Mail Stop 0306
February 10, 2005
Via Facsimile and U.S. Mail
Mr. Robert B. Mahoney
Acting Chief Financial Officer, Executive
Vice President, and President, Far East South
Molex, Inc.
2222 Wellington Court
Lisle, Illinois 60532
Re: Molex, Inc.
Form 10-K for the year ended June 30, 2004
Filed September 10, 2004
Form 10-Q as of September 30, 2004
Form 8-K`s dated November 11 and December 1, 2004
File No. 0-07491
Dear Mr. Mahoney:
We have reviewed your response letters dated January 31,
2005
and February 7, 2005 and have the following additional comments.
Where indicated, we think you should revise your documents in
response to these comments. If you disagree, we will consider
your
explanation as to why our comments are inapplicable or a revision
is
unnecessary. Please be as detailed as necessary in your
explanation.
In some of our comments, we may ask you to provide us with
supplemental information so we may better understand your
disclosure.
After reviewing this information, we may or may not raise
additional
comments.
Please understand that the purpose of our review process is
to
assist you in your compliance with the applicable disclosure
requirements and to enhance the overall disclosure in your filing.
We look forward to working with you in these respects. We welcome
any questions you may have about our comments or on any other
aspects
of our review. Feel free to call us at the telephone numbers
listed
at the end of this letter.
Form 10-K for the Year Ended June 30, 2004
Item 7. Management`s Discussion and Analysis of Financial
Condition
and Results of Operations - Page 9
Results of Operations - Page 10
1. We see your response to prior comment 2. We also note in your
response to prior comment 3 that in future filings you will
provide a
narrative discussion of any identified changes in volume by major
product lines or in overall unit sales growth. We further note
that
in future filings you will provide a narrative discussion of any
identified changes in price by major product lines. Please
explain
how you define "major product lines" for purposes of this
disclosure
and address why revenues by major product lines should not be
included in the notes to your financial statements. See paragraph
37
of SFAS 131.
Financial Statements and Supplementary Data - Page 19
Note 2 - Significant Accounting Policies - Page 25
Revenue Recognition - Page 27
2. See prior comment 10. We note that you have consignment
arrangements with customers. If material, please revise future
filings to discuss the significant terms of these arrangements and
disclose your revenue recognition policies for these sales. Also,
tell us how you determine when to record these sales. Explain the
"pull" signal referred to in your response.
3. See prior comment 10. We note that you account for returns of
product, other than warranty claims, under SFAS 5 and not SFAS 48.
Based upon the information provided, it appears that you should be
accounting for your sales returns under SFAS 48. Please revise to
account for these returns in accordance with SFAS 48 for all
periods
presented, including interim periods, or tell us in detail why you
believe that SFAS 5 is the appropriate literature and request your
auditors to tell us whether or not they believe your accounting
policy complies with generally accepted accounting principles. In
addition, please provide a revised rollforward schedule of your
reserves showing adjustments made to the reserves in each period.
That is, revise the schedule provided in Appendix 2 of your
February
7, 2005 response letter to reflect a separate column for (a)
amounts
charged to income, (b) payments and (c) adjustments due to
reversals.
Reclassifications - Page 28
4. With respect to your disclosures of reclassifications and
corrections of errors, please revise future filings as follows:
a) Clearly describe the nature and amounts of the adjustments and
the
period to which the amount relates.
b) Disclose when you identified the error.
c) If the error relates to a prior period and you are not
restating
prior period financial statements, please state why. For
instance,
state, if true, that you concluded that the effects of these
adjustments, as well as any unrecorded adjustments, were not
material
individually or in the aggregate to the current year or any prior
year. If this statement is not true, please explain to us why you
have not restated prior period financial statements.
d) If you are not recording the correction of the error in the
period
in which you discovered the error, please explain why, both
supplementally and in your future filings.
e) Include a table in your footnote disclosure showing the impact
of
each adjustment in total and by the fiscal year to which it
relates.
f) See our comment below regarding the determination of which
adjustments to record related to prior period errors. Similar to
our
comment with respect to your corrections of errors in
classification,
we believe you should use a reasonable basis for determining which
adjustments to record in your financial statements.
