Item 1. Financial Statements
Molex Incorporated
Condensed Consolidated Balance Sheets
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2013
|
|
June 30,
2013
|
|
|
(Unaudited)
|
|
|
|
ASSETS
|
|
Current assets:
|
|
|
|
|
Cash and cash equivalents
|
$
|
665,156
|
|
|
$
|
711,561
|
|
|
Marketable securities
|
11,083
|
|
|
10,378
|
|
|
Accounts receivable, less allowances of $41,376 and $40,855, respectively
|
736,983
|
|
|
703,434
|
|
|
Inventories
|
580,481
|
|
|
531,810
|
|
|
Deferred income taxes
|
54,100
|
|
|
54,163
|
|
|
Other current assets
|
39,901
|
|
|
32,538
|
|
|
Total current assets
|
2,087,704
|
|
|
2,043,884
|
|
|
Property, plant and equipment, net
|
1,128,494
|
|
|
1,114,092
|
|
|
Goodwill
|
231,050
|
|
|
191,053
|
|
|
Non-current deferred income taxes
|
51,735
|
|
|
52,543
|
|
|
Other assets
|
187,034
|
|
|
185,282
|
|
|
Total assets
|
$
|
3,686,017
|
|
|
$
|
3,586,854
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
Current liabilities:
|
|
|
|
|
Short-term borrowings and current portion of long-term debt
|
$
|
42,458
|
|
|
$
|
54,283
|
|
|
Accounts payable
|
354,565
|
|
|
347,700
|
|
|
Accrued expenses:
|
|
|
|
|
Salaries, commissions and bonuses
|
123,729
|
|
|
113,433
|
|
|
Other
|
144,866
|
|
|
127,652
|
|
|
Income taxes payable
|
20,833
|
|
|
15,966
|
|
|
Total current liabilities
|
686,451
|
|
|
659,034
|
|
|
Other non-current liabilities
|
20,702
|
|
|
18,382
|
|
|
Accrued pension and other postretirement benefits
|
74,431
|
|
|
76,275
|
|
|
Long-term debt
|
315,000
|
|
|
310,000
|
|
|
Total liabilities
|
1,096,584
|
|
|
1,063,691
|
|
|
Commitments and contingencies
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
Common stock
|
11,482
|
|
|
11,451
|
|
|
Paid-in capital
|
759,043
|
|
|
753,954
|
|
|
Retained earnings
|
2,665,101
|
|
|
2,623,868
|
|
|
Treasury stock
|
(1,122,464
|
)
|
|
(1,119,358
|
)
|
|
Accumulated other comprehensive income
|
276,271
|
|
|
253,248
|
|
|
Total stockholders’ equity
|
2,589,433
|
|
|
2,523,163
|
|
|
Total liabilities and stockholders’ equity
|
$
|
3,686,017
|
|
|
$
|
3,586,854
|
|
See accompanying Notes to Condensed Consolidated Financial Statements.
Molex Incorporated
Condensed Consolidated Statements of Income
(Unaudited)
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
September 30,
|
|
|
2013
|
|
2012
|
|
Net revenue
|
$
|
936,367
|
|
|
$
|
916,921
|
|
|
Cost of sales
|
633,816
|
|
|
648,504
|
|
|
Gross profit
|
302,551
|
|
|
268,417
|
|
|
Selling, general and administrative
|
179,429
|
|
|
163,121
|
|
|
Unauthorized activities in Japan
|
—
|
|
|
2,561
|
|
|
Total operating expenses
|
179,429
|
|
|
165,682
|
|
|
Income from operations
|
123,122
|
|
|
102,735
|
|
|
Interest expense, net
|
(1,827
|
)
|
|
(810
|
)
|
|
Other (expense) income, net
|
(2,918
|
)
|
|
1,196
|
|
|
Total other (expense) income, net
|
(4,745
|
)
|
|
386
|
|
|
Income before income taxes
|
118,377
|
|
|
103,121
|
|
|
Income taxes
|
34,298
|
|
|
31,807
|
|
|
Net income
|
$
|
84,079
|
|
|
$
|
71,314
|
|
|
Earnings per share:
|
|
|
|
|
Basic
|
$
|
0.47
|
|
|
$
|
0.40
|
|
|
Diluted
|
$
|
0.46
|
|
|
$
|
0.40
|
|
|
Dividends declared per share
|
$
|
0.24
|
|
|
$
|
0.22
|
|
|
Average common shares outstanding:
|
|
|
|
|
Basic
|
178,247
|
|
|
176,621
|
|
|
Diluted
|
181,545
|
|
|
178,564
|
|
See accompanying Notes to Condensed Consolidated Financial Statements.
Molex Incorporated
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
September 30,
|
|
|
2013
|
|
2012
|
|
Net income
|
$
|
84,079
|
|
|
$
|
71,314
|
|
|
Foreign currency translation adjustments
|
25,077
|
|
|
31,053
|
|
|
Pension and postretirement medical benefits adjustments, net of tax of $58 and $421 for the three months ended September 30, 2013 and 2012
|
(3,951
|
)
|
|
(491
|
)
|
|
Unrealized gain on derivative instruments, net of tax of $731 and $1,587 for the three months ended September 30, 2013 and 2012
|
1,413
|
|
|
3,064
|
|
|
Unrealized investment gain (loss), net of tax of $144 and $85 for the three months ended September 30, 2013 and 2012
|
484
|
|
|
(493
|
)
|
|
Other comprehensive income
|
23,023
|
|
|
33,133
|
|
|
Total comprehensive income
|
$
|
107,102
|
|
|
$
|
104,447
|
|
See accompanying Notes to Condensed Consolidated Financial Statements.
