Molex (MOLX)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

____________

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

For the fiscal year ended June 30, 2006

Commission File Number 0-7491

____________

MOLEX INCORPORATED

(Exact name of registrant as specified in its charter)

36-2369491     

(State or other jurisdiction of

(I.R.S.  Employer

incorporation or organization)

Identification No.)

(Address of principal executive offices)

Registrant’s telephone number, including area code:  (630) 969-4550

____________

Title of each class

Name of each exchange on which registered

Common Stock, par value $0.05

The Nasdaq Stock Market, Inc.

Class A Common Stock, par value $0.05

The Nasdaq Stock Market, Inc.

____________

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

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 ¨  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 ¨

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, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  þ    Accelerated filer  ¨    Non-accelerated filer  ¨

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

On July 28, 2006, the following numbers of shares of the Company’s common stock were outstanding:

Common Stock

99,414,805

Class A Common Stock

84,154,672

Class B Common Stock

94,255

The aggregate market value of the voting and non-voting shares (based on the closing price of these shares on the NASDAQ Global Select Market on December 31, 2005) held by non-affiliates was approximately $3.6 billion.

Portions of the Proxy Statement for the Annual Meeting of Stockholders, to be held on October 27, 2006 are incorporated by reference into Part III of this annual report on Form 10-K.

Page

Part I

Item 1.

Business

3 

Item 1A.

Risk Factors

12 

Item 1B.

Unresolved Staff Comments

16 

Item 2.

Properties

17 

Item 3.

Legal Proceedings

17 

Item 4.

Submission of Matters to a Vote of Security Holders

18 

Part II

Item 5.

Market for the Registrant’s Common Equity, Related Stockholder

Matters and Issuer Purchases of Equity Securities

18 

Item 6.

Selected Financial Data

20 

Item 7.

Management’s Discussion and Analysis of Financial Condition and

Results of Operations

21 

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

36 

Item 8.

Financial Statements and Supplementary Data

38 

Item 9.

Changes in and Disagreements with Accountants on Accounting and

Financial Disclosure

65 

Item 9A.

Controls and Procedures

65 

Item 9B.

Other Information

66 

Part III

Item 10.

Directors and Executive Officers of the Registrant

66 

Item 11.

Executive Compensation

66 

Item 12.

Security Ownership of Certain Beneficial Owners and Management and

Related Stockholder Matters

67 

Item 13.

Certain Relationships and Related Transactions

67 

Item 14.

Principal Accountant Fees and Services

67 

Part IV

Item 15.

Exhibits and Financial Statement Schedules

67 

Schedule II – Valuation and Qualifying Accounts

68 

Index to Exhibits

69 

Signatures

71 

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.

Item 1.  Business

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 the world’s second-largest manufacturer of electronic connectors in terms of revenue.  Net revenue was $2.9 billion for fiscal 2006.  We operated 54 manufacturing plants, located in 18 countries on five continents, and employed 32,400 people worldwide as of June 30, 2006.

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.  We also provide manufacturing services to integrate specific components into a customer’s product.

The global connector industry is highly competitive and fragmented and is estimated to represent approximately $36 billion in revenue for fiscal 2006.  The industry has grown at a compounded annual rate of 5.8% over the past 25 years and is expected to grow at a rate of 7.5% in calendar year 2006.  We believe that our market share was approximately 8% of the worldwide market for electronic connectors in fiscal 2006.  

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.  Although many of the products in the connector market are mature products, some with 25-30 year life spans, there is also a constant demand for new product solutions.

Industry trends that we deem particularly relevant include:

·

Globalization.  Synergistic opportunities exist for the industry to design, manufacture and sell electronic products in different countries around the world in an efficient and seamless process.  For example, electronic products may be designed in Japan, manufactured in China, and sold in the United States.

·

Convergence of markets.  Traditionally separate markets such as consumer electronics, data products and telecommunications are converging, resulting in single devices offering broad-based functionality.

·

Increasing electronics content.  Consumer demand for advanced product features, convenience and connectivity is driving connector growth at rates faster than the growth rates of the underlying electronics markets.

·

Product size reduction.  High-density, micro-miniature technologies are expanding to markets such as data and mobile phones, leading to smaller devices and greater mobility.

·

Consolidating supply base.  Generally, global OEMs are consolidating their supply chain by selecting global companies possessing broad product lines for the majority of their connector requirements.

·

Price erosion.  As unit volumes grow, production experience is accumulated and costs decrease, and as a result, prices decline.

The approximate percentage of our net revenue by market for fiscal 2006 is summarized below:

Markets

Percentage of Fiscal 2006

 Net Revenue

Typical End Use Products

Supported by Molex

Telecommunications

30 %

Mobile phones and devices, networking equipment, switches and transmission equipment

Data Products

22 %

Desktop and notebook computers, peripheral equipment, servers, storage, copiers, printers and scanners

Automotive

18 %

Engine control units, body electronics, safety electronics, sensors, panel instrumentation and other automotive electronics

Consumer

19 %

Digital electronics - CD and DVD players, cameras, plasma and LCD televisions, electronic games and major appliances

Industrial

9 %

Factory automation, robotics, automated test equipment, vision systems and diagnostic equipment

Other

2 %

Electronic and electrical devices for a variety of markets

Telecommunications. In the telecommunications market, we believe our key strengths include: high speed, optical signal product lines; backplane connector systems; power distribution product; micro-miniature connectors; global coordination; and complementary products such as keyboards and antennas.

