EXHIBIT 13
Ten-Year Financial Highlights Summary
(In thousands, except per share data)
Operations 2003 2002 2001 2000 1999
----------- ---------- ---------- ---------- ----------
Net revenue $ 1,843,098 $1,711,497 $2,365,549 $2,217,096 $1,711,649
Gross profit 609,741 542,035 858,489 854,889 673,338
Income before income
taxes and minority
interest 110,042 93,221 291,416 323,694 230,214
Income taxes 24,762 16,684 87,424 100,810 52,363
Net income 84,918 76,479 203,919 222,454 178,029
Earnings per
common share:(1)
Basic 0.44 0.39 1.04 1.13 0.92
Diluted 0.44 0.39 1.03 1.12 0.91
Net income as a
percent of net
revenue 4.6% 4.5% 8.6% 10.0% 10.4%
Financial Position
Current assets $ 962,113 $ 915,343 $ 891,865 $1,023,009 $ 881,338
Current liabilities 356,148 359,593 374,106 475,449 342,441
Working capital 605,965 555,750 517,759 547,560 538,897
Current ratio 2.7 2.5 2.4 2.2 2.6
Property, plant and
equipment, net 1,007,948 1,067,590 1,092,567 980,775 809,602
Total assets 2,334,890 2,253,920 2,213,627 2,247,106 1,902,012
Long-term debt 13,137 14,223 19,351 21,593 20,148
Capital leases 3,731 3,626 6,114 - -
Shareholders' equity 1,896,568 1,827,652 1,765,640 1,705,804 1,500,537
Return on beginning
shareholders' equity 4.6% 4.3% 12.0% 14.8% 14.1%
Dividends per
common share(1) 0.10 0.10 0.10 0.09 0.05
Weighted average
common shares
outstanding:(1)
Basic 191,873 194,327 195,471 196,060 194,340
Diluted 193,229 195,986 197,633 198,208 195,631
(1)Restated for the following stock dividends: 25%-January 2000;
25%-November 1997; 25%-February 1997; 25%-August 1995; 25%-November 1994.
Management's Discussion of Financial Condition and Results of Operations
(in thousands, except per share data)
Financial Highlights
Fiscal 2003 results marked a welcome turnaround from a most challenging prior
fiscal year. Revenue for the current fiscal year of $1.84 billion increased 7.7
percent from last year. Net income for the year of $84.9 million, which
included a fourth-quarter charge of $28.6 million (net of tax benefit of $11.5
million) increased 11.0 percent from the prior year. The prior year results
included a special charge of $25.3 million (net of tax benefit of $8.9
million). Management remains focused on striving for efficiencies in costs and
productivity while pushing for growth through continued investment in new
product development.
Investor Returns
Molex is committed to providing shareholders with a high return on their
investment. The Company's total shareholder return (including reinvestment of
dividends) over the last five years has averaged an annual compounded return of
6.5 percent on Molex Common Stock and 4.7 percent on Molex Class A Common
Stock.
A $100 investment in Molex Common Stock at June 30, 1998, together with
the reinvestment of dividends, would be worth $137 at June 30, 2003, and a
similar investment in Molex Class A Common Stock would be worth $126 at
June 30, 2003.
Molex Common Stock / High-Low-Close by Quarter
[GRAPHIC OMMITTED]
Five-Year Cumulative Total Return
[GRAPHIC OMITTED]
Financial Position and Liquidity
The strength of the Company's financial position is increasingly cited by
customers as a major competitive advantage for choosing Molex. We are
consistently able to fund capital projects and working capital needs
principally out of operating cash flows and cash reserves. Cash and marketable
securities at June 30, 2003 totaled $350.2 million, an increase of $36.9
million over the prior year.
The Company's long-term financing strategy is to rely on internal sources of
funds for investing in plant, equipment and acquisitions. Management remains
confident that the Company's liquidity and financial flexibility are adequate
to support both current, as well as future growth. Molex has historically used
external borrowings only when a clear financial advantage exists. Long-term
debt at June 30, 2003 totals $13.1 million. The Company has available lines of
credit totaling $129.9 million, of which $127.3 million remain unused at
June 30, 2003.
Net cash provided from operations was $349.5 million during fiscal 2003. The
decrease from the prior year was due mainly to a $58.7 million decline in cash
flows from working capital. Cash flows generated by reductions in accounts
receivable and inventory due to lower revenue in the prior year were not
repeated in the current year.
Contractual Obligations and Commercial Commitments
Contractual Obligations
Due by Year 2004 2005 2006 2007 2008
-------- ------- ------- ------- --------
Long-term debt $ 1,574 $1,578 $3,629 $1,498 $ 6,432
Capital lease
obligations 4,246 2,056 1,181 610 596
Operating leases 7,245 4,084 2,466 1,982 5,469
Total contractual -------- ------- ------- ------- --------
cash obligations $13,065 $7,718 $7,276 $4,090 $12,497
Commercial commitments consist of $2.6 million drawn on the Company's existing
lines of credit. Commitments expire as follows: $1.6 million in 2004 and
$1.0 million after 2006.
Net cash used for investing activities was $293.8 million in fiscal 2003,
consisting of capital expenditures, an increase in our level of investment in
marketable securities and other investments. During fiscal 2003, Molex added
new facilities in China, India and Slovakia while closing one facility in the
United States. In fiscal 2003, Molex facility floor space worldwide increased
to 7.0 million square feet.
Net cash used for financing activities was $92.3 million in fiscal 2003,
primarily for the payment of dividends and the purchase of treasury stock. The
Company purchased 3,352,500 shares of Class A Common Stock during fiscal
2003 and 2,902,000 shares during fiscal 2002. The Company's Board of Directors
has authorized the purchase of as much as $100 million of Common and/or Class
A Common Stock during fiscal 2004.
Percentage of Net Revenue
Fiscal year ended June 30,
2003 2002 2001
------ ------ ------
Net revenue 100.0% 100.0% 100.0%
Cost of sales 66.9 68.3 63.7
Gross profit 33.1 31.7 36.3
S, G & A expenses 27.2 25.8 24.5
Income from operations 5.9 5.9 11.8
Total other income 0.1 (0.4) 0.5
Income before income taxes 6.0 5.5 12.3
Income taxes 1.4 1.0 3.7
Net income 4.6% 4.5% 8.6%
U.S. Dollar Percentage Change 2003-2002 2002-2001
--------- ---------
Net revenue 7.7% (27.6)%
Cost of sales 5.5 (22.4)
Gross profit 12.5 (36.9)
S, G & A expenses 13.4 (23.7)
Income from operations 8.3 (64.2)
Total other income 122.9 (158.4)
Income before income taxes 18.0 (68.0)
Income taxes 48.4 (80.9)
Net income 11.0% (62.5)%
Fiscal 2003 Compared with Fiscal 2002
Fiscal 2003 net revenue was $1.84 billion, a 7.7 percent increase from $1.71
billion reported last year. Excluding the favorable impact from exchange rates,
the increase was 3.7 percent, with the strongest growth occurring during the
first half of the year. International operations generated net revenue of $1.21
billion or 65.5 percent of total Molex net revenue.
Net revenue in the Americas region declined 3 percent from last year. While we
experienced growth in the connector products and industrial markets, the lack
of demand in the telecommunications infrastructure and fiber optics markets
impeded overall revenue growth in the region. During the year, the region
focused on and was successful in reducing operating costs and achieving
operating efficiencies through consolidating functions, streamlining processes,
downsizing facilities and controlling discretionary spending.
In the Far East North, net revenue rose 16 percent in U.S. dollars during
fiscal 2003 and 10 percent in local currencies compared with the prior year.
This growth, despite a sluggish economy, was driven by the successful design-in
of new products serving the consumer electronics market in products such as
digital still and video cameras, mobile phones and plasma TVs. This success
confirms the importance of continued investment in new product development for
the region, especially in newly emerging markets.
Net revenue during fiscal 2003 in the Far East South region increased 23
percent in U.S. dollars and 22 percent in local currencies. Strong demand in
the personal computer market led the growth as more motherboards, desktop and
notebook PCs and peripherals were produced in the region. Successful new
product developments in this area keep us well poised for continued growth.
This is particularly important as customers continue transferring business
into the region and competition grows for this business.
The European region experienced a 3 percent net revenue increase in U.S.
dollars, but an 11 percent decline in local currencies. This region remains
our most difficult as it entered the global recession after our other regions
and remains behind in the economic cycle. Cost-cutting measures implemented
this year include the consolidation of our manufacturing facilities into five
main plants, streamlining processes and controlling discretionary spending.
Although the telecom market was severely impacted, we did realize growth in
the automotive and industrial markets and look to those markets for our
continued growth.
As a result of continuing weak demand in the telecommunications infrastructure
market, the Company recorded a pretax charge of $40.1 million ($28.6 million,
net of tax benefit of $11.5 million) relating to this industry during the
fourth quarter of fiscal 2003, comprising $23.1 million relating to write-offs
of manufacturing assets and facilities, $11.9 million to reflect workforce
reductions of 537 people and $5.1 million for the write-off of licenses and
investments dedicated to the telecom industry. The majority of these charges
impacted the Americas ($27.7 million) and European ($8.4 million) regions
where the Company had its highest concentration of telecom business.
The consolidated gross profit margin was 33.1 percent of net revenue in fiscal
2003, an increase from 31.7 percent reported in fiscal 2002, largely due to a
more favorable product mix, as well as lower pricing for raw materials and
purchased components. Fiscal 2003 gross profit was also impacted by $5.4
million of the aforementioned fourth quarter charge due to costs from the
manufacturing-related employment reductions and inventory write-downs. Fiscal
2002 gross profit included a similar $7.1 million pretax charge.
Selling, general and administrative expenses of $501.3 million were up 13.4
percent or $59.4 million over the prior year and as a percentage of net revenue
increased from 25.8 percent in fiscal 2002 to 27.2 percent in fiscal 2003. The
current year included the reinstatement of salaries and certain employee
retirement benefits to normal levels, as well as increases in travel and other
revenue-related expenses. Fiscal 2003 also included $29.6 million as part of
the fourth quarter pretax charge related to asset and facility write-offs, as
well as employment reductions in selling and administrative areas. Fiscal 2002
included a $15.6 million pretax charge related to employment reductions.
Research and development expenditures were $117.0 million or 6.3 percent of net
revenue during fiscal 2003, compared with $111.8 million or 6.5 percent of net
revenue in the prior year. These expenditures contributed to the release of 339
new product families during the year. In fiscal 2003, 25.7 percent of net
revenue was derived from the sale of products released by the Company within
the last three years. Molex continued its long-term commitment to reinvesting
its profits in new product design and tooling to maintain and enhance the
Company's competitive position. The Company was granted 529 new patents during
the year.
Net interest income increased $2.2 million during fiscal 2003, primarily due to
an interest benefit from the favorable closure of corporate tax audits in
several U.S. jurisdictions, as well as additional interest on the Company's
higher cash balances.
