Unless otherwise indicated or the content otherwise requires, the terms "we," "us," "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, 2012. 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 different products including terminals, connectors, planar cables, cable assemblies, interconnection systems, backplanes, integrated products and mechanical and electronic switches in 40 manufacturing locations in 16 countries. We also provide manufacturing services to integrate specific components into a customer's product.

We have two global product segments: Connector and Custom & Electrical.

• The Connector segment designs and manufactures products for high-speed, high-density, high signal-integrity applications as well as fine-pitch, low-profile connectors for the consumer and commercial markets. It also designs and manufactures products that withstand environments such as heat, cold, dust, dirt, liquid and vibration for automotive and other transportation applications.

• The Custom & Electrical segment designs and manufactures integrated and customizable electronic components 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.

Net revenue decreased during the three months ended September 30, 2012 compared with the prior year period primarily due to foreign currency translation. Net revenue in local currencies increased slightly compared with the prior year period due to an increase in customer demand in the telecommunications and infotech markets, offset by lower demand in the consumer and industrial markets. The increased customer demand resulted in sales to a consumer electronics company, directly and indirectly, that exceeded 10% of net revenue during the period. Gross margin decreased during the three months ended September 30, 2012 compared to the prior year period primarily due to changes in the mix of product sales and start-up costs related to new product introductions during the period. Selling, general and administrative expenses were lower during the three months ended September 30, 2012 primarily due to $9.9 million of property insurance proceeds for damages from the earthquake and tsunami in Japan that occurred during the third quarter of fiscal 2011. Income from operations decreased during the three months ended September 30, 2012 primarily due to the lower net revenue and lower gross margin compared with the prior year period.

Unauthorized Activities in Japan

As previously reported in our Annual Report on Form 10-K for the year ended June 30, 2012, we investigated unauthorized activities at Molex Japan Ltd. Based on the results of the completed investigation, we recorded an accrued liability of $165.8 million for accounting purposes for the effect of unauthorized activities pending the resolution of the legal proceedings reported in Note 12 of the Notes to the Condensed Consolidated Financial Statements.

We believe these unauthorized activities and related losses occurred from at least as early as 1988 through 2010. The accrued liability for these unauthorized activities was $189.0 million as of September 30, 2012, including $23.2 million in cumulative foreign currency translation, which was recorded as a component of other comprehensive income, net of tax. To the extent we prevail in not having to pay all or any portion of the unauthorized loans ($165.8 million), we would recognize a gain. In addition, we have a contingent liability of $66.4 million for other loan-related expenses, interest expense and delay damages on the outstanding unauthorized loans.

Unauthorized activities in Japan for the three months ended September 30, 2012 and 2011 represent investigative and legal fees.

Critical Accounting Policies and Estimates

This discussion and analysis of financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States. The preparation of these financial statements requires the use of estimates and assumptions related to the reporting of assets, liabilities, revenues, expenses and related disclosures. In preparing these financial statements, we have made our best estimates and judgments of certain amounts included in the financial statements. Estimates are revised periodically. Actual results could differ from these estimates.

The information concerning our critical accounting policies can be found under Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended June 30, 2012 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
                                           2012           of Revenue           2011            of Revenue
Net revenue                              $ 916,921              100.0 %      $ 935,985               100.0 %
Cost of sales                              648,504               70.7 %        643,257                68.7 %

Gross profit                               268,417               29.3 %        292,728                31.3 %

Selling, general & administrative          163,121               17.8 %        169,225                18.1 %
Unauthorized activities in Japan             2,561                0.3 %          2,922                 0.3 %

Income from operations                     102,735               11.2 %        120,581                12.9 %

Other income (expense), net                    386                 -  %         (1,115 )               0.1 %

Income before income taxes                 103,121               11.2 %        119,466                12.8 %
Income taxes                                31,807                3.4 %         38,949                 4.2 %

Net income                               $  71,314                7.8 %      $  80,517                 8.6 %

Net Revenue

We sell our products in five primary markets. Our connectors, interconnecting devices and assemblies are used principally in the telecommunications, infotech, consumer, industrial and automotive markets. Our products are used in a wide range of applications including notebook computers, computer peripheral equipment, mobile products such as smartphones and tablets, digital electronics such as cameras and televisions, gaming systems, automobile engine control units and adaptive braking systems, factory automation and diagnostic equipment.