For mobile phones, we provide micro-miniature connectors, SIM card sockets, keypads, electromechanical subassemblies and internal antennas and subsystems.  An area of particular innovation is high-speed backplanes and cables for infrastructure equipment.  For example, our Plateau HS Dock^TM incorporates a new plated plastic technology to increase bandwidth, reduce crosstalk and control impedance in applications such as telecommunication routers.

Data Products. In the data market, our key strengths include: our high-speed signal product line; storage input/output (I/O) products; standards committee leadership; global coordination; low cost manufacturing; 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.  Our ongoing involvement in industry committees contributes to the development of new standards for the connectors and cables that transport data.  For example, our family of small form-factor pluggable products offers end-users both fiber optic and copper connectivity and more efficient storage area network management.

We hold a strong position with 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.  

Our Serial ATA product enables higher-speed communication between a computer’s disk drive and processor.  In addition, our product portfolio includes virtually every interconnect for copiers, printers, scanners and projectors.

Automotive. In the automotive market, we believe our strengths include:  new product development expertise; focus on entertainment, safety and convenience features; technical skills; and integrated manufacturing capabilities.

Our interconnects are used in air bag, seatbelt and tire pressure monitoring systems and powertrain, window and temperature controls.  Today’s cars are mobile communication centers, complete with navigation tools and multimedia entertainment.  Our Media Oriented System Transport (MOST) connector system uses plastic optical fiber to transmit audio, video and data at high speeds in devices such as CD and DVD players.

Consumer. In the consumer market, we believe our key strengths include: optical and micro-miniature connector expertise; breadth of our high wattage (power) product line; cable and wire application equipment; and low cost manufacturing.

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 super micro miniature products support customer needs for increased power, speed and functionality but with decreased weight and space requirements.  We believe that they 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 and have won numerous projects that demonstrate our skill in designing innovative connectors.  In addition, we provide products for video poker and slot machines. Pachinko machines, which are popular in Japan, use our compact 2.00mm pitch MicroClasp^TM connector, which features an inner lock that helps on-site installers easily insert new game boards.

Industrial. In the industrial market, we believe our key strengths include: optical and micro miniature connector expertise; breadth of our power and signal product lines; distribution partnerships; and global presence.

This is a relatively new area of emphasis for us, further diversifying our customer mix.  Our high-performance cables, backplanes, power connectors and integrated products are found in products ranging from electronic weighing stations to industrial microscopes and vision systems.  Advances in semiconductor technology require comparable advances in equipment to verify quality, function and performance.  For this reason, we developed our Very High-Density Metric (VHDM) connector system to help assure signal integrity and overall reliability in high-speed applications such as chip testers.

In the factory automation market, we are building our base by expanding our line of compact robotic connectors and I/O connectors for servo motors, as well as identifying factory uses for the time-tested products we have developed for other industries.

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 (MRI) and dialysis machines.  Military electronics is also one of our emerging markets.  We have found a range of electronic applications for our products in the commercial-off-the-shelf (COTS) segment of this market.  Products originally developed for the computer, telecommunications and automotive markets can be used in an increasing number of military applications.

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

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

·

Broad and deep technological knowledge of microelectronic devices and techniques, power sources, coatings and materials;

·

Strong intellectual property portfolio that underlies many key products;

·

High product quality standards, backed with stringent systems designed to ensure consistent performance, that meet or surpass customers' expectations;

·

Strong technical collaboration with customers;

·

Extensive experience with the product development process;

·

Broad geographical presence in developed and developing markets;

·

Continuous effort to develop an efficient, low-cost manufacturing footprint; and

·

A broad range of products both for specific applications and for general consumption.

We intend to serve our customers and achieve our objectives by continuing to do the following:

·

Concentrate on core markets.  We focus on markets where we have the expertise, qualifications and leadership position to sustain a competitive advantage.  We have been an established supplier of interconnect solutions for more than 60 years.  We are a principal supplier of connector components to the telecommunications, computer, consumer, automotive and industrial electronics markets.

·

Grow through the development and release of new products.  We invest strategically in the tools and resources to develop and bring to market new products and to expand existing product lines.  New products are essential to enable our customers to advance their solutions and their market leadership positions.  In fiscal 2006, we generated approximately 27.5% of our revenue from new products, which are defined as those products released in the last 36 months.

·

Optimize manufacturing.  We analyze the design and manufacturing patterns of our customers along with our own supply chain economics to help ensure that our manufacturing operations are of sufficient scale and are located strategically to minimize production costs and maximize customer service.

·

Leverage financial strength.  We use our expected cash flow from operations to invest aggressively in new product development, to pursue synergistic acquisitions, to align manufacturing capacity with customer requirements and to pursue productivity improvements.  We invested approximately 14.6% of net revenue in capital expenditures and research and development activities in fiscal 2006.