The effective income tax rate was 22.5 percent for fiscal 2003 compared with
17.9 percent in fiscal 2002. The rate for the current year includes a $3.0
million benefit from the favorable closure of corporate tax audits in several
U.S. jurisdictions. This benefit reduced the current year effective tax rate
nearly three percentage points. The remaining increase in the effective tax
rate from the prior year reflected an increase in the Company's pretax earnings
from higher rate jurisdictions. The Company continues its ongoing global effort
to reduce its income tax burden through a disciplined repatriation strategy and
better planning.
Net income grew 11.0 percent during fiscal 2003 to $84.9 million. Excluding the
effect of foreign exchange rates, which had minimal impact, net income was up
10.5 percent. Fiscal 2003 net income includes a charge of $28.6 million (net of
tax benefit of $11.5 million) to reflect costs associated with write-offs of
manufacturing assets and facilities and related licenses and investments, and
employment reductions. Fiscal 2002 net income includes a charge of $25.3
million (net of tax benefit of $8.9 million) related to employment reductions,
the lower current value of investments in other companies and asset write-downs
related to certain operations being closed. Earnings per share was $0.44 during
fiscal 2003 compared with $0.39 during fiscal 2002.
Comprehensive income includes all non-shareholder changes in equity and
consists of net income, foreign currency translation adjustments, required
minimum pension liabilities and unrealized gains and losses on
available-for-sale securities. The change in comprehensive income for the year
was primarily due to net income and foreign currency translation adjustments.
During fiscal 2003, the U.S. dollar was weaker versus the euro when compared
with the prior year, resulting in an increase in comprehensive income.
Fiscal 2002 Compared with Fiscal 2001
Net revenue for fiscal 2002 was $1.71 billion, a 27.6 percent decline from
$2.37 billion reported in fiscal 2001. Excluding the impact of exchange rates,
the decline was 26.0 percent. All regions were impacted by this worldwide
decline in business levels and all were required to take drastic measures to
reduce costs and improve efficiency levels to be in line with the lower
revenue. In fiscal 2002, international operations generated net revenue of
$1.04 billion or 61.0 percent of total Molex net revenue.
In the Americas region, net revenue was down 35 percent from fiscal 2001. The
markets most severely impacted by the downturn were the telecommunications
infrastructure and fiber optics markets. Automotive was flat to slightly down,
as inventories in the channels and dealerships stayed lean and consumer
spending on automobiles remained level despite the economy. Industrial division
product revenue was impacted by the lower level of capital investment during
fiscal 2002, while networking applications and other data-market-related
high-end products such as storage systems, mainframes and servers were all down
due to cutbacks in spending by original equipment manufacturers (OEMs). In
addition, while the level of customer design activity continued, the conversion
of design into production remained very slow as customers struggle with
increasing their end-market new product sales. Overall, the region did
experience sequential improvement in revenue during the latter two quarters of
fiscal 2002 due to increased demand in several markets, but visibility remained
very limited.
Net revenue in the Far East North region during fiscal 2002 declined 29 percent
in U.S. dollars and 23 percent in local currencies, compared with fiscal 2001.
Molex Japan, the principal operating company in this region, was impacted by
the Japanese economy, which was hit especially hard as its local markets
continued to shrink overall. Exports were depressed by the weaker economies in
Europe and the Americas, which historically have been strong areas for Japan
microminiature and data products. Also, Japanese customers began to transfer
more programs to the Far East South region. This set of events required the
successful implementation of a number of programs focused on reducing costs and
inventories. In addition, consumer programs were slower to develop than
anticipated early in the year and, when finally implemented, had reduced
connector content and were priced lower to be successful in the market. Data
and telecom-related products were also adversely impacted in both Japan and
across the export markets into which Japan has traditionally sold. The Korean
economy faired better for our operations, with revenue in the second half of
the fiscal year exceeding those in the comparable prior-year period. Investment
in new product development remained a priority for the entire region,
especially in newly emerging markets, to position Molex well for an economic
recovery.
In the Far East South, net revenue decreased 7 percent in U.S. dollars during
fiscal 2002 and 5 percent in local currencies. New programs such as sockets for
next generation microprocessors, cell phones and the transfer of Japanese
consumer programs bolstered the region's growth in the face of slackened demand
for its traditional desktop and notebook products. Wins in peripheral products
such as storage disk drive devices and the growing concentration of contract
manufacturers in the region both helped support revenue levels in the face of
overall demand reductions. Also of benefit was the transfer of many customer
programs from Europe and the Americas to this region. As demand fell across the
world for electronics products, lower cost capacity in this region was used
more extensively than capacity in higher cost areas in the Americas and Europe.
Net revenue in the European region during fiscal 2002 declined 28 percent in
U.S. dollars and 29 percent in local currencies from fiscal 2001. The
disproportionate weighting in this region towards telecom made it more
vulnerable to the downturn than in other regions. Sales of cell phones and
telecommunications infrastructure were hurt by the slowdown in customer capital
spending. The Company's careful credit evaluation of customers in financial
difficulty also resulted in reduced revenue from telecom customers. General
market and distribution sales were more stable during the year but could not
compensate for the declining sales to OEMs throughout the region. Many of the
Company's key OEM customers encountered significant difficulties during the
year, further delaying the chance to turn an awarded contract into
revenue-generating products. In addition, the closure of the France membrane
switch business further hurt the region's revenue, as did price erosion, which
was higher in this region than in the Company overall.
During the second quarter of fiscal 2002, the Company recorded a pretax charge
of $34.2 million ($25.3 million, net of tax benefit of $8.9 million) comprising
$18.7 million to reflect costs associated with a reduction in the global
workforce of approximately 800 people, $10.0 million to reflect the lower
current value of investments in other companies and $5.5 million of asset
write-down costs related to certain operations being closed.
The consolidated gross profit declined to 31.7 percent of net revenue in fiscal
2002 from 36.3 percent during fiscal 2001, principally due to higher
depreciation expense. Depreciation expense as a percent of net revenue was 10.9
percent compared with 7.5 percent in fiscal 2001. Inventory reductions made
throughout the year to align production levels with revenue levels contributed
to the decline in gross profit margin. Price erosion was more severe than in
previous years, but was partially offset by the material cost reductions on
most products due to more favorable pricing for raw materials and purchased
components. In addition, many plants implemented four-day work weeks, extended
vacations or other measures to reduce variable costs as much as possible to
counteract lower revenue.
Fiscal 2002 gross profit was also impacted by $7.1 million of the
aforementioned second quarter charge due to costs from the
manufacturing-related employment reductions. Fiscal 2001 gross profit
included a $16.4 million pretax charge related to additional slow-moving and
excess inventory write-offs and employment reductions.
Selling, general and administrative expenses of $441.9 million declined 23.7
percent or $137.0 million from fiscal 2001, but as a percentage of net revenue
increased from 24.5 percent in fiscal 2001 to 25.8 percent during fiscal 2002
due to lower revenue in fiscal 2002. Cost reductions in place during fiscal
2002 included across-the-board salary reductions from 6 percent to greater than
40 percent, no bonus provision and sharp reductions in discretionary spending.
Fiscal 2002 also included $15.6 million as part of the second quarter pretax
charge related to employment reductions in selling and administrative areas,
while fiscal 2001 included a $27.1 million pretax charge related to employment
reductions and asset write-offs.
Research and development expenditures were $111.8 million
or 6.5 percent of
net revenue during fiscal 2002, compared with $134.6 million or 5.7 percent
of net revenue in fiscal 2001. These expenditures contributed to the release
of 403 new product families during the year. In fiscal 2002, 27.5 percent of
net revenue was derived from the sale of products released by the Company
within the last three years. Molex continued its long-term commitment to
reinvesting its profits in new product design and tooling to enhance the
Company's competitive position. The Company was granted 464 new patents during
the year.
Net interest income declined 12.8 percent during fiscal 2002 due to overall
lower interest rates on invested cash balances, as well as higher interest
expense due to capital lease payments.
The effective income tax rate was 17.9 percent for fiscal 2002, compared with
30.0 percent in fiscal 2001. The rate for fiscal 2002 was affected by a $5.0
million one-time tax benefit related to certain operations being closed as a
result of the second quarter charge. This tax benefit and the tax impact of
the second quarter charge reduced the effective tax rate by 6 percentage
points. The remaining reduction in the effective tax rate from fiscal 2001
reflected a change in the mix of the Company's pretax earnings from higher rate
jurisdictions in which the Company operates to lower rate jurisdictions,
principally in the Far East South, as well as the ongoing global effort to
reduce its income tax burden through a disciplined repatriation strategy and
better planning.
Net income declined 62.5 percent to $76.5 million during fiscal 2002. Excluding
the effect of foreign exchange rates, which decreased net income by $3.1
million, net income was down 61.0 percent. Fiscal 2002 net income includes a
charge of $25.3 million (net of tax benefit of $8.9 million) to reflect costs
associated with employment reductions, the lower current value of investments
in other companies and asset write-downs related to certain operations being
closed. Fiscal 2001 net income includes a charge of $30.3 million (net of tax
benefit of $13.2 million) related to slow and excess inventory write-offs,
employment reductions and asset write-offs. Earnings per share was $0.39 during
fiscal 2002, compared with $1.03 during fiscal 2001.
Comprehensive income
includes all non-shareholder changes in equity and consists of net income,
foreign currency translation adjustments and unrealized gains and losses on
available-for-sale securities. The change in comprehensive income for the year
was due mainly to net income and foreign currency translation adjustments.
During fiscal 2002, the U.S. dollar was weaker versus the Japanese yen and the
euro when compared with fiscal 2001, resulting in an increase in comprehensive
income.
New Accounting Pronouncements
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 143,
"Accounting for Asset Retirement Obligations," and SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets," as of July 1, 2002. These
statements address the recognition and remeasurement of obligations associated
with the retirement of tangible long-lived assets and the accounting and
reporting for the impairment or disposal of long-lived assets, including
discontinued operations, respectively. SFAS No. 144 establishes a single
accounting model for long-lived assets to be disposed of by sale. The adoption
of SFAS No. 143 and SFAS No. 144 had no material impact on the consolidated
financial statements other than the asset write-downs included in the fiscal
2003 fourth quarter charge.
In June 2002, the Financial Accounting Standards Board (FASB) issued SFAS
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities."
This statement requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred. It also
establishes that fair value is the objective for initial measurement of the
liability. This statement is effective for exit or disposal activities that are
initiated after December 31, 2002. The fiscal 2003 fourth quarter charge was
recorded in accordance with SFAS No. 146.
In November 2002, the FASB issued Financial Interpretation No. (FIN) 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." This Interpretation establishes
accounting and disclosure requirements for a company's obligations under
certain guarantees that it has issued. A guarantor is required to recognize a
liability for the obligation it has undertaken in issuing a guarantee,
including the ongoing obligation to stand ready to perform over the term of the
guarantee in the event that the specified triggering events or conditions
occur. The objective of the initial measurement of that liability is the fair
value of the guarantee at its inception. The initial recognition and
measurement provisions of this Interpretation are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002. The adoption of
FIN 45 had no material impact on the Company.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest
Entities." It requires that the assets, liabilities and results of the activity
of variable interest entities be consolidated into the financial statements of
the company that has the controlling financial interest. It also provides the
framework for determining whether a variable interest entity should be
consolidated based on voting interest or significant financial support provided
to it. For the Company, this Interpretation is effective immediately for
variable interest entities created after January 31, 2003 and effective July 1,
2003 for variable interest entities acquired before February 1, 2003. The
Company does not expect the adoption of this Interpretation to have any impact
on its fiscal 2004 consolidated financial statements.