During the first quarter of fiscal 2013 net revenue increased 6.8% compared to the fourth quarter of fiscal 2012 (sequential quarter) due primarily to increased demand from new product introductions in the telecommunications and infotech markets, but declined 2.0% from the record first quarter of fiscal 2012 (comparable quarter), primarily due to foreign currency translation and lower demand in the consumer and industrial markets. The increase (decrease) in net revenue from each market during the comparable quarter and the sequential quarter follows:

                                       Comparable        Sequential
                                        Quarter           Quarter
                 Telecommunications              1 %              19 %
                 Infotech                        2                12
                 Consumer                      (15 )              -
                 Industrial                     (8 )              (4 )
                 Automotive                      5                 1

Telecommunications market net revenue increased against both the comparable and sequential quarters primarily due to higher demand related to new product introductions in the first quarter of fiscal 2013 for certain mobile products.

Infotech market net revenue increased against both the comparable and sequential quarters primarily due to higher demand related to new product introductions in the first quarter of fiscal 2013 for certain tablet devices.

Consumer market net revenue decreased against the comparable quarter due to lower demand in home entertainment and gaming systems. Consumer market net revenue was level with the sequential quarter as improved demand for gaming systems and pre-holiday production offset decreased demand in home entertainment products.

Industrial market net revenue decreased against both the comparable and sequential quarters due to softening demand for semiconductor and production equipment from our customers' decreased production, companies' reluctance to invest in automation projects or deferral of projects in the current economic environment and relatively high levels of inventory in the distribution channel.

Automotive market net revenue increased against the comparable quarter due to higher automobile production, particularly in North America and Japan, and increasing electronic content in automobiles, such as navigational and entertainment systems, mobile communication and products to improve fuel efficiency. Automotive market net revenue increased slightly against the sequential quarter.

The following table shows the percentage relationship to net revenue of our sales by geographic region:

                                        Three Months Ended
                                           September 30,
                                        2012            2011
                       Americas             26 %           24 %
                       Asia Pacific         63             63
                       Europe               11             13

                       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, 2012
Net revenue for prior year period                                   $       935,985
Components of net revenue change:
Organic net revenue change                                                    3,295
Foreign currency translation                                                (25,099 )
Acquisitions                                                                  2,740

Total change in net revenue from prior year period                          (19,064 )

Net revenue for current year period                                 $       916,921

Organic net revenue change as a percentage of net revenue
from prior year period                                                          0.4 %

Organic net revenue increased during the three months ended September 30, 2012 compared with the prior year period as customer demand improved in the telecommunications and infotech markets due to increases in demand for certain mobile products and tablet devices. We completed an asset acquisition of a specialty wire and cable company during the second quarter of 2012.

Foreign currency translation decreased net revenue approximately $25.1 million for the three months ended September 30, 2012, primarily due to a weaker euro and Japanese yen, compared with the prior year period. 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, 2012
                                  Local             Currency           Net
                                Currency          Translation        Change
           Americas            $    16,224        $       (190 )    $  16,034
           Asia Pacific             (9,052 )            (8,241 )      (17,293 )
           Europe                   (2,978 )           (16,668 )      (19,646 )
           Corporate & Other         1,841                  -           1,841

           Net change          $     6,035        $    (25,099 )    $ (19,064 )

The change in net revenue on a local currency basis was as follows:

                                         Three Months
                                             Ended
                                        Sept. 30, 2012
                         Americas                   7.3 %
                         Asia Pacific              (1.5 )
                         Europe                    (2.4 )

                         Total                      0.6 %

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,
                                        2012           2011
                       Gross profit   $ 268,417      $ 292,728
                       Gross margin        29.3 %         31.3 %

The decrease in gross profit and gross margin for the three months ended September 30, 2012 compared with the prior year period was primarily due to lower net revenue from foreign currency translation, changes in the mix of product sales, start-up costs related to new product introductions during the period and price erosion.

