers increasing electronic content in
automobiles, such as rear view cameras, navigational systems, mobile communication and
entertainment systems. Automotive market net revenue declined slightly against the sequential
quarter due to seasonality and automobile manufacturers leveling out inventory after global
government incentive programs ended.
The following table shows the percentage of our net revenue by geographic region:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
September 30, |
|
|
2010 |
|
2009 |
Americas |
|
|
24 |
% |
|
|
23 |
% |
Asia Pacific |
|
|
63 |
|
|
|
61 |
|
Europe |
|
|
13 |
|
|
|
16 |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
The following table provides an analysis of the change in net revenue compared with the prior
fiscal year period (in thousands):
|
|
|
|
|
|
|
Three Months |
|
|
|
Ended |
|
|
|
Sept. 30, 2010 |
|
Net revenue for prior year period |
|
$ |
674,033 |
|
Components of net revenue change: |
|
|
|
|
Organic net revenue increase |
|
|
214,614 |
|
Currency translation |
|
|
7,033 |
|
Acquisitions |
|
|
1,992 |
|
|
|
|
|
Total change in net revenue from prior year period |
|
|
223,639 |
|
|
|
|
|
Net revenue for current year period |
|
$ |
897,672 |
|
|
|
|
|
|
|
|
|
|
Organic net revenue increase as a percentage of net revenue from prior year period |
|
|
31.8 |
% |
Organic revenue increased significantly during the three months ended September 30,
2010 compared with the comparable quarter as customer demand improved in all of our primary
markets. We also completed an asset purchase of a company in China during the second quarter of
fiscal 2010.
Foreign currency translation increased net revenue by approximately $7.0 million for the three
months ended September 30, 2010 compared with the comparable quarter principally due to a stronger
Japanese yen,
16
partially offset by a weaker euro against the dollar. The following tables show the effect on the
change in geographic net revenue from foreign currency translations to the U.S. dollar (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2010 |
|
|
|
Local |
|
|
Currency |
|
|
Net |
|
|
|
Currency |
|
|
Translation |
|
|
Change |
|
Americas |
|
$ |
61,323 |
|
|
$ |
266 |
|
|
$ |
61,589 |
|
Asia Pacific |
|
|
133,659 |
|
|
|
20,570 |
|
|
|
154,229 |
|
Europe |
|
|
22,921 |
|
|
|
(13,803 |
) |
|
|
9,118 |
|
Corporate & other |
|
|
(1,297 |
) |
|
|
|
|
|
|
(1,297 |
) |
|
|
|
|
|
|
|
|
|
|
Net change |
|
$ |
216,606 |
|
|
$ |
7,033 |
|
|
$ |
223,639 |
|
|
|
|
|
|
|
|
|
|
|
The change in revenue on a local currency basis compared with the comparable quarter was as
follows:
|
|
|
|
|
|
|
Three Months |
|
|
Ended |
|
|
Sept. 30, 2010 |
Americas |
|
|
39.3 |
% |
Asia Pacific |
|
|
32.7 |
|
Europe |
|
|
21.0 |
|
Total |
|
|
32.1 |
% |
Gross Profit
The following table provides a summary of gross profit and gross margin for the three months
ended September 30 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
September 30, |
|
|
2010 |
|
2009 |
Gross profit |
|
$ |
275,076 |
|
|
$ |
191,419 |
|
Gross margin |
|
|
30.6 |
% |
|
|
28.4 |
% |
The increase in gross profit for the three month period ended September 30, 2010 was primarily
due to higher revenue. The increase in gross margin was primarily due to higher absorption from
increased production and lower costs resulting from our restructuring program, which has improved
margins over time. The improvements in gross profit were partially offset by the impact of price
erosion and material price increases.