In April 2003, the FASB
issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities." This statement amends and clarifies financial accounting
and reporting for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities under
SFAS No. 133. The statement is effective for and should be prospectively
applied to contracts entered into or modified and for hedging relationships
designated after June 30, 2003. The Company does not expect the adoption of
this statement to have any impact on its fiscal 2004 consolidated financial
statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." This
statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. This statement is effective for financial instruments entered into or
modified after May 31, 2003 and otherwise is effective in the first interim
period beginning after June 15, 2003. The Company does not expect the adoption
of this statement to have any impact on its fiscal 2004 consolidated financial
statements.
Outlook
Visibility beyond the short term remains difficult with customers ordering only
for their short-term requirements with little advance notice, but we do expect
a modest improvement during fiscal 2004. With our continued emphasis during the
past year on cost reductions and operating efficiencies, as well as expanding
our capabilities in lower-cost locations, we expect to benefit from increased
profit leverage as business improves. The Company continues to invest in new
product development and is positioned with many new products for both our core
markets, as well as a number of new markets. We remain focused on serving our
customers, increasing our profits and gaining marketshare primarily through
reinvestment. We expect modest revenue growth of 7 percent to 11 percent during
fiscal 2004 and for profits to grow faster than revenue, due to our profit
leverage.
To further expand the Company's global presence, offer innovative products at
an accelerated pace and position itself for growth as the global economy
improves, Molex plans to invest $160 million to $170 million in capital
expenditures for the fiscal year ending June 30, 2004. The Company continues
to emphasize expansion in markets such as automotive, integrated products,
industrial and medical, while working to further strengthen its significant
position as a leader in the computer and digital consumer markets. Molex
remains committed to providing high quality products and a full range of
services to customers wherever they may be located in the world.
Critical Accounting Policies
The consolidated financial statements are prepared in conformity with
accounting principles generally accepted in the United States of America. The
preparation of these financial statements requires the use of estimates,
judgments and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the periods presented. In preparing these
financial statements, management has made its best estimates and judgments of
certain amounts included in the financial statements. The significant
accounting principles that management believes are the most important to aid
in fully understanding the Company's financial results are included below. See
Notes to the Financial Statements for a more detailed description of these and
other accounting policies of the Company.
Revenue Recognition
The Company recognizes revenue when title and risk of ownership transfers to
the buyer. The impact of judgments and estimates on revenue recognition is
minimal. A reserve for estimated returns is established at the time of sale
based on historical return experience to cover returns of defective product
and is recorded as a reduction of revenue. A reserve for doubtful accounts is
recorded generally based on a percentage of aged receivables and management's
evaluation of customer credit risk. Management judgment is utilized in
assessing customer creditworthiness, changes in customer payment history,
historical bad debt experience and economic and market trends. Different
assumptions or changes in economic circumstances could result in changes to
these reserves.
Income Taxes
The provision for income taxes is determined under the liability method
pursuant to SFAS No. 109. Under this method, deferred tax assets and
liabilities are recognized based on differences between the financial statement
and tax bases of assets and liabilities using presently enacted tax rates.
The Company has net deferred tax assets of $128 million at June 30, 2003. In
assessing the need for valuation allowances, the Company considers future
forecasted taxable income and tax planning strategies. The Company has
determined that it is unlikely that it will be able to realize a net deferred
asset in the future relating to certain European net operating losses. A
valuation allowance of $10 million was recorded in the current fiscal year to
offset the recording of a deferred tax asset of $10 million in the current
fiscal year related to certain European net operating losses. The cumulative
valuation allowance relating to these European net operating losses is
approximately $19 million at June 30, 2003.
The Company has operations in
several countries around the world that are subject to income and other similar
taxes in these countries. The estimation of the amounts of income tax to be
recorded by the Company involves the interpretation of complex tax laws and
regulations, evaluation of tax audit findings and assessment of how the foreign
taxes may affect domestic taxes. Although the Company's management believes its
tax accruals are adequate, differences may occur in the future depending on the
resolution of pending and new tax matters.
Allowance for Inventory
Inventories are valued at lower of the first-in, first-out (FIFO) cost or
market value. FIFO inventories recorded on the Company's consolidated balance
sheet are adjusted for an allowance covering inventories determined to be
slow-moving, excessive, or subject to quality inspection or other potential
adjustments. The allowance is maintained at an amount management considers
appropriate based on factors such as historical usage of the product, open
sales orders and future sales forecasts. Such factors require judgment, and
changes in any of these factors could result in changes to this allowance.
Pension and Other Postretirement Benefits
The Company's employee pension and other postretirement benefit costs and
obligations are dependent on management's assumptions used by actuaries in
calculating such amounts. These assumptions include discount rates, health
care cost trend rates, inflation, long-term returns on plan assets, retirement
rates, mortality rates and other factors. Management bases the discount rate
assumption on investment yields available on corporate long-term bonds. Health
care cost trend assumptions are developed based on historical cost data, the
near-term outlook and an assessment of likely long-term trends. The inflation
assumption is based on an evaluation of external market indicators.
Retirement and mortality rates are based primarily on actual plan experience.
Actual results that differ from the assumptions are accumulated and amortized
over future periods and, therefore, generally affect the recognized expense
and recorded obligation in such future periods. While management believes that
the assumptions used are appropriate, significant differences in actual
experience or significant changes in assumptions would affect pension and other
postretirement benefit costs and obligations.
There was a significant increase in the projected benefit obligation for
postretirement benefits at June 30, 2003. This increase was due to higher than
expected health care costs and actual claims experience greater than previously
projected. The Company contributed $18.8 million to its pension plans during
fiscal 2003, compared with $4.4 million in the prior year.
Goodwill and Intangible Assets
The Company reviews at least annually the realizability of goodwill and other
intangible assets. The Company uses a discounted cash flow model for the
evaluation of impairment. The expected future cash flows are based on
management's estimates and are determined by looking at numerous factors
including, but not limited to, projected economic conditions and customer
demand, manufacturing capacity, operating costs and new products introduced.
Although management believes its assumptions in determining the projected cash
flows are reasonable, changes in those estimates could affect the evaluation.
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 to protect
or preserve the value of intercompany cash flows. No material foreign exchange
contracts were in use at June 30, 2003 and 2002.
The Company has implemented a formalized treasury risk management policy that
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 speculative purposes, and the use of such
instruments is subject to strict approval levels by senior officers. Typically,
the use of derivative instruments is limited to hedging activities related to
specific foreign currency cash flows.
The Company's $171.2 million of marketable securities are principally debt
instruments that generate interest income for the Company on temporary excess
cash balances. These instruments contain embedded derivative features that
enhance the liquidity of the portfolio by enabling the Company to liquidate
the instrument prior to the stated maturity date. The Company's exposure
related to derivative instrument transactions is, in the aggregate, not
material to Molex's financial position, results of operations or cash flows.
Interest rate exposure is principally limited to the $171.2 million of
marketable securities owned by the Company and $13.1 million of long-term debt.
The Company does not actively manage the risk of interest rate fluctuations.
However, such risk is mitigated by the relatively short-term nature of its
investments-less than 12 months-and the fixed-rate nature of its long-term
debt.
Molex does not have material exposure to off-balance-sheet arrangements,
including special purpose entities and activities that include non-exchange
traded contracts accounted for at fair value. Due to the nature of its
operations, Molex is not subject to significant concentration risks relating
to customers, products or geographic locations.
The Company monitors the environmental laws and regulations in the countries
in which it operates. Molex has implemented an environmental program to reduce
the generation of potentially hazardous materials during its manufacturing
process and believes it continues to meet or exceed local government
regulations.
Management's Statement of Responsibility
The management of the Company is responsible for the information contained in
the consolidated financial statements and in the other parts of this report.
The accompanying consolidated financial statements of Molex Incorporated and
its subsidiaries have been prepared in accordance with accounting principles
generally accepted in the United States of America. In preparing these
statements, management has made judgments based upon available information.
The Company's internal control is designed to ensure that transactions
are executed in accordance with management's authorization and properly
recorded, and to provide reasonable assurance for the safeguarding of assets
against loss from unauthorized use or disposition and for the reliability of
financial records for the preparation of the consolidated financial statements.
Management believes that through the careful selection of employees, the
division of responsibilities and the application of formal policies and
procedures, the Company has an effective and responsive internal control
structure that is intended, consistent with reasonable cost, to provide
reasonable assurance that transactions are executed as authorized.
The Company's independent auditors, Deloitte & Touche LLP, are responsible for
conducting an audit of the Company's consolidated financial statements in
accordance with auditing standards generally accepted in the United States of
America and for expressing their opinion as to whether these consolidated
financial statements present fairly, in all material respects, the financial
position, results of operations and cash flows of Molex Incorporated and its
subsidiaries in conformity with accounting principles generally accepted in the
United States of America. Management has made available to Deloitte & Touche
LLP all the Company's financial records and related data, as well as minutes
of the Board of Directors' meetings. Management believes that all
representations made to Deloitte & Touche LLP during its audit were valid and
appropriate.
J. Joseph King Fred A. Krehbiel John H. Krehbiel Robert B. Mahoney
Vice Chairman and Co-Chairman of Co-Chairman of Executive Vice
Chief Executive Officer the Board the Board President, Treasurer
and Chief Financial
Officer
Independent Auditors' Report
To the Shareholders and Board of Directors, Molex Incorporated, Lisle, Illinois
We have audited the accompanying consolidated balance sheets of Molex
Incorporated and its subsidiaries as of June 30, 2003 and 2002 and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the three years in the period ended June 30, 2003. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Molex Incorporated and its
subsidiaries as of June 30, 2003 and 2002 and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
2003, in conformity with accounting principles generally accepted in the United
States of America.