We will begin the transition to a global organizational structure that consists of market-focused divisions during fiscal 2007, with full implementation scheduled for July 1, 2007.  The plan is to create five global divisions – automotive, consumer, commercial, industrial and integrated products – and one worldwide sales and marketing organization.  When fully implemented, we expect the new structure to enable us to work more effectively as a global team to meet customer needs as well as to better leverage our design expertise and the low-cost production centers around the world. The new worldwide sales and marketing organization structure will enhance our ability to sell any product, to any customer, anywhere in the world.  We do not expect the transition process to generate significant implementation costs during fiscal 2007.

We compete with many companies in each of our product categories.  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 Tyco International Ltd. as well as a significant number of smaller competitors.  The identity and significance of competitors may change over time.  We believe that the 10 largest connector suppliers, as measured by revenue, represent approximately 53% of the worldwide market in terms of 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.

 We sell products directly to OEMs, contract manufacturers and distributors.  Our customers include global companies such as Arrow, Cisco, Dell, Delphi, Ford, Hewlett Packard, IBM, Matsushita, Motorola and Nokia.  No customer accounted for more than 10% of net revenues in fiscal 2006, 2005 or 2004.  

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 U.S. based on shipping point to the customer was approximately 73% in fiscal 2006, 74% in fiscal 2005 and 70% in fiscal 2004.

In fiscal 2006, the share of net revenue from the different regions was approximately as follows:

·

52% of net revenue originated in Asia, with 33% from the Far East South region (China, Hong Kong, Indonesia, India, Malaysia, Philippines, Singapore, Taiwan and Thailand) and 19% from the Far East North region (Japan and Korea).  Approximately 22% and 15% of net revenue in fiscal 2006 was derived from operations in China and Japan, respectively.

·

28% of net revenue originated in the Americas (United States, Canada, Mexico and South America).

·

18% of net revenue originated in Europe.

·

2% of net revenue originated from operations that have not yet been assigned to a particular region.

Revenues from customers are generally attributed to countries based upon the location of our sales office.  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.

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 20% of our net revenue in fiscal 2006.

We seek to provide customers one-to-one service tailored to their business.  Our engineers work collaboratively with customers, often via an innovative online design system, to develop products for specific applications.  We provide customers the benefit of state-of-the-art technology for engineering, design and prototyping, supported from 27 development centers in 14 countries.  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, which integrates with 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 geographical region appears in Note 20 of the Notes to Consolidated Financial Statements.  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.

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, as well as 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 $141 million in fiscal 2006, $134 million in fiscal 2005 and $119 million in fiscal 2004.  We believe this investment, typically at 5% or more 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 approximately 45 such committees, helping give us a voice in shaping the technologies of the future.  In fiscal 2006, we commercialized approximately 308 new products and received 815 product patents.

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

Our core manufacturing expertise includes molding, stamping, plating and assembly operations.  We utilize 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 and 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 and harness assembly for our integrated products operations, which build devices that leverage our connector content. Because integrated products require labor-intensive assembly, each of our regions operates at least one low-cost manufacturing center, including China, India, Malaysia, Mexico, Poland, Slovakia or Thailand.

We continually look for ways to reduce our manufacturing costs as we increase capacity, resulting in a trend of fewer but larger factories.  We achieved economies of scale and higher capacity utilization while continuing to assure on-time delivery.  

We incurred total capital expenditures of $276.8 million in 2006, $230.9 million in 2005 and $189.7 million in 2004, which was primarily related to increasing manufacturing capacity.

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 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 and Seasonality

The backlog of unfilled orders at June 30, 2006 was approximately $370.0 million, a 42.6% increase compared with backlog of $259.5 million at June 30, 2005.  The increase in backlog was partially attributable to a general increase in demand for our products across all geographic regions. Substantially all of these orders are scheduled for delivery within 12 months.  The majority of orders are shipped within 30 days of acceptance.

We do not believe that aggregate worldwide sales reflect any significant degree of seasonality.

As of June 30, 2006, we employed 32,400 people worldwide.  We believe we have been successful in attracting and retaining qualified personnel in highly competitive labor markets due to our competitive compensation and benefits as well as our rewarding work environment.  We consider our relations with our employees to be strong.

We are committed to employee development and place a high priority on developing Molex leaders of the future through training at all levels.  This includes on-the-job and online learning, as well as custom initiatives such as our two-year, in-house global management training program.

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.  

On June 30, 2006 we entered into a merger agreement with Woodhead Industries, Inc. (NASDAQ: WDHD), pursuant to which we intend to acquire Woodhead.  Woodhead develops, manufactures and markets network and electrical infrastructure products engineered for performance in harsh, demanding, and hazardous industrial environments.  Completion of the transaction is subject to the terms and conditions of the merger agreement.  For additional information, please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Financial Highlights.”

Intellectual property rights that apply to our various products and services include patents, trade secrets and trademarks.  We maintain an active program to protect our investment in technology by attempting to ensure intellectual property rights protection for our products.

As of June 30, 2006, Molex owned 900 United States patents and 3,380 foreign patents in various countries throughout the world.  In addition, Molex had 338 patent applications on file with the U.S. Patent Office (includes both U.S. national filings and Patent Cooperation Treaty filings) and 1,820 foreign patent applications pending in various patent offices throughout the world.  No assurance can be given that any patents will be issued on pending or future applications.  As we develop products for new markets and uses, we normally seek available patent protection.

We also protect certain details about our processes, products and strategies as trade secrets, keeping confidential the information that provides us with a competitive advantage.  We have ongoing programs designed to maintain the confidentiality of such information.