A significant portion of our material cost is comprised of copper and gold. We purchased
approximately 6.8 million pounds of copper and approximately 40,600 troy ounces of gold during the
first quarter of fiscal 2011. The following table shows the change in average prices related to our
purchases of copper and gold for the three months ended September 30 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
September 30, |
|
|
2010 |
|
2009 |
Copper (price per pound) |
|
$ |
3.30 |
|
|
$ |
2.71 |
|
Gold (price per troy ounce) |
|
|
1,228.00 |
|
|
|
960.00 |
|
Generally, we are able to pass through to our customers only a small portion of changes in the
cost of copper and gold. However, we mitigate the impact of any significant increases in gold and
copper prices by hedging with call options a portion of our projected net global purchases of gold
and copper. The hedges reduced cost of sales by $2.2 million for the three months ended September
30, 2010. The hedges did not materially affect operating results for the three months ended
September 30, 2009.
17
The effect of certain significant impacts on gross profit compared with the comparable quarter
was as follows for the three months ended September 30 (in thousands):
|
|
|
|
|
|
|
Three Months |
|
|
Ended |
|
|
Sept. 30, 2010 |
Price erosion |
|
$ |
(27,695 |
) |
Currency translation |
|
|
7,896 |
|
Currency transaction |
|
|
(13,251 |
) |
Price erosion is measured as the reduction in prices of our products year over year, which
reduces our gross profit, particularly in our Connector segment, where we have the largest impacts
of price erosion. A significant portion of our price erosion occurred in our mobile phone connector
products, which are part of our telecommunications and consumer markets.
The increase in gross profit due to currency translation was primarily due to a stronger
Japanese yen against other currencies and a general weakening of the U.S. dollar against other
currencies, except the euro, during the three months ended September 30, 2010.
Certain products that we manufacture in Japan and Europe are sold in other regions of the
world at selling prices primarily denominated in or closely linked to the U.S. dollar. As a result,
changes in currency exchange rates may affect our cost of sales reported in U.S. dollars without a
corresponding effect on net revenue. The decrease in gross profit due to currency transactions was
primarily due to a stronger Japanese yen, partially offset by a weaker euro against the U.S. dollar
during the three months ended September 30, 2010.
Operating Expenses
Operating expenses were as follows as of September 30 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
September 30, |
|
|
2010 |
|
2009 |
Selling, general and administrative |
|
$ |
157,056 |
|
|
$ |
145,628 |
|
Restructuring costs and asset impairments |
|
|
|
|
|
|
55,894 |
|
Unauthorized activities in Japan |
|
|
5,542 |
|
|
|
5,554 |
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
as a percentage of revenue |
|
|
17.5 |
% |
|
|
21.6 |
% |
Selling, general and administrative expenses decreased as a percent of net revenue for the
three months ended September 30, 2010 from the comparable quarter due to the increased revenue and
our lower cost structure resulting from our restructuring efforts and specific cost containment
activities. The impact of currency translation decreased selling, general, and administrative
expenses by approximately $2.6 million for the three months ended September 30, 2010 as compared to
the comparable quarter.
Research and development expenditures, which are classified as selling, general and
administrative expense, were approximately $40.5 million, or 4.5% of net revenue, for the three
months ended September 30, 2010, compared to $36.5 million, or 5.4% of net revenue, for the
comparable quarter.
Net restructuring costs decreased $55.9 million during the three months ended September 30,
2010, compared to the comparable quarter, as we concluded our restructuring program. Net
restructuring costs during the three months ended September, 2009 included $13.2 million for asset
impairments and $42.7 million for employee termination benefits. The cumulative expense of our
restructuring program was $314.8 million with estimated annual savings of approximately $205.0
million.
18
Unauthorized activities in Japan for the three months ended September 30, 2010 represent
investigative and legal fees. See Note 2 of the Notes to Consolidated Financial Statements.