Molex Incorporated
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
September 30,
|
|
|
2013
|
|
2012
|
|
Operating activities:
|
|
|
|
|
Net income
|
$
|
84,079
|
|
|
$
|
71,314
|
|
|
Add (deduct) non-cash items included in net income:
|
|
|
|
|
Depreciation and amortization
|
57,245
|
|
|
57,742
|
|
|
Share-based compensation
|
6,195
|
|
|
6,160
|
|
|
Other non-cash items
|
(206
|
)
|
|
3,767
|
|
|
Changes in assets and liabilities:
|
|
|
|
|
Accounts receivable
|
(14,881
|
)
|
|
(7,903
|
)
|
|
Inventories
|
(32,900
|
)
|
|
(28,902
|
)
|
|
Accounts payable
|
(1,359
|
)
|
|
49,569
|
|
|
Other current assets and liabilities
|
10,521
|
|
|
4,326
|
|
|
Other assets and liabilities
|
(9,843
|
)
|
|
11,331
|
|
|
Cash provided from operating activities
|
98,851
|
|
|
167,404
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
Capital expenditures
|
(47,018
|
)
|
|
(69,413
|
)
|
|
Acquisitions
|
(62,993
|
)
|
|
—
|
|
|
Proceeds from sales of property, plant and equipment
|
131
|
|
|
1,914
|
|
|
Proceeds from sales or maturities of marketable securities
|
1,789
|
|
|
3,168
|
|
|
Purchases of marketable securities
|
(2,574
|
)
|
|
(4,099
|
)
|
|
Insurance proceeds and other investing activities
|
(920
|
)
|
|
9,722
|
|
|
Cash used for investing activities
|
(111,585
|
)
|
|
(58,708
|
)
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
Proceeds from revolving credit facility, short-term loans and debt
|
63,510
|
|
|
10,000
|
|
|
Payments on revolving credit facility, short-term loans and debt
|
(70,557
|
)
|
|
(41,611
|
)
|
|
Cash dividends paid
|
(42,723
|
)
|
|
(38,827
|
)
|
|
Exercise of stock options
|
7,680
|
|
|
1,715
|
|
|
Other financing activities
|
(1,112
|
)
|
|
(1,026
|
)
|
|
Cash used for financing activities
|
(43,202
|
)
|
|
(69,749
|
)
|
|
Effect of exchange rate changes on cash
|
9,531
|
|
|
9,608
|
|
|
Net (decrease) increase in cash and cash equivalents
|
(46,405
|
)
|
|
48,555
|
|
|
Cash and cash equivalents, beginning of period
|
711,561
|
|
|
637,417
|
|
|
Cash and cash equivalents, end of period
|
$
|
665,156
|
|
|
$
|
685,972
|
|
See accompanying Notes to Condensed Consolidated Financial Statements.
Molex Incorporated
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1
.
Basis of Presentation
Molex Incorporated (together with its subsidiaries, except where the context otherwise requires, “we,” “us,” and “our”) manufactures electronic components, including electrical and fiber optic interconnection products and systems, switches and integrated products in
45
manufacturing locations in
17
countries.
The accompanying Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments consisting of normal recurring accruals considered necessary for a fair statement of results for the interim period have been included. Operating results for the
three months ended September 30, 2013
are not necessarily an indication of the results that may be expected for the year ending June 30, 2014. The Condensed Consolidated Balance Sheet as of
June 30, 2013
was derived from our audited consolidated financial statements for the year ended
June 30, 2013
. These financial statements and related notes should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended
June 30, 2013
.
The preparation of the unaudited financial statements in conformity with GAAP requires the use of estimates and assumptions related to the reporting of assets, liabilities, revenues, expenses and related disclosures. Significant estimates and assumptions are used in the estimation of income taxes, pension and other post retirement benefits, stock options, allowances for accounts receivable and inventory and impairment reviews for goodwill, intangible assets and other long-lived assets. Estimates are revised periodically. Actual results could differ from these estimates.
On September 9, 2013, we entered into an Agreement and Plan of Merger (Merger Agreement) with Koch Industries, Inc. and Koch Connectors, Inc. which, if completed, will result in stockholders receiving
$38.50
per share in cash, for a total purchase price of approximately
$7.2 billion
. Final consideration will also include a dividend adjustment amount. The transaction is subject to customary closing conditions, regulatory approvals and approval by the holders of a majority of our common voting shares, but is not subject to any condition with regard to the financing of the transaction.
Material subsequent events are evaluated and disclosed through the report issuance date.
2
.
Acquisitions
During the first quarter of fiscal 2014, we acquired FCT Electronics Group, a custom connector and cable assembly company, for
$63.0 million
, net of cash acquired, and recorded goodwill of
$39.4 million
. The purchase price allocation for this acquisition is preliminary and subject to revision as more detailed analysis is completed and additional information about the fair value of assets and liabilities becomes available.
During the second quarter of fiscal 2013, we acquired Affinity Medical Technologies, LLC, a medical electronics company, for
$55.3 million
, net of cash acquired, and recorded goodwill of
$31.6 million
. The purchase price allocation for this acquisition is complete.
3
.
