MOLX Molex Incorporated (MM)

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

 

Form 10-K

 

 

Commission File Number 0-07491

 

 

MOLEX INCORPORATED

(Exact name of registrant as specified in its charter)

 

 

2222 Wellington Court, Lisle, Illinois 60532

(Address of principal executive offices)

Registrant’s telephone number, including area code:

(630) 969-4550

 

 

 

 

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT

 

 

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None

 

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  þ      No  o

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes  o      No  þ

 

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  þ      No  o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  þ      No  o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   þ

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes  o      No  þ

 

The aggregate market value of the voting and non-voting shares held by non-affiliates as of the last business day of the registrant’s most recently completed second fiscal quarter was approximately $2.4 billion (based on the closing price of these shares on the NASDAQ Global Select Market on December 31, 2010).

 

On July 27, 2011, the following numbers of shares of the Company’s common stock were outstanding:

 

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the Proxy Statement for the Annual Meeting of Stockholders, to be held on October 28, 2011, are incorporated by reference into Part III of this annual report on Form 10-K.

 

 

TABLE OF CONTENTS

 

 

Molex Web Site

 

We make available through our web site at www.molex.com our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with the Securities and Exchange Commission (SEC).

 

Information relating to corporate governance at Molex, including our Code of Business Conduct and Ethics, information concerning executive officers, directors and Board committees (including committee charters), and transactions in Molex securities by directors and officers, is available on or through our web site at www.molex.com under the “Investors” caption.

 

We are not including the information on our web site as a part of, or incorporating it by reference into, this annual report on Form 10-K.

 

 

Molex Incorporated (together with its subsidiaries, except where the context otherwise requires, “we,” “us” and “our”) was incorporated in the state of Delaware in 1972 and originated from an enterprise established in 1938.

 

We are one of the world’s largest manufacturers of electronic connectors in terms of net revenue. Our net revenue was $3.6 billion for fiscal 2011. We operated 39 manufacturing locations in 16 countries, and employed 33,613 people worldwide as of June 30, 2011.

 

Our core business is the manufacture and sale of electronic components. Our products are used by a large number of leading original equipment manufacturers (OEMs) throughout the world. We design, manufacture and sell more than 100,000 products, including terminals, connectors, planar cables, cable assemblies, interconnection systems, backplanes, integrated products and mechanical and electronic switches.

 

The Connector Industry

 

The global connector industry is estimated to represent approximately $45 billion in net revenue for calendar year 2010 and is a highly competitive industry. The industry has grown at a compounded annual rate of 5.2% over the past 20 years.

 

The connector industry is characterized by rapid advances in technology and new product development. These advances have been substantially driven by the increased functionality of applications in which our products are used. There is a constant demand for new product solutions and innovations in the technology industry. Our product life cycles tend to mirror the life span of our customers’ products although many of our products are designed into subsequent applications. Consumer and mobile products have relatively short product life cycles while automotive and industrial products are typically longer.

 

Industry trends that we deem particularly relevant include:

 

 

 

Markets and Products

 

The approximate percentage of our net revenue by market for fiscal 2011 is summarized below:

 

 

Telecommunications.   In the telecommunications market, we believe our key strengths include high-speed optical signal product lines, backplane connector systems and power distribution products. For mobile phones, we provide micro-miniature connectors, SIM and SD card sockets, keypads, electromechanical subassemblies and internal antennas and subsystems.

 

We released several new products for the telecommunications market in fiscal 2011:

 

 

 

Infotech.   In the infotech market, our key strengths include our high-speed signal product line, storage input/output (I/O) products, standards committee leadership, global coordination and strong relationships with OEMs, contract manufacturers and original design manufacturers.

 

We manufacture power, optical and signal connectors and cables for fast end-to-end data transfer, linking disk drives, controllers, servers, switches and storage enclosures. For example, our family of small form-factor pluggable products offer end-users both fiber optic and copper connectivity and more efficient storage area network management. Our ongoing involvement in industry committees contributes to the development of new standards for the connectors and cables that transport data.

 

We hold a strong position with the connectors used in servers, the segment of this market that accounts for the largest volume of connector purchases. We offer a large variety of products for power distribution, signal integrity, processor and memory applications. We are also a leading designer in the industry for storage devices.

 

We participate in the tablet market with a wide range of customers, largely using products developed for mobile phones and smartphones.

 

We released several new products for the infotech market in fiscal 2011:

 

 

Consumer.   In the consumer market, we believe our key strengths include micro-miniature connector engineering and manufacturing capabilities, breadth of our high wattage product line and cable and wire application equipment.

 

We design and manufacture many of the world’s smallest connectors for home and portable audio, digital still and video cameras, DVD players and recorders, as well as devices that combine multiple functions. Our micro-miniature products support customer needs for increased power, speed and functionality, but with decreased weight and space requirements. We provide industry leadership with advanced interconnection products that help enhance the performance of video and still cameras, DVD players, portable music players, PDAs and hybrid devices that combine multiple capabilities into a single unit.

 

We are a leading connector source and preferred supplier to some of the world’s largest computer game makers. In addition, we provide components for gaming machines.

We released several new products for the consumer market in fiscal 2011 including:

 

 

Industrial.   In the industrial market, we believe our key strengths include our circular ruggedized connector expertise, industrial communications and networking technology, breadth of our power and signal product lines, distribution partnerships and global presence.

 

Our extensive industrial product line includes network interface cards, software for industrial networks and custom or industry standard cord sets. We offer a complete line of Woodhead ^® electrical solutions designed to support optimal worker safety and performance for today’s harsh duty environments. Our industry-leading solutions range from portable lighting to power distribution supporting the needs of industries such as commercial construction, utility, petrochemical and food and beverage. In addition, we offer I/O connectors deployed in a variety of industrial production equipment on the factory floor, including:

 

 

We released several new products for the industrial market in fiscal 2011:

 

 

Automotive.   In the automotive market, we believe our strengths include our wide range of products and extensive research and development capabilities that include rapid prototyping and high volume production support. Our automotive products are designed for every system in today’s connected vehicle: infotainment and navigation, powertrain, safety and chassis and body electronics.

In addition to advanced electronics, we provide standard product offerings such as HSAutoLink ^tm , MX150 ^tm , STAC64 ^tm , CMC, MX123 ^tm and Squib.

 

We released several new products for the automotive market in fiscal 2011:

 

 

Other.   Medical electronics is a growing market for our connectors, switch and assembly products. We provide both connectors and custom integrated systems for diagnostic and therapeutic equipment used in hospitals, including x-ray, magnetic resonance imaging and dialysis machines. Military electronics is also one of our focus markets. There is a range of electronic applications for our products in the commercial-off-the-shelf segment of this market. Products originally developed for the infotech, telecommunications and automotive markets are used in an increasing number of military applications. We are also expanding into non-connector markets, such as Solid State Lighting. Our Solid State Lighting business focuses on producing the first plug-and-play sustainable solid state lighting module to integrate high-efficiency precision lighting with an easy-to-use socketed solution.

 

We released several new products for these other markets in fiscal 2011:

 

 

Business Objectives and Strategies

 

One of our primary business objectives is to develop or improve our leadership position in each of our core interconnect solution markets by increasing our overall position as a preferred supplier and improving our competitiveness on a global scale.

 

We believe that our success in achieving industry-leading net revenue growth throughout our history is the result of the following key strengths:

 

 

 

We intend to serve our customers and achieve our objectives by continuing to focus on the following strategies:

 

 

Our global organizational structure consists of three product-focused divisions and one worldwide sales and marketing organization. The structure enables us to work effectively as a global team to meet customer needs as well as leverage our design expertise and our low-cost production centers around the world. The worldwide sales and marketing organization structure enhances our ability to sell any product, to any customer, anywhere in the world.

 

Competition

 

We compete with many companies in each of our product categories and global industries. These competitors include Amphenol Corporation, Framatome Connectors International, Hirose Electronic Co., Ltd, Hon Hai Precision Industry Co., Ltd., Japan Aviation Electronics Industry, Ltd., Japan Solderless Terminal Ltd. and TE Connectivity Ltd. We also compete with a significant number of smaller competitors who compete in specific geographies and industries. The identity and significance of competitors may change over time. We believe that the 10 largest connector suppliers, as measured by net revenue, represent approximately 54% of the worldwide market in terms of net revenue. Many of these companies offer products in some, but not all, of the markets and regions we serve.

 

Our products compete to varying degrees on the basis of quality, price, availability, performance and brand recognition. We also compete on the basis of customer service. Our ability to compete also depends on continually providing innovative new product solutions and worldwide support for our customers.

Customers and Sales Channels

 

We sell products directly to OEMs, contract manufacturers and distributors. Our customer base includes global companies and no single customer accounted for more than 10% of our net revenue in fiscal 2011, 2010 or 2009.

 

Many of our customers operate in more than one geographic region of the world and we have developed a global footprint to service these customers. We are engaged in significant operations in foreign countries. Our net revenue originating outside the United States based on shipping point to the customer was approximately 76% in fiscal 2011.

 

In fiscal 2011, the approximate share of net revenue by geographic region follows:

 

 

Most of our sales in international markets are made by foreign sales subsidiaries. In countries with low sales volumes, sales are made through various representatives and distributors. A discussion of market risk associated with changes in foreign currency exchange rates can be found in Management’s Discussion and Analysis of Financial Condition and Results of Operations and Risk Factors.

 

We sell our products primarily through our own sales organization with a presence in most major connector markets worldwide. To complement our own sales force, we work with a network of distributors to serve a broader customer base and provide a wide variety of supply chain tools and capabilities. Sales through distributors represented approximately 27% of our net revenue in fiscal 2011.

 

We seek to provide each customer one-to-one service tailored to their business needs. Our engineers work collaboratively with customers to develop products for specific applications. We provide customers the benefit of state-of-the-art technology for engineering, design and prototyping, supported by development centers throughout the world. In addition, most customers have a single Molex customer service contact and a specific field salesperson to provide technical product and application expertise.