Other Income (Expense)
Other income (expense) consists primarily of net interest income, investment income and
currency exchange gains or losses. We recorded net expenses of $1.7 million for the three months
ended September 30, 2010, respectively, compared with net gains of $2.5 million for the comparable
quarter. The net expenses for the month ended September 30, 2010 were primarily due to a general
weakening of the U.S. dollar against other currencies, partially offset by investment income and a
stronger Japanese yen against other currencies. The gains during the three months ended September
30, 2009 primarily related to foreign currency exchange gains resulting from strengthening of the
U.S. dollar against most currencies.
Effective Tax Rate
The effective tax rate was 32.2% for the three months ended September 30, 2010. During the
three months ended September 30, 2010, we recorded income tax expense of $2.3 million due primarily
to the reversal of estimated tax benefits resulting from expirations of employee stock options and
vesting of restricted stock at amounts less than recorded book value.
The effective tax rate was (14.9)% for the three months ended September 30, 2009.
Backlog
Our order backlog on September 30, 2010 was approximately $445.5 million, an increase of 46.5%
compared with order backlog of $304.2 million at September 30, 2009. Orders for the three months
ended September 30, 2010 were $868.4 million compared with $724.4 million for the comparable
quarter, representing the significant increase in customer demand during the three months ended
September 30, 2010. Orders during the three months ended September 30, 2010 improved in all of our
primary markets compared with the comparable quarter.
Segments
The following table sets forth information on net revenue by segment as of the three months
ended September 30 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage |
|
|
|
|
|
|
Percentage |
|
|
|
2010 |
|
|
of Revenue |
|
|
2009 |
|
|
of Revenue |
|
Connector |
|
$ |
661,136 |
|
|
|
73.6 |
% |
|
$ |
489,141 |
|
|
|
72.5 |
% |
Custom & Electrical |
|
|
236,031 |
|
|
|
26.3 |
|
|
|
184,771 |
|
|
|
27.4 |
|
Corporate & Other |
|
|
505 |
|
|
|
0.1 |
|
|
|
121 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
897,672 |
|
|
|
100.0 |
% |
|
$ |
674,033 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
19
Connector
The following table provides an analysis of the change in net revenue compared with the
prior fiscal year (in thousands):
|
|
|
|
|
|
|
Three Months |
|
|
|
Ended |
|
|
|
Sept. 30, 2010 |
|
Net revenue for prior year period |
|
$ |
489,141 |
|
Components of net revenue change: |
|
|
|
|
Organic net revenue increase |
|
|
162,667 |
|
Currency translation |
|
|
9,328 |
|
|
|
|
|
Total change in net revenue from prior year period |
|
|
171,995 |
|
|
|
|
|
Net revenue for current year period |
|
$ |
661,136 |
|
|
|
|
|
|
|
|
|
|
Organic net revenue change as a percentage of
net revenue for prior year period |
|
|
33.3 |
% |
The Connector segment sells primarily to the telecommunication, infotech, consumer markets,
and automotive, which are discussed above. Segment net revenue increased in the three months ended
September 30, 2010 compared with the prior year periods due to increased demand in all of the
Connector segments primary markets, partially offset by price erosion, which is generally higher
in the Connector segment compared with our other segment. Currency translation favorably impacted
net revenue $9.3 million for the three months ended September 30, 2010.
The following table provides information on income from operations and operating margins for
the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
September 30, |
|
|
2010 |
|
2009 |
Income from operations |
|
$ |
98,647 |
|
|
$ |
4,675 |
|
Operating margin |
|
|
14.9 |
% |
|
|
1.0 |
% |
Connector segment income from operations increased compared with the prior year periods
primarily due to increased revenue and the completion of our restructuring program on June 30,
2010. Restructuring charges for the three months ended September 30, 2009 were $50.6 million. Gross
margins were positively affected by higher absorption from increased production and lower costs
from our restructuring program, which has improved margins over time. Connector segment income from
operations also improved due to lower selling, general and administrative costs in fiscal 2010 due
to savings from restructuring and specific cost containment actions. Selling, general and
administrative expenses as a percent of net revenue were 13.7% for the three months ended September
30, 2010, compared with 16.8% for the same prior year period, due primarily to increased revenue
and cost containment actions.