5. We note your response to prior comment 15. We note that in
providing for certain prior period reclassifications, you have
elected to include certain items, but exclude other items.
Explain
your basis for determining what amounts to reclassify. For
example,
for 2003, we note that you did not include the effects of the $3.5
million reclassification from non-operating loss to cost of sales
relating to impairment of licensed technology nor did you include
the
effects of the $3.1 million reclassification from selling, general
and administrative expenses to cost of sales relating to the
write-
off of certain inventory. However, you did elect to reflect the
$675,000 reclassification from other income to cost of sales. It
appears that you also excluded some corrections of errors in
classification from your statement of cash flows. Please restate
your financial statements to correct the errors in classification
if
material. Otherwise, if you believe the amounts are not material
for
restatement, you should disclose your opinion, the nature and
amount
of the corrections of errors in classifications, and use a
reasonable
basis for determining which reclassification entries to include in
your revised presentation.
6. We note your responses to prior comments 6, 7, 15, 16, 25, 29,
32,
33, and 44. You state that you have concluded that each of the
adjustments and reclassifications contained therein are not
material
to the financial statements. In addition, we note per review of
the
supplemental information provided in appendix 42 that your
auditors
highlighted certain other adjustments recorded in the first
quarter
of 2005, including an adjustment to the Sumitmo cable reserve,
revenue recognition cut-off in two locations and the adjustment of
bonus accruals. Finally, we note throughout your responses
references to various additional adjustments, reclassifications
and
corrections of errors that are being recorded in the second
quarter
of 2005. Provide us with a comprehensive qualitative and
quantitative analysis of the materiality of the adjustments and
errors in classification based on the guidance in SAB 99. Your
analysis should include addressing the following specific items:
a) Provide the analysis on a comprehensive basis assuming all
aforementioned adjustments, reclassifications and errors had been
recorded in the appropriate periods. That is, this analysis
should
address whether or not the prior period errors are material for
restatement in prior periods.
b) Provide the analysis on a comprehensive basis based on the
manner
in which the aforementioned adjustments and reclassifications are
currently being reflected in your financial statements, including
your second quarter 2005 financial statements. That is, this
analysis should address whether or not the correction of prior
period
errors in the current period is material to the current period.
Include an analysis of materiality for the manner in which you are
recording the corrections between the first and second quarter and
not just in the first quarter.
c) Include your statement of cash flows.
7. See prior comments 36 and 44. We note from your January 31,
2005
response letter, including Appendix 44.1, that you had identified
an
estimated over-accrual in your accounts receivable reserve of $3
to
$4 million. Based upon various disclosures, it appears that you
knew
about this matter prior to filing your September 30, 2004 Form 10-
Q.
If you do not restate prior periods for this error, please provide
us
with your analysis of why you plan to record this adjustment of a
prior period error in the second quarter and not the first quarter
of
fiscal 2005. Explain in detail the company`s policies with
respect
to the determination of how and when to record and recognize
errors
in your financial statements and how your policies comply with
generally accepted accounting principles. We note that your audit
committee is reviewing your reserve creation and reversal
practices
and that you will provide us with the results of that review.
Note 3 - Restatement of Cash Flow Activities - Page 29
8. See prior comment 16. Please clarify your disclosure in future
filings, as noted from your response, to state that you made
similar
errors in fiscal 2002 and the first three quarters of 2004 and why
you did not restate for those errors.
Item 9A. Controls and Procedures - Page 43
9. We note your response to prior comment 20. In your response,
you
indicate the clerical error relating to the manual adjustment to
reclassify the change in certain other asset accounts totaled
$25.4
million. However, we note in your disclosures on page 7 of your
10-Q
as of September 30, 2004 that the restatement of cash flow
activities
reduced cash provided by operating activities by $44.6 million.
Please supplementally tell us and revise future disclosures to
clearly describe the nature of all items that caused the changes.
Also, clarify your disclosure in future filings, as noted from
your
response, to state that you made similar errors in fiscal 2002 and
the first three quarters of 2004.
Form 10-Q for the Quarterly Period Ended September 30, 2004
Part I - Financial Information - Page 3
Item 1. Financial Statements - Page 3
10. We note your response to prior comment 24. We note that you
intend to include the review report of your new auditor in your
10-
Q/A for the quarter ended September 30, 2004. Please request your
auditor to tell us how they considered paragraph 37(g) of SAS 100
in
light of the adjustments that are being recorded in the second
quarter of 2005.