Deloitte & Touche LLP
Chicago, Illinois
July 21, 2003
Consolidated Balance Sheets
(in thousands, except per share data)
Assets June 30, 2003 June 30, 2002
------------- -------------
Current assets:
Cash and cash equivalents $ 178,976 $ 213,477
Marketable securities (Note 2) 171,235 99,848
Accounts receivable, less
allowance of $18,404 in 2003
and $18,697 in 2002 for
returns and doubtful accounts 396,780 386,150
Inventories (Note 2) 179,256 167,253
Deferred income taxes (Note 4) 19,632 27,307
Prepaid expenses 16,234 21,308
--------- ---------
Total current assets 962,113 915,343
Property, plant and equipment
at cost (Note 2) 2,607,930 2,482,105
Less accumulated depreciation
and amortization (1,599,982) (1,414,515)
Net property, plant and equipment 1,007,948 1,067,590
Goodwill (Note 2) 160,732 160,180
Non-current deferred income
taxes (Note 4) 113,333 61,000
Other assets 90,764 49,807
---------- ----------
$2,334,890 $2,253,920
---------- ----------
Liabilities and Shareholders'
Equity
Current liabilities:
Short-term loans and current
portions of long-term debt and
capital leases (Notes 7 and 8) $ 6,088 $ 10,128
Accounts payable 175,815 184,630
Accrued expenses:
Salaries, commissions and bonuses 45,318 37,943
Severance 12,714 16,105
Other 59,962 67,894
Income taxes payable (Note 4) 51,251 37,893
Dividends payable 5,000 5,000
--------- ---------
Total current liabilities 356,148 359,593
Other non-current liabilities 6,123 6,346
Accrued pension and postretirement
benefits (Note 6) 58,430 41,999
Long-term debt (Note 8) 13,137 14,223
Obligations under capital
leases (Note 7) 3,731 3,626
Minority interest in subsidiaries 753 481
Commitments and contingencies
(Notes 5 and 7) - -
Shareholders' equity
(Notes 3 and 10):
Common Stock, $0.05 par value;
200,000 shares authorized;
110,124 shares issued at 2003 and
109,451 shares issued at 2002 5,506 5,473
Class A Common Stock, $0.05 par
value; 200,000 shares authorized;
103,390 shares issued at 2003 and
103,008 shares issued at 2002 5,169 5,150
Class B Common Stock, $0.05 par
value; 146 shares authorized;
94 shares issued at 2003 and 2002 5 5
Paid-in capital 341,530 311,631
Retained earnings 2,003,440 1,937,488
Treasury stock (Common Stock,
9,855 shares at 2003 and 9,893
shares at 2002; Class A Common
Stock, 12,976 shares at 2003 and
9,624 shares at 2002), at cost (437,234) (362,479)
Deferred unearned compensation
(Note 10) (32,094) (27,262)
Accumulated other comprehensive
income:
Cumulative translation and
other adjustments 10,246 (42,354)
--------- ---------
Total shareholders' equity 1,896,568 1,827,652
---------- ----------
$2,334,890 $2,253,920
---------- ----------
The accompanying notes are an integral part of these consolidated financial
statements.
Consolidated Statements of Income
(in thousands, except per share data)
For the year ended June 30, 2003 2002 2001
---------- ---------- ----------
Net revenue $1,843,098 $1,711,497 $2,365,549
Cost of sales 1,233,357 1,169,462 1,507,060
---------- ---------- ----------
Gross profit 609,741 542,035 858,489
---------- ---------- ----------
Selling, general and
administrative expenses:
Selling 161,519 145,004 180,485
General and administrative 339,760 296,903 398,414
Total selling, general and ---------- ---------- ----------
administrative expenses 501,279 441,907 578,899
---------- ---------- ----------
Income from operations 108,462 100,128 279,590
---------- ---------- ----------
Other income (expense):
Impairment and write-down of
investments (5,089) (12,570) (2,763)
Interest, net 8,166 5,986 6,854
Other (1,497) (323) 7,735
---------- ---------- ----------
Total other income (expense) 1,580 (6,907) 11,826
---------- ---------- ----------
Income before income taxes
and minority interest 110,042 93,221 291,416
Income taxes (Note 4) 24,762 16,684 87,424
---------- ---------- ----------
Income before minority interest 85,280 76,537 203,992
Minority interest (362) (58) (73)
---------- ---------- ----------
Net income $ 84,918 $ 76,479 $ 203,919
---------- ---------- ----------
Earnings per common share (Based
upon weighted average common shares
outstanding) (Notes 2 and 3):
Basic $ 0.44 $ 0.39 $ 1.04
Diluted $ 0.44 $ 0.39 $ 1.03
Dividends per common share (Note 3)$ 0.10 $ 0.10 $ 0.10
Weighted average common shares
outstanding (Notes 2 and 3):
Basic 191,873 194,327 195,471
Diluted 193,229 195,986 197,633
The accompanying notes are an integral part of these consolidated financial
statements.
Consolidated Statements of Shareholders' Equity
(in thousands)
Accumulated
Class A Class B Deferred Other Total
Common Common Common Paid-In Retained Treasury Unearned Comprehensive Shareholders'
Stock Stock Stock Capital Earnings Stock Compensation Income Equity
-------- -------- ------ -------- ---------- ---------- ----------- ------------- ------------
Balance, June 30, 2000 $ 5,418 $ 5,132 $ 5 $259,806 $1,696,162 $(241,893) $(25,788) $ 6,962 $ 1,705,804
Comprehensive income:
Net income 203,919 203,919
Translation adjustments (110,583) (110,583)
Unrealized investment loss (1,593) (1,593)
Total comprehensive income 91,743
Cash dividends declared (19,631) (19,631)
Stock options
-granted 13,787 (13,787) -
-exercised 35 5 10,449 (921) 9,568
-cancelled (1,544) 1,770 226
Stock bonus 2 974 976
Treasury stock
-purchases (39,908) (39,908)
-reissuances 1,907 1,253 3,160
Deferred unearned
compensation amortization 9,398 9,398
Stock option tax benefit 4,304 4,304
-------- -------- ------ -------- ---------- ---------- ----------- ------------- -----------
Balance, June 30, 2001 5,455 5,137 5 289,683 1,880,450 (281,469) (28,407) (105,214) 1,765,640
Comprehensive income:
Net income 76,479 76,479
Translation adjustments 61,512 61,512
Reclass of unrealized
investment loss 1,348 1,348
Total comprehensive income 139,339
Cash dividends declared (19,441) (19,441)
Stock options
-granted 10,280 (10,280) -
-exercised 17 13 7,322 (1,332) 6,020
-cancelled (3,059) 2,925 (134)
Stock bonus 1 3,463 (2,610) 854
Treasury stock
-purchases (80,165) (80,165)
-reissuances 1,084 1,294 2,378
Deferred unearned
compensation amortization 11,110 11,110
Stock option tax benefit
and other 2,858 (807) 2,051
-------- -------- ------ -------- ---------- ---------- ----------- ------------- -----------
Balance, June 30, 2002 5,473 5,150 5 311,631 1,937,488 (362,479) (27,262) (42,354) 1,827,652
Comprehensive income:
Net income 84,918 84,918
Translation adjustments 56,982 56,982
Minimum pension liability (4,503) (4,503)
Reclass of unrealized
investment loss 121 121
Total comprehensive income 137,518
Cash dividends declared (19,202) (19,202)
Stock options
-granted 12,552 (12,552) -
-exercised 33 19 9,173 (645) 8,580
-cancelled (939) 942 3
Stock bonus 6,564 (6,029) 535
Treasury stock
-purchases (74,997) (74,997)
-reissuances 635 1,450 2,085
Deferred unearned
compensation amortization 12,807 12,807
Stock option tax benefit
and other 1,914 236 (563) 1,587
-------- -------- ------ -------- ---------- ---------- ----------- ------------- -----------
Balance, June 30, 2003 $ 5,506 $ 5,169 $ 5 $341,530 $2,003,440 $(437,234) $(32,094) $ 10,246 $ 1,896,568
-------- -------- ------ -------- ---------- ---------- ----------- ------------- -----------
The accompanying notes are an integral part of these consolidated financial
statements.
Consolidated Statements of Cash Flows
(in thousands)
For the year ended June 30, 2003 2002 2001
--------- --------- ---------
Cash and cash equivalents,
beginning of year $ 213,477 $ 138,438 $ 164,288
Cash and cash equivalents were
provided from (used for):
Operations:
Net income 84,918 76,479 203,919
Add (deduct) non-cash items included in net income:
Depreciation and amortization 228,730 223,687 217,954
Impairment and write-downs of investments 5,089 12,570 2,763
Deferred income taxes (31,412) (19,785) (3,804)
Loss on sale of property, plant and equipment 5,394 1,654 2,450
Fixed asset write-downs included in special charges 23,070 5,452 3,043
Minority interest 362 58 73
Amortization of deferred unearned compensation 12,807 11,110 9,398
Amortization of deferred investment grants (32) (195) (514)
Other debits (credits) to earnings, net (4,729) 664 (3,571)
Current items:
Accounts receivable 836 46,841 63,463
Inventories (6,734) 52,798 11,358
Prepaid expenses 14,050 7,034 (24,663)
Accounts payable (11,730) (408) (77,164)
Accrued expenses 15,164 (21,069) 30,612
Income taxes payable 13,690 (1,261) (18,765)
--------- --------- ---------
Net cash provided from operations 349,473 395,629 416,552
--------- --------- ---------
Investments:
Purchases of property, plant and equipment (171,193) (172,497) (376,300)
Proceeds from sale of property, plant and equipment 3,851 4,751 5,731
Purchases of businesses, net of cash acquired - (4,702) -
(Increase) decrease in marketable securities (71,387) (30,454) 7,561
Increase in other assets (55,097) (20,725) (14,002)
--------- --------- ---------
Net cash used for investments (293,826) (223,627) (377,010)
--------- --------- ---------
Financing:
Increase (decrease) in short-term loans (794) (853) 187
Decrease in long-term debt (927) (5,447) (1,678)
Increase in long-term debt 11 318 308
Cash dividends paid (19,214) (19,462) (19,555)
Principal payments on capital leases (7,075) (8,926) -
Exercise of stock options 8,580 6,020 9,568
Purchase of treasury stock (74,997) (80,165) (39,908)
Reissuance of treasury stock 2,085 2,378 3,160
--------- --------- ---------
Net cash used for financing (92,331) (106,137) (47,918)
--------- --------- ---------
Effect of exchange rate changes on cash 2,183 9,174 (17,474)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents (34,501) 75,039 (25,850)
--------- --------- ---------
Cash and cash equivalents, end of year $ 178,976 $ 213,477 $ 138,438
--------- --------- ---------
Supplemental disclosure of cash flow information
Cash paid during the year for:
Interest $ 1,835 $ 2,225 $ 2,837
Income taxes $ 41,776 $ 45,406 $ 87,862
The accompanying notes are an integral part of these consolidated financial
statements.
Notes to Consolidated Financial Statements
(in thousands, except per share data)
(1) Nature of Operations
Molex Incorporated manufactures electronic components, including electrical and
fiber optic interconnection products and systems; switches; integrated
products; and application tooling in 58 plants in 19 countries throughout the
world.
(2) Summary of Significant Accounting Policies
The following is a summary of the major accounting policies and practices of
Molex Incorporated and subsidiaries that affect significant elements of the
accompanying consolidated financial statements.
(A) Principles of Consolidation The consolidated financial statements include
the accounts of Molex Incorporated and its majority-owned subsidiaries (the
Company or Molex). All material intercompany balances and transactions have
been eliminated. Subsidiaries in which the Company's ownership is 20 percent to
50 percent are accounted for using the equity method.
Molex does not have material exposure to off-balance-sheet arrangements,
including special purpose entities and activities that include
non-exchange-traded contracts accounted for at fair value. Due to the nature
of its operations, Molex is not subject to significant concentration risks
relating to customers, products or geographic locations.
(B) Use of Estimates in Financial Statement Preparation The preparation of
financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates
and assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
(C) Cash and Cash Equivalents The Company considers all highly liquid
investments with original maturities of three months or less to be cash
equivalents.
(D) Currency Translation Assets and liabilities of international entities have
been translated at period-end exchange rates and income and expenses have been
translated using weighted average exchange rates for the period. Translation
adjustments are included as a component of accumulated other comprehensive
income.