20
Custom & Electrical
The following table provides an analysis of the change in net revenue compared with the
prior fiscal year (in thousands):
|
|
|
|
|
|
|
Three Months |
|
|
|
Ended |
|
|
|
Sept. 30, 2010 |
|
Net revenue for prior year period |
|
$ |
184,771 |
|
Components of net revenue change: |
|
|
|
|
Organic net revenue change |
|
|
51,567 |
|
Currency translation |
|
|
(2,299 |
) |
Acquisitions |
|
|
1,992 |
|
|
|
|
|
Total change in net revenue from prior year period |
|
|
51,260 |
|
|
|
|
|
Net revenue for current year period |
|
$ |
236,031 |
|
|
|
|
|
|
|
|
|
|
Organic net revenue change as a percentage of
net revenue for prior year period |
|
|
27.9 |
% |
The sale of Custom & Electrical segments products is concentrated in the industrial,
telecommunications and infotech markets. Custom & Electrical segment revenue increased in the three
months ended September 30, 2010 due to increased demand in all of the segments primary markets. We
also completed an asset purchase of a company in China during the second quarter of fiscal 2010.
The following table provides information on income from operations and operating margins for
the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
September 30, |
|
|
2010 |
|
2009 |
Income from operations |
|
$ |
42,566 |
|
|
$ |
11,151 |
|
Operating margin |
|
|
18.0 |
% |
|
|
6.0 |
% |
Custom & Electrical segment income from operations increased compared with the prior year
periods primarily due to increased revenue and the completion of our restructuring program on June
30, 2010. Restructuring charges for the three months ended September 30, 2009 were $4.6 million.
Gross margins were positively affected by higher absorption and lower costs from our restructuring
program, which has improved margins over time. Selling, general and administrative expenses as a
percent of net revenue were 17.4% for the three months ended September 30, 2010, compared with
22.2% for the same prior year period, due to increased revenue, savings from restructuring and
specific cost containment actions.
Non-GAAP Financial Measures
Organic net revenue growth, which is included in the discussion above, is a non-GAAP financial
measure. The tables presented in Results of Operations above provide reconciliations of U.S. GAAP
reported net revenue growth (the most directly comparable GAAP financial measure) to organic net
revenue growth.
We believe organic net revenue growth provides useful information to investors because it
reflects the underlying growth from the ongoing activities of our business and provides investors
with a view of our operations from managements perspective. We use organic net revenue growth to
monitor and evaluate performance, as it is an important measure of the underlying results of our
operations. It excludes items that are not completely under managements control, such as the
impact of changes in foreign currency exchange rates, and items that do not reflect the underlying
growth of the company, such as acquisition activity. Management uses organic net revenue growth
together with GAAP measures such as net revenue growth and operating income in its decision making
processes related to the operations of our reporting segments and our overall company.
21
Financial Condition and Liquidity
We fund capital projects and working capital needs principally out of operating cash flows and
cash reserves. Cash, cash equivalents and marketable securities totaled $358.9 million and $394.9
million at September 30, 2010 and June 30, 2010, respectively, of which $326.4 million was in
non-U.S. accounts as of September 30, 2010. The primary source of our cash flow is cash generated
by operations. Principal uses of cash are capital expenditures, dividend payments and business
investments.
