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| MOLX > SEC Filings for MOLX > Form 10-Q on 30-Oct-2009 | All Recent SEC Filings |
30-Oct-2009
Quarterly Report
Unless otherwise indicated or the content otherwise requires, the terms "we,"
"us" and "our" and other similar terms in this Quarterly Report on Form 10-Q
refer to Molex Incorporated and its subsidiaries.
The following discussion and analysis should be read in conjunction with our
condensed consolidated financial statements and accompanying notes contained
herein and our consolidated financial statements and accompanying notes and
management's discussion and analysis of results of operations and financial
condition contained in our Annual Report on Form 10-K for the fiscal year ended
June 30, 2009. 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 electronic components. Our
products are used by a large number of leading original equipment manufacturers
(OEMs) throughout the world. We design, manufacture and sell more than 100,000
products including terminals, connectors, planar cables, cable assemblies,
interconnection systems, backplanes, integrated products and mechanical and
electronic switches in 41 manufacturing locations in 17 countries. We also
manufacture specific components that are integrated into a customer's product.
Our reportable segments consist of the Connector and Custom & Electrical
reportable segments. A summary of our reportable segments follows:
• 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 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.
Our sales are dependent on end markets impacted by consumer, industrial and
infrastructure spending, and our operating results can be adversely affected by
reduced demand in those markets. Worldwide economic conditions and instability
in the global economy led to a significant drop in demand for our connectors
beginning in the second quarter of fiscal 2009. The drop in revenue was
significant as our customers attempted to manage their inventory. Customer
demand increased during the three months ended September 30, 2009 compared with
the three months ended June 30, 2009; however, we experienced lower net revenue,
reduced gross margins and an operating loss during the three months ended
September 30, 2009 compared with the prior year period.
During fiscal 2007, we undertook a 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 relates to
facilities located in North America, Europe and Japan and, in general, the
movement of manufacturing activities at these plants to other facilities. Net
restructuring cost during the quarter ended September 30, 2009 was
$55.9 million, consisting of $13.2 million of asset impairments and
$42.7 million for employee termination benefits that were net of a $3.8 million
pension curtailment gain. Restructuring costs during the three months ended
September 30, 2008 were $21.8 million, consisting of $2.7 million for asset
impairments and $19.1 million for employee termination benefits. The cumulative
restructuring costs and related asset impairments since we announced the
restructuring plan totaled $253.8 million.
We expect to incur total restructuring and asset impairment costs related to
these actions approximating $280 million. Management approved several actions
related to this plan. The total cost estimates increased as we
formulated detailed plans for the latest additions to the restructuring actions,
which included reorganization of our global product divisions. A portion of this
plan involves cost savings or other actions that do not result in incremental
expense, such as better utilization of assets, reduced spending and
organizational efficiencies. This plan includes employee reduction targets
throughout the company, and we expect to achieve these targets through ongoing
employee attrition and terminations. We expect to complete the actions under
this plan by June 30, 2010 with estimated annual cost savings ranging from $190
- $210 million. See Note 2 of the "Notes to the Condensed Consolidated Financial
Statements" for further discussion.
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 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 through successful execution of our restructuring plans, and
attract, motivate and retain key personnel to manage our operational, financial
and management information systems.
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 were prepared
in conformity with accounting principles generally accepted in the United
States. The preparation of these financial statements requires the use of
estimates and assumptions related to the reporting of assets, liabilities,
revenues, expenses and related disclosures. In preparing these financial
statements, we have made our best estimates and judgments of certain amounts
included in the financial statements. Estimates are revised periodically. Actual
results could differ from these estimates.
The information concerning our critical accounting policies can be found
under Management's Discussion of Financial Condition and Results of Operations
in our Annual Report on Form 10-K for the fiscal year ended June 30, 2009 filed
with the Securities and Exchange Commission, which is incorporated by reference
in this Form 10-Q.
Results of Operations
The following table sets forth consolidated statements of income data as a
percentage of net revenue for the three months ended September 30 (in
thousands):
Percentage Percentage
2009 of Revenue 2008 of Revenue
Net revenue $ 674,033 100.0 % $ 838,985 100.0 %
Cost of sales 482,614 71.6 % 589,513 70.3 %
Gross profit 191,419 28.4 % 249,472 29.7 %
Selling, general & administrative 145,628 21.6 % 166,351 19.8 %
Restructuring costs and asset impairments 55,894 8.3 % 21,778 2.6 %
Income (loss) from operations (10,103 ) (1.5 )% 61,343 7.3 %
Other income, net 2,484 0.4 % 3,800 0.5 %
Income (loss) before income taxes (7,619 ) (1.1 )% 65,143 7.8 %
Income taxes 3,976 0.6 % 20,846 2.5 %
Net (loss) income $ (11,595 ) (1.7 )% $ 44,297 5.3 %
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Net Revenue
We sell our products in five primary markets. Fiscal 2009 revenue declined
significantly across all of the primary markets, except consumer, due to
contracting global economic conditions starting in the second quarter of fiscal
2009 and subsequent inventory reductions in the supply chain, which decreased
our production levels and demand for components. Revenue increased across all
markets during the first quarter of fiscal 2010 compared with the fourth quarter
of fiscal 2009 (sequential quarter), but remained lower than the same quarter
last year (comparable quarter). The estimated change in revenue from each market
during the first quarter of fiscal 2010 compared with the comparable quarter and
the sequential quarter follows:
Comparable Sequential
Quarter Quarter
Telecommunications (32 )% 21 %
Consumer (2 ) 27
Data (13 ) 18
Industrial (27 ) 6
Automotive (19 ) 16
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Telecommunications market revenue declined against the comparable quarter as
demand for our mobile products has not returned to levels realized prior to the
significant slow down and related supply chain inventory reductions during the
second and third quarters of fiscal 2009. Telecommunications market revenue
increased against the sequential quarter due to higher demand for smartphones
and our customers' introduction of new smartphone models that include our
connector and antenna products.
