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MOLX > SEC Filings for MOLX > Form 10-Q on 24-Oct-2013All Recent SEC Filings

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Form 10-Q for MOLEX INC


24-Oct-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

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, 2013. 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, cable assemblies, interconnection systems, sockets, antennas, integrated products and switches in 45 manufacturing locations in 17 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, infotech and mobile devices 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 2.1% during the three months ended September 30, 2013 compared with the prior year period primarily due to strong demand in the Americas region and an increase in customer demand in the automotive, telecommunications and industrial markets. Gross margin increased during the three months ended September 30, 2013 compared with the prior year period primarily due to higher revenue, favorable mix of product sales, lower commodity costs and higher absorption of fixed costs. Selling, general and administrative expenses were higher during the three months ended September 30, 2013 compared with the prior year period primarily to support the increase in net revenue and due to $8.0 million in one-time merger-related transaction costs in the current quarter. Income from operations reached a new record during the three months ended September 30, 2013 primarily due to higher gross profit, partially offset by higher selling, general and administrative expenses.

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, 2013 filed with the Securities and Exchange Commission, which is incorporated by reference in this Form 10-Q.


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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
                                     2013       of Revenue       2012      of Revenue
Net revenue                       $ 936,367        100.0 %    $ 916,921        100.0 %
Cost of sales                       633,816         67.7 %      648,504         70.7 %
Gross profit                        302,551         32.3 %      268,417         29.3 %
Selling, general & administrative   179,429         19.2 %      163,121         17.8 %
Unauthorized activities in Japan          -            - %        2,561          0.3 %
Income from operations              123,122         13.1 %      102,735         11.2 %
Other (expense) income, net          (4,745 )       (0.5 %)         386            - %
Income before income taxes          118,377         12.6 %      103,121         11.2 %
Income taxes                         34,298          3.6 %       31,807          3.4 %
Net income                        $  84,079          9.0 %    $  71,314          7.8 %

Net Revenue

We sell our products in six primary markets. Our connectors, interconnecting devices and assemblies are used principally in the automotive, infotech, mobile devices, consumer, industrial and telecommunications markets. Our products are used in a wide range of applications including: servers and storage devices; networking products; mobile products such as mobile phones, tablets and notebook computers; home entertainment products such as televisions and gaming systems; automobile infotainment and safety systems; and factory automation and diagnostic equipment.

During the first quarter of fiscal 2014, net revenue increased 6.1% compared with the fourth quarter of fiscal 2013 (sequential quarter) primarily due to improved customer demand in the telecommunications, mobile devices and consumer markets. Net revenue increased 2.1% compared with the first quarter of fiscal 2013 (comparable quarter) primarily due to continued growth in the automotive market and improved demand in the industrial and telecommunications markets, partially offset by foreign currency translation, weaker demand in the consumer market and reduced demand for new products introduced in the first quarter of fiscal 2013 in the mobile devices market. The increase (decrease) in net revenue from each market during the sequential quarter and the comparable quarter follows:

                   Sequential    Comparable
                     Quarter       Quarter
Telecommunications    19  %           6  %
Infotech              (2 )           (1 )
Mobile devices        17            (12 )
Consumer               7            (11 )
Industrial             1              7
Automotive             1             21

Telecommunications market net revenue increased versus both the comparable and sequential quarters primarily due to improved demand for networking products to meet increasing bandwidth requirements resulting from delayed infrastructure spending in prior periods.

Infotech market net revenue decreased versus both the sequential and comparable quarters primarily due to lower enterprise spending and lower customer demand for desktop computers.

Mobile devices market net revenue increased versus the sequential quarter primarily due to increased demand for mobile phones, tablets and accessories related to our customers' new model introductions in advance of the holiday season. Mobile devices market net revenue decreased versus the comparable quarter due to lower demand for new programs introduced in the prior year period for certain mobile phones and tablets and unfavorable foreign currency translation.


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Consumer market net revenue increased versus the sequential quarter due to increased demand, primarily for gaming systems, in advance of the holiday season. Consumer market net revenue decreased versus the comparable quarter due to lower customer demand for gaming systems and home entertainment products, such as televisions, and unfavorable foreign currency translation.

Industrial market net revenue increased versus both the sequential and comparable quarters due to improved demand in the distribution channel for transportation and production equipment to support our customers' increased production. Industrial market net revenue also increased versus the comparable quarter as companies are investing in automation projects after deferring projects in the prior year.

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 global automotive production.

