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| MOLX > SEC Filings for MOLX > Form 10-Q on 24-Jan-2013 | All Recent SEC Filings |
24-Jan-2013
Quarterly Report
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 41 manufacturing locations in 15 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 for the telecommunications and infotech markets as well as fine-pitch, low-profile connectors for the consumer market. 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 increased 12.8% and 5.1% during the three and six months ended December 31, 2012, respectively, compared with the prior year periods primarily due to an increase in customer demand in the telecommunications and infotech markets, partially offset by lower demand in the consumer and industrial markets. The increased customer demand in the telecommunications and infotech markets resulted in sales to a consumer electronics company, directly and indirectly, that exceeded 10% of net revenue during the three and six months ended December 31, 2012. Gross margin decreased during the three and six months ended December 31, 2012 compared with the prior year periods primarily due to changes in the mix of product sales and start-up costs related to new product introductions. Selling, general and administrative expenses were higher during the three and six months ended December 31, 2012 compared with the prior year periods to support the increase in net revenue. Selling, general and administrative expenses decreased as a percentage of net revenue over prior year periods. Income from operations increased during the three months ended December 31, 2012 primarily due to higher net revenue compared with the prior year period, but decreased during the six months ended December 31, 2012 as higher net revenue was offset by lower gross margin and higher selling, general and administrative expenses 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 Co., 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.
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 $170.7 million as of December 31, 2012, including $4.9 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 $66.2 million for interest expense, delay damages and other loan-related expenses on the outstanding unauthorized loans.
On August 31, 2010, the holder of the unauthorized loans filed a complaint in Tokyo District Court requesting the court to find Molex Japan liable for payment of the outstanding unauthorized loans and to enter a judgment for such payment. On October 13, 2010, Molex Japan filed a written answer requesting the court to dismiss the complaint and subsequently both parties have submitted additional briefs, witness statements and witness testimony. At a court hearing on October 10, 2012, the court informed the parties that it would render its decision on December 26, 2012; however, in late November, upon consultation with the court, court-supervised settlement discussions commenced. At a settlement meeting on December 21, 2012, the court postponed issuing its decision until February 27, 2013. There can be no assurance the parties will reach settlement or the settlement amount will not exceed the accrued liability for unauthorized activities in Japan. If settlement discussions fail to resolve the litigation, we intend to continue to vigorously contest the enforceability of the outstanding unauthorized loans. For a complete discussion of legal proceedings, see Note 12 of the Notes to Condensed Consolidated Financial Statements.
Unauthorized activities in Japan for the three and six months ended December 31, 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 December 31 (in thousands):
Percentage Percentage
2012 of Revenue 2011 of Revenue
Net revenue $ 967,735 100.0 % $ 857,598 100.0 %
Cost of sales 678,565 70.1 % 594,661 69.3 %
Gross profit 289,170 29.9 % 262,937 30.7 %
Selling, general & administrative 181,028 18.7 % 163,073 19.0 %
Unauthorized activities in Japan 1,627 0.2 % 2,723 0.4 %
Income from operations 106,515 11.0 % 97,141 11.3 %
Other (expense) income, net (4,284 ) (0.4 %) (612 ) 0.0 %
Income before income taxes 102,231 10.6 % 96,529 11.3 %
Income taxes 31,837 3.3 % 32,513 3.8 %
Net income $ 70,394 7.3 % $ 64,016 7.5 %
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The following table sets forth consolidated statements of income data as a percentage of net revenue for the six months ended December 31 (in thousands):
Percentage Percentage
2012 of Revenue 2011 of Revenue
Net revenue $ 1,884,656 100.0 % $ 1,793,583 100.0 %
Cost of sales 1,327,069 70.4 % 1,237,918 69.0 %
Gross profit 557,587 29.6 % 555,665 31.0 %
Selling, general & administrative 344,149 18.3 % 332,298 18.5 %
Unauthorized activities in Japan 4,188 0.2 % 5,645 0.4 %
Income from operations 209,250 11.1 % 217,722 12.1 %
Other (expense) income, net (3,898 ) (0.2 %) (1,727 ) (0.1 %)
Income before income taxes 205,352 10.9 % 215,995 12.0 %
Income taxes 63,644 3.4 % 71,462 4.0 %
Net income $ 141,708 7.5 % $ 144,533 8.0 %
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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 servers and storage devices, networking products, notebook computers, mobile products such as smartphones and tablets, home entertainment products such as cameras and televisions, gaming systems, automobile infotainment and safety systems, factory automation and diagnostic equipment.