Earnings Per Share
A reconciliation of the basic average common shares outstanding to diluted average common shares outstanding is as follows (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
September 30,
|
|
|
2013
|
|
2012
|
|
Net income
|
$
|
84,079
|
|
|
$
|
71,314
|
|
|
Basic average common shares outstanding
|
178,247
|
|
|
176,621
|
|
|
Effect of dilutive stock options
|
3,298
|
|
|
1,943
|
|
|
Diluted weighted average common shares outstanding
|
181,545
|
|
|
178,564
|
|
|
Earnings per share:
|
|
|
|
|
Basic
|
$
|
0.47
|
|
|
$
|
0.40
|
|
|
Diluted
|
$
|
0.46
|
|
|
$
|
0.40
|
|
There were no anti-dilutive shares excluded from the computation above for the
three months ended September 30, 2013
. For the
three months ended September 30, 2012
,
2.0 million
anti-dilutive shares were excluded from the computation.
4
.
Inventories
Inventories are valued at the lower of first-in, first-out cost or market. Inventories, net of allowances, consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2013
|
|
June 30,
2013
|
|
Raw materials
|
$
|
91,771
|
|
|
$
|
77,202
|
|
|
Work in process
|
174,146
|
|
|
153,581
|
|
|
Finished goods
|
314,564
|
|
|
301,027
|
|
|
Total inventories
|
$
|
580,481
|
|
|
$
|
531,810
|
|
5
.
Pensions and Other Postretirement Benefits
The components of pension benefit cost are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
September 30,
|
|
|
2013
|
|
2012
|
|
Service cost
|
$
|
1,509
|
|
|
$
|
1,627
|
|
|
Interest cost
|
2,155
|
|
|
2,060
|
|
|
Expected return on plan assets
|
(2,442
|
)
|
|
(2,272
|
)
|
|
Amortization of prior service cost
|
53
|
|
|
65
|
|
|
Recognized actuarial losses
|
627
|
|
|
681
|
|
|
Amortization of transition obligation
|
4
|
|
|
10
|
|
|
Other income
|
—
|
|
|
(59
|
)
|
|
Benefit cost
|
$
|
1,906
|
|
|
$
|
2,112
|
|
The components of retiree health care benefit cost are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
September 30,
|
|
|
2013
|
|
2012
|
|
Service cost
|
$
|
19
|
|
|
$
|
179
|
|
|
Interest cost
|
97
|
|
|
341
|
|
|
Amortization of prior service cost
|
(2,572
|
)
|
|
(516
|
)
|
|
Recognized actuarial gains
|
(292
|
)
|
|
(179
|
)
|
|
Benefit
|
$
|
(2,748
|
)
|
|
$
|
(175
|
)
|
Effective December 31, 2012, we amended a postretirement medical benefits plan in the United States to cap subsidies provided to plan participants retiring after January 31, 2013. We remeasured the postretirement medical benefits liability, reducing the liability
$18.5 million
with the offset to other comprehensive income, net of tax. The benefit of the remeasured liability is being recognized over a
27
month period, which is the average time until the remaining active participants in the plan are retirement eligible.
6
.
Debt
Total debt consisted of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
Interest
Rate
|
|
Calendar
Year
Maturity
|
|
September 30,
2013
|
|
June 30,
2013
|
|
Long-term debt:
|
|
|
|
|
|
|
|
|
Private Placement
|
3.59
|
%
|
|
2016 – 2021
|
|
$
|
150,000
|
|
|
$
|
150,000
|
|
|
U.S. Credit Facility
|
1.18
|
%
|
|
2018
|
|
165,000
|
|
|
160,000
|
|
|
Other debt
|
Varies
|
|
|
2013 – 2014
|
|
403
|
|
|
415
|
|
|
Total long-term debt
|
|
|
|
|
315,403
|
|
|
310,415
|
|
|
Less current portion of long-term debt:
|
|
|
|
|
|
|
|
|
Other debt
|
Varies
|
|
|
|
|
403
|
|
|
415
|
|
|
Long-term debt, less current portion
|
|
|
|
|
315,000
|
|
|
310,000
|
|
|
Short-term borrowings:
|
|
|
|
|
|
|
|
|
Overdraft loans
|
0.46
|
%
|
|
2014
|
|
38,369
|
|
|
50,450
|
|
|
Other short-term borrowings
|
Varies
|
|
|
|
|
3,686
|
|
|
3,418
|
|
|
Total short-term borrowings
|
|
|
|
|
42,055
|
|
|
53,868
|
|
|
Total debt
|
|
|
|
|
$
|
357,458
|
|
|
$
|
364,283
|
|
In September 2013, Molex Japan renewed three overdraft loans totaling
¥11.0 billion
with
one
-year terms and fluctuating interest rates based on interbank offered rates plus a spread ranging from
30
basis points to
35
basis points. At
September 30, 2013
, the outstanding balances of the overdraft loans, which require full repayment by the end of the terms if not renewed, approximated
$38.4 million
.
In August 2011, we issued senior notes pursuant to a Note Purchase Agreement (the Agreement) totaling
$150.0 million
through an unregistered, private placement of debt (the Private Placement). The Private Placement consists of three
$50.0 million
series notes: Series A with an interest rate of
2.91%
matures in August 2016; Series B with an interest rate of
3.59%
matures in August 2018; and Series C with an interest rate of
4.28%
matures in August 2021. The Agreement contains customary covenants regarding liens, debt and substantial asset sales and mergers. The Agreement also requires us to maintain financial covenants pertaining to, among other things, our consolidated leverage and interest rate coverage. As of
September 30, 2013
, we were in compliance with these covenants and the balance of the senior notes was
$150.0 million
.
