1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- ------- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
----------------------------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- ------- SECURITIES EXCHANGE ACT OF 1934
For the transition period from
----------------------------------
Commission File Number 0-7491
MOLEX INCORPORATED
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 36-2369491
- --------------------------------- -------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
2222 WELLINGTON COURT, LISLE, ILLINOIS 60532
- ---------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 630-969-4550
------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------------ ------------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date (applicable only to corporate
registrants). At December 31, 1998:
Common Stock 76,341,813 shares
Class A Common Stock 78,831,078 shares
Class B Common Stock 94,255 shares
2
MOLEX INCORPORATED
FORM 10-Q
DECEMBER 31, 1998
INDEX
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Information - Unaudited
Condensed Consolidated Balance Sheets -- 2
December 31, 1998 and June 30, 1998
Condensed Consolidated Statements of Income -- 3
Three and Six Months Ended December 31, 1998 and 1997
Condensed Consolidated Statements of Cash Flows -- 4
Six Months Ended December 31, 1998 and 1997
Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II - OTHER INFORMATION 12
-1-
3
MOLEX INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited - In Thousands)
ASSETS Dec. 31, June 30,
1998 1998
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents $ 193,773 $ 205,262
Marketable securities 100,800 117,151
Accounts receivable - net 365,329 328,560
Inventories 201,401 184,433
Other current assets 36,051 32,385
---------- ----------
Total current assets 897,354 867,791
PROPERTY, PLANT AND EQUIPMENT - NET 756,901 676,161
OTHER ASSETS 127,534 95,682
---------- ----------
$1,781,789 $1,639,634
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 136,933 $ 140,350
Accrued expenses 129,848 119,161
Other current liabilities 70,543 73,363
---------- ----------
Total current liabilities 337,324 332,874
DEFERRED ITEMS 5,815 6,504
ACCRUED POSTRETIREMENT BENEFITS 34,074 30,536
LONG-TERM DEBT, less portion due currently 5,663 5,566
MINORITY INTEREST 2,579 2,584
SHAREHOLDERS' EQUITY
Common stock 8,289 8,272
Paid-in capital 152,259 147,782
Retained earnings 1,400,871 1,322,775
Treasury stock (174,824) (143,714)
Deferred unearned compensation (16,436) (19,988)
Cumulative translation and other adjustments 26,175 (53,557)
---------- ----------
Total shareholders' equity 1,396,334 1,261,570
---------- ----------
$1,781,789 $1,639,634
========== ==========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
- 2 -
4
MOLEX INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited - In Thousands Except per Share)
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------- --------------------
Dec. 31, Dec. 31, Dec. 31, Dec. 31,
1998 1997 1998 1997
-------- -------- -------- --------
NET REVENUE $429,718 $405,497 $839,610 $815,691
COST OF SALES 253,121 236,989 497,437 476,850
-------- -------- -------- --------
Gross Profit 176,597 168,508 342,173 338,841
OPERATING EXPENSES:
Selling 35,452 33,062 69,264 65,370
Administrative 75,561 68,442 151,675 140,595
-------- -------- -------- --------
Total Operating Expenses 111,013 101,504 220,939 205,965
Income from Operations 65,584 67,004 121,234 132,876
OTHER INCOME:
Foreign currency transaction
gain/(loss) (2,388) 76 (2,655) (206)
Interest income, net 1,374 2,552 4,822 6,216
-------- -------- -------- --------
Total Other Income/(Loss) (1,014) 2,628 2,167 6,010
INCOME BEFORE INCOME TAXES 64,570 69,632 123,401 138,886
INCOME TAXES 20,697 24,081 40,355 48,879
-------- -------- -------- --------
NET INCOME $ 43,873 $ 45,551 $ 83,046 $ 90,007
======== ======== ======== ========
EARNINGS PER COMMON SHARE:
BASIC $ 0.28 $ 0.29 $ 0.53 $ 0.57
======== ======== ======== ========
DILUTED $ 0.28 $ 0.29 $ 0.53 $ 0.57
======== ======== ======== ========
CASH DIVIDENDS PER COMMON SHARE $ 0.015 $ 0.015 $ 0.030 $ 0.027
======== ======== ======== ========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING
DURING THE PERIOD: BASIC 155,329 156,729 155,561 156,791
======== ======== ======== ========
DILUTED 156,525 159,029 156,622 159,119
======== ======== ======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
- 3 -
5
MOLEX INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited - In Thousands)
SIX MONTHS ENDED
-----------------------
Dec. 31, Dec. 31,
1998 1997
-------- --------
CASH AND CASH EQUIVALENTS, Beginning of Period $205,262 $199,767
CASH AND CASH EQUIVALENTS
PROVIDED FROM (USED FOR):
Operations:
Net income 83,046 90,007
Add (deduct) non-cash items included in net income:
Depreciation and amortization 78,615 74,555
Amortization of deferred unearned compensation 3,552 2,852
Other (credits)/charges to net income 2,611 (573)
Current items:
Accounts receivable (3,547) (10,454)
Inventories (6,519) (19,368)
Other current assets (3,313) (6,246)
Accounts payable (30,473) (15,076)
Accrued expenses 5,324 11,404
Income taxes (7,778) (10,328)
-------- --------
NET CASH PROVIDED FROM OPERATIONS 121,518 116,773
Investments:
Purchases of property, plant and equipment (103,146) (108,148)
Proceeds from sale of property, plant and equipment 2,010 3,137
Proceeds from sale of marketable securities 2,522,536 1,024,384
Purchases of marketable securities (2,538,887) (1,051,550)
(Increase) decrease in other assets (21,701) 5,746
-------- --------
NET CASH USED FOR INVESTMENTS (139,188) (126,431)
Financing:
Increase in long-term debt - 1,231
Decrease in long-term debt - (3,000)
Cash dividends paid (2,330) (3,835)
Purchase of treasury stock (31,480) (20,851)
Reissuance of treasury stock 1,192 1,155
Exercise of stock options 2,603 3,331
-------- --------
NET CASH USED FOR FINANCING (30,015) (21,969)
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS 36,196 (17,283)
-------- --------
CASH AND CASH EQUIVALENTS, End of Period $193,773 $150,857
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
- 4 -
6
MOLEX INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated financial statements have been prepared from the
Company's books and records without audit and are subject to year-end
adjustments. The interim financial statements reflect all adjustments which are,
in the opinion of management, necessary for a fair presentation of information
for the interim periods presented. The condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Molex Incorporated 1998 Annual
Report to Shareholders and the 1998 Annual Report on Form 10-K. The results of
operations for the interim periods should not be considered indicative of
results to be expected for the full year.
(2) EARNINGS PER COMMON SHARE
The reconciliation of common shares outstanding to dilutive common shares
outstanding is as follows:
Three Months Ended Six Months Ended
--------------------- ---------------------
Dec. 31, Dec. 31, Dec. 31, Dec. 31,
1998 1997 1998 1997
------- ------- ------- -------
Weighted average shares outstanding - basic 155,329 156,729 155,561 156,791
Dilutive effect of stock options 1,196 2,300 1,061 2,328
------- ------- ------- -------
Weighted average shares outstanding - diluted 156,525 159,029 156,622 159,119
======= ======= ======= =======
(3) COMPREHENSIVE INCOME
Effective July 1, 1998, the Company adopted the Financial Accounting Standards
Board's (FASB) Statement of Financial Accounting Standards (SFAS) No. 130,
"Reporting Comprehensive Income". SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components. Comprehensive
income includes all non-shareowner changes in equity and consists of net income,
foreign currency translation adjustments and unrealized gains and losses on
available-for-sale securities.