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

Three Months Ended
September 30,
               2013         2012
Americas         31 %         26 %
Asia Pacific     57           63
Europe           12           11
Total           100 %        100 %

Net revenue in the Americas region increased during the three months ended September 30, 2013 compared with the prior year period primarily due to strong growth in the automotive, telecommunications and industrial markets. Net revenue in the Asia Pacific region decreased during the three months ended September 30, 2013 compared with the prior year period primarily due to lower demand in the consumer and mobile devices markets and unfavorable foreign currency translation. Net revenue in Europe increased during the three months ended September 30, 2013 compared with the prior year period primarily due to growth in the automotive and industrial markets and favorable foreign currency translation.

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

                                                                   Three Months Ended
                                                                   September 30, 2013
Net revenue for prior year period                                 $         916,921
Components of net revenue change:
Organic net revenue change                                                   26,399
Currency translation                                                        (17,056 )
Acquisitions                                                                 10,103
Total change in net revenue from prior year period                           19,446
Net revenue for current year period                               $         936,367
Organic net revenue change as a percentage of net revenue for
prior year period                                                               2.9 %

Organic net revenue increased during the three months ended September 30, 2013 compared with the prior year period primarily due to strong demand in the Americas region and increased customer demand in the automotive, telecommunications and industrial markets, partially offset by lower demand in the consumer and mobile devices markets. We acquired FCT Electronics Group during the first quarter of fiscal 2014 and Affinity Medical Technologies, LLC during the second quarter of fiscal 2013.


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Foreign currency translation decreased net revenue approximately $17.1 million for the three months ended September 30, 2013 compared with the prior year period primarily due to a weaker 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, 2013
                    Local         Currency         Net
                   Currency     Translation       Change
Americas          $ 49,835     $       (156 )   $ 49,679
Asia Pacific       (18,322 )        (22,998 )    (41,320 )
Europe               5,093            6,098       11,191
Corporate & Other     (104 )              -         (104 )
Net change        $ 36,502     $    (17,056 )   $ 19,446

The change in net revenue compared with the prior year period on a local currency basis was as follows:
Three Months Ended
September 30, 2013

Americas             20.9  %
Asia Pacific         (3.2 )
Europe                4.8
Total                 4.0  %

Gross Profit

The following table sets forth gross profit and gross margin for the three
months ended September 30 (in thousands):
                2013          2012
Gross profit $ 302,551     $ 268,417
Gross margin      32.3 %        29.3 %

Gross profit increased for the three months ended September 30, 2013 compared with the prior year period due to the increase in net revenue, favorable mix of product sales, lower commodity costs and higher absorption of fixed costs. Gross profit for the three months ended September 30, 2012 was lower due to 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. Net of scrap recovery, we purchased approximately 4.9 million pounds of copper and approximately 12,400 troy ounces of gold during the three months ended September 30, 2013. The following table sets forth the average prices of copper and gold we purchased during the three months ended September 30:

                               2013          2012
Copper (price per pound)    $     3.23    $     3.52
Gold (price per troy ounce)   1,330.00      1,653.00

We mitigate the impact of any significant fluctuations in copper and gold prices by hedging a portion of our projected net global purchases with call options. The hedges increased cost of sales by $1.9 million and $2.5 million for the three months ended September 30, 2013 and 2012, respectively.

In addition to commodity costs, the following table sets forth the increase (decrease) in gross profit of certain significant items for the three months ended September 30, 2013 compared with the prior year period (in thousands):
Price erosion $ (13,533 )
Currency translation (7,056 )
Currency transaction 14,092


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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 devices 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, 2013 was primarily due to a weaker Japanese yen against the U.S. dollar, partially offset by a stronger euro against the U.S. dollar 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 during the three months ended September 30, 2013 compared with the prior year period was primarily due to the significant weakening of the Japanese yen against the U.S. dollar.

Operating Expenses

Operating expenses were as follows for the three months ended September 30 (in
thousands):
                                                                      2013          2012
Selling, general and administrative                                $ 179,429     $ 163,121
Unauthorized activities in Japan                                           -         2,561
Selling, general and administrative as a percentage of net revenue      19.2 %        17.8 %

Selling, general and administrative expenses increased $16.3 million for the three months ended September 30, 2013, compared with the prior year period, primarily to support the increase in net revenue and due to $8.0 million in one-time merger-related transaction costs. Selling, general and administrative expenses for the three months ended September 30, 2012 were reduced $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 $4.8 million for the three months ended September 30, 2013, compared with the prior year period.

Research and development expenditures, which are classified as selling, general and administrative expenses, were approximately $45.0 million, or 4.8% of net revenue, for the three months ended September 30, 2013, compared with $46.3 million, or 5.0% 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.

Other (Expense) Income

Other (expense) income consists primarily of net interest expense, investment income and currency transaction exchange gains or losses. We recorded net expense of $4.7 million for the three months ended September 30, 2013, compared with other income of $0.4 million for the three months ended September 30, 2012. Fluctuations in other (expense) income are primarily due to changes in foreign currency gains and losses.