In June 2009, we entered into a
$195.0 million
unsecured, three-year revolving credit facility in the United States (the U.S. Credit Facility), which was subsequently amended, including in April 2013, when we amended and restated the revolving credit facility to increase the credit line to
$500.0 million
and extend the term to April 2018. Borrowings under the U.S. Credit Facility
bear interest at a fluctuating interest rate (based on London Interbank Offered Rate) plus an applicable percentage based on our consolidated leverage. The applicable percentage was
100
basis points as of
September 30, 2013
. The agreement governing the U.S. Credit Facility contains customary covenants regarding liens, debt, substantial asset sales and mergers, dividends and investments. The U.S. Credit Facility also requires us to maintain financial covenants pertaining to, among other things, our consolidated leverage and interest rate coverage. As of
September 30, 2013
, we were in compliance with these covenants and had outstanding borrowings of
$165.0 million
.
Principal payments on long-term debt obligations are due as follows as of
September 30, 2013
(in thousands):
|
|
|
|
|
|
|
|
Year one
|
$
|
403
|
|
|
Year two
|
—
|
|
|
Year three
|
50,000
|
|
|
Year four
|
—
|
|
|
Year five
|
215,000
|
|
|
Thereafter
|
50,000
|
|
|
Total long-term debt obligations
|
$
|
315,403
|
|
We had available lines of credit totaling
$513.8 million
at
September 30, 2013
, including
$335.0 million
available on the U.S. Credit Facility. The lines of credit expire between
2013
and
2018
.
7
.
Income Taxes
The effective tax rate was
29.0%
for the
three months ended September 30, 2013
, reflecting the mix of earnings in tax jurisdictions with tax rates less than the U.S. federal tax rate of
35.0%
and a
$1.2 million
benefit due to the release of a valuation allowance resulting from improved operating performance. During the
three months ended September 30, 2013
, we recorded income tax expense of
$34.3 million
.
The effective tax rate was
30.8%
for the
three months ended September 30, 2012
.
We are subject to tax in U.S. federal, state and foreign tax jurisdictions. The examinations of U.S. federal income tax returns for 2007, 2008 and 2009 were completed during fiscal 2012. The tax years 2010 through 2012 remain open to examination by all major taxing jurisdictions to which we are subject.
It is our practice to recognize interest and penalties related to income tax matters in tax expense. As of
September 30, 2013
, there were
no
material interest or penalty amounts to accrue.
8
.
Accumulated Other Comprehensive Income
The changes in accumulated other comprehensive income, net of tax, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Translation Adjustments
|
|
Pension and Postretirement Medical Benefits
|
|
Unrealized (Loss) Gain on Derivative Instruments
|
|
Unrealized Investment Gain
|
|
Total
|
|
Balance at June 30, 2013
|
$
|
291,613
|
|
|
$
|
(36,322
|
)
|
|
$
|
(2,936
|
)
|
|
$
|
893
|
|
|
$
|
253,248
|
|
|
Other comprehensive income (loss) before reclassifications
|
25,077
|
|
|
(1,129
|
)
|
|
226
|
|
|
484
|
|
|
24,658
|
|
|
Reclassifications to net income
|
—
|
|
|
(2,822
|
)
|
|
1,187
|
|
|
—
|
|
|
(1,635
|
)
|
|
Other comprehensive income (loss)
|
25,077
|
|
|
(3,951
|
)
|
|
1,413
|
|
|
484
|
|
|
23,023
|
|
|
Balance at September 30, 2013
|
$
|
316,690
|
|
|
$
|
(40,273
|
)
|
|
$
|
(1,523
|
)
|
|
$
|
1,377
|
|
|
$
|
276,271
|
|
9
.
Fair Value Measurements
The following table summarizes our financial assets and liabilities, which are measured at fair value on a recurring basis (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Measured
at Fair
Value
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Sept. 30, 2013
|
|
June 30, 2013
|
|
Sept. 30, 2013
|
|
June 30, 2013
|
|
Sept. 30, 2013
|
|
June 30, 2013
|
|
Sept. 30, 2013
|
|
June 30, 2013
|
|
Available-for-sale and trading securities
|
$
|
21,974
|
|
|
$
|
20,772
|
|
|
$
|
21,974
|
|
|
$
|
20,772
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Derivative financial instruments, net
|
1,951
|
|
|
2,081
|
|
|
—
|
|
|
—
|
|
|
1,951
|
|
|
2,081
|
|
|
—
|
|
|
—
|
|
We determine the fair value of our available-for-sale securities based on quoted market prices (Level 1). We generally use derivatives for hedging purposes pursuant to ASC 815-10, which are valued based on Level 2 inputs in the ASC 820 fair value hierarchy. The fair value of our derivative financial instruments is determined by a mark-to-market valuation based on forward curves using observable market prices.
The carrying value of our long-term debt approximates fair value.
10
.
Derivative Instruments and Hedging Activities
We use derivative instruments to manage our foreign exchange and commodity cost exposures. All derivative instruments are recognized at fair value in other current assets or liabilities.
Derivatives Not Designated as Hedging Instruments
We use one-month foreign currency forward contracts to offset the impact of exchange rate volatility on certain assets and liabilities, including intercompany receivables and payables denominated in non-functional currencies. These forward contracts have not been designated as hedges, and the gains or losses on these forward contracts, along with the offsetting losses or gains due to the fluctuation of exchange rates on the underlying foreign currency denominated assets and liabilities, are recognized in other (expense) income. The notional amounts of the forward contracts were
$235.4 million
and
$228.5 million
at
September 30, 2013
and
June 30, 2013
, respectively, with corresponding fair values of a
$1.1 million
liability at
September 30, 2013
and a
$0.8 million
asset at
June 30, 2013
.