We believe that our intellectual property is important but do not consider ourselves materially dependent upon any single patent or group of related patents.

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 regional environmental, health and safety (EHS) policies and strict 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.

Many of our worldwide manufacturing sites are certified to the International Organization for Standardization (ISO) 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.  Our ISO 14001 environmental 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 company-wide short and long-term performance targets for key resources and emissions.

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 believe that our efforts to reduce the use of hazardous substances have positioned us well to meet environmental restrictions on product content throughout the world, such as the Restriction on Hazardous Substances (RoHS) directive in the European Union.  The RoHS directive eliminates most uses of lead, cadmium, hexavalent-chromium, mercury and certain flame-retardants in electronics placed on the market after July 1, 2006. 

Executive Officers

Our executive officers are set forth in the table below.  

Positions Held with Registrant

Year

Name

During the Last Five Years

Age

..

Frederick A. Krehbiel^(a)

Co-Chairman (1999-); Chief Executive Officer (2004-2005);

65

1965^(b)

Co-Chief Executive Officer (1999-2001).

..

John H. Krehbiel, Jr.^(a)

Co-Chairman (1999-); Co-Chief Executive

69

1959^(b)

Officer (1999-2001).

..

Martin P. Slark

Vice-Chairman and Chief Executive Officer (2005-);

51

1976

President and Chief Operating Officer (2001-2005);

Executive Vice President (1999-2001).

..

Liam McCarthy

President and Chief Operating Officer (2005-);

50

1976

Regional Vice President of Operations, Europe (2000-

2005); Interim General Manager of Molex Ireland Ltd.

(2002-2004).

..

Robert B. Mahoney

Executive Vice President (2002-); Regional

53

1995

President, Asia Pacific South (2004-); Treasurer

and Chief Financial Officer (1996-2004, 2005);

Corporate Vice President (1996-2002).

..

Ronald L. Schubel

Executive Vice President (2001-); Corporate Vice

62

1981

President (1982-2001); Regional President, Americas (1998-).

Positions Held with Registrant

Year

Name

During the Last Five Years

Age

..

James E. Fleischhacker

Executive Vice President (2001-); Corporate

62

1984

Vice President (1994-2001); Regional President,

Asia Pacific South (1998-2001, 2003-2004).

..

David D. Johnson

Vice President, Treasurer and Chief

50

2005

Financial Officer (2005-); Vice President, Treasurer and

Chief Financial Officer, Sypris Solutions, Inc. (1998-2005).

..

Katsumi Hirokawa

Vice President (2005-). Positions at Molex Japan

59

1995

Co., Ltd.: President (2002-); Executive Vice President-

Sales (2002-2002); Senior Director-Sales (1996-2002).

..

Graham C. Brock

Vice President (2005-) and Regional

52

1976

President, Europe (2005-); Regional Vice President -

Sales & Marketing, Europe (2000-2005).

..

David B. Root

Vice President and Regional President, Americas (2005-);

52

1982

Vice President, Sales Americas (2004-2005); President,

Connector Products Division (2002-2004); President,

Data Comm Division (2001-2002).

..

Kathi M. Regas

Vice President (1994-).

50

1985

..

^(a)  John H. Krehbiel, Jr. and Frederick A. Krehbiel (the Krehbiel Family) are brothers.  The members of the Krehbiel Family may be considered to be “control persons” of the Registrant.  The other executive officers listed above have no relationship, family or otherwise, to the Krehbiel Family, Registrant or each other.

^(b) Includes period employed by our predecessor company.

We have adopted a Code of Business Conduct and Ethics applicable to all employees and officers, including the chief executive officer and chief financial officer, and including our directors, with regard to their Molex-related activities.  The Code incorporates our guidelines designed to deter wrongdoing and to promote honest and ethical conduct and compliance with applicable laws and regulations.  It also incorporates our expectations of our employees that enable us to provide accurate and timely disclosure in filings with the SEC and other public communications.  In addition, it incorporates our guidelines pertaining to topics such as environmental, health and safety compliance, diversity and non-discrimination, supplier expectations, privacy and business continuity.

The full text of our Code is published on our investor relations Web site at www.molex.com.

This Annual Report on Form 10-K and other documents we file with the Commission 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,” 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 our management at the time the statements are made. We caution you 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, and competitive strengths.  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 distribution of this report, whether as a result of new information, future events, changes in assumptions, or otherwise.

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.

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 and competition may intensify from various U.S. and non-U.S. competitors and new market entrants, some of which may be our current customers.  The competition in the future may, in some cases, 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.  In addition, market factors could cause a decline in spending for the technology products manufactured by our customers.

We expect that a significant portion of our future 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 new products, enhance existing products and achieve market acceptance for such products.  However, 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 profits 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 are dependent on the continued growth, viability and financial stability of our customers.  Our customers generally are original equipment manufacturers in the telecommunications, data product, automotive, consumer, and industrial industries.  These industries are, to a varying extent, subject to rapid technological change, vigorous competition and short product life cycles.  When our customers are adversely affected by these factors, we may be similar affected.

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 acquisitions of or consolidations among 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.