A significant portion of our material cost is comprised of copper and gold. We purchased approximately 4.8 million pounds of copper and approximately 23,400 troy ounces of gold during the first quarter of fiscal 2013. The following table sets forth the average prices of copper and gold we purchased in the three months ended September 30:

                                                Three Months Ended
                                                   September 30,
                                                2012           2011
               Copper (price per pound)      $     3.52     $     4.07
               Gold (price per troy ounce)     1,653.00       1,702.00

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 copper and gold prices by hedging with call options a portion of our projected net global purchases of copper and gold. The hedges increased cost of sales by $2.5 million for the three months ended September 30, 2012 and reduced cost of sales by $1.8 million for the three months ended September 30, 2011.

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):

                                             Three Months
                                                 Ended
                                            Sept. 30,  2012
                    Price erosion          $         (22,113 )
                    Currency translation              (5,668 )
                    Currency transaction                 650

Price erosion measures the reduction in prices of our products year over year, which reduces our gross profit. The largest impact from price erosion is in our Connector segment. A significant portion of our price erosion occurred in mobile phone connector products, which are part of our mobile market. We minimize the impact of price erosion through the use of pricing software that provides enhanced visibility to recoverable costs and improved detail of profit margin by product.

The decrease in gross profit due to currency translation during the three months ended September 30, 2012 was primarily due to a weaker euro, compared with the prior year period.

Certain products we manufacture in Japan and Europe are sold in other regions of the world at selling prices primarily denominated in or closely linked to the U.S. dollar. As a result, changes in foreign currency exchange rates may affect our cost of sales reported in U.S. dollars without a corresponding effect on net revenue. The increase in gross profit due to currency transactions was nominal as the impact of fluctuations in foreign exchange rates principally offset each other during the three months ended September 30, 2012, compared with the prior year period.

Operating Expenses

Operating expenses were as follows as of September 30 (in thousands):



                                                                 Three Months Ended
                                                                    September 30,
                                                               2012              2011
Selling, general and administrative                          $ 163,121         $ 169,225
Unauthorized activities in Japan                                 2,561             2,922

Selling, general and administrative as a percentage of
net revenue                                                       17.8 %            18.1 %

Selling, general and administrative expenses decreased $6.1 million for the three months ended September 30, 2012, compared with the prior year period, primarily due to $9.9 million of property insurance proceeds for damages from the earthquake and tsunami in Japan that occurred during the third quarter of fiscal 2011. The impact of foreign currency translation decreased selling, general and administrative expenses approximately $4.2 million for the three months ended September 30, 2012, compared with the prior year period.

Research and development expenditures, which are classified as selling, general and administrative expense, were approximately $46.3 million, or 5.0% of net revenue for the three months ended September 30, 2012, compared with $43.9 million, or 4.7% of net revenue for the comparable prior year period.

Unauthorized activities in Japan for the three months ended September 30, 2012 represent investigative and legal fees. See Note 2 of the Notes to the Condensed Consolidated Financial Statements.

Other Income (Expense)

Other income (expense) consists primarily of net interest expense, investment income and currency exchange gains or losses. We recorded other income of $0.4 million for the three months ended September 30, 2012, compared with net expense of $1.1 million for the three months ended September 30, 2011. Fluctuations in other income (expense) are primarily due to changes in foreign currency gains and losses.

Effective Tax Rate

The effective tax rate was 30.8% for the three months ended September 30, 2012. During the three months ended September 30, 2012, we recorded income tax expense of $31.8 million.