 

Our sales force around the world has access to our customer relationship management database and our global information system to provide 24/7 visibility on orders, pricing, contracts, shipping, inventory and customer programs. We offer a self-service environment for our customers through our web site at www.molex.com, so that customers can access our entire product line, download drawings or 3D models, obtain price quotes, order samples and track delivery.

 

Information regarding our operations by reporting segment appears in Note 21 of the Notes to Consolidated Financial Statements.

 

Research and Development

 

We remain committed to investing in world-class technology development, particularly in the design and manufacture of connectors and interconnect systems. Our research and development activities are directed toward developing technology innovations, primarily high-speed signal integrity, miniaturization, higher power delivery, optical signal delivery and sealed harsh environment connectors that we believe will deliver the next generation of products. We continue to invest in new manufacturing processes improve, existing products and reduce costs. We believe that we are well positioned in

the technology industry to help drive innovation and promote industry standards that will yield innovative and improved products for customers.

 

We incurred total research and development costs of $170.1 million in fiscal 2011, $154.0 million in fiscal 2010 and $159.2 million in fiscal 2009. We believe this investment, approximating 4.7% of net revenue, is among the highest level relative to the largest participants in the industry and helps us achieve a competitive advantage.

 

We strive to provide customers with the most advanced interconnection products through intellectual property development and participation in industry standards committees. Our engineers are active in many of these committees, helping give us a voice in shaping the technologies of the future. In fiscal 2011, we commercialized approximately 227 new products and received 370 patents.

 

We perform a majority of our design and development of connector products in the United States and Japan, but have additional product development capabilities in various locations, including China, Germany, India, Ireland, Korea and Singapore.

 

Manufacturing

 

Our core manufacturing expertise includes molding, stamping, plating and assembly operations. We use state of the art plastic injection molding machines and metal stamping and forming presses. We have created new processes to meet the ongoing challenge of manufacturing smaller connectors. We have also developed proprietary plated plastic technology, which provides excellent shielding performance while eliminating secondary manufacturing processes in applications such as mobile phone antennas.

 

We also have expertise in printed circuit card, flexible circuit and harness assembly for our integrated products operations, which build devices that leverage our connector content. We operate low-cost manufacturing centers in China, India, Malaysia, Mexico, Poland, Philippines, Thailand and Vietnam to reduce our manufacturing costs and align our footprint with our customers’ needs.

 

Continuous improvements achieved through a global lean/six sigma program have reduced our manufacturing costs and improved our quality and delivery. A trend of fewer but larger factories, such as our one million square foot facility in Chengdu, China, provides increasing economies of scale and efficiencies.

 

Raw Materials

 

The principal raw materials that we purchase for the manufacture of our products include plastic resins for molding, metal alloys (primarily copper based) for stamping and gold and palladium salts for use in the plating process. We also purchase molded and stamped components and connector assemblies. Most materials and components used in our products are available from several sources. To achieve economies of scale, we concentrate purchases from a limited number of suppliers, and therefore in the short term may be dependent upon certain suppliers to meet performance and quality specifications and delivery schedules. We use financial instruments to hedge the volatility of commodity material costs. We anticipate that our raw material expenditures as a percentage of sales may increase due to growth in our integrated products business and increases in certain commodity costs.

 

Backlog

 

The backlog of unfilled orders at June 30, 2011 was approximately $418.5 million compared with backlog of $473.0 million at June 30, 2010. Substantially all of these orders are scheduled for delivery within 12 months. The majority of orders are shipped within 30 days of acceptance.

Employees

 

As of June 30, 2011, we had approximately 33,000 people working for us worldwide. Approximately 75% of these people were located in low labor cost countries. We believe that we have strong relations with our employees.

 

Acquisitions and Investments

 

Our strategy to provide a broad range of connectors requires a wide variety of technologies, products and capabilities. The rapid pace of technological development in the connector industry and the specialized expertise required in different markets make it difficult for a single company to organically develop all of the required products. Though a significant majority of our growth has come from internally developed products, we will seek to make future acquisitions or investments where we believe we can stimulate the development of, or acquire, new technologies and products to further our strategic objectives and strengthen our existing businesses. Information regarding our acquisitions appears in Note 5 of the Notes to Consolidated Financial Statements.

 

Intellectual Property

 

Patents, trade secrets and trademarks and other proprietary rights (collectively, Intellectual Property) are important to our business. We own an extensive portfolio of U.S. and foreign patents and trademarks. In addition, we are a licensee of various third-party patents and trademarks. We review third-party Intellectual Property in an effort to avoid infringements of third-party Intellectual Property rights and to identify desirable third-party Intellectual Property rights to license to advance our business objectives. We also review our competitors’ products to identify infringements of our Intellectual Property rights and to identify licensing opportunities for our Intellectual Property rights. We believe that our Intellectual Property is important to our business, but do not consider ourselves materially dependent upon any particular piece of Intellectual Property.

 

Environmental, Health & Safety (EHS) Matters

 

We are committed to achieving high standards of environmental quality and product safety, and strive to provide a safe and healthy workplace for our employees, contractors and the communities in which we do business. We have EHS policies and disciplines that are applied to our operations. We closely monitor the environmental laws and regulations in the countries in which we operate and believe we are in compliance in all material respects with federal, state and local regulations pertaining to environmental protection.

 

All major Molex manufacturing sites are certified to the International Organization for Standardization 14001 environmental management system standard, which requires that a broad range of environmental processes and policies be in place to minimize environmental impact, maintain compliance with environmental regulations and communicate effectively with interested stakeholders. In addition, many sites globally are Occupational Health and Safety Assessment Series 18001 certified Occupational Health and Safety Management Systems, which is intended to manage occupational health and safety risks and drive continual health and safety improvement within our operations. Our corporate social responsibility auditing program includes not only compliance components, but also modules on business risk, environmental excellence and management systems. We have internal processes that focus on minimizing and properly managing hazardous materials used in our facilities and products. We monitor regulatory and resource trends and set short and long-term targets to continually improve our environmental performance.

 

The manufacture, assembly and testing of our products are subject to a broad array of laws and regulations, including restrictions on the use of hazardous materials. We have a program for compliance with the European Union Restriction on Certain Hazardous Substances Directive (RoHS) and similar laws.

Executive Officers

 

Our executive officers as of July 29, 2011 are set forth in the table below.

 

 

 

 

Code of Business Conduct and Ethics

 

We have adopted a Code of Business Conduct and Ethics applicable to all employees, officers and directors. The Code of Business Conduct incorporates our policies and guidelines designed to deter wrongdoing and to promote honest and ethical conduct and compliance with applicable laws and regulations. We have also adopted a Code of Ethics for Senior Financial Management applicable to our Chief Executive Officer, Chief Financial Officer, Chief Accounting Officer and other senior financial managers. The Code of Ethics sets out our expectations that financial management produce full, fair, accurate, timely and understandable disclosure in our filings with the SEC and other public communications. We intend to post any amendments to or waivers from the Codes on our web site.

 

The full text of these Codes is published on the investor relations page of our web site at www.molex.com.

 

Available Information

 

We file with the SEC our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports, proxy statements and registration statements. You may read and copy any material we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. You may also obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an internet site at http://www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers, including us, that file electronically. We make available free of charge on or through our website at www.molex.com our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we file these materials with the SEC.

 

 

Forward-looking Statements

 

This Annual Report on Form 10-K and other documents we file with the SEC contain forward-looking statements that are based on current expectations, estimates, forecasts and projections about our future performance, our business, our beliefs, and our management’s assumptions. In addition, we, or others on our behalf, may make forward-looking statements in press releases or written statements, or in our communications and discussions with investors and analysts in the normal course of business through meetings, web casts, phone calls, and conference calls. Words such as “expect,” “anticipate,” “outlook,” “forecast,” “could,” “project,” “intend,” “plan,” “continue,” “believe,” “seek,” “estimate,” “should,” “may,” “assume,” “potential,” variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties, and assumptions that are difficult to predict. We describe our respective risks, uncertainties, and assumptions that could affect the outcome or results of operations below.

 

We have based our forward-looking statements on our management’s beliefs and assumptions based on information available to them at the time the statements are made. We caution that actual outcomes and results may differ materially from what is expressed, implied, or forecast by our forward-looking statements. Reference is made in particular to forward-looking statements regarding growth strategies, industry trends, financial results, cost reduction initiatives, acquisition synergies, manufacturing strategies, product development and sales, regulatory approvals, competitive strengths and legal and investigative proceedings. Except as required under the federal securities laws, we do

not have any intention or obligation to update publicly any forward-looking statements after the filing of this report, whether as a result of new information, future events, changes in assumptions, or otherwise.

 

Risk Factors

 

You should carefully consider the risks described below. Such risks are not the only ones facing our company. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also impair our business operations. If any of the following risks occur, our business, financial condition or operating results could be materially adversely affected.

 

Risks Relating to Our Business

 

We may be adversely affected by a prolonged economic downturn or economic uncertainty.

 

Our business and operating results have been and will continue to be affected by global economic conditions. As global economic conditions deteriorate or economic uncertainty increases, our customers or potential customers may experience deterioration of their businesses, which may result in the delay or cancellation of plans to purchase our products. Our sensitivity to economic cycles and any related fluctuation in the businesses of our customers or potential customers may have a material adverse effect on our financial condition, results of operations or cash flows.

 

We may see a negative effect on our business due to disruptions in financial markets.

 

Economic downturns and economic uncertainty generally affect global credit markets. Financial markets in the United States, Europe and Asia have been experiencing volatility in security prices, diminished liquidity and credit availability, rating downgrades of certain investments and declining valuation of others. While these conditions have not impaired our ability to access credit markets and finance our operations, there can be no assurance that there will not be a further deterioration in financial markets and confidence in major economies. The tightening of credit in financial markets may adversely affect the ability of our customers and suppliers to obtain financing of significant purchases and operations and this can in turn have a material adverse affect on our business and results of operations.