Our long-term financing strategy is to primarily rely on internal sources of funds for
investing in plant, equipment and acquisitions. Long-term debt and obligations under capital leases
totaled $227.7 million and $236.3 million at September 30, 2010 and June 30, 2010, respectively. We
had available lines of credit totaling $258.1 million at September 30, 2010, including a $270.0
million unsecured, three-year revolving credit facility with $160.0 million available as of
September 30, 2010. The credit facility also requires us to maintain financial covenants pertaining
to, among other things, our consolidated leverage, fixed charge coverage and liquidity. As of
September 30, 2010, we were in compliance with these covenants. Additionally, we have three
unsecured borrowing agreements totaling ¥18.0 billion ($214.4 million) with weighted average fixed
rates of 1.5%. As of September 30, 2010, we had a remaining balance on these agreements of ¥14.3
billion ($170.6 million). See Note 8 of the Notes to the Condensed Consolidated Financial
Statements.
Cash Flows
Our cash balance decreased $35.7 million during the three months ended September 30, 2010. Our
primary sources of cash were operating cash flows of $62.6 million and $10.0 million in net
borrowings against the credit facility. We used capital during the period to fund capital
expenditures of $71.2 million and pay dividends of $26.6 million. The translation of our cash to
U.S. dollars reduced our cash balance by $12.5 million as compared with the balance as of June 30,
2010.
|
|
Below is a table setting forth the key lines of our Consolidated Statements of Cash Flows (in
thousands): |
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
Cash provided from operating activities |
|
$ |
62,595 |
|
|
$ |
70,618 |
|
Cash used for investing activities |
|
|
(69,622 |
) |
|
|
(8,452 |
) |
Cash (used for) provided from financing activities |
|
|
(41,217 |
) |
|
|
22,884 |
|
Effect of exchange rate changes on cash |
|
|
12,536 |
|
|
|
11,242 |
|
|
|
|
|
|
|
|
Net (decrease) increase in cash |
|
$ |
(35,708 |
) |
|
$ |
96,292 |
|
|
|
|
|
|
|
|
Operating Activities
Cash provided from operating activities declined by $8.0 million from the prior year period
due mainly to an $84.4 million increase in working capital needs in the current year period
compared with the prior year, partially offset by a net loss in the prior year period. Working
capital increased in the three months ended September 30, 2010 as inventory production increased
due to customer demand. Working capital is defined as current assets minus current liabilities. Our
restructuring accrual as of September 30, 2010 was $19.0 million, which we expect to reduce through
cash outlays during fiscal 2011.
Investing Activities
Cash used for investing activities increased by $61.2 million from the prior year period due
mainly to an increase in capital expenditures of $25.6 million. Capital expenditures were $71.2
million for the three months ended September 30, 2010 compared with $45.6 million in the prior year
period. Additionally, in fiscal 2011, we had $2.2 million in net proceeds of marketable securities
compared to $35.3 million during fiscal 2010.
22
Financing Activities
Cash used for financing activities decreased $64.1 million during the three months ended
September 30, 2010, as compared with the prior year period primarily due to a $24.6 million
reduction of outstanding loans for Molex Japan.
We borrowed $20.0 million against our $270.0 million unsecured, three-year revolving credit
facility. Total borrowings against the credit facility were $110.0 million as of September 30,
2010.
As part of our growth strategy, in the future we may acquire other companies in the same or
complementary lines of business and pursue other business ventures. The timing and size of any new
business ventures or acquisitions we complete may impact our cash requirements. To the extent we
are required to pay all or any portion of the unauthorized loans in Molex Japan may also impact our
cash requirements.
Contractual Obligations and Commercial Commitments
We have contractual obligations and commercial commitments as described in Item 7,
Managements Discussion and Analysis of Financial Condition and Results of Operations
Contractual Obligations and Commercial Commitments of our Annual Report on Form 10-K filed with
the Securities and Exchange Commission (the Commission) for the year ended June 30, 2010. In
addition, we have obligations under open purchase orders and the long-term liabilities reflected in
our consolidated balance sheet, which principally consist of pension and retiree health care
benefit obligations. There have been no material changes in our contractual obligations and
commercial commitments since June 30, 2010 arising outside of the ordinary course of business.