-5-
7
Total comprehensive income, in thousands of dollars, is as follows:
Three Months Ended Six Months Ended
-------------------- ---------------------
Dec. 31, Dec. 31, Dec. 31, Dec. 31,
1998 1997 1998 1997
------- ------- ------- -------
Net income $43,873 $ 45,551 $ 83,046 $ 90,007
Currency translation and other adjustments 52,645 (45,764) 78,462 (85,482)
------- -------- -------- --------
Total comprehensive income $96,518 $ (213) $161,508 $ 4,525
======= ======== ======== ========
4) INVENTORIES
Inventories are valued at the lower of first-in, first-out cost or market.
Inventories, in thousands of dollars, consist of the following:
Dec. 31, June 30,
1998 1998
-------- --------
Raw Materials $ 50,508 $ 48,324
Work in Process 52,145 49,025
Finished Goods 98,748 87,084
-------- --------
$201,401 $184,433
======== ========
(4) NEW ACCOUNTING PRONOUNCEMENTS
In 1997, FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information." In 1998, FASB issued SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits." Both are
effective for fiscal years beginning after December 15, 1997, or the Company's
fiscal year ending June 30, 1999. SFAS No. 131 establishes standards for
reporting information about operating segments and related disclosures about
products and services, geographic areas and major customers. SFAS No. 132
revises employers' disclosures about pensions and other postretirement benefit
plans. The requirements of these statements only impact financial statement
disclosure. Accordingly, these statements will have no impact on the Company's
financial position or the results of its operations.
Also in 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", effective for all fiscal quarters of all
fiscal years beginning after June 15, 1999. It establishes accounting and
reporting standards for derivative instruments and for hedging activities. It
requires that an
-6-
8
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. The
Company is assessing the impact this statement will have on its statement of
financial position and the results of its operations.
-7-
9
MOLEX INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Consolidated net revenues were $429.7 million for the quarter ended December 31,
1998, increasing 6.0 percent in US dollars and 4.4 percent in local currencies
over the corresponding quarter of the prior fiscal year. For the six months
ended December 31, 1998 revenue grew to $839.6 million from $815.7 million in
the prior year, resulting in growth of 2.9 percent in US dollars and 5.8 percent
in local currencies. The generally higher value of the US dollar compared to
other currencies worldwide decreased net revenue by $23.1 million for the six
months ended December 31, 1998, but for the quarter, the strengthening of other
currencies caused net revenue to increase $6.5 million.
Management believes that Molex continues to grow at a rate higher than the
worldwide connector market. All geographic regions experienced local currency
sales growth for the quarter as well as the six months ended December 31, 1998.
For the quarter ended December 31, 1998, revenue in the Americas region
increased 1.5 percent in US dollars and 1.7 percent in local currencies over the
prior year period which was exceptionally strong. For the six months ended
December 31, 1998, the revenue growth over the same period in the prior year was
4.9 percent in US dollars and 5.2 percent in local currencies. Improved sales of
data communications and telecommunications products as well as strong sales of
fiber optic products were partially offset by a softening in distribution sales
of commercial products.
Quarterly net revenue in the Far East North increased 14.7 percent in US dollars
and 8.2 percent in local currencies compared to the prior year. For the six
months ended December 31, 1998, revenue remained relatively flat over the prior
year period in US dollars but increased by 5.1 percent in local currencies.
Market share gains from the introduction of new products and the penetration of
new market areas contributed to the local currency growth.
Far East South net revenue for the quarter ended December 31, 1998 increased
18.8 percent in US dollars and 20.6 percent in local currencies from the prior
year. For the six months ended December 31, 1998, revenue increased over the
same period in the prior year by 8.8 percent in US dollars and 18.8 percent in
local currencies. Personal computer and computer-peripheral products continue to
produce strong results.
In Europe, net revenue increased 8.4 percent in US dollars and 3.6 percent in
local currencies over a very strong prior year quarter.
-8-
10
For the six months ended December 31, 1998, the revenue growth for the
comparable prior year period was 7.4 percent in US dollars and 4.0 percent in
local currencies. Evidence of a slowdown in the region, especially in the U.K.,
has impacted local currency growth.
