UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 1999 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from Commission File Number 0-7491 MOLEX INCORPORATED (Exact name of registrant as specified in its charter) Delaware 36-2369491 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 2222 Wellington Court, Lisle, Illinois 60532 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 630-969-4550 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date (applicable only to corporate registrants). At December 31, 1999 as restated for the January 2000 stock dividend: Common Stock 98,275,285 shares Class A Common Stock 97,741,934 shares Class B Common Stock 94,255 shares MOLEX INCORPORATED FORM 10-Q DECEMBER 31, 1999 INDEX Page 	 ---- PART I - FINANCIAL INFORMATION Item 1.	Financial Information - Unaudited Condensed Consolidated Balance Sheets -- 2 December 31, 1999 and June 30, 1999 Condensed Consolidated Statements of Income -- 3 Three and Six Months Ended December 31, 1999 and 1998 Condensed Consolidated Statements of Cash Flows -- 4 Six Months Ended December 31, 1999 and 1998 Notes to Condensed Consolidated Financial Statements 5 Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations 7 Item 3.	Quantitative and Qualitative Disclosure About Market Risk 11 PART II - OTHER INFORMATION 12 MOLEX INCORPORATED CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited - In Thousands) ASSETS Dec. 31, June 30, 1999 1999 _________ _________ CURRENT ASSETS: Cash and cash equivalents $ 194,124 $ 182,992 Marketable securities 76,742 83,874 Accounts receivable - net 450,575 391,120 Inventories 234,294 188,861 Other current assets 20,735 34,491 Total current assets 976,470 881,338 PROPERTY, PLANT AND EQUIPMENT - NET 906,418 809,602 GOODWILL 135,521 137,378 OTHER ASSETS 138,563 73,694 $2,156,972 $1,902,012 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 205,877 $ 156,556 Accrued expenses 142,846 130,969 Other current liabilities 23,805 54,916 Total current liabilities 372,528 342,441 DEFERRED ITEMS 15,516 6,968 ACCRUED POSTRETIREMENT BENEFITS 40,675 30,706 LONG-TERM DEBT 23,355 20,148 MINORITY INTEREST 1,601 1,212 SHAREHOLDERS' EQUITY Common stock 8,432 8,415 Paid-in capital 238,792 233,806 Retained earnings 1,583,297 1,491,337 Treasury stock (218,946) (193,317) Deferred unearned compensation (19,564) (21,996) Cumulative translation and other adjustments 111,286 (17,708) Total shareholders' equity 1,703,297 1,500,537 $2,156,972 $1,902,012 The accompanying notes are an integral part of these condensed consolidated financial statements. MOLEX INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited - In Thousands Except per Share Data) THREE MONTHS ENDED SIX MONTHS ENDED Dec. 31, Dec. 31, Dec. 31, Dec. 31, 1999 1998 1999 1998 NET REVENUE $543,009 $429,718 $1,034,879 $839,610 COST OF SALES 333,554 253,121 632,001 497,437 Gross Profit 209,455 176,597 402,878 342,173 OPERATING EXPENSES: Selling 41,681 35,452 79,585 69,264 Administrative 91,667 75,561 182,894 151,675 Total Operating Expenses 133,348 111,013 262,479 220,939 Income from Operations 76,107 65,584 140,399 121,234 OTHER INCOME: Foreign currency transaction loss (999) (2,388) (1,637) (2,655) Interest income, net 2,396 1,374 4,047 4,822 Total Other Income/(Loss) 1,397 (1,014) 2,410 2,167 INCOME BEFORE INCOME TAXES 77,504 64,570 142,809 123,401 INCOME TAXES 23,386 20,697 43,194 40,355 NET INCOME $ 54,118 $ 43,873 $ 99,615 $ 83,046 EARNINGS PER COMMON SHARE: BASIC $0.28 $0.23 $0.51 $0.43 DILUTED $0.27 $0.22 $0.50 $0.42 CASH DIVIDENDS PER COMMON SHARE $0.020 $0.012 $0.040 $0.024 WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING DURING THE PERIOD: BASIC 196,158 194,161 196,215 194,451 DILUTED 198,074 195,656 197,976 195,777 The accompanying notes are an integral part of these condensed consolidated financial statements. MOLEX INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited - In Thousands) SIX MONTHS ENDED Dec. 31, Dec. 31, 1999 1998 CASH AND CASH EQUIVALENTS, Beginning of Period $182,992 $205,262 CASH AND CASH EQUIVALENTS PROVIDED FROM (USED FOR): Operations: Net income 99,615 83,046 Add (deduct) non-cash items included in net income: Depreciation and amortization 93,626 78,615 Amortization of deferred unearned compensation 3,254 3,552 Other charges to net income 6,380 2,611 Current items: Accounts receivable (41,888) (3,547) Inventories (39,733) (6,519) Other current assets 11,572 (3,313) Accounts payable 36,170 (30,473) Accrued expenses 6,056 5,324 Other current liabilities (21,876) (7,778) NET