Cautionary Statement Regarding Forward-Looking Information
This Quarterly Report contains forward-looking statements that are based on current
expectations, estimates, forecasts and projections about our future performance, our business, our
beliefs, and our managements assumptions. In addition, we, or others on our behalf, may make
forward-looking statements in press releases or written statements, or in our communications and
discussions with investors and analysts in the normal course of business through meetings, web
casts, phone calls, and conference calls. Words such as expect, anticipate, outlook,
forecast, could, project, intend, plan, continue, believe, seek, estimate,
should, may, assume, variations of such words and similar expressions are intended to
identify such forward-looking statements. These statements are not guarantees of future
performance and involve certain risks, uncertainties, and assumptions that are difficult to
predict. We describe our respective risks, uncertainties, and assumptions that could affect the
outcome or results of operations in Part 1, Item 1A of our Annual Report on Form 10-K for the year
ended June 30, 2010 (Form 10-K). You should carefully consider the risks described in our Form
10-K and Form 10-Q. Such risks are not the only ones facing our Company. Additional risks and
uncertainties not presently known to us or that we currently believe to be immaterial may also
impair our business operations. If any of the risks occur, our business, financial condition or
operating results could be materially adversely affected.
We have based our forward-looking statements on our managements beliefs and assumptions based
on information available to our management at the time the statements are made. We caution you that
actual outcomes and results may differ materially from what is expressed, implied, or forecast by
our forward-looking statements. Reference is made in particular to forward looking statements
regarding growth strategies, industry trends, financial results, cost reduction initiatives, the
ability to realize cost savings from restructuring activities, unauthorized activities in Japan,
acquisition synergies, manufacturing strategies, product development and sales, regulatory
approvals, competitive strengths, and legal proceedings. Except as required under the federal
securities laws, we do not have any intention or obligation to update publicly any forward-looking
statements after the distribution of this report, whether as a result of new information, future
events, changes in assumptions, or otherwise.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are subject to market risk associated with changes in foreign currency exchange rates,
interest rates and certain commodity prices.
23
We mitigate our foreign currency exchange rate risk principally through the establishment of
local production facilities in the markets we serve. This creates a natural hedge since
purchases and sales within a specific country are both denominated in the same currency and
therefore no exposure exists to hedge with a foreign exchange forward or option contract
(collectively, foreign exchange contracts). Natural hedges exist in most countries in which we
operate, although the percentage of natural offsets, compared with offsets that need to be hedged
by foreign exchange contracts, will vary from country to country.
We also monitor our foreign currency exposure in each country and implement strategies to
respond to changing economic and political environments. Examples of these strategies include the
prompt payment of intercompany balances utilizing a global netting system, the establishment of
contra-currency accounts in several international subsidiaries, and the development of natural
hedges and use of foreign exchange contracts to protect or preserve the value of cash flows. No
material foreign exchange contracts were in use at September 30, 2010 or June 30, 2010.
We have implemented a formalized treasury risk management policy that describes procedures and
controls over derivative financial and commodity instruments. Under the policy, we do not use
derivative financial or commodity instruments for speculative or trading purposes, and the use of
such instruments is subject to strict approval levels by senior management. Typically, the use of
derivative instruments is limited to hedging activities related to specific foreign currency cash
flows, net receivable and payable balances and call options on certain commodities. No material
derivative instruments were in use at September 30, 2010 or June 30, 2010.
The translation of the financial statements of the non-North American operations is impacted
by fluctuations in foreign currency exchange rates. Consolidated net revenue and income from
operations was impacted by the translation of our international financial statements into U.S.
dollars resulting in increased net revenue of $7.0 million and increased income from operations of
$7.9 million for the three months ended September 30, 2010, compared with the estimated results for
the comparable period in the prior year.
Our $18.3 million of marketable securities at September 30, 2010 are principally invested in
time deposits.