On occasion, customers may require rapid increases in production, which can stress our resources and reduce operating margins.  In addition, because many of our costs and operating expenses are relatively fixed, a reduction in customer demand can harm our gross profit and operating results.

In the current economic climate, consolidation in industries that utilize electronics components may further increase as companies combine to achieve further economics of scale and other synergies.  Consolidation in industries that utilize electronics components could result in an increase in excess manufacturing capacity as companies seek to divest manufacturing operations or eliminate duplicative product lines.  Excess manufacturing capacity has increased, and may continue to increase, pricing and competitive pressures for our industry as a whole and for us in particular.  Consolidation could also result in an increasing number of very large companies offering products in multiple industries.  The significant purchasing power and market power of these large companies could increase pricing and competitive pressures for us.  

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.  

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 revenue, gross profit and operating results may be below our expectations and those of investors and analysts.

The value of our inventory may decline as a result of surplus inventory, price reductions or technological obsolescence.  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 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.

Currently, more than 70% of our revenues come from international sales.  In addition, a significant portion of our operations consists of manufacturing and sales activities outside of the U.S.  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 where we do business.  Additionally, we face the following risks:

·

International business conditions including the relationships between the U.S., Chinese and other governments;

·

Unexpected changes in laws, regulations, trade, monetary or fiscal policy, including interest rates, foreign currency exchange rates and changes in the rate of inflation in the U.S., China or other foreign countries;

·

Tariffs, quotas and other import or export restrictions and other trade barriers;

·

Difficulties in staffing and management;

·

Language and cultural barriers; and

·

Potentially adverse tax consequences.

Since a significant portion of our business is conducted outside the U.S., we face substantial exposure to movements in non-U.S. currency exchange rates.  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.  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.

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.  While we engage in extensive product quality programs and processes, these may not be sufficient to avoid a product failure rate that results in substantial delays in shipment, significant repair or replacement costs, or potential damage to our reputation.

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 connectors assemblies, is critical to our success.  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.  From time to time, we use financial instruments to hedge the volatility of commodity material costs.  The success of our hedging program depends on accurate forecasts of transaction activity in the various commodity materials.  To the extent that these forecasts are over or understated during periods of volatility, we could experience unanticipated commodity materials or hedge gains or losses.

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:

·

Difficulty in integrating acquired operations, technology and products or realizing cost savings or other anticipated benefits from integration;

·

Retaining customers and existing contracts;

·

Retaining the key employees of the acquired operation;

·

Potential disruption of our or the acquired company’s ongoing business;

·

Unanticipated expenses related to integration; and

·

Potential unknown liabilities associated with the acquired company.

In 2005, we announced plans to realign part of our manufacturing capacity in order to reduce costs and better optimize plan utilization.  The process of restructuring entails, among other activities, moving production between facilities, reducing staff levels, realigning our business processes 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 operation may suffer.

In addition, we recently announced that we would begin the transition to a global organizational structure that consists of market-focused divisions that will 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; in the short-term we may fail to maintain the quality of products and services we have historically provided; diversion of management’s attention to the reorganization; potential disruption of our ongoing business; and unanticipated expenses related to such reorganization.

Our future success depends partly on the continued contribution of our key employees, including executive, engineering, sales, marketing, manufacturing and administrative personnel.  We currently do not have employment agreements with any of our key executive officers.  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 a wide and ever-changing variety of U.S. and foreign federal, state and local laws and regulations, compliance with which may require substantial expense.  Of particular note are two recent European Union (EU) directives known as the Restriction on Certain Hazardous Substances Directive (RoHS) and the Waste Electrical and Electronic Equipment Directive.  These directives restrict the distribution of products within the EU of certain substances and require a manufacturer or importer to recycle products containing those substances.  Failure to comply with these directives could result in fines or suspension of sales.  Additionally, RoHS may result in our having non-compliant inventory that may be less readily salable or have to be written off.

In addition, some environment 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 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 technology, 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.

Our operations and those of our suppliers 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, or failures of our management information or other systems.  If a business interruption occurs, our business could be materially and adversely affected.

None.

Item 2.  Properties    

We own and lease manufacturing, warehousing and office space in locations around the world.  The leases are of varying terms with expirations ranging from fiscal 2007 through fiscal 2017.  The leases in aggregate are not considered material to the financial position of Molex.  The total square footage of these facilities at June 30, 2006 is presented below:

Owned

Leased

7,360,463

865,596

8,226,059

We believe that our buildings, machinery and equipment are well maintained and adequate for our current needs.  A listing of principal manufacturing facilities is presented below (parentheticals represent number of plants, if more than one):

Australia

Ireland

Melton, Victoria

Millstreet

Ansan City (2)

Shannon

Gwang-Ju

Brazil

Manaus

Italy

Singapore

São Paulo

Padova

Jurong Town  

China (P.R.C.)