 

We are dependent on the success of our customers.

 

We are dependent on the continued growth, viability and financial stability of our customers. Our customers generally are OEM’s in the telecommunications, infotech, automotive, consumer and industrial markets. These industries are subject to rapid technological change, vigorous competition and short product life cycles and cyclical and reduced consumer demand patterns. When our customers are adversely affected by these factors, we may be similarly affected.

 

For example, the telecommunications market, which accounted for approximately 25% of our net revenue in fiscal 2011, has historically experienced periods of robust capital expenditure followed by periods of retrenchment and consolidation. The infotech market, which accounted for 23% of our net revenue in fiscal 2011, has fluctuated seasonally and is subject to variations in enterprise spending depending on current economic and credit conditions. Periodic downturns in our customers’ industries can significantly reduce demand for certain of our products, which could have a material adverse effect on our results of operations, financial position, and cash flows.

 

We are subject to continuing pressure to lower our prices.

 

Over the past several years we have experienced, and we expect to continue to experience, pressure to lower our prices. In the last three years, we have experienced annual price erosion averaging from 3% to 4%. In order to maintain our margins, we must continue to reduce our costs by

similar amounts. Continuing pressures to reduce our prices could have a material adverse effect on our financial condition, results of operations and cash flows.

 

We face rising costs of commodity materials.

 

The cost and availability of certain commodity materials used to manufacture our products, such as plastic resins, copper-based metal alloys, gold and palladium salts, molded and stamped components and connector assemblies, is critical to our success. The price of many of these raw materials, including copper and gold, has increased in recent years, and continues to fluctuate. Gold, which made up approximately 14% of our material cost in fiscal 2011, has increased in price approximately 56% since 2009. In addition, many of these commodity materials are produced in a limited number of regions around the world or are only available from a limited number of suppliers. Volatility in the prices and shortages of such materials may result in increased costs and lower operating margins if we are unable to pass such increased costs through to our customers. Some of our competitors may be less dependent on these commodity materials and have less exposure to these volatile commodity costs. Our results of operations, financial condition and cash flows may be materially and adversely affected if we have difficulty obtaining these commodity materials, the quality of available commodity materials deteriorates, or there are continued significant price increases for these commodity materials. We use financial instruments to hedge the volatility of commodity material costs. The success of our hedging program depends on accurate forecast of transaction activity in the various commodity materials. We could experience unanticipated commodity materials or hedge gains or losses if these forecasts are inaccurate during periods of volatility.

 

We face intense competition in our markets.

 

Our markets are highly competitive and we expect that both direct and indirect competition will increase in the future. Our overall competitive position depends on a number of factors including the price, quality and performance of our products, the level of customer service, the development of new technology and our ability to participate in emerging markets. Within each of our markets, we encounter direct competition from other electronic components manufacturers and suppliers ranging in size from large, diversified manufacturers to small, highly specialized manufacturers. Competition may intensify from various U.S. and non-U.S. competitors and new market entrants, some of which may be our current customers. Our markets have continued to become increasingly concentrated and globalized in recent years, and our major competitors have significant financial resources and technological capabilities. Increased competition may result in price reductions, reduced margins or loss of market share, any of which could materially and adversely affect our business, operating results and financial condition.

 

We are dependent on new products.

 

We expect that a significant portion of our future net revenue will continue to be derived from sales of newly introduced products. Rapidly changing technology, evolving industry standards and changes in customer needs characterize the market for our products. If we fail to modify or improve our products in response to changes in technology, industry standards or customer needs, our products could rapidly become less competitive or obsolete. We must continue to make investments in research and development in order to continue to develop timely new products, enhance existing products and achieve market acceptance for such products. As a result of our need to make these investments in research and development, our operating results could be materially affected if our net revenue falls below expectations. Moreover, there can be no assurance that development stage products will be successfully completed or, if developed, will achieve significant customer acceptance.

 

We may need to license new technologies to respond to technological change and these licenses may not be available to us on terms that we can accept or may materially change the gross profit margin that we are able to obtain on our products. We may not succeed in adapting our products to new technologies as they emerge. Development and manufacturing schedules for technology products

are difficult to predict, and there can be no assurance that we will achieve timely initial customer shipments of new products. The timely availability of these products in volume and their acceptance by customers are important to our future success.

 

We face manufacturing challenges.

 

The volume and timing of sales to our customers may vary due to: variation in demand for our customers’ products; our customers’ attempts to manage their inventory; design changes; changes in our customers’ manufacturing strategy; and consolidations among or acquisitions of customers. Due in part to these factors, many of our customers do not commit to long-term production schedules. Our inability to forecast the level of customer order with certainty makes it difficult to schedule production and maximize utilization of manufacturing capacity.

 

Our industry must provide increasingly rapid product turnaround for its customers. We generally do not obtain firm, long-term purchase commitments from our customers and we continue to experience reduced lead-times in customer orders. Customers may cancel their orders, change production quantities or delay production for a number of reasons and such actions could negatively impact our operating results. In addition, we make significant operating decisions based on our estimate of customer requirements. The short-term nature of our customers’ commitments and the possibility of rapid changes in demand for their products reduce our ability to accurately estimate the future requirements of those customers.

 

We rely on third-party suppliers for the components used in our products, and we rely on third-party manufacturers to manufacture certain of our assemblies and finished products. Our results of operations, financial condition, and cash flows could be adversely affected if our third-party suppliers lack sufficient quality control or if there are significant changes in their financial or business condition. If our third-party suppliers fail to deliver products, parts, and components of sufficient quality on time and at reasonable prices, we could have difficulties fulfilling our orders, sales and profits could decline, and our commercial reputation could be damaged.

 

From time to time, we have underutilized our manufacturing lines. This excess capacity means we incur increased fixed costs in our products relative to the net revenue we generate, which could have an adverse effect on our results of operations, particularly during economic downturns. If we are unable to improve utilization levels for these manufacturing lines and correctly manage capacity, the increased expense levels will have an adverse effect on our business, financial condition and results of operations. In addition, some of our manufacturing lines are located in China or other foreign countries that are subject to a number of additional risks and uncertainties, including increasing labor costs and political, social and economic instability.

 

We are dependent on independent distributors to sell and market our products.

 

Sales through independent distributors accounted for approximately 27% of our net revenue in fiscal 2011. Although we have entered into written agreements with most of the distributors, the agreements are nonexclusive and generally may be terminated by either party upon written notice. The distributors are not within our control, are not obligated to purchase products from us, and may also sell other lines of products. We do not assure you that these distributors will continue their current relationships with us or that they will not give higher priority to the sale of other products, which could include products of competitors. A reduction in sales efforts or discontinuance of sales of our products by the distributors would lead to reduced sales and could materially adversely affect our financial condition, results of operations and business. Selling through indirect channels such as distributors may limit our contact with the ultimate customers and our ability to assure customer satisfaction.

 

We face industry consolidation.

 

Many of the industries to which we sell our products, as well as many of the industries from which we buy materials, have become increasingly concentrated in recent years, including the

telecommunications, infotech, automotive and consumer electronics industries. Consolidation of customers may lead to decreased product purchases from us. In addition, as our customers buy in larger volumes, their volume buying power has increased, and they may be able to negotiate more favorable pricing and find alternative sources from which to purchase. Our materials suppliers similarly have increased their ability to negotiate favorable pricing. These trends may adversely affect the profit margins on our products, particularly for commodity components.

 

We depend on industries exposed to rapid technological change.

 

Our customers compete in markets that are characterized by rapidly changing technology, evolving industry standards and continuous improvements in products and services. These conditions frequently result in short product life cycles. Our success will depend largely on the success achieved by our customers in developing and marketing their products. If technologies or standards supported by our customers’ products become obsolete or fail to gain widespread commercial acceptance, our business could be materially adversely affected. In addition, if we are unable to offer technologically advanced, cost effective, quick response manufacturing services to customers, demand for our products may also decline.

 

We face the possibility that our gross margins may decline.

 

In response to changes in product mix, competitive pricing pressures, increased sales discounts, introductions of new competitive products, product enhancements by our competitors, increases in manufacturing or labor costs or other operating expenses, we may experience declines in prices, gross margins and profitability. To maintain our gross margins we must maintain or increase current shipment volumes, develop and introduce new products and product enhancements and reduce the costs to produce our products. If we are unable to accomplish this, our net revenue, gross profit and operating results may be below our expectations and those of investors and analysts.

 

We face risks associated with inventory.

 

The value of our inventory may decline as a result of surplus inventory, price reductions or technological obsolescence. The life cycles of some of our products can be very short compared with the development cycle, which may result in excess or obsolete inventory or equipment that we may need to write off. We must identify the right product mix and maintain sufficient inventory on hand to meet customer orders. Failure to do so could adversely affect our net revenue and operating results. However, if circumstances change (for example, an unexpected shift in market demand, pricing or customer defaults) there could be a material impact on the net realizable value of our inventory. We maintain an inventory valuation reserve account against diminution in the value or salability of our inventory. However, there is no guaranty that these arrangements will be sufficient to avoid write-offs in excess of our reserves in all circumstances.

 

We may encounter problems associated with our global operations.

 

For fiscal year 2011, approximately 76% of our net revenue came from international sales, including 32% and 16% in China and Japan, respectively. In addition, a significant portion of our operations consists of manufacturing activities outside of the United States, including approximately 26% and 20% in China and Japan, respectively. Our ability to sell our products and conduct our operations globally is subject to a number of risks. Local economic, political and labor conditions in each country could adversely affect demand for our products and services or disrupt our operations in these markets. We may also experience reduced intellectual property protection or longer and more challenging collection cycles as a result of different customary business practices in certain countries, including China where we do business. Additionally, we face the following risks:

 

 

 

We are exposed to fluctuations in currency exchange rates.