Cash Flow Hedges
We use foreign currency forward contracts to hedge a portion of our cash flow exposure to fluctuations in the Chinese renminbi versus the U.S. dollar. These derivative instruments are designated as cash flow hedges and target up to
70%
of our projected U.S. dollar denominated third party sales from a subsidiary based in China. Gains and losses of the effective hedges are recorded as a component of accumulated other comprehensive income (AOCI) and reclassified to cost of sales during the period the third party sales occur. The notional amounts of the forward contracts were
$45.0 million
at
September 30, 2013
and
$37.5 million
at
June 30, 2013
, with immaterial corresponding fair values at
September 30, 2013
and
June 30, 2013
. These forward contracts have maturities of
12 months or less
.
We use derivatives in the form of call options to hedge the variability of gold and copper prices. These derivative instruments are designated as cash flow hedges and hedge approximately
60%
of our planned gold and copper purchases. Gains and losses of the effective hedges are recorded as a component of AOCI and reclassified to cost of sales during the period the product containing the commodity is sold. The fair values of the call options were
$2.8 million
and
$1.1 million
at
September 30, 2013
and
June 30, 2013
, respectively. These call options have maturities of
12 months or less
.
The following table sets forth the impact to AOCI and earnings from cash flow hedges before taxes for the
three months ended September 30
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
2012
|
|
Unrealized gain recognized in AOCI
|
|
$
|
280
|
|
|
$
|
7,147
|
|
|
Realized loss reclassified into earnings
|
|
(1,864
|
)
|
|
(2,496
|
)
|
At
September 30, 2013
,
$2.5 million
is expected to be reclassified from AOCI to cost of sales within the next
12 months
.
11
.
New Accounting Pronouncements
In July 2013, the Financial Accounting Standards Board (the FASB) issued Accounting Standards Update (ASU) No. 2013-11, Income Taxes (Topic 740). This ASU provides guidance on the presentation of unrecognized tax benefits, reflecting the manner in which an entity would settle, at the reporting date, any additional income taxes that would result from the disallowance of a tax position when net operating loss carryforwards, similar tax losses or tax credit carryforwards exist. We adopted ASU 2013-11 in the current quarter. The new guidance will result in enhanced disclosures, but does not otherwise have a material impact on our consolidated financial statements.
In March 2013, the FASB issued ASU No. 2013-05, Foreign Currency Matters (Topic 830). This ASU updates accounting guidance related to foreign currency matters and resolves the diversity in practice about what guidance applies to the release of cumulative translation adjustment into net income. We adopted ASU 2013-05 in the current quarter. The new guidance does not have a material impact on our consolidated financial statements.
In February 2013, the FASB issued ASU No. 2013-02, Comprehensive Income (Topic 220). The guidance requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. We adopted ASU 2013-02 in the current quarter and present reclassifications out of accumulated other comprehensive income in Note
8
.
12
.
Contingencies
We are currently a party to various legal proceedings, claims and investigations including those disclosed below. While management presently believes that the ultimate outcome of these proceedings, individually and in the aggregate, will not materially adversely affect our financial position, legal proceedings are subject to inherent uncertainties, and unfavorable rulings or other events could occur. If one or more unfavorable final outcome were to occur, then our business could be materially and adversely affected.
Employment and Benefits Litigation
In 2009, Molex Automotive SARL (MAS), decided to close a facility it operated in Villemur-sur-Tarn, France. MAS submitted a social plan to MAS’s labor representatives providing for payments to approximately
280
terminated employees. This social plan was adopted by MAS in 2009 and payments were made to those employees until September 2010. In September 2010, former employees of MAS who were covered under the social plan filed suit against MAS and AGS (a state fund for wage guarantee) in the Toulouse Labor Court, requesting additional compensation. The total amount sought by the former employees is approximately
€24.0 million
(
$32.4 million
). Molex International initiated liquidation of MAS, and pursuant to a court proceeding, a liquidator was appointed in November 2010. One of the liquidator’s responsibilities is to assess and respond to the lawsuits involving MAS. In June 2011, the former employees of MAS noticed Molex Incorporated (Molex) as a defendant to the Toulouse Labor Court proceedings. In their court submission, the former employees claim that Molex was a co-employer of the former employees and thus jointly liable for any additional compensation the court awards. The former employees also claim that there was no economic justification for their dismissal, that MAS decided to close the facility before it consulted with the employees and their representatives and that MAS did not adequately comply with its obligation to assist the terminated employees in obtaining alternative employment. The liquidator has filed a submission on behalf of MAS and argues that the dismissal was economically justified, that the former employees have not proven the damages they are seeking but nonetheless Molex was co-employer and thus liable for any additional payments that may be awarded to the former employees. AGS filed its submission, adopting essentially the same substantive position as the liquidator on the dismissal of the former employees but arguing that Molex was the employer.
Molex filed its briefs in reply on January 6, 2012 arguing the plaintiff’s claims be dismissed. In the reply briefs, Molex argued it was not the co-employer of the plaintiffs and the court should find that it lacks jurisdiction over Molex to hear the dispute. In the alternative, Molex argued there was no breach of the information consultation process with the employees and their
representatives, the dismissals were valid and based on economic grounds, MAS complied with its redeployment obligations and requested that the court dismiss the claims for damages. Molex also argued if the court were to award compensation, then any judgment against Molex be several but not jointly with MAS and the amount awarded to plaintiffs not exceed six months’ salary, approximately
€2.0 million
(
$2.7 million
).