(E) Marketable Securities Marketable securities consist of government and
municipal debt securities. These instruments contain embedded derivative
features that enhance the liquidity of the portfolio by enabling the Company
to liquidate the instrument prior to the stated maturity date. The Company
generally holds these instruments for three months to 12 months, and they are
carried at fair value. These marketable securities are classified as trading
securities and, accordingly, marked-to-market adjustments are recorded in the
income statement.
(F) Fair Value of Financial Instruments The Company's financial instruments
include accounts receivable and payable, marketable securities and long-term
debt. The carrying amounts of the financial instruments approximate their
fair value.
(G) Inventories Inventories are valued at the lower of first-in, first-out
cost or market. Net inventories at June 30 consist of the following:
2003 2002
--------- ---------
Raw materials $ 26,155 $ 25,753
Work in progress 63,807 63,180
Finished goods 89,294 78,320
--------- ---------
$ 179,256 $ 167,253
The inventory allowance was $40,386 at June 30, 2003 and $46,916 at
June 30, 2002.
(H) Property, Plant and Equipment Property, plant and equipment are reported at
cost less accumulated depreciation, which is provided substantially on a
straight-line basis for financial statement purposes and on accelerated methods
for tax purposes. At June 30, property, plant and equipment consist of the
following:
2003 2002
--------- ---------
Land and improvements $ 79,844 $ 77,331
Buildings and leasehold improvements 519,611 478,100
Machinery and equipment 1,341,032 1,279,372
Molds and dies 590,794 540,749
Construction in progress 76,649 106,553
----------- -----------
$ 2,607,930 $ 2,482,105
Accumulated depreciation and
amortization (1,599,982) (1,414,515)
----------- -----------
Net property, plant and equipment $ 1,007,948 $ 1,067,590
----------- -----------
The estimated useful lives are as follows:
Buildings 25-45 years
Machinery and equipment 3-10 years
Molds and dies 3-4 years
Costs of leasehold improvements are amortized over the terms of the related
leases using various methods. The Company performs reviews for impairment of
long-lived assets whenever events or circumstances indicate that the carrying
value of an asset may not be recoverable. An impairment loss would be
recognized when estimated future cash flows expected to result from the use of
the asset and the eventual disposition are less than the carrying amount.
Depreciation and amortization expense for property, plant and equipment was
$223,867 in 2003; $217,714 in 2002; and $202,230 in 2001.
(I) Research and Development and Patent Costs Costs incurred in connection
with the development of new products and applications are charged to operations
as incurred. Total research and development costs equaled $116,986 in 2003;
$111,771 in 2002; and $134,637 in 2001. Total patent costs were $3,949 in 2003;
$4,564 in 2002; and $6,740 in 2001.
(J) Revenue Recognition The Company recognizes revenue when title and risk
of ownership transfers to the buyer. A reserve for estimated returns is
established at the time of sale based on historical return experience to cover
returns of defective product and is recorded as a reduction of revenue. A
reserve for doubtful accounts is recorded generally based on a percentage of
aged receivables and management's evaluation of customer credit risk.
Management judgment is utilized in assessing customer creditworthiness, changes
in customer payment history, historical bad debt experience and economic and
market trends.
(K) Derivative Instruments and Hedging Activities The use of derivative
instruments is limited primarily to hedging activities related to specific
foreign currency cash flows. The Company had no derivatives outstanding at
June 30, 2003. The impact of gains and losses on such instruments was not
material to the results of operations for years ending June 30, 2003, 2002
and 2001.
(L) Earnings Per Share (EPS) Basic EPS is computed by dividing net income
by the weighted average number of common shares outstanding during the period.
Diluted EPS is computed by dividing net income by the weighted average number
of common shares and dilutive securities outstanding during the period. The
basic weighted-average shares outstanding reconciles to diluted
weighted-average shares outstanding as follows:
2003 2002 2001
------- ------- -------
Basic 191,873 194,327 195,471
Effect of dilutive stock options 1,356 1,659 2,162
Diluted 193,229 195,986 197,633
Anti-dilutive shares 2,103 971 1,099
(M) Goodwill and Intangible Assets The Company adopted SFAS No. 142,
"Goodwill and Other Intangible Assets," as of July 1, 2001. This statement
changed the accounting for goodwill and intangible assets, which are no longer
amortized unless, in the case of intangible assets, the asset has a finite
life. Goodwill, as well as intangible assets with indefinite lives, are now
subject to an annual test for impairment. An annual review was performed at
May 31, 2003 resulting in no impairment in the value of the Company's goodwill
and other intangible assets. During the years ended June 30, 2003 and 2002, the
carrying amount of the Company's goodwill changed solely due to goodwill
resulting from business acquisitions. The Company did not record a goodwill
impairment loss in either year.
Comparative information for prior years as if goodwill had not been amortized
in those periods is as follows:
For the years ended June 30, 2003 2002 2001
-------- -------- --------
Reported net income $ 84,918 $ 76,479 $203,919
Add back: Goodwill amortization - - 10,058
-------- -------- --------
Adjusted net income $ 84,918 $ 76,479 $213,977
-------- -------- --------
Basic earnings per share:
Reported net income $ 0.44 $ 0.39 $ 1.04
Add back: Goodwill amortization - - 0.05
-------- -------- --------
Adjusted net income $ 0.44 $ 0.39 $ 1.09
-------- -------- --------
Diluted earnings per share:
Reported net income $ 0.44 $ 0.39 $ 1.03
Add back: Goodwill amortization - - 0.05
-------- -------- --------
Adjusted net income $ 0.44 $ 0.39 $ 1.08
-------- -------- --------
All of the Company's intangible assets are recorded in "Other Assets" and are
subject to amortization as follows:
License fees Patents Total
------------ -------- --------
At June 30, 2003:
Gross carrying value $ 12,765 $ 1,358 $ 14,123
Accumulated amortization (6,254) (399) (6,653)
------------ -------- --------
Net carrying value $ 6,511 $ 959 $ 7,470
------------ -------- --------
At June 30, 2002:
Gross carrying value $ 17,028 $ 565 $ 17,593
Accumulated amortization (7,593) (410) (8,003)
------------ -------- --------
Net carrying value $ 9,435 $ 155 $ 9,590
------------ -------- --------
Total amortization expense for intangible assets was $4,013 in 2003; $4,887
in 2002; and $2,414 in 2001.
Estimated aggregate amortization expense for intangible assets is as follows:
$2,170 in 2004; $1,921 in 2005; $1,316 in 2006; $837 in 2007; and $374 in 2008.
(N) Income Taxes The provision for income taxes is determined under the
liability method pursuant to SFAS No. 109. Under this method, deferred tax
assets and liabilities are recognized based on differences between the
financial statement and tax bases of assets and liabilities using presently
enacted tax rates.
The Company has operations in several countries around the world that are
subject to income and other similar taxes in these countries. The estimation
of the amounts of income tax to be recorded by the Company involves the
interpretation of complex tax laws and regulations, evaluation of tax audit
findings and assessment of how the foreign taxes may affect domestic taxes.
Although the Company's management believes Molex's tax accruals are adequate,
differences may occur in the future depending on the resolution of pending and
new tax matters.
(O) Stock-Based Compensation Stock-based employee compensation plans are
acccounted for under the recognition and measurement principles of APB Opinion
No. 25, "Accounting for Stock Issued to Employees." As permitted by SFAS
No. 123, "Accounting for Stock-based Compensation" and amended by SFAS No. 148,
"Accounting for Stock-based Compensation-Transition and Disclosure, an
amendment of SFAS No. 123," the effect on net income, basic earnings per share
and diluted earnings per share of accounting for stock-based compensation in
accordance with SFAS No. 123 is disclosed. See Note 10 for a description of the
stock-based compensation plans and the aforementioned disclosures.
(P) New Accounting Pronouncements The Company adopted SFAS No. 143,
"Accounting for Asset Retirement Obligations," and SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets," as of July 1, 2002. These
statements address the recognition and remeasurement of obligations associated
with the retirement of tangible long-lived assets and the accounting and
reporting for the impairment or disposal of long-lived assets, including
discontinued operations, respectively. SFAS No. 144 establishes a single
accounting model for long-lived assets to be disposed of by sale. The adoption
of SFAS No. 143 and SFAS No. 144 had no material impact on the consolidated
financial statements, other than the asset write-downs included in the fiscal
2003 fourth quarter charge.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This statement requires that a liability for
a cost associated with an exit or disposal activity be recognized when the
liability is incurred. It also establishes that fair value is the objective
for initial measurement of the liability. This statement is effective for exit
or disposal activities that are initiated after December 31, 2002. The fiscal
2003 fourth quarter charge was recorded in accordance with SFAS No. 146.
In November 2002, the FASB issued FIN 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others." This Interpretation establishes accounting and
disclosure requirements for a company's obligations under certain guarantees
that it has issued. A guarantor is required to recognize a liability for the
obligation it has undertaken in issuing a guarantee, including the ongoing
obligation to stand ready to perform over the term of the guarantee in the
event that the specified triggering events or conditions occur. The objective
of the initial measurement of that liability is the fair value of the guarantee
at its inception. The initial recognition and measurement provisions of this
Interpretation are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002. The adoption of FIN 45 had no material impact
on the Company.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest
Entities." It requires that the assets, liabilities and results of the activity
of variable interest entities be consolidated into the financial statements of
the company that has the controlling financial interest. It also provides the
framework for determining whether a variable interest entity should be
consolidated based on voting interest or significant financial support
provided to it. For the Company, this Interpretation is effective immediately
for variable interest entities created after January 31, 2003 and effective
July 1, 2003 for variable interest entities acquired before February 1, 2003.
The Company does not expect the adoption of this Interpretation to have any
impact on its fiscal 2004 consolidated financial statements.
In April 2003 the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under SFAS No. 133. The statement is effective for and
should be prospectively applied to contracts entered into or modified and for
hedging relationships designated after June 30, 2003. The Company does not
expect the adoption of this statement to have any impact on its fiscal 2004
consolidated financial statements.
In May 2003 the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." This
statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. This statement is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective in the first interim
period beginning after June 15, 2003. The Company does not expect the adoption
of this statement to have any impact on its fiscal 2004 consolidated financial
statements.
(Q) Reclassifications Certain reclassifications have been made to the prior
years' financial statements to conform to the 2003 classifications.
(3) Capital Stock
The shares of Common Stock, Class A Common Stock and Class B Common Stock are
identical except as to voting rights. Class A Common Stock has no voting rights
except in limited circumstances. So long as more than 50 percent of the
authorized number of shares of Class B Common Stock continues to be
outstanding, all matters, other than the election of directors, submitted to a
vote of the shareholders must be approved by a majority of the Class B Common
Stock, voting as a class, and by a majority of the Common Stock, voting as a
class. During such period, holders of a majority of the Class B Common Stock
could veto corporate action, other than the election of directors, that
requires shareholder approval. There are 25 million shares of preferred stock
authorized, none of which were issued or outstanding during the three years
ended June 30, 2003.
The Class B Common Stock can be converted into Common Stock on a
share-for-share basis at any time at the option of the holder. The authorized
Class A Common Stock would automatically convert into Common Stock on a
share-for-share basis at the discretion of the Board of Directors upon the
occurrence of certain events. Upon such conversion, the voting interests of the
holders of Common Stock and Class B Common Stock would be diluted. The
Company's Class B Common Stock outstanding has remained at 94,255 shares
throughout the three-year period ended June 30, 2003.