During the second quarter of fiscal 2013 net revenue increased 5.5% and 12.8% compared with the first quarter of fiscal 2013 (sequential quarter) and the second quarter of fiscal 2012 (comparable quarter), respectively, due primarily to increased demand from new product introductions in the telecommunications and infotech markets, partially offset by foreign currency translation and lower demand in the consumer and industrial markets. The increase (decrease) in net revenue from each market during the sequential quarter and the comparable quarter follows:
Sequential Comparable
Quarter Quarter
Telecommunications 15 % 15 %
Infotech 11 31
Consumer (9 ) (11 )
Industrial (9 ) (4 )
Automotive 3 15
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Telecommunications market net revenue increased versus both the sequential and comparable quarters primarily due to higher demand related to new product introductions for certain mobile phone products. Net revenue also increased versus the sequential quarter due to increased holiday seasonal demand. The higher net revenue was partially offset by lower demand for networking products.
Infotech market net revenue increased versus both the sequential and comparable quarters primarily due to higher demand related to new product introductions for certain tablet devices and higher demand for notebook computers. Net revenue also increased versus the sequential quarter due to increased holiday seasonal demand and versus the comparable quarter due to relatively high levels of inventory in the distribution channel in the prior year period.
Consumer market net revenue decreased versus the sequential quarter as the first quarter of fiscal 2013 benefitted from pre-holiday production volumes in gaming systems. Consumer market net revenue decreased versus the comparable quarter due to lower demand for home entertainment products and gaming systems.
Industrial market net revenue decreased versus both the sequential and comparable quarters due to lower 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 versus both the sequential and comparable quarters due to increasing electronic content in automobiles, such as infotainment and safety systems and products to improve fuel efficiency. Automotive market net revenue also increased versus the comparable quarter due to higher automobile production, particularly in North America.
The following table shows the percentage relationship to net revenue of our sales by geographic region:
Three Months Ended Six Months Ended
December 31, December 31,
2012 2011 2012 2011
Americas 25 % 26 % 26 % 25 %
Asia Pacific 64 61 63 62
Europe 11 13 11 13
Total 100 % 100 % 100 % 100 %
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The following table provides an analysis of the change in net revenue compared with the prior fiscal year period (in thousands):
Three Months Six Months
Ended Ended
Dec. 31, 2012 Dec. 31, 2012
Net revenue for prior year period $ 857,598 $ 1,793,583
Components of net revenue change:
Organic net revenue change 109,512 112,807
Currency translation (7,851 ) (32,950 )
Acquisitions 8,476 11,216
Total change in net revenue from prior year period 110,137 91,073
Net revenue for current year period $ 967,735 $ 1,884,656
Organic net revenue change as a percentage of net
revenue for prior year period 12.8 % 6.3 %
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Organic net revenue increased during the three and six months ended December 31, 2012 compared with the prior year periods as customer demand for certain mobile phone products and tablet devices improved in the telecommunications and infotech markets. We acquired Affinity Medical Technologies, LLC during the second quarter of fiscal 2013 and completed an asset purchase of Temp-Flex Cable, Inc. during the second quarter of fiscal 2012.
Foreign currency translation decreased net revenue approximately $7.9 million and $33.0 million for the three and six months ended December 31, 2012, respectively, primarily due to a weaker euro and Japanese yen
against the U.S. dollar, compared with the prior year periods. 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 December 31, 2012 Six Months Ended December 31, 2012
Local Currency Net Local Currency Net
Currency Translation Change Currency Translation Change
Americas $ 25,560 $ 111 $ 25,671 $ 41,784 $ (79 ) $ 41,705
Asia Pacific 98,951 (1,784 ) 97,167 89,899 (10,025 ) 79,874
Europe (4,839 ) (6,178 ) (11,017 ) (7,817 ) (22,846 ) (30,663 )
Corporate & Other (1,684 ) - (1,684 ) 157 - 157
Net change $ 117,988 $ (7,851 ) $ 110,137 $ 124,023 $ (32,950 ) $ 91,073
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The change in net revenue on a local currency basis was as follows:
Three Months Six Months
Ended Ended
Dec. 31, 2012 Dec. 31, 2012
Americas 11.8 % 9.5 %
Asia Pacific 18.9 8.1
Europe (4.3 ) (3.3 )
Total 13.8 % 6.9 %
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Gross Profit
The following table provides a summary of gross profit and gross margin for the
three and six months ended December 31 (in thousands):
Three Months Ended Six Months Ended
December 31, December 31,
2012 2011 2012 2011
Gross profit $ 289,170 $ 262,937 $ 557,587 $ 555,665
Gross margin 29.9 % 30.7 % 29.6 % 31.0 %
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Gross profit increased for the three and six months ended December 31, 2012 compared with the prior year periods despite the lower gross margin due to the higher net revenue in the telecommunications and infotech markets. The lower gross margin compared with the prior year periods was primarily due to higher material costs, 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 8.6 million pounds of copper and approximately 47,900 troy ounces of gold during the six months ended December 31, 2012. The following table sets forth the average prices of copper and gold we purchased in the three and six months ended December 31:
Three Months Ended Six Months Ended
December 31, December 31,
2012 2011 2012 2011
Copper (price per pound) $ 3.60 $ 3.41 $ 3.55 $ 3.78
Gold (price per troy ounce) 1,718.00 1,683.00 1,686.00 1,693.00
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Generally, we are able to pass through to our customers only a small portion of changes in the price 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 $1.5 million and $4.0 million for the three and six months ended December 31, 2012, respectively, and
reduced cost of sales by $3.4 million and $6.5 million for the three and six months ended December 31, 2011, respectively.