Note 3 - Prior Year Adjustment - Page 8
11. See prior comment 30 from our December 17, 2004 letter to you
and
prior comment one from our February 4, 2005 letter to you. Please
respond to the following comments:
a) Please disclose in your September 30, 2004 10-Q to what periods
the remainder of the cumulative adjustment relates. That is, from
your analysis it appears that $5.4 million, or 67.5%, of the total
cumulative amount relates to periods on or before 1999.
b) Please tell us in more detail how you calculated the amount of
the
restatement for each period, including the cumulative amount of
$5.4
million in 1999. In your response, address why the fiscal year
effect
is negative in 2001 and why the fiscal year effect is 5.2%,
(11.7)%,
2.4%, 1.7%, and 10.8% in 2000, 2001, 2002, 2003, and 2004 of total
in-transit inventory for each period.
c) Your response states that the adjustment related to profit-in-
inventory in one fiscal year reverses in subsequent fiscal periods
when the inventory is sold to an end-user, third party customer.
In
addition, the example intercompany elimination entry you provided
in
Appendix 1.2 of your February 7, 2005 response letter would also
reflect that if the elimination entry were not recorded in each
period that the impact is reversing once the inventory is sold to
a
third party. As such, please explain what the cumulative effect of
$8.0 million represents as of June 30, 2004. Address whether the
$8.0
million represents an elimination of profit in inventory for
inventory still on hand. We again note that the majority of the
$8.0
million relates to periods on or prior to 1999. If so, tell us the
total amount of intercompany inventory still on hand as of June
30,
2004 by the period that the inventory was transferred. Address
reserve balances and requirements for this inventory.
d) We note that your adjustment of $8.0 million is an increase to
cost of sales and a reduction of inventory. Explain why it is
appropriate to reduce inventories for the $8.0 million. Also see
our
comment in (c) above.
e) Please show us how you applied the percent of profit-in-
inventory
for inventory on-hand to your inventory-in-transit and why this
percentage properly excludes slow and excess. Explain why the
percentages listed in comment (b) above show percentage that do
not
appear to correspond to your intercompany profit margin. Explain
why
it is appropriate to apply your reserve for slow and excess
inventory
to inventory-in-transit. Reconcile this response with your
analysis
in Appendix 44.1 of your January 31, 2005 response letter.
12. See prior comment 32. Based upon your response, it appears
that
you recorded the original reserve of $2.7 million in error.
Please
clarify, if true, in your disclosure that the reversal is due to
the
correction of an error and not a change in estimate.
13. See response to prior comment 44 and Appendix 44.4 of your
January 31, 2005 response letter. Please explain to us in more
detail how you calculate the accrual for vacation under the new
policy. Explain how your calculation considers terminated
employees
and differences in anniversary dates. Explain how you used the
actual number of hours at December 31, 2004 to determine the
adjustment to your vacation accrual balance. Explain how you
first
became aware of this problem and a chronology of significant
events
from that date.
Item 4. Controls and Procedures - Page 13
14. We note your response to prior comment 34. We also see your
proposed revised disclosure included as Exhibit A to your
response.
We further note your statement included in your revised disclosure
that management has concluded that your disclosure controls and
procedures are effective "to ensure that information required to
be
disclosed by Molex in reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported
within
the time periods specified in the Securities and Exchange
Commission`s rules and forms." The language that is currently
included after the word "effective" in your disclosure appears to
be
superfluous, since the meaning of "disclosure controls and
procedures" is established by Rule 13a-15(e) of the Exchange Act.
However, if you do not wish to eliminate this language, please
revise
to clarify, if true, that your officers have also concluded that
your
disclosure controls and procedures are effective to ensure that
information required to be disclosed in the reports that you file
or
submit under the Exchange Act is accumulated and communicated to
your
management, including your chief executive officer and chief
financial officer, to allow timely decisions regarding required
disclosure. Refer to Rule 13a-15(e) of the Exchange Act.
15. We note your disclosure on page 14 of your 10-Q that
"management
is not aware of any information which would result in any
adjustments
to the financial information included in this Form 10-Q."