Consumer market revenue had a modest decline against the comparable quarter.
Revenue nearly returned to levels prior to the significant slow down in fiscal
2009 due to government incentives in certain countries, customers replenishing
inventory levels and our customers' anticipation of increased consumer spending
during the holiday season. Consumer market revenue increased sequentially as
demand increased for our components in portable navigation devices and flat
panel display televisions. The increased revenue from flat panel display
televisions was partially offset by price erosion.
Data market revenue decreased against the comparable quarter primarily
because of a strong first quarter in fiscal 2009 prior to the supply chain
correction and lower demand for notebook computers. Data market revenue
increased sequentially due to demand for networking, server and storage
products, which returned to levels realized prior to the slow down in fiscal
2009.
Industrial market revenue decreased against the comparable quarter due to
declines in residential and commercial construction, lower demand in the
industrial communications business worldwide, particularly in North America and
Europe, and lower demand for factory automation due to worldwide excess
manufacturing capacity. Many industrial automation projects were delayed due to
poor economic conditions. As a result, the industrial market is recovering
slower and sequential growth is lower than our other primary markets.
Automotive market revenue declined against the comparable quarter due to the
significant decline in global vehicle production. Automotive market revenue
increased sequentially due to global government incentive programs. The
automotive market also benefited from our customers' increasing electronic
content in automobiles, such as navigational systems, mobile communication and
entertainment systems.
The following table shows the percentage of our net revenue by geographic
region:
Three Months Ended
September 30,
2009 2008
Americas 23 % 27 %
Asia Pacific 61 54
Europe 16 19
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, 2009
Net revenue for prior year period $ 838,985
Components of net revenue increase:
Organic net revenue decline (163,901 )
Currency translation (5,786 )
Acquisitions 4,735
Total change in net revenue from prior year period (164,952 )
Net revenue for current year period $ 674,033
Organic net revenue decline as a percentage of net revenue from prior
year period (19.5 )%
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Revenue declined significantly during fiscal 2009 across all of the primary
markets due to deterioration in global economic conditions starting in the
second quarter and subsequent inventory reductions in the supply chain, which
decreased demand for our products. Although demand has increased during the
three months ended September 30, 2009, revenue has not returned to levels
realized prior to the second quarter of fiscal 2009.
Foreign currency translation decreased revenue by approximately $5.8 million
for the three months ended September 30, 2009 compared with the comparable
quarter principally due to the strengthening of the U.S. dollar against the
euro, partially offset by a stronger Japanese yen against the U.S. dollar. The
following tables show the effect on the change in geographic net revenue from
foreign currency translations to the U.S. dollar (in thousands):
Three Months Ended September 30, 2009
Local Currency Net
Currency Translation Change
Americas $ (65,677 ) $ (298 ) $ (65,975 )
Asia Pacific (49,182 ) 5,167 (44,015 )
Europe (39,035 ) (10,655 ) (49,690 )
Corporate & Other (5,272 ) - (5,272 )
Net change $ (159,166 ) $ (5,786 ) $ (164,952 )
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The change in revenue on a local currency basis was as follows:
Three Months
Ended
Sept. 30, 2009
Americas (29.6 )%
Asia Pacific (10.9 )
Europe (24.6 )
Total (19.0 )
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The following table sets forth information on revenue by segment as of the three months ended September 30 (in thousands):
Percentage Percentage
2009 of Revenue 2008 of Revenue
Connector $ 489,141 72.5 % $ 581,110 69.2 %
Custom & Electrical 184,771 27.4 257,334 30.7
Corporate & Other 121 0.1 541 0.1
Total $ 674,033 100.0 % $ 838,985 100.0 %
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Gross Profit
The following table provides a summary of gross profit and gross margin for
the three months ended September 30 (in thousands):
2009 2008
Gross profit $ 191,419 $ 249,472
Gross margin 28.4 % 29.7 %
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The reduction in gross margin was primarily due to lower absorption from
lower production caused by the poor global economic conditions in fiscal 2009.
While we were unable to reduce factory-related costs as quickly as production
declined, the expansion of our restructuring program has improved our gross
margins over time.