Japan

Dongguan (2)

Kagoshima (3)

Kechnec

Shanghai (3)

Okayama

Dalian (3)

Shizuoka

Taiwan

Chengdu (2)

Tochigi

Taipei

Yamato

France

Thailand

Villemur

Malaysia

Bangpakong

Perai, Penang

Germany

United States

Ettlingen

Mexico

Pinellas Park, Florida

Guadalajara

St. Petersburg, Florida

Nogales

Downers Grove, Illinois  

Bangalore

Lincoln, Nebraska (3)

Gandhinagar

Naperville, Illinois

Noida

Tczew

Mooresville, Indiana

Pune

Sulecin  

Maumelle, Arkansas (2)

St. Paul, Minnesota (2)

Lisle, Illinois

Between March 2, 2005 and April 22, 2005, seven separate complaints were filed, each purporting to be on behalf of a class of Molex shareholders, against us, and certain of our officers and employees.  The shareholder actions have been consolidated before Judge Ruben Castillo in a case pending in the United States District Court for the Northern District of Illinois Eastern Division entitled The Takara Trust v. Molex Incorporated, et. al., Case No. 05C 1245.  The Consolidated Amended Complaint alleges, among other things, that during the period from July 27, 2004 to February 14, 2005, the named defendants made or caused to be made a series of materially false or misleading statements about Molex’s business, prospects, operations, and financial statements which constituted violations of Section 10(b) of the Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder and Section 20(a) of the Exchange Act.  The complaint also alleges that

certain of the named defendants engaged in insider trading in violation of Section 10(b) and Rule 10b-5.  As relief, the complaint seeks, among other things, a declaration that the action be certified as a proper class action, unspecified compensatory damages (including interest) and payment of costs and expenses (including fees for legal counsel and experts).  The individual defendants named in the Consolidated Amended Complaint are: J. Joseph King, Diane S. Bullock, John H. Krehbiel Jr., Frederick A. Krehbiel and Martin P. Slark.  On April 28, 2006, the Court denied defendants’ motion to dismiss the complaint.  On July 6, 2005, the Court appointed City of Pontiac Group, Joan L. Weeks individually and as trustee, and James Baker as lead plaintiffs, and approved lead plaintiffs’ choice of lead counsel.  On June 15, 2006, defendants answered the complaint, denying any liability to plaintiffs and asserting numerous defenses.  Discovery is ongoing, and is scheduled to conclude in March 2007.  We believe plaintiff’s allegations are without merit and intend to vigorously contest the complaint.

In addition, in the Fall of 2005, two stockholder derivative actions were filed against us and certain of our directors and officers in the Circuit Court of Cook County, Illinois. The derivative actions arise principally out of the same facts as the stockholder actions described above.  These two actions have been consolidated and an amended and consolidated complaint has been filed.  Defendants have moved to transfer the case to a different venue and intend to move to dismiss the complaint once venue for the case has been determined.   Discovery is ongoing.   We believe the allegations in the stockholder derivative actions are without merit and intend to vigorously contest these actions.    

Item 4.   Submission of Matters to a Vote of Security Holders

None.

PART II

Item 5.  Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Molex 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.

The number of stockholders of record at June 30, 2006 was 2,660 for Common Stock and 6,681 for Class A Common Stock.  

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

2006

2005

2004

Low

–

High

Low

–

High

Low

–

High

Common Stock

1st

 $25.34

 $29.20

 $27.55

 $31.39

 $26.14

 $31.10

2nd

   24.07

   28.02

   27.57

   31.31

   28.70

   35.12

3rd

   25.89

   33.39

   24.62

   29.13

   28.48

   36.10

4th

   32.48

   39.36

   24.47

   28.15

   27.72

   33.24

Class A Common Stock

1st

   23.54

   26.50

   23.55

   26.82

   21.72

   26.69

2nd

   22.82

   27.15

   24.33

   27.46

   24.36

   29.67

3rd

   24.33

   29.87

   22.48

   25.99

   24.44

   30.36

4th

   27.94

   33.47

   21.75

   25.08

   23.72

   28.55

Cash dividends on common stock have been paid every year since 1977.  On April 28, 2006, our Board of Directors increased the regular quarterly cash dividend to $0.075 per share.  The following table presents quarterly dividends declared per common share for the years ended June 30:

Common Stock

Class A

Common Stock

2006

2005

2006

2005

Quarter ended:

September 31

$   0.0500

$   0.0375

$   0.0500

$   0.0375

December 31

0.0500

0.0375

0.0500

0.0375

March 31

0.0500

0.0375

0.0500

0.0375

June 30

0.0750

0.0375

0.0750

0.0375

Total

$   0.2250

$   0.1500

$   0.2250

$   0.1500

On April 25, 2005, our Board of Directors authorized purchases of our outstanding Common Stock and Class A Common Stock during the period ending December 31, 2006 up to an aggregate value of $250 million on a discretionary basis.  The following table contains information about our purchases of Molex equity securities pursuant to the current authorization during the quarter ended June 30, 2006 (in thousands, except price per share data):

Common Stock:

Total Number

of Shares

Purchased

Average Price

Paid per Share

Total Number

of Shares

Purchased As

Part of Publicly

Announced

Plan

April 1 to April 30

3

$   35.26

–

May 1 to May 31

150

$   36.63

150

June 1 to June 30

58

$   35.89

50

Total

211

$   36.41

 200

Class A Common Stock:

Total Number

of Shares

Purchased

Average Price

Paid per Share

Total Number

of Shares

Purchased As

Part of Publicly

Announced

Plan

April 1 to April 30

5

$   32.05

–

May 1 to May 31

 732

$   31.33

685

June 1 to June 30

 77

$   30.81

50

Total

 814

$   31.28

735

As of June 30, 2006, the dollar value of shares that may yet be purchased under the plan was $50.1 million, as shown in the following table (in thousands):

Dollar Value

of Shares

That May Yet

Be Purchased

Under the Plan

April 1 to April 30

$    80,354

May 1 to May 31

$    53,438

June 1 to June 30

$    50,075

During the quarter ended June 30, 2006, 11,002 shares of Common Stock and 79,345 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 $2.9 million.