CASH PROVIDED FROM OPERATIONS 153,176 121,518 Investments: Purchases of property, plant and equipment (150,204) (103,146) Proceeds from sale of property, plant and equipment 5,777 2,010 Proceeds from sale of marketable securities 2,053,535 2,522,536 Purchases of marketable securities (2,046,403)(2,538,887) (Increase)/decrease in other assets 13,228 (21,701) NET CASH USED FOR INVESTMENTS (124,067) (139,188) Financing: Increase in long-term debt 4,457 - Decrease in long-term debt (1,250) - Cash dividends paid (6,280) (4,596) Purchase of treasury stock (26,256) (31,480) Reissuance of treasury stock 1,212 1,192 Exercise of stock options 2,862 2,603 NET CASH USED FOR FINANCING (25,255) (32,281) EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 7,278 38,462 CASH AND CASH EQUIVALENTS, End of Period $194,124 $193,773 The accompanying notes are an integral part of these condensed consolidated financial statements. MOLEX INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (1) Condensed Consolidated Financial Statements The condensed consolidated financial statements have been prepared from the Company's books and records without audit and are subject to year-end adjustments. The interim financial statements reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of information for the interim periods presented. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Molex Incorporated 1999 Annual Report to Shareholders and the 1999 Annual Report on Form 10-K. The results of operations for the interim periods should not be considered indicative of results to be expected for the full year. (2) Earnings per Common Share On January 28, 2000 the Board of Directors of Molex Incorporated declared a twenty-five percent (25%) stock dividend. The dividend is payable on March 6, 2000 to shareholders of record on February 14, 2000. One quarter (1/4) share of Common Stock will be paid for each share of Common Stock and each share of Class B Common Stock outstanding, and one quarter (1/4) share of Class A Common Stock will be paid for each share of Class A Common Stock outstanding. All shares outstanding, earnings and dividends have been retroactively restated for the stock split effected in the form of a stock dividend. The reconciliation of common shares outstanding to dilutive common shares outstanding is as follows as restated for the January 2000 stock dividend: Three Months Ended Six Months Ended December 31, December 31, 1999 1998 1999 1998 Weighted average shares outstanding - basic 196,158 194,161 196,215 194,451 Dilutive effect of stock options 1,916 1,495 1,761 1,326 Weighted average shares outstanding - diluted 198,074 195,656 197,976 195,777 (3) Comprehensive Income Comprehensive income includes all non-shareowner changes in equity and consists of net income, foreign currency translation adjustments and unrealized gains and losses on available-for-sale securities. Total comprehensive income, in thousands of dollars, is as follows: Three Months Ended Six Months Ended December 31, December 31, 1999 1998 1999 1998 Net income $ 54,118 $43,873 $ 99,615 $ 83,046 Currency translation and other adjustments 81,741 52,645 128,994 78,462 Total comprehensive income $135,859 $96,518 $228,609 $161,508 4) Inventories Inventories are valued at the lower of first-in, first-out cost or market. Inventories, in thousands of dollars, consist of the following: Dec. 31, June 30, 1999 1999 Raw Materials $ 36,921 $ 46,767 Work in Process 88,628 58,893 Finished Goods 108,745 83,201 $234,294 $188,861 (5) New Accounting Pronouncements In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." Originally effective for all fiscal quarters of all fiscal years beginning after June 15, 1999, it has since been delayed one year. It establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The Company is assessing the impact this statement will have on its statement of financial position and the results of its operations. MOLEX INCORPORATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Consolidated net revenues were $543.0 million for the quarter ended December 31, 1999, increasing 26.4 percent in US dollars and 25.8 percent in local currencies over the same period last year. For the six months ended December 31, 1999, net revenues rose to $1,034.9 million from $839.6 million in the corresponding period last year, resulting in US dollar growth of 23.3 percent and local currency growth of 20.9 percent. This growth included the revenue of the Cardell acquisition, without which the US dollar