For the six months ended December 31, 1998, 68.2 percent of Molex's worldwide
net revenue was generated from its international operations. International
operations are subject to currency fluctuations and government actions. The
devaluations of several Asian currencies have had an adverse effect on reported
sales and profits for the six month period, but showed improvement during the
second quarter. Molex monitors its currency exposure in each country and
continues to implement defensive strategies to respond to changing economic
environments. Due to the uncertainty of the foreign exchange markets, Molex
cannot reasonably predict future trends related to foreign currency
fluctuations. Foreign currency fluctuations have impacted results in the past
and may impact results in the future.
Gross profit as a percent of net revenue was 41.1 percent for the quarter ended
December 31, 1998 compared to 41.2 percent for the quarter ended December 31,
1997. For the six months ended December 31, 1998 the gross profit percentage was
40.8 percent, down from 41.5 percent for the same period in the prior year. This
decrease is primarily due to depreciation expense associated with the Company's
increased level of capital investments in new products and manufacturing
capacity.
Selling and administrative expenses were $111.0 million and $220.9 million,
respectively, for the quarter and six month period ended December 31, 1998 as
compared to $101.5 million and $206.0 million, respectively, for the comparable
periods in the prior year. For the quarter and six months ended December 31,
1998, selling and administrative expenses as a percent of net revenue were 25.8
percent and 26.3 percent, respectively, as compared to 25.0 percent and 25.3
percent, respectively, for the same period in the prior year. The Company's
implementation of its Global Information Systems and the general increase in
sales levels across the Company contributed to the slightly higher spending.
Also included in selling and administrative expenses are research and
development expenditures which for the six months ended December 31, 1998,
increased at a higher rate as a percent of net revenues than the prior year
period, 6.1 percent versus 5.8 percent, respectively.
Interest income, net of interest expense, was $1.4 million in the quarter ended
December 31, 1998 as compared to $2.5 million in the prior year and was $4.8
million for the six months ended December 31, 1998 as compared to $6.2 million a
year ago.
The effective tax rate was 32.1 percent for the quarter ended December 31, 1998,
as compared to 34.6 percent in the prior year period and was 32.7 percent for
the six months ended December 31, 1998 as compared to 35.2 percent last year.
The overall change was caused by the Company implementing a more aggressive
repatriation strategy offset by increased revenues in countries with higher
income tax rates.
-9-
11
Net income for the quarter was $43.9 million or 28 cents per basic and diluted
share, a 3.7 percent decrease compared with $45.6 million or 29 cents per basic
and diluted share for the same quarter last fiscal year. Net income for the six
months ended December 31, 1998 was $83.0 million or 53 cents per basic and
diluted share, as compared to net income of $90.0 million or 57 cents per basic
and diluted share, for the same period in the prior year. Excluding the effects
of currency translation, net income decreased 6.4 percent for the quarter and
4.6 percent for the six months ended December 31, 1998 from the comparable prior
year periods.
LIQUIDITY AND CAPITAL RESOURCES
Molex's balance sheet continues to be exceptionally strong. Working capital at
December 31, 1998 was $560.0 million, an increase from $544.8 million at June
30, 1998.
During the six months ended December 31, 1998, the Company has purchased an
aggregate of 1,087,000 shares of treasury stock at an aggregate cost of $31.5
million. This is in accordance with authorization by the Board of Directors
allowing for the purchase of up to $50 million of Company stock during the
current fiscal year.
Management believes that the Company's current liquidity and financial
flexibility are adequate to support its continued growth.