 

We face substantial exposure to movements in non-U.S. currency exchange rates because a significant portion of our business is conducted outside the United States. This may harm our results of operations, and any measures that we may implement to reduce the effect of volatile currencies and other risks of our global operations may not be effective. Approximately 61% of our net revenue for fiscal year 2011 was invoiced in currencies other than the U.S. dollar, and we expect net revenue and manufacturing costs from non-U.S. markets to continue to represent a significant portion of our operating results. Price increases caused by currency exchange rate fluctuations may make our products less competitive or have an adverse effect on our margins. Our international net revenue and expenses generally are derived from sales and operations in currencies other than the U.S. dollar. Accordingly, when the U.S. dollar strengthens in relation to the currencies of the countries in which we sell our products, our U.S. dollar reported net revenue and income will decrease. Currency exchange rate fluctuations may also disrupt the business of our suppliers by making their purchases of raw materials more expensive and more difficult to finance. We mitigate our foreign currency exchange rate risk principally through the establishment of local production facilities in the markets we serve. This creates a “natural hedge” since purchases and sales within a specific country are both denominated in the same currency and therefore no exposure exists to hedge with a foreign exchange forward or option contract (collectively, “foreign exchange contracts”). Natural hedges exist in most countries in which we operate, although the percentage of natural offsets, as compared with offsets that need to be hedged by foreign exchange contracts, will vary from country to country. To reduce our exposure to fluctuations in currency exchange rates when natural hedges are not effective, we may use financial instruments to hedge U.S. dollar and other currency commitments and cash flows arising from trade accounts receivable, trade accounts payable and fixed purchase obligations.

 

If these hedging activities are not successful or we change or reduce these hedging activities in the future, we may experience significant unexpected expenses from fluctuations in exchange rates or financial instruments which become ineffective. The success of our hedging program depends on accurate forecasts of transaction activity in the various currencies. To the extent that these forecasts are over or understated during periods of currency volatility, we could experience unanticipated currency or hedge gains or losses.

 

We may find that our products have quality issues.

 

The fabrication of the products we manufacture is a complex and precise process. Our customers specify quality, performance and reliability standards. If flaws in either the design or manufacture of our products were to occur, we could experience a rate of failure in our products that could result in significant delays in shipment and product re-work or replacement costs. Although we engage in extensive product quality programs and processes, these may not be sufficient to avoid product failures, which could cause us to:

 

 

 

If we fail to manage our growth effectively or to integrate successfully any future acquisition, our business could be harmed.

 

We expect to continue to make investments in companies, products and technologies through acquisitions. While we believe that such acquisitions are an integral part of our long-term strategy, there are risks and uncertainties related to acquiring companies. Such risks and uncertainties include:

 

 

In addition, if we were to undertake a substantial acquisition for cash, the acquisition would likely need to be financed in part through additional financing from banks, through public offerings or private placements of debt or equity securities, or other arrangements. This acquisition financing might decrease our ratio of earnings to fixed charges and adversely affect other leverage measures. Any necessary acquisition financing may not be available to us on acceptable terms if and when required. If we undertake an acquisition by issuing equity securities or equity-linked securities, the issued securities may have a dilutive effect on the interests of the holders of our stock.

 

We face risks arising from reorganizations of our operations.

 

In 2007, we announced plans to realign part of our manufacturing capacity in order to reduce costs and better optimize plant utilization. We completed our restructuring program on June 30, 2010 and recorded restructuring related charges of $314.8 million since we announced the plans. The process of restructuring entails, among other activities, moving production between facilities, reducing staff levels, realigning our business processes (including our supply chain logistics), closing facilities and reorganizing our management. We continue to evaluate our operations and may need to undertake additional restructuring initiatives in the future. If we incur additional restructuring related charges, our financial condition and results of operations may be adversely affected.

 

In addition, in fiscal 2009, we reorganized our global product divisions to enable us to work more effectively as a global team to meet customer needs, as well as to better leverage design expertise and the low-cost production centers we have around the world. This reorganization entails risks, including: the need to implement financial and other systems and add management resources; the challenge to maintain the quality of products and services; the possible diversion of management’s attention to the reorganization; the potential disruption to our ongoing business; greater than anticipated severance costs and other expenses associated with the closing of a facility or realigning our business processes.

We depend on our key employees and face competition in hiring and retaining qualified employees.

 

Our future success depends partly on the continued contribution of our key employees, including executive, engineering, sales, marketing, manufacturing and administrative personnel. We face intense competition for key personnel in several of our product and geographic markets. Our future success depends in large part on our continued ability to hire, assimilate and retain key employees, including qualified engineers and other highly skilled personnel needed to compete and develop successful new products. We may not be as successful as competitors at recruiting, assimilating and retaining highly skilled personnel.

 

We are subject to various laws and government regulations.

 

We are subject to a wide and ever-changing variety of United States and foreign federal, state and local laws and regulations, compliance with which may require substantial expense. Of particular note are laws and regulations restricting the use of certain chemical substances in the production of electronic equipment. Failure to comply with these requirements could result in fines or suspension of sales.

 

In addition, some environmental laws impose liability, sometimes without fault, for investigating or cleaning up contamination on or emanating from our currently or formerly owned, leased or operated property, as well as for damages to property or natural resources and for personal injury arising out of such contamination.

 

We rely on our intellectual property rights.

 

We rely on a combination of patents, copyrights, trademarks and trade secrets and confidentiality provisions to establish and protect our proprietary rights. To this end, we hold rights to a number of patents and registered trademarks and regularly file applications to attempt to protect our rights in new technology and trademarks. Even if approved, our patents or trademarks may be successfully challenged by others or otherwise become invalidated for a variety of reasons. Also, to the extent a competitor is able to reproduce or otherwise capitalize on our intellectual property, it may be difficult, expensive or impossible for us to obtain necessary legal protection.

 

Third parties may claim that we are infringing their intellectual property rights. Such claims could have an adverse affect on our business and financial condition. From time to time we receive letters alleging infringement of patents. Litigation concerning patents or other intellectual property is costly and time consuming. We may seek licenses from such parties, but they could refuse to grant us a license or demand commercially unreasonable terms. Such infringement claims could also cause us to incur substantial liabilities and to suspend or permanently cease the manufacture and sale of affected products.

 

We could suffer significant business interruptions.

 

Our operations and those of our suppliers and customers may be vulnerable to interruption by natural disasters such as earthquakes, tsunamis, typhoons, or floods, or other disasters such as fires, explosions, acts of terrorism or war, disease or failures of our management information or other systems due to internal or external causes. If a business interruption occurs, our business could be materially and adversely affected.

 

On March 11, 2011, an earthquake occurred near the northeastern coast of Japan creating a tsunami that caused extensive damage. Thus far, our operations have not been materially affected. However, the long-term consequences of the disasters to our operations and the overall Japanese economy remain unclear.

A decline in the market value of our pension plans’ investment portfolios could adversely affect our results of operations, financial condition and cash flows.

 

Concerns about deterioration in the global economy, together with the current credit crisis, have caused significant volatility in interest rates and equity prices, which could decrease the value of our pension plans’ investment portfolios. A decrease in the value of our pension plans’ investment portfolios could have an adverse affect on our results of operations, financial condition and cash flows.

 

We may have exposure to income tax rate fluctuations and to additional tax liabilities, which could negatively affect our financial position.

 

As a corporation with operations both in the United States and abroad, we are subject to income taxes in the United States and various foreign jurisdictions. Our effective tax rate is subject to significant fluctuation from one period to the next because the income tax rates for each year are a function of a number of factors, including the following:

 

 

Changes in the mix of these items and other items may cause our effective tax rate to fluctuate between periods, which could have a material adverse effect on our results of operations and financial condition.

 

In addition, if we encounter a significant need for liquidity domestically or at a particular location that we cannot fulfill through borrowings, equity offerings, or other internal or external sources, we may experience unfavorable tax and earnings consequences due to cash transfers. These adverse consequences would occur, for example, if the transfer of cash into the United States is taxed and no offsetting foreign tax credit is available to offset the U.S. tax liability, resulting in lower earnings. Foreign exchange ceilings imposed by local governments and the sometimes lengthy approval processes that foreign governments require for international cash transfers may delay our internal cash transfers from time to time.

 

We are also subject to non-income taxes, such as payroll, sales, use, value-added, net worth, property and goods and services taxes, in both the United States and various foreign jurisdictions.

 

Significant judgment is required in determining our provision for income taxes and other tax liabilities. Although we believe our tax estimates are reasonable, we are regularly under audit by tax authorities with respect to both income and non-income taxes and may have exposure to additional tax liabilities as a result of these audits. Unfavorable audit findings and tax rulings may result in payment of taxes, fines and penalties for prior periods and higher tax rates in future periods, which may have a material adverse effect on our results of operations and financial condition.

 

An adverse outcome in a litigation proceeding may result in a material adverse affect on our financial position.

 

We are currently a party to various legal proceedings which may divert financial and management resources. If one or more unfavorable final outcomes were to occur, there exists the possibility of a material adverse effect on our financial position.

Covenants in our debt instruments may adversely affect us if we are determined not to be in compliance.

 

Our material debt instruments contain representations and covenants with which we are required to be in compliance. Although we believe none of these covenants are restrictive to our operations, our ability to meet these representations and/or covenants can be affected by events beyond our control, and we do not assure you that we will continue to comply. A breach of any of these representations and/or covenants could result in a default giving the lender(s) the right to declare all amounts outstanding thereunder to be immediately due and payable and our lender(s) could terminate commitments to extend further credit. If the lender(s) accelerate the repayment of borrowings, we do not assure you that we will have sufficient assets to repay our affected indebtedness. In addition, acceleration of any debt obligation under any of our material debt instruments may permit the lender(s) under other material debt instruments to accelerate payment of amounts outstanding.

 

Our certificate of incorporation and bylaws include antitakeover provisions, which may deter or prevent a takeover attempt.