On February 24, 2012, the five employees who fall within the executive section submitted a reply brief and requested a postponement of the March 5, 2012 court date. The court granted the request and rescheduled separate court dates for each plaintiff. On June 25, 2012, one plaintiff withdrew his claims against Molex. On May 16, 2013, the Toulouse Appellate Court issued its decision finding that the Toulouse Labor Court has jurisdiction over Molex. Molex intends to appeal this decision to the French Supreme Court.
On February 7, 2013, the Toulouse Appellate Court affirmed the Toulouse Labor Court ruling that it has jurisdiction over Molex with respect to the
190
employees who fall within the industry section. Molex appealed this decision to the French Supreme Court (Court of Cassation), and expects a decision in the first half of calendar year 2014. Separately, the Industry Section of the Labor Court is expected to issue its decision on the merits of the plaintiffs' claims on December 5, 2013.
On March 29, 2012, Molex received notice that the liquidator filed an action against Molex in the Commercial Court of Paris claiming Molex is responsible for the liabilities of MAS that remain as a result of the liquidation. The liquidator alleged that Molex acted as de facto manager of MAS and mismanaged MAS. Although the liabilities are currently estimated at
€1.9 million
(
$2.6 million
), future liabilities of MAS may also include any amounts successfully awarded to plaintiffs in their lawsuits against MAS (described above). Molex filed a brief opposing the liquidator’s claims and the court is expected to issue its decision on December 18, 2013.
We intend to vigorously contest the attempt by the former employees to seek additional compensation from Molex and the liquidator’s attempt to hold Molex responsible for the liabilities of MAS.
Securities and Exchange Commission (SEC) Investigation
On April 25, 2011, the SEC informed us they issued a formal order of private investigation in connection with the previously reported unauthorized activities in Molex Japan Co., Ltd. (Molex Japan). We are fully cooperating with the SEC’s investigation.
In April 2010, we launched an investigation into unauthorized activities at Molex Japan and learned that an individual working in Molex Japan’s finance group obtained unauthorized loans from third party lenders, that included in at least one instance the attempted unauthorized pledge of Molex Japan facilities as security, in Molex Japan’s name that were used to cover losses resulting from unauthorized trading, including margin trading, in Molex Japan’s name. We also learned that the individual misappropriated funds from Molex Japan’s accounts to cover losses from unauthorized trading. The individual admitted to forging documentation in arranging and concealing the transactions. In the Annual Report on Form 10-K for the year ended June 30, 2010, Molex restated prior period financial statements to record liabilities in the periods in which the unauthorized transactions and potential losses occurred.
Shareholder Litigation Relating to the Merger
In September 2013, four class action complaints were filed purportedly on behalf of holders of Molex common stock, with certain exclusions, and named as defendants Molex, each member of Molex’s Board of Directors (the “Individual Defendants”), Koch Industries, Inc. (“Parent”) and Koch Connectors, Inc. (“Merger Sub”). Three class action complaints were filed in Illinois and the fourth in Delaware.
On September 10, 2013, a putative shareholder class action complaint was filed in the Chancery Division of the Circuit Court of DuPage County in the State of Illinois, captioned Carolyn Williams v. Molex Incorporated, et. al., Case No. 2013CH002616. On September 11, 2013, a putative shareholder class action complaint was filed in the Eighteenth Judicial District of the Circuit Court of DuPage County in the State of Illinois, captioned Spoleto Corp. v. Molex Incorporated, et. al., Case No. 2013CH002625. On September 27, 2013, a putative shareholder class action complaint was filed in the Eighteenth Judicial District of the Circuit Court of DuPage County in the State of Illinois, captioned Donald C. Croson v. Molex Incorporated, et. al., Case No. 2013CH002766. These complaints generally allege that the Individual Defendants breached their fiduciary duties by agreeing to a transaction at an inadequate price, by conducting an inadequate sale process and by agreeing to unreasonable deal protection provisions. The complaints also allege that Parent and Merger Sub aided and abetted these purported breaches of fiduciary duties. In addition, the Croson complaint further alleges that the preliminary proxy statement filed by Molex in accordance with the Merger Agreement entered into with Parent and Merger Sub (the “Preliminary Proxy Statement”) contains a variety of inaccurate, misleading or incomplete disclosures about, among other things, the sale process, the financial analysis of the transaction and certain financial
projections. The relief sought by the complaints includes, among other things, an injunction prohibiting the completion of the merger contemplated by the Merger Agreement, rescission (to the extent the merger has been completed) and the payment of plaintiffs’ attorneys’ and experts’ fees and costs. Plaintiffs have consolidated the three cases. Molex believes that the complaints are without merit and intends to vigorously defend the actions.
On September 30, 2013, a putative shareholder class action complaint was filed in the Court of Chancery of the State of Delaware, captioned George Leon Family Trust v. Molex Incorporated, et al., Civil Action No. 8961-VCL. The complaint generally alleges that the Individual Defendants breached their fiduciary duties by conducting an allegedly flawed sale process and agreeing to allegedly improper deal protections. In addition, the complaint alleges that the Preliminary Proxy Statement fails to adequately disclose material information about certain events leading up to the merger and about the financial analyses of the merger set forth in the Preliminary Proxy Statement. The complaint further alleges that Molex, Parent and Merger Sub aided and abetted these purported breaches of fiduciary duties. The relief sought includes, among other things, an injunction prohibiting the completion of the merger, an accounting of putative damages and the payment of plaintiff’s attorneys’ and experts’ fees and costs. Molex believes that the complaint is without merit and intends to vigorously defend the action.
13
.