revenue growth for the current quarter and year-to-date periods would have been 20.3 percent and 16.7 percent, respectively. The strengthening of other currencies against the US dollar caused net revenues to increase $2.6 million and $20.1 million for the quarter and year-to-date periods, respectively. Management believes that Molex continues to grow at a rate higher than the worldwide connector market. All geographic regions experienced sales growth for the quarter as well as the six months ended December 31, 1999. Net revenue in the Americas region increased 36.1 percent in both US dollars and local currencies over the prior year quarter. Year-to-date net revenue growth over last year was 31.6 percent in US dollars and 31.5 percent in local currencies. Excluding the sales of the Cardell acquisition, net revenue rose 21.3 percent and 16.0 percent for the quarter and year-to-date periods, respectively. Growth in the region was a result of strong demand in all major markets, including business through distributors. Quarterly net revenue in the Far East North increased 36.6 percent in US dollars and 20.9 percent in local currencies compared to the prior year. For the six months ended December 31, 1999, revenue grew 34.8 percent in US dollars and 14.7 percent in local currencies over last year. Revenue growth was supported by strong demand in the Japanese market for DVDs, LCDs, CD-Roms, games, mobile phones, PCs and printers. Strength in the Korean automotive, home electronics and telecommunications markets also contributed to the growth. Far East South net revenue for the quarter increased 10.1 percent in US dollars and 10.6 percent in local currencies over the prior year. For the year-to-date period, revenue rose 10.8 percent in US dollars and 9.4 percent in local currencies over last year due to increased demand in the personal computer and computer-peripheral product markets. In Europe, net revenue grew 4.5 percent in US dollars and 18.9 percent in local currencies over the prior year quarter. For the six months ended December 31, 1999, the revenue growth over the comparable prior year period was 3.3 percent in US dollars and 14.3 percent in local currencies. Strength in the telecommunications and fiber optic markets contributed to the growth. For the six months ended December 31, 1999, 62.6 percent of Molex's worldwide net revenue was generated from its international operations. International operations are subject to currency fluctuations and government actions. Molex monitors its currency exposure in each country and continues to implement strategies to respond to changing economic environments. Due to the uncertainty of the foreign exchange markets, Molex cannot reasonably predict future trends related to foreign currency fluctuations. Foreign currency fluctuations have impacted results in the past and may impact results in the future. Gross profit as a percent of net revenue was 38.6 percent for the quarter ended December 31, 1999 compared to 41.1 percent last year. For the six months ended December 31, 1999, the gross profit percentage was 38.9 percent, down from 40.8 percent in the prior year period. This year's margins were impacted by inclusion of the results of the Cardell division, which currently has a lower gross profit margin than the overall Molex gross margin, higher operating costs to meet customer demands and an unplanned reduction in margins on value-added products. Selling and administrative expenses were $133.3 million and $262.5 million, respectively, for the quarter and six month period ended December 31, 1999 as compared with $111.0 million and $220.9 million, respectively, for the corresponding periods in the prior year. As a percent of net revenue, selling and administrative expenses for the quarter were 24.6 percent compared with 25.8 percent in the prior year, and for the year-to-date period were 25.4 percent compared with 26.3 percent in the prior year. Also included in selling and administrative expenses are research and development expenditures, which for the six months ended December 31, 1999, increased as a percent of net revenue to 6.2 percent from 6.1 percent in the prior year period. Interest income, net of interest expense, was $2.4 million in the quarter ended December 31, 1999 compared with $1.4 million in the prior year and was $4.1 million for the six months ended December 31, 1999 as compared with $4.8 million a year ago. The year-to-date decline is primarily due to a lower level of short-term investments than in the prior