 

Some provisions of our certificate of incorporation and bylaws may deter or prevent a takeover attempt, including a takeover that might result in a premium over the market price for our Common Stock and Class A Common Stock. Our governing documents establish a classified board, require shareholders to give advance notice prior to the annual meeting if they want to nominate a candidate for director or present a proposal, and contain a number of provisions subject to supermajority vote. In addition, the Board may issue up to 25,000,000 shares of preferred stock without action by our stockholders, which could be used to make it more difficult and costly to acquire our company.

 

 

None.

 

 

We own and lease manufacturing, design, warehousing, sales and administrative space in locations around the world. The leases are of varying terms with expirations ranging from fiscal 2011 through fiscal 2020. The leases in aggregate are not considered material to the financial position of Molex.

 

As of June 30, 2011, we owned or leased a total of approximately 9.9 million square feet of facility space worldwide. We have vacated several buildings in France, Germany and Slovakia and are holding these buildings and related assets for sale. We own 88% of our manufacturing, design, warehouse and office space and lease the remaining 12%. Our manufacturing plants are equipped with machinery, most of which we own and which, in part, we developed to meet the special requirements of our manufacturing processes. We believe that our buildings, machinery and equipment are well maintained and adequate for our current needs.

 

Our principal executive offices are located at 2222 Wellington Court, Lisle, Illinois, United States of America. We own 39 manufacturing locations, of which 13 are located in North America and 26 are located in other countries. A listing of the locations of our principal manufacturing facilities by geographic region is presented below:

 

 

 

We are currently a party to various legal proceedings, claims and investigations including those disclosed in Note 20 of the Notes to Consolidated Financial Statements. While management presently believes that the ultimate outcome of these proceedings, individually and in the aggregate, will not materially adversely affect our financial position or overall trends in operations, legal proceedings are subject to inherent uncertainties, and unfavorable rulings or other events could occur. If one or more unfavorable final outcomes were to occur, then there exists the possibility of a material adverse effect on our business.

 

Employment and Benefits Litigation

 

In 2009, a French subsidiary of Molex, Molex Automotive SARL, decided to close a facility it operated in Villemur-sur-Tarn, France. Molex Automotive SARL submitted a social plan to Molex Automotive SARL’s labor representatives providing for payments to approximately 280 terminated employees. This social plan was adopted by Molex Automotive SARL in 2009, which made payments to those employees until September 2010. In September 2010, former employees of Molex Automotive SARL who were covered under the social plan filed suit against Molex Automotive SARL in the Toulouse Labor Court, requesting additional compensation on the basis that their dismissal was not economically justified. The total amount sought by the former employees of Molex Automotive SARL is approximately €24 million ($34.8 million). Molex initiated liquidation of Molex Automotive SARL, and pursuant to a court proceeding, a liquidator was appointed in November 2010. One of the liquidator’s responsibilities is to assess and respond to the lawsuits involving Molex Automotive SARL. In June 2011, Molex Incorporated received notice that it had been added as a defendant in the Toulouse Labor Court proceedings and is requested to attend a hearing on October 20, 2011. We intend to vigorously contest the attempt by the former employees to seek compensation from Molex Incorporated.

 

Molex Japan Co., Ltd

 

As we previously reported in our fiscal 2010 Annual Report on Form 10-K, we launched an investigation into unauthorized activities at Molex Japan Co., Ltd. in April 2010. We learned that an individual working in Molex Japan’s finance group obtained unauthorized loans from third party lenders, that included in at least one instance the attempted unauthorized pledge of Molex Japan facilities as security, in Molex Japan’s name that were used to cover losses resulting from unauthorized trading, including margin trading, in Molex Japan’s name. We also learned that the individual misappropriated funds from Molex Japan’s accounts to cover losses from unauthorized trading. The individual admitted to forging documentation in arranging and concealing the transactions. We retained outside legal counsel, and they retained forensic accountants, to investigate the matter. The investigation has been completed.

 

On August 31, 2010, Mizuho Bank (“Mizuho”), which holds the unauthorized loans, filed a complaint in Tokyo District Court requesting the court to find Molex Japan liable for the payment of the outstanding unauthorized loans and to enter a judgment for such payment. Mizuho is claiming payment of outstanding principal borrowings of ¥3 billion ($37.2 million), ¥5 billion ($62.1 million), ¥5 billion ($62.1 million) and ¥2 billion ($24.8 million), other loan-related expenses of approximately ¥106 million ($1.3 million) and interest and delay damages of approximately ¥2.5 billion ($31.2 million) as of June 30, 2011. On October 13, 2010, Molex Japan filed a written answer requesting the court to dismiss the complaint, Mizuho filed plaintiff’s brief no. 1 on December 15, 2010, Molex Japan filed defendant’s brief no. 1 on February 16, 2011 and Mizuho filed plaintiff’s brief no. 2 on April 20, 2011. Molex Japan filed defendant’s brief no. 2 on June 28, 2011 and the court instructed Mizuho to file a reply brief by the end of August. We intend to vigorously contest the enforceability of the outstanding unauthorized loans and any attempt by the lender to obtain payment. See Note 3 of the Notes to Consolidated Financial Statements for accounting treatment of the accrual for unauthorized activities in Japan.

As we reported on April 29, 2011, the SEC informed us that the SEC has issued a formal order of private investigation in connection with the activities in Molex Japan Co., Ltd. We are fully cooperating with the SEC’s investigation.

 

PART II

 

 

Molex Incorporated is traded on the NASDAQ Global Select Market and on the London Stock Exchange and trades under the symbols MOLX for Common Stock and MOLXA for Class A Common Stock. Molex Class B Common Stock is not publicly traded.

 

The number of stockholders of record at June 30, 2011 was 2,182 for Common Stock, 7,922 for Class A Common Stock and 14 for Class B Common Stock.

 

The following table presents quarterly stock prices for the fiscal years ended June 30:

 

 

 

Cash dividends on common stock have been paid every year since 1977. The following table presents quarterly dividends declared per share of Common Stock, Class A Common Stock and Class B Common Stock for the fiscal years ended June 30:

 

 

During the quarter ended June 30, 2011, 95,222 shares of Class A Common Stock were transferred to us from certain employees to pay either the purchase price and/or withholding taxes on the vesting of restricted stock or the exercise of stock options. The aggregate market value of the shares transferred totaled $2.1 million. Share purchases of Molex Common and/or Class A Common

Stock for the quarter ended June 30, 2011 were as follows (in thousands, except price per share data):

 

 

 

 

Descriptions of our Common Stock appear under the caption “Molex Stock” in our 2011 Proxy Statement and in Note 17 of the Notes to Consolidated Financial Statements.

Performance Graph

 

The performance graph set forth below shows the value of an investment of $100 on June 30, 2006 in each of Molex Common Stock, Molex Class A Common Stock, the S&P 500 Index, and a Peer Group Index. The Peer Group Index includes 50 companies (including Molex) classified in the Global Sub-industry Classifications “Electronic Equipment and Instruments,” “Electronic Manufacturing Services,” and “Technology Distributors.” All values assume reinvestment of the pre-tax value of dividends paid by Molex and the companies included in these indices, and are calculated as of June 30 of each year. The historical stock price performance of Molex’s Common Stock and Class A Common Stock is not necessarily indicative of future stock price performance.

 

Comparison of Five-Year Cumulative Total Return
(Value of Investment of $100 on June 30, 2006)
Among Molex Incorporated, the S&P 500 Index
and a Peer Group

 

 

 

 

Molex Incorporated
Five-Year Financial Highlights Summary
(in thousands, except per share data)

 

 

 

 

 

See Notes 3, 6 and 9 of the Notes to Consolidated Financial Statements for a discussion of unauthorized activities in Japan, restructuring costs and asset impairments.

 

 

 

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements relating to future events or the future financial performance of Molex, which involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements. Please see the discussion regarding forward-looking statements included under Item 1A, “Risk Factors” for a discussion of the uncertainties, risks and assumptions associated with these statements.

 

The following discussion should be read in conjunction with our consolidated financial statements and the related notes and other financial information appearing elsewhere in this Annual Report on Form 10-K. All references to fiscal years relate to the fiscal year ended June 30.

 

Overview

 

Our Business

 

Our core business is the manufacture and sale of electronic components. Our products are used by a large number of leading original equipment manufacturers (OEMs) throughout the world. We design, manufacture and sell more than 100,000 different products including terminals, connectors, planar cables, cable assemblies, interconnection systems, backplanes, integrated products and mechanical and electronic switches in 39 manufacturing locations in 16 countries. We also provide manufacturing services to integrate specific components into a customer’s product.

 

We have two global product segments: Connector and Custom & Electrical.

 

 

We sell our products in five primary markets. Our connectors, interconnecting devices and assemblies are used principally in the telecommunications, infotech, consumer, industrial and automotive markets. Our products are used in a wide range of applications including desktop and notebook computers, computer peripheral equipment, mobile phones, digital electronics such as cameras and flat panel display televisions, automobile engine control units and adaptive braking systems, factory robotics and diagnostic equipment.

 

Net revenue by market can fluctuate based on various factors including new technologies within the industry, composition of customers and changes in their net revenue levels and new products or

model changes that we or our customers introduce. The following table sets forth, for fiscal 2011, 2010 and 2009 the percentage relationship to net revenue of our sales by primary markets.

 

 

The following table sets forth, for fiscal 2011, 2010 and 2009, the percentage relationship to net revenue of our sales by geographic region:

 

 

The following table sets forth, for fiscal 2011, 2010 and 2009, the percentage relationship to net revenue of our sales by reporting segment:

 

 

We sell our products directly to OEMs and to their contract manufacturers and suppliers and, to a lesser extent, through distributors worldwide. Many of our customers are multi-national corporations that manufacture their products in multiple operations in several countries.