Segments and Related Information
We have two global reportable segments: Connector and Custom & Electrical. The reportable segments represent an aggregation of three operating segments.
|
|
|
|
•
|
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.
|
Information by segment is summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Connector
|
|
Custom &
Electrical
|
|
Corporate
& Other
|
|
Total
|
|
For the three months ended:
|
|
|
|
|
|
|
|
|
September 30, 2013:
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
$
|
639,525
|
|
|
$
|
296,658
|
|
|
$
|
184
|
|
|
$
|
936,367
|
|
|
Income (loss) from operations
|
111,551
|
|
|
51,422
|
|
|
(39,851
|
)
|
|
123,122
|
|
|
Depreciation & amortization
|
46,323
|
|
|
7,452
|
|
|
3,470
|
|
|
57,245
|
|
|
Capital expenditures
|
34,575
|
|
|
8,102
|
|
|
4,341
|
|
|
47,018
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2012:
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
$
|
656,574
|
|
|
$
|
259,784
|
|
|
$
|
563
|
|
|
$
|
916,921
|
|
|
Income (loss) from operations
|
95,256
|
|
|
40,860
|
|
|
(33,381
|
)
|
|
102,735
|
|
|
Depreciation & amortization
|
46,275
|
|
|
7,079
|
|
|
4,388
|
|
|
57,742
|
|
|
Capital expenditures
|
52,387
|
|
|
13,309
|
|
|
3,717
|
|
|
69,413
|
|
Corporate & Other includes expenses primarily related to corporate operations that are not allocated to segments such as executive management, human resources, legal, finance and information technology. We also include in Corporate & Other the assets of certain plants that are not specific to a particular segment. Corporate & Other loss from operations for the three months ended September 30, 2013 includes
$8.0 million
in one-time merger-related transaction costs.
Segment assets, which are comprised of accounts receivable, inventory and fixed assets, are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Connector
|
|
Custom &
Electrical
|
|
Corporate
& Other
|
|
Total
|
|
September 30, 2013
|
$
|
1,787,680
|
|
|
$
|
546,605
|
|
|
$
|
111,673
|
|
|
$
|
2,445,958
|
|
|
June 30, 2013
|
1,723,316
|
|
|
513,813
|
|
|
112,207
|
|
|
2,349,336
|
|
The reconciliation of segment assets to consolidated total assets is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2013
|
|
June 30,
2013
|
|
Segment assets
|
$
|
2,445,958
|
|
|
$
|
2,349,336
|
|
|
Other current assets
|
770,240
|
|
|
808,640
|
|
|
Other non-current assets
|
469,819
|
|
|
428,878
|
|
|
Consolidated total assets
|
$
|
3,686,017
|
|
|
$
|
3,586,854
|
|
Molex Incorporated
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.
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
Percentage
of Revenue
|
|
2012
|
|
Percentage
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
Quarter
|
|
Comparable
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.
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.
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
|
|
Currency
Translation
|
|
Net
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
|
|
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
.
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
Percentage
of Revenue
|
|
2012
|
|
Percentage
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
|
%
|
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 acquisition activity. Management uses organic net revenue growth together with GAAP measures, such as net revenue and operating income, in its decision making processes related to the operations of our reporting segments and our overall company. Because organic net revenue growth calculations may vary among other companies, organic net revenue growth amounts presented may not be comparable with similar measures of other companies.
Financial Condition and Liquidity
We fund capital projects and working capital needs principally out of operating cash flows and cash reserves. Cash, cash equivalents and marketable securities totaled
$676.2 million
and
$721.9 million
at
September 30, 2013
and
June 30, 2013
, respectively. Cash, cash equivalents and marketable securities as of
September 30, 2013
included $638.9 million held in non-U.S. accounts, including $284.5 million in countries where we may experience administrative delays in withdrawing and transferring cash to U.S. accounts. Transferring cash, cash equivalents or marketable securities to U.S. accounts from non-U.S. accounts could subject us to additional U.S. repatriation income tax. The primary source of our cash flow is cash generated by operations. Principal uses of cash are capital expenditures, dividend payments and business investments. Our long-term financing strategy is to primarily rely on internal sources of funds for investing in property, plant, equipment and acquisitions.
In September 2013, Molex Japan renewed three overdraft loans totaling
¥11.0 billion
with
one
-year terms and fluctuating interest rates based on interbank offered rates plus a spread ranging from
30
basis points to
35
basis points. At
September 30, 2013
, the outstanding balance of the overdraft loans, which requires full repayment by the end of the term, if not renewed, approximated
$38.4 million
.
In August 2011, we issued senior notes pursuant to a Note Purchase Agreement (the Agreement) totaling
$150.0 million
through a private placement of debt (the Private Placement). The Private Placement consists of three
$50.0 million
series notes: Series A with an interest rate of
2.91%
matures in August 2016; Series B with an interest rate of
3.59%
matures in August 2018; and Series C with an interest rate of
4.28%
matures in August 2021. The Agreement requires us to maintain financial covenants pertaining to, among other things, our consolidated leverage and interest rate coverage. As of
September 30, 2013
, we were in compliance with these covenants.
In June 2009, we entered into a
$195.0 million
unsecured, three-year revolving credit facility in the United States (the U.S. Credit Facility), which was subsequently amended and restated, including in April 2013, when we increased the credit line to
$500.0 million
and extended the term to April 2018. The agreement governing the U.S. Credit Facility contains customary covenants regarding liens, debt, substantial asset sales and mergers, dividends and investments. The U.S. Credit Facility also requires us to maintain financial covenants pertaining to, among other things, our consolidated leverage and interest rate coverage. As of
September 30, 2013
, we were in compliance with the covenants of the U.S. Credit Facility and had outstanding borrowings of
$165.0 million
.