The holders of the Common Stock, Class A Common Stock and Class B Common Stock
participate equally, share-for-share, in any dividends that may be paid
thereon, if, as and when declared by the Board of Directors or in any assets
available upon liquidation or dissolution of the Company.
Changes in shares of common stock for the years ended June 30 are as follows:
Class A
Common Common Treasury
Stock Stock Stock
------- ------- -------
Shares outstanding at June 30, 2000 108,363 102,629 15,431
Exercise of stock options 704 123 22
Purchase of treasury stock - - 1,230
Issuance of stock bonus - - (77)
Other 30 - 26
------- ------- -------
Shares outstanding at June 30, 2001 109,097 102,752 16,632
Exercise of stock options 330 256 42
Purchase of treasury stock - - 2,902
Issuance of stock bonus 24 - (76)
Other - - 17
------- ------- -------
Shares outstanding at June 30, 2002 109,451 103,008 19,517
Exercise of stock options 662 377 8
Purchase of treasury stock - - 3,353
Issuance of stock bonus 11 - (82)
Other - 5 35
------- ------- -------
Shares outstanding at June 30, 2003 110,124 103,390 22,831
------- ------- -------
(4) Income Taxes
Income before income taxes and minority interest is summarized as follows:
2003 2002 2001
-------- -------- --------
United States $ 11,472 $ (5,686) $ 98,435
International 98,570 98,907 192,981
-------- -------- --------
$110,042 $ 93,221 $291,416
-------- -------- --------
The components of income tax expense (benefit) were as follows:
2003 2002 2001
-------- -------- --------
Currently payable:
U.S. Federal $ 3,675 $ (2,829) $ 17,339
State (2,250) (525) 1,067
International 54,749 39,823 72,822
-------- -------- --------
56,174 36,469 91,228
Deferred:
United States (26,525) (22,185) (6,013)
International (4,887) 2,400 2,209
-------- -------- --------
(31,412) (19,785) (3,804)
-------- -------- --------
Total provision for income taxes $ 24,762 $ 16,684 $ 87,424
-------- -------- --------
The Company's tax rate differs from the U.S. Federal income tax rate as
follows:
2003 2002 2001
-------- -------- --------
U.S. Federal income tax rate 35.0% 35.0% 35.0%
Permanent tax exemptions (8.5) (8.4) (2.6)
Foreign tax credits (8.7) (5.4) (0.6)
Investments - (5.0) -
Valuation allowance 9.1 8.7 -
State income taxes, net
of Federal tax benefit (2.0) (0.6) 0.4
Foreign tax rates less than
U.S. Federal rate (net) (2.5) (6.0) (2.0)
Other 0.1 (0.4) (0.2)
-------- -------- --------
22.5% 17.9% 30.0%
-------- -------- --------
At June 30, 2003, the Company had approximately $42,000 of non-U.S. net
operating loss carryforwards and $17,000 of U.S. capital loss carryforwards.
The capital loss carryforwards can be carried forward to offset future U.S.
capital gains through the year ended June 30, 2007. The non-U.S. net operating
losses can be carried forward indefinitely.
A valuation allowance is provided for when it is more likely than not that some
portion of the deferred tax asset will not be realized. As of June 30, 2003 and
2002, the Company has recorded valuation allowances of $18,557 and $8,581,
respectively, against the non-U.S. net operating loss carryforwards.
The components of deferred tax assets and liabilities are as follows:
2003 2002
-------- --------
Deferred income tax assets:
Foreign tax credits $ 47,617 $ 23,570
Employee benefit programs 35,894 27,396
Net operating losses 18,557 8,581
Depreciation and amortization 16,782 -
Inventory reserves 9,752 12,466
Allowance for doubtful accounts 5,283 5,398
Inventory-other 4,771 4,620
Minimum tax credit 4,736 -
Patent costs 4,656 4,512
Severance 1,990 4,211
Other, net 1,330 6,022
Valuation allowance (18,557) (8,581)
-------- --------
Total deferred tax assets 132,811 88,195
-------- --------
Deferred income tax liabilities:
Investments (4,866) (1,094)
Depreciation and amortization - (4,010)
-------- --------
Total deferred tax liabilities (4,866) (5,104)
-------- --------
$127,945 $ 83,091
-------- --------
The net deferred tax accounts reported on the balance sheet as of June 30 are
as follows:
2003 2002
-------- --------
Net deferred:
Current asset $ 19,632 $ 27,307
Non-current asset 113,333 61,000
Current liability - -
Non-current liability (5,020) (5,216)
-------- --------
$127,945 $ 83,091
-------- --------
The Company has not provided for U.S. deferred income taxes or foreign
withholding taxes on $430,000 of undistributed earnings of its non-U.S.
subsidiaries as of June 30, 2003. Should these earnings be distributed,
no additional U.S. income tax expense would be incurred due to the availability
of foreign tax credits.
(5) Commitments and Contingencies
In the normal course of business, the Company is a party to various matters
involving disputes and litigation. While it is not possible at this time to
determine the ultimate outcome of these matters, management believes that the
ultimate liability, if any, will not be material to the consolidated results
of operations, financial condition or liquidity of the Company. The Company
does not offer product warranties or other performance guarantees.
(6) Pension and Other Postretirement Benefits
Pension and Other Plans The Company sponsors and/or contributes to pension
plans, including defined benefit plans, covering substantially all U.S. hourly
employees and certain employees in international subsidiaries. The benefits are
primarily based on years of service and the employees' compensation for certain
periods during their last years of employment. The Company and certain of its
subsidiaries also provide discretionary savings and other defined contribution
plans covering substantially all of their salaried employees. Employer
contributions to such plans of $15,438; $10,801; and $9,382 were charged to
operations during 2003, 2002 and 2001, respectively.
Other Postretirement Benefits The Company provides certain retiree health
care and life insurance benefits to its employees. The cost of retiree
insurance benefits is accrued over the period in which the employees become
eligible for such benefits. The majority of the Company's U.S. employees may
become eligible for these benefits if they reach age 55, with age plus years
of service equal to 70. There are no significant postretirement health care
benefit plans outside of the United States. The Company continues to fund
benefit costs primarily as claims are paid.
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation was 10 percent in 2003, declining annually
to an ultimate rate of 5 percent by 2008. The health care cost trend rate
assumption has a significant effect on the amount of the obligation and
periodic cost reported. A one-percentage-point change in assumed health care
cost trend rates would have the following effects:
1 Percentage 1 Percentage
Point Point
Increase Decrease
------------ ------------
Effect on total of service and
interest cost components $ 407 $ (317)
Effect on postretirement
benefit obligation $ 5,942 $ (4,654)
As a result of Molex's global workforce reduction in fiscal 2002, the Company
recognized net curtailment gains for its U.S. pension and postretirement plans
in fiscal 2002 of $640 and $113, respectively. Internationally, the Company
experienced curtailment and settlement losses in fiscal 2002 of $392 and $718
in its pension plans.
The weighted average assumptions used in computing the following information
are presented below:
2003 2003 2003 2002 2002 2002
Pension Pension Postretirement Pension Pension Postretirement
U.S. Plans Int'l Plans Other Plans U.S. Plans Int'l Plans Other Plans
---------- ----------- -------------- ---------- ----------- --------------
Discount rates 6.25% 3.1% 6.25% 7.25% 3.6% 7.25%
Rates of increase in compensation 3.5% 2.9% - 4.0% 3.2% -
Expected long-term rates of
return on plan assets 8.5% 6.5% - 9.0% 6.4% -
Net periodic pension and postretirement benefit costs for the Company's plans
consist of the following for the year ended June 30:
Interest Costs Amortization of
on Projected Expected Recognized Unrecognized Recognized Net Periodic
Service Benefit Return on Prior Transition (Gains) Other Pension
Costs Obligation Plan Assets Service Cost Obligation Losses Items Expense
------- ------------ --------- ---------- ------------ -------- ------- ----------
2003
Pension:
U.S. plans $ 1,962 $ 1,613 $ (1,661) $ 202 $ - $ - $ - $ 2,116
International plans 4,107 1,960 (1,377) - 57 (286) - 5,033
Postretirement
Other plans 889 1,071 - (262) - (32) 766 2,432
2002
Pension:
U.S. plans 2,376 1,572 (1,611) 231 - - (640) 1,928
International plans 3,372 1,729 (1,463) - 56 (722) 1,110 4,082
Postretirement
Other plans 1,019 1,000 - (292) - (11) (113) 1,603
2001
Pension:
U.S. plans 1,621 1,282 (1,661) 231 - (200) - 1,273
International plans 4,234 1,922 (1,442) - 87 (432) - 4,369
Postretirement
Other plans 781 927 - (292) - 396 - 1,812
The following provides a reconciliation of benefit obligations, plan assets and
funded status of the plans:
2003 2003 2003 2002 2002 2002
Pension Pension Postretirement Pension Pension Postretirement
U.S. Plans Int'l Plans Other Plans U.S. Plans Int'l Plans Other Plans
---------- ----------- -------------- ---------- ----------- --------------
Change in benefit obligation
Benefit obligation at beginning of year $ 22,511 $ 54,095 $ 15,117 $ 21,929 $ 42,399 $ 14,070
Service cost 1,962 4,107 889 2,376 3,372 1,019
Interest cost 1,613 1,960 1,071 1,572 1,729 1,000
Participants contributions - 173 266 - 171 129
Special termination benefits - - 766 - - -
Effect of curtailment - - - (845) (704) (867)
Effect of settlement - - - - 554 -
Benefits paid (716) (2,859) (714) (520) (4,629) (508)
Liability (gains) losses 4,190 5,700 14,098 (2,001) 7,060 274
Changes in foreign currency - 3,318 - - 4,143 -
---------- ----------- -------------- ---------- ----------- --------------
Benefit obligation at end of year $ 29,560 $ 66,494 $ 31,493 $ 22,511 $ 54,095 $ 15,117
---------- ----------- -------------- ---------- ----------- --------------
Change in plan assets
Fair value of plan assets at beginning of year $ 18,441 $ 19,522 $ - $ 18,143 $ 19,604 $ -
Actual return on plan assets (1,260) (1,212) - 518 (2,209) -
Employer contributions 12,600 5,774 448 300 3,702 379
Participants contributions - 173 266 - 171 129
Effect of settlement - - - - (164) -
Benefits paid (716) (2,619) (714) (520) (4,287) (508)
Changes in foreign currency - 2,901 - - 2,705 -
---------- ----------- -------------- ---------- ----------- --------------
Fair value of plan assets at end of year $ 29,065 $ 24,538 $ - $ 18,441 $ 19,522 $ -
---------- ----------- -------------- ---------- ----------- --------------
Funded status $ (495) $ (41,956) $ (31,493) $ (4,070) $ (34,573) $ (15,117)
Unrecognized net transition liability - 705 - - 757 -
Unrecognized net actuarial loss 7,081 16,986 14,757 96 10,668 1,495
Unrecognized prior service cost 551 - (752) 831 - (1,127)
Effect of curtailment - - - (205) - (754)
---------- ----------- -------------- ---------- ----------- --------------
Net amount recognized $ 7,137 $ (24,265) $ (17,488) $ (3,348) $ (23,148) $ (15,503)
Amounts recognized in the consolidated ---------- ----------- -------------- ---------- ----------- --------------
balance sheet consist of:
Prepaid benefit cost $ 12,000 $ 4,341 $ - $ - $ - $ -
Accrued benefit liability (8,487) (32,455) (17,488) (3,348) (23,148) (15,503)
Intangible asset 551 - - - - -
Accumulated other comprehensive (income) loss 3,073 3,849 - - - -
---------- ----------- -------------- ---------- ----------- --------------
Net amount recognized $ 7,137 $ (24,265) $ (17,488) $ (3,348) $ (23,148) $ (15,503)
---------- ----------- -------------- ---------- ----------- --------------
The minimum pension liability adjustment included in accumulated other
comprehensive (income) loss is recorded on the consolidated balance
sheet net of deferred income taxes of $2,419 at June 30, 2003.