Further,
we note in your proposed amended Item 4 disclosures included as
Exhibit A to your response that you state that "the unaudited
financial statements included in this Form 10-Q reflect all
adjustments that, in the opinion of management, are necessary for
a
fair presentation of information for the interim periods
presented."
In light of the additional adjustments that are being recorded in
the
second quarter of 2005, including the $1.9 million loss on
investment, the $5.6 million correction of an error in the
vacation
accrual and the $4.0 million relating to the reduction in your
accounts receivable reserve, provide us with additional details
regarding why management feels it is able to make these
statements.
16. In light of the fact that numerous deficiencies existed,
disclose
in reasonable detail the basis of officers` conclusions that the
company`s disclosure controls and procedures were nonetheless
effective as of the end of the period covered by the report.
17. See prior comment 36. Please provide the disclosures
previously
requested for each significant deficiency.
18. In light of the apparent deficiencies in your system of
internal
control over financial reporting that existed as of the beginning
of
the period covered by this report, and given the disclosed
modifications to the design and operation of your internal control
over financial reporting that were made during the period covered
by
this report, please disclose in reasonable detail the basis for
your
statement that, during the period covered by this report, there
were
no changes to your internal control over financial reporting that
have materially affected, or that are reasonably likely to
materially
affect, your internal control over financial reporting.
19. We note the November 30, 2004 letter from Deloitte & Touche
LLP
attached as Exhibit 16.1 to your Form 8-K/A filed on December 1,
2004. Please tell us what consideration you have given to
addressing
in the context of your controls and procedures disclosures the
different or additional facts pertaining to the events that
occurred
during the period covered by this report that were noted by
Deloitte
& Touche in its letter, to the extent that those different or
additional facts may impact your management`s conclusion as to the
effectiveness of your disclosure controls and procedures and/or to
the extent that those different or additional facts may impact
your
disclosures with respect to changes in your internal control over
financial reporting.
Other
20. We note the three acknowledgements included at the end of your
letters filed in response to our December 17, 2004 comment letter.
We also note, however, that the third of those acknowledgements
differs materially from the acknowledgement requested in our
original
comment letter, in that the acknowledgement provided begins with
four
additional words that were not included in the acknowledgement
requested. Please provide all three acknowledgements in the form
previously requested.
* * * * * * * *
As appropriate, please amend your September 30, 2004 Form
10-Q
and respond to these comments within 10 business days or tell us
when
you will provide us with a response. You may wish to provide us
with
marked copies of the amendment to expedite our review. Please
furnish
a cover letter with your amendment that keys your responses to our
comments and provides any requested supplemental information.
Detailed cover letters greatly facilitate our review. Please file
your cover letter on EDGAR. Please understand that we may have
additional comments after reviewing your amendment and responses
to
our comments.
We urge all persons who are responsible for the accuracy and
adequacy of the disclosure in the filings reviewed by the staff to
be
certain that they have provided all information investors require.
Since the company and its management are in possession of all
facts
relating to a company`s disclosure, they are responsible for the
accuracy and adequacy of the disclosures they have made.
In connection with responding to our comments, please
provide,
in writing, a statement from the company acknowledging that
* The company is responsible for the adequacy and accuracy of the
disclosure in the filings;
* Staff comments or changes to disclosure in response to staff
comments in the filings reviewed by the staff do not foreclose the
Commission from taking any action with respect to the filing; and
* The company may not assert staff comments as a defense in any
proceeding initiated by the Commission or any person under the
federal securities laws of the United States.
In addition, please be advised that the Division of
Enforcement
has access to all information you provide to the staff of the
Division of Corporation Finance in our review of your filing or in
response to our comments on your filing.
You may contact Kevin Vaughn, Staff Accountant, at (202)
824-
5387, Kate Tillan, Reviewing Accountant, at (202) 942-2861, or me
at
(202) 942-2813 if you have questions regarding these comments. In
this regard, do not hesitate to contact Martin James, the Senior
Assistant Chief Accountant, at (202) 942-1984.
Sincerely,
Daniel Gordon
Branch Chief
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Robert B. Mahoney
Molex, Inc.
February 10, 2005
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