year as well as an increased level of debt. The effective tax rate was 30.0 percent for the quarter ended December 31, 1999 compared with 32.1 percent in the prior year period and was 30.1 percent for the six month period compared with 32.7 percent last year. The reduction was caused by the Company implementing a more aggressive repatriation strategy, Japanese tax rate reductions, and the continuing effort to reduce the overall tax burden through better planning. Net income for the quarter was $54.1 million or 28 cents per basic and 27 cents per diluted share, a 23.4 percent increase compared with $43.9 million or 23 cents per basic and 22 cents per diluted share for the same quarter last fiscal year. Net income for the six months ended December 31, 1999 was $99.6 million or 51 cents per basic and 50 cents per diluted share, as compared with net income of $83.0 million or 43 cents per basic and 42 cents per diluted share, for the same period in the prior year. Excluding the effects of currency translation, net income increased 20.7 percent for the quarter and 15.1 percent for the six months ended December 31, 1999 from the comparable prior year periods. LIQUIDITY AND CAPITAL RESOURCES Molex's balance sheet continues to be exceptionally strong. Working capital at December 31, 1999 was $603.9 million, an increase from $538.9 million at June 30, 1999. During the six months ended December 31, 1999, the Company purchased an aggregate of 937,500 shares of treasury stock at an aggregate cost of $26.3 million. This is in accordance with authorization by the Board of Directors allowing for the purchase of up to $50 million of Company stock during the current fiscal year. Management believes that the Company's current liquidity and financial flexibility are adequate to support its continued growth. YEAR 2000 Molex recognized the importance of, and gave high priority to, the Year 2000 issue. The Company completed an assessment of its business and other information systems, as well as the non-information system aspects of its business that could have been impacted by the Year 2000 issue. The Global Information System (GIS), which is Year 2000 compliant, covered more than 80 percent of the Company's business while the legacy business systems in the remaining operations were remediated. The Company did not experience and was not aware of any material operational problems with its information systems posed by the Year 2000 issue, but will continue to closely monitor its systems. While the GIS implementation addressed many of the Company's Year 2000 issues, the Company does not consider the GIS implementation costs to be related to the Year 2000 issue as such costs are a strategic expenditure to enhance future operations and would be incurred regardless of the Year 2000 issue. Total costs related to the GIS project are expected to reach $60 million once complete. Part of the risk inherent in the Year 2000 issue resulted from the general uncertainty of the readiness of material third-party relationships. To date, the Company has not been impacted and is not aware of any Year 2000 issues experienced by its suppliers and customers. Although the Company cannot know or foresee every eventuality that suppliers and customers may face that could impact its operations, the Company will remain actively involved in a broad-structured contingency planning effort to mitigate the impact of potential failures in any of its critical third-party relationships. The Company cannot estimate the cost it may incur as a result of the failure of third parties to address their Year 2000 issues, and there can be no assurance that there will not be a material adverse effect on the Company if third parties did not convert their systems in a timely manner and in a way that is compatible with the Company's systems. However, management believes that the likelihood of such a significant failure is low. OUTLOOK The outlook for the remainder of fiscal 2000 is encouraging, based on improved business levels for the first half. Due to the uncertainty of the foreign currency exchange markets, Molex cannot reasonably predict future trends related to foreign currency fluctuations. Foreign currency fluctuations have impacted the Company's results in the past and may impact results in the future. To further expand the Company's global presence, offer innovative products at an accelerated pace, and improve internal productivity, Molex plans to invest approximately $231 million in capital expenditures and approximately $129 million in research and development for the fiscal year ending June 30, 2000. Management believes the Company is well positioned to continue growing faster than the overall connector industry. The Company continues to emphasize expansion in rapidly growing industry segments, product lines and geographic regions. Molex remains committed to providing high quality products and a full range of services to its customers worldwide. FORWARD LOOKING STATEMENT This document contains various forward looking statements. Statements that are not historical are forward looking statements and are subject to various risks and uncertainties which could cause actual results to vary materially from those stated. Such risks and uncertainties include: economic conditions in various regions, product and price competition, raw material prices, foreign currency exchange rates, technology changes, patent issues, litigation results, legal and regulatory developments, and other risks and uncertainties described in documents filed with the Securities and Exchange Commission. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is subject to market risk associated with changes in foreign currency exchange rates, interest rates and certain commodity prices. The Company mitigates its foreign currency exchange rate risk principally through the establishment of local production facilities in the markets it serves and invoicing of customers in the same currency as the source of the products. Molex also monitors its foreign currency exposure in each country and implements strategies to respond to changing economic and political environments. Examples of these strategies include the prompt payment of intercompany balances utilizing a global netting system, the establishing of contra-currency accounts in several international subsidiaries, development of natural hedges and occasional use of foreign exchange contracts. One of the Company's subsidiaries utilizes derivative commodity futures contracts to hedge against fluctuations in commodity price fluctuations. Such commodity futures contracts are limited to a maximum duration of eighteen months. A formalized treasury risk management policy has been implemented by the Company which describes the procedures and controls over derivative financial and commodity instruments. Under the policy, the Company does not use derivative financial or commodity instruments for trading purposes and the use of such instruments are subject to strict approval levels by senior officers. Typically, the use of such derivative instruments is limited to hedging activities related to specific foreign currency cash flows or inventory purchases. The Company's exposure related to such transactions is, in the aggregate, not material to the Company's financial position, results of operations and cash flows. Interest rate exposure is principally limited to the $76.7 million of marketable securities owned by the Company. Such securities are debt instruments which generate interest income for the Company on temporary excess cash balances. The Company does not actively manage the risk of interest rate fluctuations, however, such risk is mitigated by the relatively short term, less than twelve months, nature of these investments. Part II - Other Information Items 1-4. Not Applicable Item 5. Other Information On January 28, 2000, Martin P. Slark was appointed as a Director of Molex Incorporated. Mr. Slark is the Executive Vice President of the Company. His appointment expands the Molex Board to eleven directors. On February 4, 2000, Molex announced that it has entered into a definitive asset purchase agreement pursuant to which it has agreed to acquire substantially all of the assets and assume certain liabilities of the Beau Interconnect Division of Axsys Technologies. Beau is a leading manufacturer of electronic interconnect devices in many industrial and commercial markets. The closing of the transaction is subject to the satisfaction or waiver of various conditions, but is currently expected to occur in the first calender quarter of 2000. Item 6. Not applicable S I G N A T U R E S Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MOLEX INCORPORATED -------------------- (Registrant) Date February 11, 2000 /s/ ROBERT B. MAHONEY ----------------- -------------------- Robert B. Mahoney Corporate Vice President, Treasurer and Chief Financial Officer Date February 11, 2000 /s/ LOUIS A. HECHT ----------------- -------------------- Louis A. Hecht Corporate Secretary and General Counsel