(7) Leases
The Company rents certain facilities and equipment under lease arrangements
classified as both capital and operating leases. Some of the leases have
renewal options. Assets under capital leases consist primarily of data
processing equipment.
Future minimum lease payments are presented below:
Capital Operating
Fiscal Year Leases Leases
- ---------------------- ---------- ---------
2004 $ 4,246 $ 7,245
2005 2,056 4,084
2006 1,181 2,466
2007 610 1,982
2008 and thereafter 596 5,469
---------- ---------
$ 8,689 $ 21,246
Less amount representing
interest, at 2% to 9.7% 1,100
----------
Present value of minimum lease payments
(includes current portion of $3,858) $ 7,589
----------
Rental expense was $8,720 in 2003; $9,949 in 2002; and $11,005 in 2001.
(8) Debt
The details relative to long-term debt are as follows:
2003 2002
-------- --------
Mortgages $ 6,672 $ 7,250
Bank loans 3,407 3,706
Industrial development bonds 4,350 4,350
Other 282 322
-------- --------
14,711 15,628
Less current portion 1,574 1,405
-------- --------
Total long-term debt $ 13,137 $ 14,223
-------- --------
Mortgages consist of two loans that certain buildings, carry an annual interest
rate of 7.79 percent and require periodic principal payments through 2012.
The Company has two bank loans with annual interest rates of 4.5 percent and
4.75 percent, respectively, payable in periodic installments through March
2007.
Industrial development bonds, secured by certain land, buildings, and
equipment, have annual interest rates ranging from 1.5 percent to 2.7 percent,
with periodic principal payments through March 2011.
The long-term debt as of June 30, 2003 matures as follows: $1,574 in 2004;
$1,578 in 2005; $3,629 in 2006; $1,498 in 2007; and $6,432 thereafter.
At June 30, 2003, the Company had available lines of credit of $129,900, of
which $127,300 remained unused at June 30, 2003.
Short-term loans at June 30, 2003 of $656 are held in Brazil, bear the
prevailing annual market interest rate of 19 percent and mature within a
12-month period.
(9) Special Charges
During the fourth quarter of fiscal 2003, the Company recorded a pretax charge
of $40.1 million ($28.6 million, net of a tax benefit of $11.5 million)
comprising $23.1 million relating to write-offs of manufacturing assets and
facilities, $11.9 million to reflect workforce reductions of 537 people and
$5.1 million for the write-off of licenses and investments. The majority of
these charges impacted the Americas region by $27.7 million and the European
region by $8.4 million. Of the 537 people included in the workforce reduction,
376 were directly involved in manufacturing operations and 161 were involved in
manufacturing support and sales, general and administrative positions. Some
employment reductions occurred during fiscal 2003, and all remaining employment
reductions are expected to occur in the first half of fiscal 2004. Most
severance payments will continue for up to a year, with some extending beyond
that period.
Pretax charges of $5.4 million were recorded in cost of sales; $29.6 million
in selling, general and administrative expenses; and $5.1 million in other
expenses. The charges relating to facility, asset, license and investment
write-downs were credited to the respective items on the balance sheet, and the
unpaid amounts relating to employment reductions were included in accrued
expenses.
During the second quarter of fiscal 2002, the Company recorded a pretax charge
of $34.2 million ($25.3 million, net of tax benefit of $8.9 million) comprising
$18.7 million to reflect costs associated with a reduction in the global
workforce of approximately 800 people, $10.0 million to reflect the lower
current value of investments in other companies and $5.5 million of asset
write-down costs related to certain operations being closed. Of the
approximately 800 people included in the workforce reduction, approximately 400
were directly involved in manufacturing operations and approximately 400 were
involved in sales and administrative positions. Employment reductions of
approximately 600 occurred during the second quarter of fiscal 2002, resulting
in cash payments of $5.7 million . The remaining employment reductions occurred
during the second half of fiscal 2002, and any remaining severance payments
will be completed by the end of fiscal 2004.
Pretax charges of $7.1 million were recorded in cost of sales; $15.6 million in
selling, general and administrative expenses; and $11.5 million in other
expenses. The charges relating to asset and investment write-downs were
credited to the respective items on the balance sheet, and the unpaid amounts
relating to employment reductions were included in accrued expenses. In
addition, during the second quarter of fiscal 2002, a one-time positive tax
planning adjustment of $5.0 million related to certain operations being closed
was recorded.
During the fourth quarter of fiscal 2001, the Company recorded a pretax charge
of $43.5 million ($30.3 million, net of tax benefit of $13.2 million) to
reflect costs associated with a reduction in the global workforce of
approximately 950 people ($27.7 million), write-off of slow-moving and excess
inventories ($12.7 million) and asset write-offs related to operations being
closed ($3.1 million). Of the approximately 950 people included in the
workforce reduction, approximately 400 were directly involved in manufacturing
operations and approximately 550 were involved in sales and administrative
positions. Employment reductions of approximately 100 occurred during the
fourth quarter of fiscal 2001, resulting in cash payments of $2.4 million.
The majority of the remaining employment reductions occurred during the first
quarter of fiscal 2002, and substantially all remaining severance payments were
made by the end of fiscal 2003. The inventory written off was disposed of
during the first quarter of fiscal year 2002.
Pretax charges of $16.4 million were included in cost of sales and $27.1
million in selling, general and administrative expenses. The charges relating
to fixed asset and inventory write-offs were credited to the respective items
on the balance sheet, and the employment reductions were included in accrued
expenses.
Total spending and use of reserves during fiscal 2003 were $13.5 million. The
major components of the fiscal 2001 fourth quarter and fiscal 2002 second
quarter charges and the remaining accrual balance as of June 30, 2003 were as
follows:
June December Cash Assets Accrued
2001 2001 Payments Disposed Balance at
Charge Charge Made and Other June 30, 2003
-------- -------- -------- --------- -----------
Severance and other benefits $ 27,690 $ 18,675 $(37,476) $ (6,301) $ 2,588
Inventory write-offs 12,714 - - (12,714) -
Asset write-offs 3,043 15,483 - (18,526) -
-------- -------- -------- --------- -----------
Total $ 43,447 $ 34,158 $(37,476) $(37,541) $ 2,588
-------- -------- -------- --------- -----------
The major components of the fiscal 2003 fourth quarter charges and the
remaining accrual balance as of June 30, 2003 were as follows:
June Cash Assets Accrued
2003 Payments Disposed Balance at
Charge Made and Other June 30, 2003
-------- -------- -------- ---------
Severance and other benefits $ 11,960 $ (1,834) $ - $ 10,126
Asset write-offs 28,156 - (28,156) -
-------- -------- -------- ---------
Total $ 40,116 $ (1,834) $(28,156) $ 10,126
-------- -------- -------- ---------
(10) Stock Option Plans
The Company has five stock option plans currently in effect, three of which may
issue future grants: the 1990 Stock Option Plan (1990 Plan), the 1991 Stock
Option Plan (1991 Plan), the 1998 Stock Option Plan (1998 Plan), the Incentive
Stock Option Plan (ISO Plan) and the Long-Term Stock Plan (LT Plan).
1990 Plan: This plan expired as of June 30, 1999. Future grants cannot be
issued from this plan, but all grants issued prior to this date can be
exercised. The most significant terms of this plan provided that (1) options
were authorized to be granted for 6.875 million shares of Common Stock and
(2) the option price was 50 percent of the fair market value of the stock of
the Company on the date of grant. The option term was five years to nine years
from the date of grant. Under the 1990 Plan, all shares issued were
nonqualified.
1991 Plan: This plan expired as of June 30, 2000. Future grants cannot be
issued from this plan, but all grants issued prior to this date can be
exercised. The most significant terms of this plan provided that (1) options
were authorized to be granted for 3.8 million shares of Common Stock and
(2) the option price was the fair market value of the stock on date of grant.
The option term was five years to 11 years from date of grant.
1998 Plan: The most significant terms of this plan provide that (1) options may
be granted for 12.5 million shares of Class A Common Stock and (2) the option
price shall be not less than 10 percent nor more than 100 percent of the fair
market value of the Class A Common Stock of the Company on the date of grant.
The option term is five years to nine years from the date of grant.
The option price per share for certain options in the 1990 and 1998 plans was
less than the fair market value at the date of grant, thus creating deferred
unearned compensation. Deferred unearned compensation is charged to
operations over the term of the option and was $12,807 in 2003; $11,110 in
2002; and $9,398 in 2001.
Stock option transactions relating to the 1990, 1991 and 1998 Plans are
summarized as follows (shares are in thousands):
1990 Plan 1991 Plan 1998 Plan
Wtd. Avg. Wtd. Avg. Wtd. Avg.
Price Price Price
----------------- ----------------- -----------------
Shares Per Share Shares Per Share Shares Per Share
------ --------- ------ --------- ------ ---------
Outstanding at June 30, 2000 2,149 $ 9.40 2,156 $ 19.96 1,738 $ 11.64
Granted - - - - 781 13.44
Exercised 360 9.47 298 17.40 117 11.13
Canceled 60 9.27 5 17.55 64 12.68
------ --------- ------ --------- ------ ---------
Outstanding at June 30, 2001 1,729 $ 9.39 1,853 $ 20.38 2,338 $ 12.27
Granted - - - - 829 11.73
Exercised 230 10.68 100 21.63 236 12.15
Canceled 127 9.48 - - 152 12.27
------ --------- ------ --------- ------ ---------
Outstanding at June 30, 2002 1,372 $ 9.16 1,753 $ 20.30 2,779 $ 12.12
Granted - - - - 1,298 9.67
Exercised 650 7.89 11 23.96 327 11.67
Canceled 2 12.36 18 28.13 83 11.68
------ --------- ------ --------- ------ ---------
Outstanding at June 30, 2003 720 $ 10.31 1,724 $ 20.20 3,667 $ 11.30
Options exercisable at June 30, 2002 161 $ 11.37 212 $ 23.74 476 $ 12.56
Options exercisable at June 30, 2003 103 $ 6.77 352 $ 22.73 779 $ 12.70
------ --------- ------ --------- ------ ---------
ISO Plan: The most significant terms of this plan, available to executives and
directors, provide that (1) options may be granted for 500,000 shares of
Class A Common Stock and (2) the option price shall be the fair market value of
the stock on the date of grant. The option term is four years to 10 years from
the date of grant. Under the ISO Plan, the options granted can be either
incentive or nonqualified. Unless specifically stated otherwise, all options
granted shall be incentive.