Effective Tax Rate

The effective tax rate was 29.0% for the three months ended September 30, 2013. During the three months ended September 30, 2013, we recorded income tax expense of $34.3 million which was net of a $1.2 million benefit due to the release of a valuation allowance resulting from improved operating performance.

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 30.8% for the three months ended September 30, 2012.


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Backlog

Our order backlog on September 30, 2013 was approximately $471.6 million compared with order backlog of $452.8 million at June 30, 2013 and $445.3 million at September 30, 2012. Orders for the three months ended September 30, 2013 were $939.1 million compared with $880.0 million and $943.9 million for the three months ended June 30, 2013 and September 30, 2012, respectively. Orders increased $59.1 million over the sequential quarter and were consistent with net revenue for the three months ended September 30, 2013 as orders improved in all of our primary markets. Orders improved compared with the prior year period primarily due to an increase in customer demand in the automotive, industrial, telecommunications and infotech markets, partially offset by weaker demand in the consumer and mobile devices 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
                       2013      of Revenue       2012      of Revenue
Connector           $ 639,525         68.3 %   $ 656,574         71.6 %
Custom & Electrical   296,658         31.7       259,784         28.3
Corporate & Other         184            -           563          0.1
Total               $ 936,367        100.0 %   $ 916,921        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
                                                                   September 30, 2013
Net revenue for prior year period                                 $        656,574
Components of net revenue change:
Organic net revenue change                                                  (1,063 )
Currency translation                                                       (17,630 )
Acquisitions                                                                 1,644
Total change in net revenue from prior year period                         (17,049 )
Net revenue for current year period                               $        639,525
Organic net revenue change as a percentage of net revenue for
prior year period                                                             (0.2 )%

The Connector segment sells primarily to the telecommunications, infotech, mobile devices, consumer and automotive markets. Organic net revenue and segment net revenue decreased during the three months ended September 30, 2013 compared with the prior year period primarily due to decreased demand for new programs introduced in the mobile devices market in the prior year period and lower demand in the consumer market for gaming systems and home entertainment products, partially offset by continued growth in the automotive market and improved demand in the telecommunications market. Price erosion, which is generally higher in the Connector segment compared with our Custom & Electrical segment, also negatively impacted organic net revenue and segment net revenue. Foreign currency translation decreased net revenue by $17.6 million for the three months ended September 30, 2013 primarily due to a weaker Japanese yen against the U.S dollar. We acquired FCT Electronics Group during the first quarter of fiscal 2014.

The following table provides information on income from operations and operating margin for the Connector segment for the three months ended September 30 (in thousands):

                          2013          2012
Income from operations $ 111,551     $ 95,256
Operating margin            17.4 %       14.5 %


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Connector segment income from operations and operating margin increased for the three months ended September 30, 2013 compared with the prior year period despite lower net revenue due to favorable mix of product sales, lower commodity costs, controlled spending and higher absorption of fixed costs. Selling, general and administrative expenses for the three months ended September 30, 2012 were reduced $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.

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
                                                                   September 30, 2013
Net revenue for prior year period                                 $         259,784
Components of net revenue change:
Organic net revenue change                                                   27,863
Currency translation                                                            552
Acquisitions                                                                  8,459
Total change in net revenue from prior year period                           36,874
Net revenue for current year period                               $         296,658
Organic net revenue change as a percentage of net revenue for
prior year period                                                              10.7 %

The Custom & Electrical segment sells primarily to the industrial, telecommunications and infotech markets. Custom & Electrical segment organic net revenue increased for the three months ended September 30, 2013 compared with the prior year period primarily due to improved demand in the telecommunications market and the distribution channel for transportation and production equipment in the industrial market. Foreign currency translation increased net revenue $0.6 million for the three months ended September 30, 2013. We acquired Affinity Medical Technologies, LLC during the second quarter of fiscal 2013.

The following table provides information on income from operations and operating margin for the Custom & Electrical segment for the three months ended September
30 (in thousands):

                          2013         2012
Income from operations $ 51,422     $ 40,860
Operating margin           17.3 %       15.7 %

Custom & Electrical income from operations and operating margin increased for the three months ended September 30, 2013 compared with the prior year period primarily due to higher net revenue, favorable mix of product sales, lower commodity costs and controlled spending.

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 GAAP reported net revenue growth (the most directly comparable GAAP financial measure) to organic net revenue growth.

We believe organic net revenue growth provides useful information to investors because it reflects the underlying growth from the ongoing activities of our business and provides investors with a view of our operations from management's perspective. We use organic net revenue growth to monitor and evaluate performance, since it is an important measure of the underlying results of our operations. It excludes items that are not completely under management's control, such as the impact of changes in foreign currency exchange rates, and items that do not reflect the underlying growth of the company, such as . . .

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