Interest rate exposure is generally limited to our marketable securities and three-year
unsecured credit facility. We do not actively manage the risk of interest rate fluctuations. Our
marketable securities mature in less than 12 months. We had $110.0 million outstanding on our
$270.0 million credit facility with an interest rate of approximately 2.8% at September 30, 2010.
Due to the nature of our operations, we are not subject to significant concentration risks
relating to customers or products.
We monitor the environmental laws and regulations in the countries in which we operate. We
have implemented an environmental program to reduce the generation of potentially hazardous
materials during our manufacturing process and believe we continue to meet or exceed local
government regulations.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management has evaluated, under the supervision and with the participation of our chief
executive officer and chief financial officer, the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934,
as amended (the Exchange Act)) as of the end of the period covered by this report. Based on that
evaluation, our chief executive officer and chief financial officer have concluded that, as of the
end of the period covered by this report, our disclosure controls and procedures are effective in
ensuring that information required to be disclosed in our Exchange Act reports is (1) recorded,
processed, summarized and reported within the time periods specified in SECs rules and forms, and
(2) accumulated and communicated to our management, including our chief executive officer and chief
financial officer, as appropriate to allow timely decisions regarding required disclosure.
24
Internal Control Over Financial Reporting
During the three months ended September 30, 2010, there were no changes in our internal
control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act) or in other factors that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Our management, including the CEO and CFO, do not expect that our disclosure controls or our
internal control over financial reporting will prevent or detect all error and all fraud. A control
system, no matter how well designed and operated, can provide only reasonable, not absolute,
assurance that the control systems objectives will be met. The design of a control system must
reflect the fact that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Further, because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that misstatements due to error
or fraud will not occur or that all control issues and instances of fraud, if any, will be
detected. These inherent limitations include the realities that judgments in decision-making can be
faulty and that breakdowns can occur because of simple error or mistake. Controls can also be
circumvented by the individual acts of some persons, by intentionally falsified documentation, by
collusion of two or more individuals within Molex or third parties, or by management override of
the controls. The design of any system of controls is based in part on certain assumptions about
the likelihood of future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions. Projections of any evaluation of
controls effectiveness to future periods are subject to risks. Over time, controls may become
inadequate because of changes in conditions or deterioration in the degree of compliance with
policies or procedures.
PART II
Item 1. Legal Proceedings
Currently, we are involved in a number of legal proceedings. For a discussion of contingencies
related to legal proceedings, see Note 12 to our Condensed Consolidated Financial Statements, which
is hereby incorporated by reference.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Share purchases of Molex Common and/or Class A Common Stock for the quarter ended September
30, 2010 were as follows (in thousands, except price per share data):
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Total Number |
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of Shares |
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Total Number |
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Purchased as |
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of Shares |
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Average Price |
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Part of Publicly |
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Purchased |
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Paid per Share |
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Announced Plan |
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July 1 July 31 |
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Common Stock |
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21 |
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$ |
15.50 |
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Class A Common Stock |
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$ |
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August 1 August 31 |
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Common Stock |
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102 |
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$ |
16.51 |
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Class A Common Stock |
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$ |
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September 1 September 30 |
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Common Stock |
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19 |
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$ |
16.01 |
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Class A Common Stock |
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$ |
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Total |
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142 |
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$ |
16.29 |
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The shares purchased represent exercises of employee stock options.
25
Item 6. Exhibits
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Number |
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Description |
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31
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Rule 13a-14(a)/15d-14(a) Certifications |
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31.1 Section 302 certification by Chief Executive Officer |
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31.2 Section 302 certification by Chief Financial Officer |
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32
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Section 1350 Certifications |
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32.1 Section 906 certification by Chief Executive Officer |
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32.2 Section 906 certification by Chief Financial Officer |
26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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MOLEX INCORPORATED |
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(Registrant) |
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Date: October 29, 2010 |
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/S/ DAVID D. JOHNSON
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David D. Johnson |
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Executive Vice President, Treasurer and
Chief Financial Officer
(Principal Financial Officer) |
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27