The effect of certain significant impacts on gross profit compared with the prior year periods was as follows for the three and six months ended December 31 (in thousands):
Three Months Six Months
Ended Ended
Dec. 31, 2012 Dec. 31, 2012
Price erosion $ (23,341 ) $ (41,425 )
Currency translation (2,566 ) (8,234 )
Currency transaction 1,136 901
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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 price erosion occurred in mobile phone connector products, which are part of the 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 and six months ended December 31, 2012 was primarily due to a weaker Japanese yen and euro against the U.S. dollar, compared with the prior year periods.
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 and six months ended December 31, 2012, compared with the prior year periods.
Operating Expenses
Operating expenses were as follows as of December 31 (in thousands):
Three Months Ended Six Months Ended
December 31, December 31,
2012 2011 2012 2011
Selling, general and administrative $ 181,028 $ 163,073 $ 344,149 $ 332,298
Unauthorized activities in Japan 1,627 2,723 4,188 5,645
Selling, general and administrative as a
percentage of net revenue 18.7 % 19.0 % 18.3 % 18.5 %
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Selling, general and administrative expenses increased $18.0 million and $11.9 million for the three and six months ended December 31, 2012, respectively, compared with the prior year periods, but decreased as a percentage of net revenue. The increase in selling, general and administrative expenses was primarily due to the increase in net revenue and investments in research and development to support new product introductions. We also increased investments in business development to drive future growth. Selling, general and administrative expenses for the six months ended December 31, 2012 were reduced by $9.9 million due to property insurance proceeds for damages from the earthquake and tsunami that occurred in Japan during the third quarter of fiscal 2011. The impact of foreign currency translation decreased selling, general and administrative expenses approximately $5.9 million and $1.7 million for the three and six months ended December 31, 2012, compared with the prior year periods.
Research and development expenditures, which are classified as selling, general and administrative expenses, were approximately $47.9 million, or 4.9% of net revenue and $94.2 million, or 5.0% of net revenue, for the three
and six months ended December 31, 2012, compared with $44.8 million, or 5.2% of net revenue and $88.7 million, or 4.9% of net revenue, for the comparable prior year periods.
Unauthorized activities in Japan for the three and six months ended December 31, 2012 represent investigative and legal fees. See Note 2 of the Notes to Condensed Consolidated Financial Statements.
Other (Expense) Income
Other (expense) income consists primarily of net interest expense, investment income and currency exchange gains or losses. We recorded net expense of $4.3 million and $3.9 million for the three and six months ended December 31, 2012, respectively, compared with net expense of $0.6 million and $1.7 million for the three and six months ended December 31, 2011, respectively. Fluctuations in other (expense) income are primarily due to changes in foreign currency gains and losses as net interest expense and investment income principally offset.
Effective Tax Rate
The effective tax rate was 31.1% for the three months ended December 31, 2012. During the three months ended December 31, 2012, we recorded income tax expense of $31.8 million. The effective tax rate for the six months ended December 31, 2012 was 31.0%.
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 33.7% for the three months ended December 31, 2011.
Backlog
Our order backlog on December 31, 2012 was approximately $404.0 million compared with order backlog of $445.3 million at September 30, 2012 and $346.3 million at December 31, 2011. Orders for the three months ended December 31, 2012 were $919.7 million compared with $943.9 million and $815.3 million for the three months ended September 30, 2012 and December 31, 2011, respectively. Orders for the three months ended December 31, 2012 decreased $24.2 million over the sequential quarter and fell short of net revenue during the period as customer demand weakened. Orders for the three months ended December 31, 2012 improved compared with the prior year period due primarily to new product introductions in the telecommunications and infotech markets. . . .
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