Our effective tax rate reflects tax benefits derived from significant operations outside the United States, which, other than Japan, are generally taxed at rates lower than the U.S. statutory rate of 35.0%. A change in the mix of income before income taxes from these various jurisdictions can have a significant impact on our periodic effective rate.

The effective tax rate was 32.6% for the three months ended September 30, 2011.

Backlog

Our order backlog on September 30, 2012 was approximately $445.3 million compared with order backlog of $416.4 million at June 30, 2012 and $387.2 million at September 30, 2011. Orders for the three months ended September 30, 2012 were $943.9 million compared with $901.0 million and $910.0 million for the three months ended June 30, 2012 and September 30, 2011, respectively. Orders increased $42.9 million over the sequential quarter and exceeded net revenue during the three months ended September 30, 2012. Orders improved compared with the prior year period due primarily to new product introductions in our telecommunications and infotech markets.

Segments

The following table sets forth information on net revenue by segment as of the
three months ended September 30 (in thousands):



                                           Percentage                      Percentage
                              2012         of Revenue         2011         of Revenue
      Connector             $ 656,574             71.6 %    $ 678,780             72.5 %
      Custom & Electrical     259,784             28.3        256,794             27.4
      Corporate & Other           563              0.1            411              0.1

      Total                 $ 916,921            100.0 %    $ 935,985            100.0 %

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,  2012
Net revenue for prior year period                                 $         678,780

Components of net revenue change:
Organic net revenue change                                                   (7,159 )
Currency translation                                                        (15,047 )

Total change in net revenue from prior year period                          (22,206 )

Net revenue for current year period                               $         656,574

Organic net revenue change as a percentage of net revenue
for prior year period                                                          (1.1 )%

The Connector segment sells primarily to the telecommunication, infotech, consumer and automotive markets. Organic net revenue and segment net revenue decreased during the three months ended September 30, 2012 compared with the prior year period. The decrease was primarily due to slower customer demand, particularly in the consumer market, partially offset by higher demand in our telecommunications and infotech markets. Price erosion, which is generally higher in the Connector segment compared with our other segment, also negatively impacted organic net revenue and segment net revenue. Foreign currency translation decreased net revenue by $15.0 million for the three months ended September 30, 2012.

The following table provides information on income from operations and operating margins for the Connector segment for the periods indicated (in thousands):

                                             Three Months Ended
                                                September 30,
                                             2012          2011
                  Income from operations   $ 95,256      $ 106,262
                  Operating margin             14.5 %         15.7 %

Connector segment income from operations declined for the three months ended September 30, 2012 compared with the prior year period primarily due to lower net revenue, changes in the mix of product sales and start-up costs related to new product introductions during the period. Lower production levels due to decreasing customer demand in the consumer market also led to lower absorption of our fixed costs. Selling, general and administrative expenses for the three months ended September 30, 2012 decreased primarily due to $9.9 million of property insurance proceeds for damages from the earthquake and tsunami in Japan that occurred during the third quarter of fiscal 2011.

Custom & Electrical

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



                                                                     Three Months
                                                                         Ended
                                                                    Sept. 30,  2012
Net revenue for prior year period                                  $         256,794

Components of net revenue increase:
Organic net revenue change                                                    10,313
Foreign currency translation                                                 (10,063 )
Acquisitions                                                                   2,740

Total change in net revenue from prior year period                             2,990

Net revenue for current year period                                $         259,784

Organic net revenue change as a percentage of net revenue
for prior year period                                                            4.0 %

The Custom & Electrical segment sells primarily to the industrial, telecommunications and infotech markets. Custom & Electrical segment net revenue increased in the three months ended September 30, 2012 compared with the prior year period due to increased customer demand in the telecommunications and infotech markets. Foreign currency translation decreased net revenue $10.1 million for the three months ended September 30, 2012, primarily due to a weaker . . .