 

In fiscal 2011, 61.3% of our net revenue was derived from sales in the Asia-Pacific region. We expect greater economic growth in Asia, particularly in China, than in the Americas and Europe. We continue to expand our manufacturing operations in lower cost regions. Approximately 56% of our manufacturing capacity is in lower cost areas such as China, Eastern Europe and Mexico. In addition, reduced trade barriers and improved supply chain logistics have reduced our need to duplicate regional manufacturing capabilities. For these reasons, we have consolidated multiple plants of modest size and established a strategy of operating fewer, larger and more integrated facilities in select locations. We believe that our business is positioned to benefit from this strategy.

 

Business Environment

 

The market in which we operate is highly fragmented with a limited number of large companies and a significant number of smaller companies making electronic connectors. We are one of the world’s largest manufacturers of electronic connectors. We believe that our global presence and our ability to design and manufacture our products throughout the world and to service our customers globally is a key advantage for us. Our growth has come primarily from new products that we develop, often in collaboration with our customers.

The markets in which we compete are highly competitive. Our financial results are influenced by factors in the markets in which we operate and by our ability to successfully execute our business strategy. Marketplace factors include competition for customers, raw material prices, product and price competition, economic conditions in various geographic regions, foreign currency exchange rates, interest rates, changes in technology, fluctuations in customer demand, patent and intellectual property issues, natural disasters, litigation results and legal and regulatory developments. Our ability to execute our business strategy successfully will require that we meet a number of challenges, including our ability to accurately forecast sales demand and calibrate manufacturing to such demand, manage volatile raw material costs, develop, manufacture and successfully market new and enhanced products and product lines, control operating costs, and attract, motivate and retain key personnel to manage our operational, financial and management information systems. Our sales are also dependent on end markets impacted by consumer, industrial and infrastructure spending and our operating results can be adversely affected by reduced demand in these end markets.

 

Non-GAAP Financial Measures

 

Organic net revenue growth, which is included in Management’s Discussion & Analysis, is a non-GAAP financial measure. The tables presented in Results of Operations provide reconciliations of U.S. GAAP reported net revenue growth (the most directly comparable GAAP financial measure) to organic net revenue growth.

 

We believe organic net revenue growth provides useful information to investors because it reflects the underlying growth from the ongoing activities of our business and provides investors with a view of our operations from management’s perspective. We use organic net revenue growth to monitor and evaluate performance, since it is an important measure of the underlying results of our operations. It excludes items that are not completely under management’s control, such as the impact of changes in foreign currency exchange rates, and items that do not reflect the underlying growth of the company, such as acquisition activity. Management uses organic net revenue growth together with GAAP measures such as net revenue and operating income in its decision making processes related to the operations of our reporting segments and our overall company. Because organic net revenue growth calculations may vary among other companies, organic net sales growth amounts presented below may not be comparable with similar measures of other companies.

 

Unauthorized Activities in Japan

 

As we previously reported in our fiscal 2010 Annual Report on Form 10-K, we launched an investigation into unauthorized activities at Molex Japan Co., Ltd. in April 2010. We learned that an individual working in Molex Japan’s finance group obtained unauthorized loans from third-party lenders, that included in at least one instance the attempted unauthorized pledge of Molex Japan facilities as security, in Molex Japan’s name that were used to cover losses resulting from unauthorized trading, including margin trading, in Molex Japan’s name. We also learned that the individual misappropriated funds from Molex Japan’s accounts to cover losses from unauthorized trading. The individual admitted to forging documentation in arranging and concealing the transactions. We retained outside legal counsel, and they retained forensic accountants, to investigate the matter. The investigation has been completed. Based on our consultation with legal counsel in Japan and the information learned from the investigation, we intend to vigorously contest the enforceability of the outstanding unauthorized loans and any attempt by the lender to obtain payment.

 

As previously reported in our Annual Report on Form 10-K for the year ended June 30, 2010, based on the results of the completed investigation, we recorded for accounting purposes an accrued liability for the effect of unauthorized activities pending the resolution of these matters including the legal proceedings reported in Note 20 of the Notes to Consolidated Financial Statements.

 

We believe these unauthorized activities and related losses occurred from at least as early as 1988 through 2010, with approximately $167.4 million of losses occurring prior to June 30, 2007. The

accrued liability for these potential net losses was $182.5 million as of June 30, 2011, including $16.6 million in cumulative foreign currency translation, which was recorded as a component of accumulated other comprehensive income. To the extent we prevail in not having to pay all or any portion of the outstanding unauthorized loans, we would recognize a gain in that amount. In addition, we have a contingent liability of $31.2 million for other loan-related expenses, interest expense and delay damages on the outstanding unauthorized loans.

 

Financial Highlights

 

Net revenue for fiscal 2011 of $3.6 billion increased 19.2% from fiscal 2010. Organic net revenue increased 16.2% in fiscal 2011 compared with fiscal 2010. Income from operations for fiscal 2011 of $430.2 million increased 212% compared with fiscal 2010 as we completed our restructuring program on June 30, 2010. We recognized net income of $298.8 million in fiscal 2011 compared with net income of $76.9 million in fiscal 2010. Fiscal 2011 results include a net loss on unauthorized activities in Japan of $14.5 million ($10.1 million after-tax). Fiscal 2010 results include restructuring charges of $117.1 million ($92.8 million after-tax) and a net loss on unauthorized activities in Japan of $26.9 million ($17.1 million after-tax).

 

Results of Operations

 

The following table sets forth, for fiscal 2011, 2010 and 2009, certain consolidated statements of operations data as a percentage of net revenue (dollars in thousands):

 

Net Revenue

 

The following table provides an analysis of the change in net revenue compared with the prior fiscal year (in thousands):

 

 

Net revenue increased during fiscal 2011 and 2010 as customer demand improved in all of our primary markets compared with the prior fiscal years. Excluding the telecommunications market in fiscal 2010, we experienced double-digit percentage growth in net revenue in each of our primary markets in fiscal 2011 and 2010 compared with the prior fiscal years.

 

The increase in net revenue attributed to currency translation in fiscal 2011 compared with fiscal 2010 was principally due to a stronger Japanese yen and weaker U.S. dollar against most currencies except the euro. The increase in net revenue attributed to currency translation in fiscal 2010 compared with fiscal 2009 was principally due to stronger Asian currencies. The following tables show the effect on the change in geographic net revenue from foreign currency translations to the U.S. dollar (in thousands):

 

 

The change in net revenue on a local currency basis as of June 30 follows:

 

 

Net revenue increased across all five primary markets in fiscal 2011 and 2010 compared with prior fiscal periods as customer demand improved over the prior years. Net revenue in Japan weakened at the end of fiscal 2011 due to the impact of the March 11, 2011 earthquake on the Japanese economy.

The following table sets forth, for fiscal 2011 and 2010, changes in net revenue from each of our five primary product markets from the prior fiscal year:

 

 

Telecommunications market net revenue increased in fiscal 2011 compared with fiscal 2010 due to higher infrastructure spending and increased demand for mobile products, including higher demand for smartphones and our customers’ introduction of smartphone models with higher connector content. Telecommunications market net revenue increased in fiscal 2010 compared with fiscal 2009 due to increased infrastructure spending, higher demand for smartphones and our customers’ introduction of smartphone models that include our connector products, partially offset by a decline in standard feature mobile phones.

 

Infotech market net revenue increased in fiscal 2011 compared with fiscal 2010 primarily due to increased content and demand for servers, data storage, notebook computers and tablet devices. Infotech market net revenue for fiscal 2010 increased significantly compared with fiscal 2009 because of increased demand for notebooks, storage products, computers and accessories and depressed enterprise spending in the prior year.

 

Consumer market net revenue increased in fiscal 2011 compared with fiscal 2010 primarily due to increased demand for our components in flat panel display televisions, digital cameras and home appliances, as well as expansion into the non-connector audio accessories market, partially offset by reduced demand in gaming equipment. Consumer market net revenue increased significantly in fiscal 2010 compared with fiscal 2009 due to government incentives in certain countries, customers replenishing inventory levels and increased demand for our components in flat panel display televisions, digital cameras and home appliances.

 

Industrial market net revenue for fiscal 2011 increased compared with fiscal 2010 due to higher demand for our connectors in semiconductor and other production equipment as our customers’ increased production to meet demand. Industrial market net revenue for fiscal 2010 increased compared with fiscal 2009 as global economic conditions improved over the prior year. Demand for industrial instruments and production equipment improved as our customers increased production to meet demand after delaying many industrial automation projects due to uncertainties about the economic conditions.

 

Automotive market net revenue for fiscal 2011 increased compared with fiscal 2010 due to increased automobile production levels in the United States and China and our customers’ increasing electronic content in automobiles, such as navigational and entertainment systems, mobile communication and products to promote fuel efficiency. Automotive market net revenue for fiscal 2010 increased substantially compared with fiscal 2009 as global car sales have increased, particularly in North America, China and Europe, as improving global economic conditions led to our customers increasing vehicle builds to replenish inventory levels and meet demand.

 

Gross Profit

 

We measure gross profit as net revenue less cost of sales. Cost of sales includes manufacturing costs, such as materials, direct and indirect labor, and factory overhead. Our gross margins are primarily affected by the following factors: product mix; volume; cost reduction efforts; competitive pricing pressure; commodity costs and currency fluctuations.

The following table sets forth gross profit and gross margin for fiscal 2011, 2010 and 2009 (dollars in thousands):

 

 

The increase in gross margin during fiscal 2011 was primarily due to increased net revenue. Gross margins have improved over time due to lower costs resulting from our restructuring program. The improvements in gross profit and gross margin were partially offset by the impact of price erosion and material price increases. The increase in gross margin during fiscal 2010 was primarily due to higher absorption from increased production and lower costs resulting from our restructuring program. The improvements in gross profit were partially offset by the impact of price erosion, material price increases and increased delivery costs to meet the significant increase in demand.

 

A significant portion of our material cost consists of copper and gold costs. We purchased approximately 22 million pounds of copper and 125,000 troy ounces of gold in fiscal 2011 compared with approximately 23 million pounds of copper and 112,000 troy ounces of gold in fiscal 2010 and approximately 16 million pounds of copper and 87,000 troy ounces of gold in fiscal 2009.