Total debt, including obligations under capital leases, totaled
$357.5 million
and
$364.3 million
at
September 30, 2013
and
June 30, 2013
, respectively. We had available lines of credit totaling
$513.8 million
at
September 30, 2013
, including
$335.0 million
available on the U.S. Credit Facility. See Note
6
of the Notes to Condensed Consolidated Financial Statements.
Cash Flows
Below is a table setting forth the key lines of our Condensed Consolidated Statements of Cash Flows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
September 30,
|
|
|
2013
|
|
2012
|
|
Cash provided from operating activities
|
$
|
98,851
|
|
|
$
|
167,404
|
|
|
Cash used for investing activities
|
(111,585
|
)
|
|
(58,708
|
)
|
|
Cash used for financing activities
|
(43,202
|
)
|
|
(69,749
|
)
|
|
Effect of exchange rate changes on cash
|
9,531
|
|
|
9,608
|
|
|
Net (decrease) increase in cash and cash equivalents
|
$
|
(46,405
|
)
|
|
$
|
48,555
|
|
Operating Activities
Cash
provided from
operating activities
decreased
$68.6 million
from the prior year period. Working capital needs increased $55.7 million compared with the prior year period primarily due to an increase in accounts receivable balances related to higher revenue and building of inventory to meet increased customer demand. Working capital is defined as current assets minus current liabilities.
Investing Activities
Cash
used for
investing activities
increased
$52.9 million
from the prior year period primarily due to a
$63.0 million
increase
in acquisitions during the
three months ended September 30, 2013
. Capital expenditures were
$47.0 million
for the
three months ended September 30, 2013
, compared with
$69.4 million
in the prior year period. Capital expenditures
decreased
primarily due to plant expansions and significant investments in new product introductions in the prior year period. Cash used for investing activities for the three months ended September 30, 2012 benefited from $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.
Financing Activities
Cash
used for
financing activities
decreased
$26.5 million
from the prior year period primarily due to a $24.6 million decrease in net payments on debt and a $6.0 million increase in stock option exercises, partially offset by a $3.9 million increase in dividends paid during the
three months ended September 30, 2013
.
Net borrowings on the revolving U.S. Credit Facility were $5.0 million for the
three months ended September 30, 2013
. There were no outstanding borrowings for the
three months ended September 30, 2012
. Cash used for financing activities for the three months ended September 30, 2012 included repayment of unsecured bonds of approximately $25.1 million.
Our quarterly cash dividend was
$0.24
per share for the
three months ended September 30, 2013
, an increase of 9.1% from the previous cash dividend of
$0.22
per share in the prior fiscal year.
As part of our growth strategy, in the future we may acquire other companies in the same or complementary lines of business and pursue other business ventures. The timing and size of any new business ventures or acquisitions we complete may impact our cash requirements.
Contractual Obligations and Commercial Commitments
We have contractual obligations and commercial commitments as described in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Contractual Obligations and Commercial Commitments” of our Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended
June 30, 2013
. In addition, we have obligations under open purchase orders and the long-term liabilities reflected in our consolidated balance sheet, which principally consist of pension and other postretirement benefits obligations and debt. Since
June 30, 2013
, there have been no material changes in our contractual obligations and commercial commitments arising outside of the ordinary course of business. See Note
6
of the Notes to Condensed Consolidated Financial Statements.
Cautionary Statement Regarding Forward-Looking Information
This Quarterly Report contains forward-looking statements that are based on current expectations, estimates, forecasts and projections about our future performance, business, beliefs, and management’s assumptions. In addition, we, or others on our behalf, may make forward-looking statements in press releases or written statements, or in our communications and discussions with investors and analysts in the normal course of business through meetings, web casts, phone calls, and conference calls. Words such as “expect,” “anticipate,” “outlook,” “forecast,” “could,” “project,” “intend,” “plan,” “continue,” “believe,” “seek,” “estimate,” “should,” “may,” “assume,” “potential,” variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. We describe our respective risks, uncertainties and assumptions that could affect the outcome or results of operations in Part 1, Item 1A of our Annual Report on Form 10-K for the year ended
June 30, 2013
(Form 10-K). You should carefully consider the risks described in our Form 10-K. Such risks are not the only ones facing our company; additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also impair our business operations. If any of the risks occur, our business, financial condition or operating results could be materially adversely affected. Among other risks and uncertainties, there can be no guarantee that the pending merger with Koch Industries, Inc. and Koch Connectors, Inc. will be completed, or if it is completed, the time frame in which it will be completed. The pending merger is subject to the satisfaction of certain conditions contained in the Merger Agreement. Pursuing the pending merger could disrupt certain of our current plans, operations, business and employee relationships.
We have based our forward-looking statements on our management’s beliefs and assumptions based on information available to management at the time the statements are made. We caution you that actual outcomes and results may differ materially from what is expressed, implied or forecast by our forward-looking statements. Reference is made in particular to forward-looking statements regarding growth strategies, industry trends, global economic conditions, success of customers, cost of raw materials,
value of inventory, currency exchange rates, labor costs, protection of intellectual property, cost reduction initiatives, acquisition synergies, manufacturing strategies, product development introduction and sales, regulatory changes, competitive strengths, natural disasters, unauthorized access to data, government investigations and outcomes of legal proceedings. Except as required under the federal securities laws, we do not have any intention or obligation to update publicly any forward-looking statements after the distribution of this quarterly report, whether as a result of new information, future events, changes in assumptions or otherwise.