Stock option transactions relating to the ISO Plan are summarized as follows
(shares are in thousands):
Wtd. Avg.
Price
Shares Per Share
------ ---------
Outstanding at June 30, 2001 65 $ 34.22
Granted 61 26.99
Exercised - -
Canceled - -
------ ---------
Outstanding at June 30, 2002 126 $ 30.71
Granted 58 21.57
Exercised - -
Canceled - -
------ ---------
Outstanding at June 30, 2003 184 $ 27.84
Options exercisable at June 30, 2002 16 $ 34.22
Options exercisable at June 30, 2003 48 $ 31.91
------ ---------
LT Plan: The most significant terms of this plan, available to executives
and management, provide that (1) options may be granted for three million
shares of Class A Common Stock and (2) the option price shall be the fair
market value of the stock on the date of grant. The options vest over their
terms, which are four years to seven years from the date of grant.
The LT Plan also allows for the grant of stock awards to certain executives
based on meeting performance targets established in the Company's stock bonus
plans. The awards vest over a period of generally four years and are valued at
fair market value at date of grant.
Stock option transactions and stock awards relating to the LT Plan are
summarized as follows (shares are in thousands):
Wtd. Avg.
Price
Shares Per Share
------ ---------
Outstanding at June 30, 2001 657 $ 27.90
Granted 620 22.89
Exercised 25 -
Canceled - -
------ ---------
Outstanding at June 30, 2002 1,252 $ 25.99
Granted 1,485 17.12
Exercised 49 -
Canceled - -
------ ---------
Outstanding at June 30, 2003 2,688 $ 21.57
Options exercisable at June 30, 2002 139 $ 33.00
Options exercisable at June 30, 2003 409 $ 31.11
------ ---------
The following table summarizes information about options outstanding at
June 30, 2003:
Wtd. Avg.
Number Remaining Number
Range of Outstanding Contractual Wtd. Avg. Exercisable Wtd. Avg.
Exercise Prices (thousands) Life (in years) Exercise Price (thousands) Exercise Price
--------------- ------------ --------------- -------------- ----------- --------------
Common
$ 2.56 - 10.81 720 1.9 $ 9.83 102 $ 6.72
11.20 - 18.94 687 3.7 15.59 1 11.20
20.80 - 20.80 551 5.0 20.80 248 20.80
23.60 - 27.95 473 5.2 26.65 93 27.08
30.03 - 30.03 13 1.1 30.03 10 30.03
Class A Common
$ 0.00 - 9.28 1,871 5.6 $ 7.26 8 $ 9.24
9.33 - 13.00 1,821 2.9 11.91 613 11.76
13.08 - 23.62 1,622 5.5 19.98 158 16.51
23.92 - 36.30 1,209 4.4 30.01 449 31.08
38.19 - 38.19 16 2.3 38.19 9 38.19
--------------- ------------ --------------- -------------- ----------- --------------
8,983 1,691
As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company has elected to account for its stock-based compensation programs
according to the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees." During its fiscal third quarter,
the Company adopted the disclosure provisions of SFAS No.148, "Accounting for
Stock-Based Compensation - Transition and Disclosure." Had the Company elected
to apply the provisions of SFAS No. 123 as amended by SFAS No. 148 regarding
recognition of compensation expense to the extent of the calculated fair value
of stock options granted, the effects on reported net income and earnings per
common share would have been as follows:
2003 2002 2001
--------- --------- ---------
Net income, as reported $ 84,918 $ 76,479 $ 203,919
Add: Stock-based employee
compensation expense included in
reported net income, net of related
tax effects 9,925 9,122 6,578
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for all
awards, net of related tax effects (17,433) (14,842) (10,831)
Pro forma net income 77,410 70,759 199,666
Earnings per share:
Basic 0.44 0.39 1.04
Diluted 0.44 0.39 1.03
Pro forma earnings per share:
Basic 0.40 0.36 1.02
Diluted 0.40 0.36 1.01
Weighted average fair value of options
granted during the year
- at fair value 7.79 14.69 19.00
- at less than fair value 11.89 16.04 19.41
For purposes of computing pro forma net income and earnings per common share,
the fair value of each option grant is estimated as of the date of grant using
the Black-Scholes option pricing model with the following assumptions:
2003 2002 2001
--------- --------- ---------
Dividend yield 0.4% 0.2% 0.2%
Expected volatility 46.18% 52.02% 58.93%
Risk-free interest rate 4.48% 5.56% 5.89%
Expected life of option (years) 3.65 4.65 4.31
(11) Segment and Related Information
The Company operates in one product segment: the manufacture and sale of
electrical components. Revenue is recognized based on the location of the
selling entity. Management operates the business by geographic segments. The
Americas region consists primarily of operations in North America. The Far
East North region is substantially Japan, but also includes Korea, while the
Far East South region includes China, Singapore and the remaining countries
in Asia. European operations are located in both eastern and western Europe.
Information by geographic area is summarized in the following table:
United Americas Far East Far East Corporate
States (Non-U.S.) North South Europe and Other Eliminations Total
---------- -------- -------- -------- -------- --------- ------------ ----------
2003
Customer revenue $ 635,332 $19,850 $407,821 $469,342 $310,685 $ 68 $ - $1,843,098
Intercompany revenue 84,078 28,417 153,845 55,153 28,408 - (349,901) -
Total revenue 719,410 48,267 561,666 524,495 339,093 68 (349,901) 1,843,098
Depreciation and amortization 76,911 2,063 75,282 23,515 31,318 19,641 - 228,730
Tax expense 4,524 901 15,438 13,466 (2,449) (7,118) - 24,762
Net income 16,234 2,323 40,080 61,436 (10,984) (24,171) - 84,918
Identifiable assets 851,512 57,665 489,509 475,458 468,809 179,315 (187,378) 2,334,890
Capital expenditures 36,962 2,586 62,538 30,036 24,835 14,236 - 171,193
2002
Customer revenue $ 668,047 $10,018 $351,542 $380,882 $300,951 $ 57 $ - $1,711,497
Intercompany revenue 92,409 36,643 124,976 48,901 27,685 - (330,614) -
Total revenue 760,456 46,661 476,518 429,783 328,636 57 (330,614) 1,711,497
Depreciation and amortization 81,722 640 74,996 21,081 29,939 15,309 - 223,687
Tax expense 5,939 - 13,496 10,197 2,026 (14,974) - 16,684
Net income 19,543 (541) 34,843 55,182 1,400 (33,948) - 76,479
Identifiable assets 973,847 69,599 513,282 413,068 432,259 150,664 (298,799) 2,253,920
Capital expenditures 44,459 618 44,823 32,370 26,732 23,495 - 172,497
2001
Customer revenue $ 984,754 $71,514 $499,271 $404,955 $404,985 $ 70 $ - $2,365,549
Intercompany revenue 119,973 12,469 172,473 56,132 50,138 - (411,185) -
Total revenue 1,104,727 83,983 671,744 461,087 455,123 70 (411,185) 2,365,549
Depreciation and amortization 73,682 3,346 78,440 19,079 27,077 16,330 - 217,954
Tax expense 45,569 (585) 38,394 11,304 6,759 (14,017) - 87,424
Net income 91,750 (724) 79,188 52,099 20,124 (38,518) - 203,919
Identifiable assets 1,013,701 49,736 497,381 337,280 387,578 149,865 (221,914) 2,213,627
Capital expenditures 156,531 1,747 111,251 40,983 43,507 22,281 - 376,300
Intercompany net revenue is generally recorded at cost plus the normal mark-up
charged to unaffiliated customers.
Identifiable assets are those assets of the Company that are identified with
operations in each country. During 2003, 2002 and 2001, no customer accounted
for more than 10 percent of consolidated net revenue.
Fiscal 2003, 2002 and 2001 by Quarter
(in thousands, except per share data-unaudited)
Quarter 2003 2002 2001
Net revenue 1st $ 469,246 $ 430,453 $ 625,925
2nd 454,609 416,460 629,319
3rd 443,177 408,307 599,801
4th 476,066 456,277 510,504
Gross profit 1st 159,556 137,304 244,690
2nd 146,394 125,345 240,849
3rd 148,532 132,272 219,036
4th 155,259 147,114 153,914
Income/(loss) before income
taxes and minority interest 1st 39,515 35,129 93,637
2nd 37,150 (3,757) 98,451
3rd 32,737 25,879 85,793
4th 640 35,970 13,535
Income taxes 1st 9,483 9,840 29,027
2nd 8,916 (8,005) 30,520
3rd 7,857 6,211 24,880
4th (1,494) 8,638 2,997
Net income 1st 29,962 25,196 64,522
2nd 28,188 4,264 67,834
3rd 24,804 19,683 60,735
4th 1,964 27,336 10,828
Basic earnings per common share 1st 0.16 0.13 0.33
2nd 0.15 0.02 0.35
3rd 0.13 0.10 0.31
4th 0.01 0.14 0.06
Diluted earnings per common share 1st 0.15 0.13 0.33
2nd 0.15 0.02 0.34
3rd 0.13 0.10 0.31
4th 0.01 0.14 0.05
LOW HIGH LOW HIGH LOW HIGH
National Market System
Price of Common Stock 1st $22.85 $33.75 $25.76 $36.59 $43.69 $56.00
2nd 19.43 29.62 26.46 32.97 34.19 57.63
3rd 19.98 25.50 27.94 36.65 34.13 48.00
4th 21.15 29.36 30.45 39.61 31.60 42.49
Price of Class A 1st 19.79 28.94 22.40 29.55 32.50 42.31
Common Stock 2nd 17.95 26.12 22.80 28.35 24.63 43.94
3rd 17.02 22.12 24.47 32.29 25.44 34.81
4th 18.01 25.73 25.05 33.80 25.25 32.40
During the fourth quarter of fiscal 2003, gross profit was impacted by a pretax
charge of $5.4 million relating to employment reductions. Selling, general and
administrative expenses included a pretax charge of $29.6 million related to
the write-off of assets and facilities, as well as employment reductions. Other
expenses included a pretax charge of $5.1 million for the write-off of licenses
and investments. These combined charges reduced net income by $28.6 million
(net of tax benefit of $11.5 million).
During the second quarter of fiscal 2002, gross profit was impacted by a pretax
charge of $7.1 million relating to employment reductions. Selling, general and
administrative expenses included a pretax charge of $15.6 million related to
employment reductions and asset write-offs. Other expenses included a pretax
charge of $11.5 million, reflecting the lower current value of investments
in other companies. These combined charges reduced net income by $25.3 million
(net of tax benefit of $8.9 million). The second quarter was also impacted by a
$5.0 million one-time tax benefit related to certain operations being closed.
During the fourth quarter of fiscal 2001, gross profit was impacted by a pretax
charge of $16.4 million relating to the write-off of slow-moving and excess
inventory and employment reductions. Selling, general and administrative
expenses included a pretax charge of $27.1 million related to employment
reductions and asset write-offs. These combined charges reduced net income by
$30.3 million (net of tax benefit of $13.2 million).