Descriptions of our Common Stock appear under the caption “Molex Stock” in our 2006 Proxy Statement and in Note 17 of the “Notes to Consolidated Financial Statements.”

Item 6.  Selected Financial Data

Molex Incorporated

(in thousands, except per share data)

2006

2005

2004

2003

2002

Net revenue

$  2,861,289

$  2,548,652

$  2,246,715

$  1,843,098

$  1,711,497

Gross profit

998,812

873,344

776,746

607,700

536,551

Income from operations

311,074

197,346

221,183

102,258

101,148

Income before

income taxes

329,303

216,887

239,892

110,042

93,221

Income taxes

92,205

62,463

63,571

24,762

16,684

Net income ⁽¹⁾

237,009

154,434

175,950

84,918

76,479

Earnings per share:

Basic

1.28

0.82

0.93

0.44

0.39

Diluted

1.26

0.81

0.92

0.44

0.39

Net income percent

of net revenue

8.3%

6.1%

7.8%

4.6%

4.5%

Financial Position:

Current assets

1,548,233

1,374,063

1,168,644

962,113

915,343

Current liabilities

594,812

469,504

428,464

356,148

359,593

Working capital ⁽²⁾

953,421

904,559

740,180

605,965

555,750

Current ratio ⁽³⁾

2.6

2.9

2.7

2.7

2.5

Property, plant and

equipment, net

1,025,852

984,237

1,022,378

1,007,948

1,067,590

Total assets

2,973,241

2,727,672

2,572,346

2,329,870

2,253,920

Long-term debt and capital leases

8,815

9,975

14,039

16,868

17,849

Stockholders’ equity

2,280,690

2,168,264

2,065,994

1,896,568

1,827,652

Return on invested capital ⁽⁴⁾

10.3%

6.9%

8.5%

4.4%

4.1%

Dividends declared per share

0.225

0.15

0.10

0.10

0.10

Average common

shares outstanding:

Basic

185,521

188,646

190,207

191,873

194,327

Diluted

187,416

190,572

192,186

193,229

195,986

(1)

Fiscal 2006 results include a restructuring charge of $26.4 million ($19.2 million after-tax). Fiscal 2005 results include a restructuring charge of $27.9 million ($21.6 million after-tax) and a charge for goodwill and other asset impairments of $25.2 million ($24.3 million after-tax).  Fiscal 2003 results include a restructuring charge of $35.0 million ($24.8 million after-tax). Fiscal year 2002 results include a restructuring charge of $24.2 million ($18.8 million after-tax).  See Notes 6 and 10 of the “Notes to Consolidated Financial Statements” for a discussion of our restructuring costs and other charges and credits to income.

(2)

Working capital is defined as current assets minus current liabilities.

(3)

Current ratio is defined as current assets divided by current liabilities.

(4)

Return on invested capital is defined as the current year net income divided by the sum of average total assets less average current liabilities for the year.

Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Our core business is the manufacture and sale of electromechanical 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.  We also provide manufacturing services to integrate specific components into a customer’s product.

Our connectors, interconnecting devices and assemblies are used principally in the telecommunications, data, consumer products, automotive and industrial 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 plasma televisions, automobile engine control units and adaptive braking systems, factory robotics and diagnostic equipment.

We believe that our sales mix is balanced, with growth prospects in a number of markets.  Net revenues by market can fluctuate based on various factors including new technologies within the industry, composition of customers and new products or model changes that we or our customers introduce.  The approximate percentage of net revenue by market for fiscal 2006, 2005 and 2004 is outlined below.  

% of Net Revenue

2006

2005

2004

Telecommunications

30

%

27

%

23

%

Data Products

22

24

26

Automotive

18

19

17

Consumer

19

18

21

Industrial

9

9

10

Other

2

3

3

  Total

100

%

100

%

100

%

 We sell our products directly to OEMs and to their subcontractors and suppliers and, to a lesser extent, through distributors throughout the world.  Our engineers work collaboratively with customers to develop products that meet their specific needs.  Our connector products are designed to help manufacturers assemble their own products more efficiently. Our electronic components help enable manufacturers to break down their production into sub-assemblies that can be built on different production lines, in different factories or by subcontractors.  Our connectors allow these sub-assemblies to be readily plugged together before selling the end product to a customer.  Our connectors also enable users to connect together related electronic items, such as mobile phones to battery chargers and computers to printers.  Many of our customers are multi-national corporations that manufacture their products in multiple operations in several countries.