 

The following table sets forth the average prices of copper and gold we purchased in fiscal 2011, 2010 and 2009:

 

 

Generally, we are able to pass through to our customers only a small a portion of the changes in the cost of copper and gold. However, we mitigated the impact of the change in copper and gold prices by hedging with call options a portion of our projected net global purchases of copper and gold. The hedges reduced cost of sales by $7.2 million and $5.1 million in fiscal 2011 and 2010, respectively. The hedges did not materially affect the operating results for fiscal 2009.

 

In addition to commodity costs, the following table sets forth, for fiscal 2011, 2010 and 2009 the effects of certain significant impacts on gross profit from the prior year (in thousands):

 

 

Price erosion measures the reduction in prices of our products year over year, which reduces our gross profit. Price erosion as a percent of net revenue was 2.9%, 4.0% and 3.6% in fiscal 2011, 2010 and 2009, respectively.

 

The increase in gross profit due to currency translation gains in fiscal 2011 was primarily due to a stronger Japanese yen against other currencies and a general weakening of the U.S. dollar against other currencies except the euro. The increase in gross profit due to currency translation gains in fiscal 2010 was primarily due to stronger Asian currencies. The increase in gross profit due to currency translation gains in fiscal 2009 was primarily due to a stronger Japanese yen against other currencies, partially offset by a general strengthening of the U.S. dollar against other currencies.

 

Certain products that we manufacture in Japan and Europe are sold in other regions of the world at selling prices primarily denominated in or closely linked to the U.S. dollar. As a result, changes in currency exchange rates may affect our cost of sales reported in U.S. dollars without a corresponding effect on net revenue. The decrease in gross profit due to currency transactions in fiscal 2011 was primarily due to a stronger Japanese yen and a weaker U.S. dollar against most currencies. The decrease in gross profit due to currency transactions in fiscal 2010 was primarily due to a general

weakening of the U.S. dollar against other currencies except the euro. The decrease in gross profit due to currency transaction losses in fiscal 2009 was primarily due to a stronger Japanese yen.

 

Operating Expenses

 

The following table sets forth our operating expenses for fiscal 2011, 2010 and 2009 (dollars in thousands):

 

 

Selling, general & administrative expenses

 

Selling, general and administrative expense increased $32.7 million in fiscal 2011 compared with fiscal 2010 primarily due to foreign currency translation, investments in our global sales and marketing organization and research and development to drive future growth. The impact of currency translation increased selling, general and administrative expenses by approximately $12.7 million for fiscal 2011 compared with fiscal 2010 and increased selling, general and administrative expenses by approximately $13.7 million for fiscal 2010 compared with fiscal 2009. Selling, general and administrative expense decreased as a percentage of net revenue in fiscal 2011 compared with fiscal 2010 primarily due to efforts to control spending as net revenue increased. Selling, general and administrative expense increased $24.1 million in fiscal 2010 compared with fiscal 2009 primarily due to increased headcount and certain employee benefits that were suspended during fiscal 2009, but were reinstated in fiscal 2010. Selling, general and administrative expense decreased as a percentage of net revenue in fiscal 2010 compared with fiscal 2009 primarily due to our lower cost structure resulting from our restructuring efforts and specific cost containment activities.

 

Research and development expenditures, which are classified as selling, general and administrative expense, were $170.1 million, or 4.7% of net revenue, for fiscal 2011 compared with $154.0 million, or 5.1% of net revenue, for fiscal 2010 and $159.2 million, or 6.2% of net revenue, for fiscal 2009. Research and development expense increased in fiscal 2011 compared with fiscal 2010 as we made strategic investments in developing future technology innovations following cost containment efforts in the prior year. The decrease in research and development expense in fiscal 2010 compared with fiscal 2009 is primarily due to efforts to contain cost.

 

Restructuring costs and asset impairments

 

Restructuring costs and asset impairments consist of the following (in thousands):

 

 

During fiscal 2007, we undertook a multi-year restructuring plan designed to reduce costs and to improve return on invested capital in connection with a new global organization that was effective

July 1, 2007. A majority of the plan related to facilities located in North America, Europe and Japan and, in general, the movement of manufacturing activities at these plants to other lower-cost facilities. We completed our restructuring program on June 30, 2010 with cumulative expense of $314.8 million since we announced the restructuring plan. Annual cost savings related to the restructuring program are estimated to be $205.0 million.

 

In fiscal 2010, we recognized net restructuring costs related to employee severance and benefit arrangements for approximately 1,000 employees, resulting in a charge of $79.6 million. A large part of these employee terminations resulted from plant closings in Europe. We recognized asset impairment charges of $37.3 million to write-down assets to fair value less the cost to sell.

 

In fiscal 2009, we recognized net restructuring costs related to employee severance and benefit arrangements for approximately 6,600 employees, resulting in a charge of $110.2 million. A large part of these employee terminations resulted from plant closings in Europe and Asia. We recognized asset impairment charges of $41.4 million to write-down assets to fair value less the cost to sell. Restructuring costs and asset impairments in fiscal 2009 included intangible asset impairments of $16.3 million due to lower projected future net revenue and profit in our Industrial business unit of our Custom & Electrical segment.

 

The timing of the cash expenditures associated with these charges does not necessarily correspond to the period in which the accounting charge is taken. For additional information concerning the status of our restructuring programs see Note 6 of the Notes to Consolidated Financial Statements.

 

Goodwill

 

Fiscal 2009 income from operations included goodwill impairment charges of $264.1 million. We recorded $93.1 million and $171.0 million goodwill impairment charges in the Transportation business unit of our Connector segment and Industrial business unit of our Custom & Electrical segment, respectively. The economic downturn in fiscal 2009 had a negative impact on the business units’ operating results. The potential liquidity risk extended our estimate for the automotive industry’s economic recovery and our Industrial business unit’s results were not recovering in line with other business units. These factors resulted in lower growth and profit expectations for these business units, which resulted in the goodwill impairment charges.

 

Other (Expense) Income, net

 

Other (expense) income consists primarily of investment income, net interest expense or income, and currency exchange gains or losses. Interest expense and foreign currency losses principally offset investment income in fiscal 2011 and 2010. Currency exchange losses for fiscal 2011 and 2010 were $11.0 million and $1.8 million, respectively, due to a general weakening of the U.S. dollar against other currencies, partially offset by a stronger Japanese yen against most other currencies. Currency exchange gains in fiscal 2009 were $11.8 million due to a stronger U.S. dollar and Japanese yen against most other currencies.

 

Effective Tax Rate

 

The effective tax rate for the fiscal years ended June 30, follows:

 

 

The effective tax rate for fiscal 2011 was 30.5%. The effective tax rate for fiscal 2010 was higher than fiscal 2011 due to (1) income tax expense booked during the year of $7.7 million, due primarily to the reversal of an estimated tax benefit resulting from a significant number of employee stock options that expired unexercised, (2) a charge due to legislation passed during fiscal 2010 which includes a provision that reduces the deductibility, for Federal income tax purposes, of retiree prescription drug

benefits to the extent they are reimbursed under Medicare Part D, (3) tax losses generated in non-U.S. jurisdictions for which no tax benefit has been recognized, and (4) additional U.S. tax cost to repatriate earnings from non-US subsidiaries during the year. The effective tax rate in fiscal 2009 was (0.1%) due primarily to charges for goodwill impairments for which no tax benefit was available and increases in tax reserves based on evaluation of certain tax positions taken.

 

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. We have net deferred tax assets of $167.3 million at June 30, 2011.

 

Results by Product Segment

 

Connector.   The following table sets forth the change in net revenue for the Connector segment for fiscal 2011 and 2010 (dollars in thousands):

 

 

The Connector segment sells primarily to the telecommunications, infotech, automotive and consumer markets, which are discussed above. Segment net revenue increased in fiscal 2011 and 2010 compared with the prior year periods due to increased demand in all of the Connector segment’s primary markets, partially offset by price erosion. Price erosion, which is generally higher in the Connector segment compared with our other segments, was 3.3% and 4.5% in fiscal 2011 and 2010, respectively.

 

The following table sets forth information on income from operations and operating margins for the Connector segment for fiscal 2011, 2010 and 2009 (dollars in thousands):

 

 

Connector segment income from operations increased in fiscal 2011 compared with fiscal 2010 primarily due to increased net revenue and completion of our restructuring program on June 30, 2010. Gross margins were positively impacted from lower costs from our restructuring program, which has improved margins over time. Connector segment income from operations also improved in fiscal 2011 due to controlled selling, general and administrative costs in a period of increased net revenue. Selling, general and administrative expenses were $368.4 million, or 14.2% of net revenue, for fiscal 2011 compared with $347.6 million or 16.0% of net revenue, for fiscal 2010, due to efficiencies gained from restructuring and specific cost-containment actions.

 

Connector segment income from operations increased in fiscal 2010 compared with fiscal 2009 primarily due to increased net revenue and the $93.1 million goodwill impairment charge during fiscal 2009 to write-off goodwill based on lower projected future net revenue and profit growth in our Transportation business unit. Gross margins in fiscal 2010 were positively affected by higher absorption and restructuring. Connector segment income from operations also improved due to lower selling, general and administrative costs in fiscal 2010. Selling, general and administrative expenses were

$347.6 million, or 16.0% of net revenue, for fiscal 2010 compared with $365.5 million, or 20.5% of net revenue, for fiscal 2009, due to savings from restructuring and specific cost-containment actions. Income from operations was unfavorably impacted by restructuring costs of $100.3 million and $93.9 million for fiscal 2010 and 2009, respectively.