YEAR 2000
Molex recognizes the importance of the Year 2000 issue and has been giving high
priority to it. The Company has completed an assessment of its business and
other information systems as well as the non-information system aspects of its
business that could be impacted by the Year 2000 issue. Over the past few years,
the Company has developed and is currently implementing its Global Information
System (GIS), which is Year 2000 compliant. The GIS project is approximately 65
percent implemented and is expected to be substantially complete by October
1999. The Company presently believes that with modifications to existing
software and the GIS implementation, the Year 2000 issue will not pose material
operational problems for its information systems. While considered unlikely,
management believes that the most likely, worst case Year 2000 scenario would be
a delay in the completion of the GIS implementation at one or more of its
operating subsidiaries and the need for rapid remediation of legacy systems to
make them Year 2000 compliant. At this time management has not determined the
impact this worst case scenario would have on its financial position, results of
operations or cash flows, but believes that its experience implementing GIS to
date mitigates this risk.
-10-
12
While the GIS implementation addresses many of the Company's Year
2000 issues, the Company does not consider the GIS implementation costs to be
related to the Year 2000 issue as such costs are a strategic expenditure to
enhance future operations and would be incurred regardless of the Year 2000
issue. Total costs related to the GIS project are expected to reach $55-60
million once complete. Expenditures related to the Year 2000 date conversion
effort, principally the cost to remediate existing software or microprocessors
embedded in the Company's manufacturing systems, are not expected to be
significant and management expects the total costs of such remediation effort to
range from $2-5 million. Such costs will be incurred principally during calendar
1999 and should not have a material impact on the Company's financial position,
results of operations or cash flows.
Part of the risk inherent in the Year 2000 issue results from the general
uncertainty of the readiness of material third-party relationships. Although
the Company cannot know or foresee every eventuality that suppliers and
customers may face which could impact its operations, the Company has been
initiating communications with its critical external relationships to determine
the extent to which the Company may be vulnerable to such parties' failure to
resolve their own Year 2000 issues. At present, the Company has not developed
specific contingency plans, but where practicable, the Company will assess and
attempt to mitigate its risks with respect to the failure of these entities to
be Year 2000 ready. The Company cannot estimate the cost to the Company of the
failure of third parties to address their Year 2000 issues and there can be no
assurance that there will not be a material adverse effect on the Company if
third parties do not convert their systems in a timely manner and in a way that
is compatible with the Company's systems.
OUTLOOK
The outlook for the remainder of fiscal 1999 remains cautious for Molex in light
of continuing difficult economic conditions in many parts of the world,
particularly in Asia. Notwithstanding the significantly adverse effect of
currency devaluation, the underlying Molex growth rates in this part of the
world are encouraging. With the evidence of a slow down in Europe and the
moderation of growth in the Americas, the outlook for the remaining year is one
of guarded optimism.
To further expand the Company's global presence, offer innovative products at an
accelerated pace, and improve internal productivity, Molex plans to invest
approximately $230 million in capital expenditures and approximately $105
million in research and development for the fiscal year ending June 30, 1999.
Management believes the Company is well positioned to continue growing faster
than the overall connector industry. The Company continues to emphasize
expansion in rapidly growing industry segments, product lines and geographic
regions. Molex remains committed to providing high quality products and a full
range of services to its customers worldwide.
-11-
13
FORWARD LOOKING STATEMENT
This document contains various forward looking statements. Statements that are
not historical are forward looking statements and are subject to various risks
and uncertainties which could cause actual results to vary materially from those
stated. Such risks and uncertainties include: economic conditions in various
regions, product and price competition, raw material prices, foreign currency
exchange rates, technology changes, patent issues, litigation results, legal and
regulatory developments, and other risks and uncertainties described in
documents filed with the Securities and Exchange Commission.
PART II - OTHER INFORMATION
Items 1 - 6. Not Applicable
-12-
14
S I G N A T U R E S
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MOLEX INCORPORATED
--------------------
(Registrant)
Date February 12, 1999 /s/ ROBERT B. MAHONEY
----------------- --------------------
Robert B. Mahoney
Corporate Vice President,
Treasurer and
Chief Financial Officer
Date February 12, 1999 /s/ LOUIS A. HECHT
----------------- --------------------
Louis A. Hecht
Corporate Secretary and
General Counsel