A significant portion of our material cost is comprised of copper and gold.
We purchased approximately five million pounds of copper and approximately
25,000 troy ounces of gold during the three months ended September 30, 2009. The
following table shows the average prices related to our purchases of copper and
gold for the three months ended September 30 (in thousands):
Three Months Ended
September 30,
2009 2008
Copper (price per pound) $ 2.71 $ 3.74
Gold (price per troy ounce) 960.00 872.00
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Generally, we are able to pass through to our customers only a small portion of changes in 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 did not materially affect operating results for the three months ended September 30, 2009 and 2008.
The effect of certain significant impacts on gross profit compared with the prior year period was as follows for the three months ended September 30 (in thousands):
2009
Price erosion $ (36,339 )
Currency translation (506 )
Currency transaction (2,511 )
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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.
The decrease in gross profit due to currency translation was primarily due to
a weaker U.S. dollar against the Japanese yen offset by a generally stronger
U.S. dollar against other currencies. During the three months ended
September 30, 2009, the U.S. dollar generally weakened against other currencies,
and continued to weaken in October 2009.
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 the weakening U.S. dollar during the three months ended
September 30, 2009.
Operating Expenses
Operating expenses were as follows for the three months ended September 30
(in thousands):
2009 2008
Selling, general and administrative $ 145,628 $ 166,351
Selling, general and administrative as a percentage of revenue 21.6 % 19.8 %
Restructuring costs and asset impairments $ 55,894 $ 21,778
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Selling, general and administrative expenses increased as a percent of net
revenue over the prior year period primarily due to the significant drop in
revenue that began during the second and third quarters of fiscal 2009. Selling,
general and administrative expenses declined by $20.7 million or 12.5% primarily
due to 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
$0.5 million for the three months ended September 30, 2009 versus the comparable
period.
Research and development expenditures, which were classified as selling,
general and administrative expense, were approximately $36.5 million, or 5.4% of
net revenue, and $43.6 million, or 5.2% of net revenue for the three months
ended September 30, 2009 and 2008, respectively. The expense decreased as part
of cost containment activities, but remained comparable to the prior year period
as a percent of revenue.
Net restructuring cost during the three months ended September 30, 2009 was
$55.9 million, consisting of $13.2 million of asset impairments and
$42.7 million for employee termination benefits. The cumulative expense since we
announced the restructuring plan totals $253.8 million.
Other Income (net)
Other income consists primarily of net interest income, investment income and
currency exchange gains or losses. We recognized exchange gains of $1.5 million
and losses of $0.8 million for the three months ended September 30, 2009 and
2008, respectively.
Effective Tax Rate
The effective tax rate was (52.2)% for the three months ended September 30,
2009. The effective tax rate was 32% for the three months ended September 30,
2008. During the three months ended September 30, 2009, we recorded income tax
expense of $4.0 million, due primarily to the reversal of an estimated tax
benefit resulting from a significant number of employee stock options that
expired unexercised during the quarter.
Backlog
Our order backlog on September 30, 2009 was approximately $304.2 million
compared with $385.5 million at September 30, 2008. Orders for the first quarter
of fiscal 2010 were $724.4 million compared with $795.9 million for the prior
year period, representing the carryover impact of the significant decline in
demand during the second and third quarters of fiscal 2009 due to the global
economic conditions and subsequent supply chain inventory reductions.
Segments
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, 2009
Net revenue for prior year period $ 581,110
Components of net revenue change:
Organic net revenue decline (97,912 )
Currency translation 1,208
Acquisitions 4,735
Total change in net revenue from prior year period (91,969 )
Net revenue for current year period $ 489,141
Organic net revenue decline as a percentage of net revenue from prior
year period (16.8 )%
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The Connector segment sells primarily to the telecommunication, data products
and consumer markets, which are discussed above. Organic revenue declined in the
three months ended September 30, 2009, compared with the prior year period
primarily due to lower revenue in the mobile phone sector of the
telecommunications market and the automotive market. We also completed an asset
purchase of a company in Japan during the second quarter of fiscal 2009.
Additionally, price erosion is generally higher in the Connector segment
compared with our other segment.
The following table provides information on income from operations and
operating margins for the periods indicated (in thousands):
Three Months Ended
September 30,
2009 2008
Income from operations $ 4,675 $ 58,504
Operating margin 1.0 % 10.0 %
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Connector segment income from operations decreased compared with the prior year period primarily due to the decrease in revenue and restructuring charges of $50.6 million during the three months ended September 30, 2009. Restructuring charges for the three months ended September 30, 2008 were $15.3 million. Selling, general and administrative expenses decreased $13.9 million compared with the prior year period due to savings from restructuring and specific cost-containment actions.
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, 2009
Net revenue for prior year period $ 257,334
Components of net revenue change:
Organic net revenue decline (65,589 )
Currency translation (6,974 )
Total change in net revenue from prior year period (72,563 )
Net revenue for current year period $ 184,771
Organic net revenue decline as a percentage of net revenue from prior
year period (25.5 )%
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