 

Custom & Electrical.   The following table sets forth net revenue for fiscal 2011 and 2010 (dollars in thousands):

 

 

The sale of Custom & Electrical segment’s products is concentrated in the industrial, telecommunications and infotech markets. Custom & Electrical segment organic net revenue increased in fiscal 2011 and 2010 due to increased demand in all of the segment’s primary markets. We also completed an asset acquisition of an active optical cable business during the third quarter of fiscal 2011 and completed an asset purchase of a company in China during the second quarter of fiscal 2010.

 

The following table sets forth income from operations and operating margins for the Custom & Electrical segment for fiscal 2011, 2010 and 2009 (dollars in thousands):

 

 

Custom & Electrical segment income from operations increased in fiscal 2011 compared with fiscal 2010 primarily due to increased net revenue and completion of our restructuring program on June 30, 2010. Gross margins were positively impacted from lower costs from our restructuring program, which has improved margins over time. Income from operations also improved in fiscal 2011 due to controlled selling, general and administrative costs in a period of increased net revenue. Selling, general and administrative expenses were $169.6 million, or 17.2% of net revenue, for fiscal 2011 compared with $168.5 million, or 20.2% of net revenue, for fiscal 2010, due to efficiencies gained from restructuring and specific cost-containment actions.

 

Custom & Electrical segment income from operations increased in fiscal 2010 compared with fiscal 2009 primarily due to increased net revenue, lower selling, general and administrative costs and the $171.0 million goodwill impairment charge and $16.3 million intangible asset charge during fiscal 2009 to write-off goodwill and intangible assets in our Industrial business unit due to lower projected future net revenue and profit growth. Gross margins in fiscal 2010 were positively affected by higher absorption and restructuring. Custom & Electrical segment income from operations also improved due to lower selling, general and administrative costs in fiscal 2010. Selling, general and administrative expenses were $168.5 million, or 20.2% of net revenue, for fiscal 2010 compared with $186.0 million, or 23.5% of net revenue, for fiscal 2009, due to savings from restructuring and specific cost-containment actions. Income from operations was unfavorably impacted by restructuring costs of $12.2 million and $39.3 million for fiscal 2010 and 2009, respectively.

Financial Condition and Liquidity

 

We fund capital projects and working capital needs principally out of operating cash flows and cash on hand. Cash, cash equivalents and marketable securities totaled $546.5 million and $394.9 million at June 30, 2011 and 2010, respectively, of which approximately $514.3 million was in non-U.S. accounts, including $183.2 million in China, as of June 30, 2011. Transferring cash, cash equivalents or marketable securities to U.S. accounts from non-U.S. accounts could subject us to additional U.S. repatriation income tax. Principal uses of cash are capital expenditures, dividend payments and business investments. Our long-term financing strategy is to primarily rely on internal sources of funds for investing in plant, equipment and acquisitions.

 

In June 2009, we entered into a $195.0 million unsecured, three-year revolving credit facility in the United States, amended in January 2010 and September 2010, that was initially scheduled to mature in June 2012 (the “U.S. Credit Facility”). In connection with the September 2010 amendment, we increased the credit line on the U.S. Credit Facility to $270.0 million. In March 2011, we amended the credit facility to increase the credit line to $350.0 million and extend the term to March 2016.

 

Total debt, including obligations under capital leases totaled $342.6 million and $293.5 million at June 30, 2011 and 2010, respectively. We had available lines of credit totaling $244.3 million at June 30, 2011, including $165.0 million available under the U.S. Credit Facility as of June 30, 2011. The U.S. Credit Facility also requires us to maintain financial covenants pertaining to, among other things, our consolidated leverage and fixed charge coverage. As of June 30, 2011, we were in compliance with these covenants. Additionally, we have three unsecured borrowing agreements in Japan totaling ¥12.2 billion ($151.4 million) as of June 30, 2011, with weighted average fixed interest rates of 1.25%. See Note 13 of the “Notes to the Consolidated Financial Statements.”

 

Cash Flows

 

Below is a table setting forth the key lines of our Consolidated Statements of Cash Flows (in thousands):

 

 

Operating Activities

 

Cash provided from operating activities in fiscal 2011 increased by $215.6 million from the prior year due primarily to an increase in net income in fiscal 2011 compared with fiscal 2010. Working capital needs increased $116.0 million in fiscal 2011 as inventory production increased due to customer demand and supply chain inventory increased due to the conversion from air shipment to sea shipment. Working capital is defined as current assets minus current liabilities. Our restructuring accrual as of June 30, 2011 was $14.0 million compared to $26.9 million as of June 30, 2010, which was reduced through cash outlays during fiscal 2011.

 

Cash provided from operating activities in fiscal 2010 decreased $119.3 million from fiscal 2009 due mainly to an increase in working capital needs in fiscal 2010 compared with fiscal 2009.

 

Investing Activities

 

Cash used for investing activities increased by $53.8 million due to increased investments in capital expenditures and acquisitions and lower net sales of marketable securities in fiscal 2011 compared with fiscal 2010.

During fiscal 2011, we completed an asset acquisition of an active optical cable business for $24.6 million and recorded goodwill of $14.6 million. The purchase price includes contingent consideration up to $5.8 million. During fiscal 2010, we completed an asset purchase of a company in China for $10.1 million. During fiscal 2009, we completed the acquisition of two companies and a joint venture in cash transactions approximating $74.8 million. We recorded additional goodwill of $27.9 million in connection with the acquisitions.

 

Capital expenditures increased $32.8 million during fiscal 2011 as demand and production increased. Capital expenditures increased $51.5 million during fiscal 2010 compared with fiscal 2009 as demand and production increased.

 

We had $3.6 million in net sales of marketable securities during fiscal 2011 compared with $25.5 million in net sales of marketable securities during fiscal 2010. We had $13.2 million net purchases of marketable securities in fiscal 2009. Our marketable securities generally have a term of less than one year. Our investments in marketable securities are primarily based on our uses of cash in operating, other investing and financing activities.

 

Financing Activities

 

Cash used for financing activities decreased $6.0 million during fiscal 2011 compared with fiscal 2010 primarily due to the increase in net proceeds from the revolving credit facility, partially offset by an increase in quarterly cash dividends paid.

 

Net borrowings against our $350.0 million unsecured, five-year revolving credit facility during the twelve months ended June 30, 2011 were $85.0 million compared to $75.0 million in the prior year period. Total borrowings against the credit facility were $185.0 million as of June 30, 2011.

 

We increased our quarterly cash dividend in fiscal 2011 to $0.1750 per share, an increase of 14.8% from the previous quarterly cash dividend of $0.1525 per share in fiscal 2010. The increase was effective to shareholders of record on December 31, 2010. We increased our cash dividend again during the fourth quarter of fiscal 2011 to $0.2000 per share, which was effective to shareholders of record on June 30, 2011.

 

On August 1, 2008, our Board of Directors authorized the repurchase of up to an aggregate $200.0 million of common stock through June 30, 2009. We purchased shares of Common Stock and Class A Common Stock totaling 4.5 million shares during fiscal 2009. The aggregate cost of the purchase was $76.3 million for fiscal 2009.

 

As part of our growth strategy, in the future we may acquire other companies in the same or complementary lines of business and pursue other business ventures. The timing and size of any new business ventures or acquisitions we complete may impact our cash requirements. To the extent we are required to pay all or any portion of the unauthorized loans in Molex Japan our cash requirements may also be impacted.

 

Sources of Liquidity

 

We believe we have sufficient cash balances, cash flow and available credit lines to support our planned growth. As part of our growth strategy, we may, in the future, acquire other companies in the same or complementary lines of business, and pursue other business ventures. The timing and size of any new business ventures or acquisitions we complete may affect our cash requirements and debt balances.

Total debt consisted of the following at June 30:

 

 

In June 2009, we entered into a $195.0 million unsecured, three-year revolving credit facility in the United States, amended in January 2010, September 2010 and March 2011 that was initially scheduled to mature in June 2012 (the U.S. Credit Facility). In connection with the September 2010 amendment, we increased the credit line on the U.S. Credit Facility to $270.0 million. In March 2011, we further amended the credit facility to increase the credit line to $350.0 million and extend the term to March 2016. Borrowings under the U.S. Credit Facility bear interest at a fluctuating interest rate (based on London InterBank Offered Rate) plus an applicable percentage based on our consolidated leverage. The applicable percentage was 150 basis points as of June 30, 2011. The instrument governing the U.S. Credit Facility contains customary covenants regarding liens, debt, substantial asset sales and mergers, dividends and investments. The U.S. Credit Facility also requires us to maintain financial covenants pertaining to, among other things, our consolidated leverage and fixed charge coverage. As of June 30, 2011, we were in compliance with these covenants and had outstanding borrowings of $185.0 million.

 

In March 2011, Molex Japan renewed a ¥5.0 billion overdraft loan, with a six month term and an interest rate of approximately 2.48%. At June 30, 2011, the balance of the overdraft loan, which requires full repayment by the end of the term if not renewed, approximated $62.1 million.

 

In March 2010, Molex Japan entered into a ¥3.0 billion syndicated term loan for three years, with interest rates equivalent to six month Tokyo Interbank Offered Rate (TIBOR) plus 75 basis points and scheduled principal payments of ¥0.5 billion every six months (Syndicated Term Loan). At June 30, 2011, the balance of the syndicated term loan approximated $24.8 million, of which $12.4 million was current.

 

In September 2009, Molex Japan issued unsecured bonds totaling ¥10.0 billion with a term of three years, an interest rate of approximately 1.65% and scheduled principal payments of ¥1.6 billion every six months. At June 30, 2011, the outstanding balance of the unsecured bonds approximated $64.5 million, of which $39.7 million was current.

Certain assets, including land, buildings and equipment, secure a portion of our long-term debt. Principal payments on long-term debt obligations are due as follows (in thousands):

 

 

We had available lines of credit totaling $244.3 million at June 30, 2011 expiring between 2011 and 2016.

 

Contractual Obligations and Commercial Commitments

 

The following table summarizes our significant contractual obligations at June 30, 2011, and the effect such obligations are expected to have on liquidity and cash flows in future periods (in thousands):