 We service our customers through our global manufacturing footprint.  As of June 30, 2006, we operated 54 manufacturing plants, located in 18 countries on five continents.  Manufacturing in many sectors has continued to move from the United States and Western Europe to lower cost regions.  In addition, reduced trade barriers, lower freight cost and improved supply chain logistics have reduced the need for duplicate regional manufacturing capabilities.  For these reasons, our strategy has been to consolidate multiple plants of modest size in favor of operating fewer, larger and more integrated facilities in strategic locations around the world.  As announced in April 2005, we realigned part of our manufacturing capacity that resulted in the closing of seven plants in five countries.  We operate our business in four geographic regions.  In 2006, 52% of our revenue was derived from sales in Asia.  Economic growth in Asia, particularly in China, is anticipated to be greater than in the Americas and Europe.  Our management believes that it has positioned the business to benefit from this trend.   Approximately 50% of our manufacturing capacity is in lower cost areas such as China, Eastern Europe and Mexico.

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 the world’s second-largest manufacturer 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.  

Net revenue for fiscal 2006 of $2.86 billion increased 12.3% over fiscal 2005 net revenue of $2.55 billion.  Net revenue in local currencies increased 13.5%.  Net income for the year of $237.0 million increased $82.6 million from $154.4 million reported in the prior year.  Fiscal 2006 includes restructuring costs of $26.4 million ($19.2 million after tax).  Fiscal 2005 net income included a restructuring charge of $27.9 million ($21.6 million after-tax), a goodwill impairment charge of $22.9 million ($22.9 million after-tax) and an asset impairment charge of $2.3 million ($1.4 million after-tax).

As announced on April 25, 2005, we realigned part of our manufacturing capacity in order to reduce costs and better optimize plant utilization and to reduce selling, general and administrative expenses.  We recorded a pre-tax charge of $27.9 million in the fourth quarter of fiscal 2005 and recorded an additional pre-tax charge of $26.4 million during fiscal 2006 in connection with this plan.  Cash expenditures through June 30, 2006 in connection with the restructuring were $17.8 million, consisting primarily of severance and other employee-related costs.  Implementation of this restructuring program began in the fourth quarter of fiscal 2005 and continued throughout fiscal 2006.  We believe that the restructuring plan was substantially complete as of June 30, 2006.

The fiscal 2006 results include the effect of expensing stock options according to Statement of Financial Accounting Standard (SFAS) No. 123(R), “Share-Based Payment.”  Selling, general and administrative expense was $13.7 million higher in fiscal 2006 as a result of adopting SFAS No. 123(R).

On June 30, 2006, we signed a definitive merger agreement with Woodhead Industries, Inc. (Woodhead) pursuant to which we agreed to acquire Woodhead in an all cash transaction valued at approximately $256.0 million, including payments with respect to outstanding stock options and the assumption of debt and net of cash acquired.  The Boards of Directors of both companies approved the transaction.

Under the terms of the merger agreement, we commenced on July 10, 2006, a tender offer for all outstanding shares of Woodhead stock at a price of $19.25 per share in cash.  We plan to acquire shares not purchased pursuant to the tender offer, other than dissenting shares, in a subsequent merger at a price of $19.25 per share in cash as soon as practicable after completion of the tender offer.  Completion of the tender offer is currently anticipated during the fiscal quarter ending September 30, 2006, and is subject to certain conditions, including the tender by Woodhead stockholders of a majority of Woodhead’s common shares on a fully diluted basis, receipt of regulatory approvals, and other customary conditions.  There is no guarantee that we will acquire sufficient Woodhead shares to complete the acquisition.

Critical Accounting Estimates

Our accounting and financial reporting policies are in conformity with U.S. generally accepted accounting principles (GAAP).  The preparation of financial statements in conformity with GAAP requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period.  Our management has discussed the development and selection of the critical accounting estimates communicated below with the Audit Committee of our Board of Directors and the Audit Committee has reviewed our related disclosures herein.

Our significant accounting policies are summarized in Note 2 of the “Notes to Consolidated Financial Statements.”  Noted here are a number of policies that require significant judgments or estimates.

Our revenue recognition policies are in accordance with Staff Accounting Bulletin (SAB) No. 101, “Revenue Recognition in Financial Statements,” and SAB No. 104, “Revenue Recognition,” as issued by the SEC and other applicable guidance.

We recognize revenue upon shipment of product and transfer of ownership to the customer.  Contracts and customer purchase orders generally are used to determine the existence of an arrangement.  Shipping documents, proof of delivery and customer acceptance (when applicable) are used to verify delivery.  We assess whether an amount due from a customer is fixed and determinable based on the terms of the agreement with the customer, including, but not limited to, the payment terms associated with the transaction.  The impact of judgments and estimates on revenue recognition is minimal.  A reserve for estimated returns is established at the time of sale based on historical return experience to cover returns of defective product and is recorded as a reduction of revenue.

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 $148.3 million at June 30, 2006.

We have operations in countries around the world that are subject to income and other similar taxes in these countries.  The estimation of the income tax amounts that we record involves the interpretation of complex tax laws and regulations, evaluation of tax audit findings and assessment of how foreign taxes may affect domestic taxes.  Although our management believes our tax accruals are adequate, differences may occur in the future depending on the resolution of pending and new tax matters.

We periodically assess the carrying value of our deferred tax assets based upon our ability to generate sufficient future taxable income in certain tax jurisdictions.  If we determine that we will not be able to realize all or part of our deferred tax assets in the future, a valuation allowance is established in the period such determination is made.  We have determined that it is unlikely that we will realize a net deferred asset in the future relating to certain non-U.S. net operating losses.  A valuation allowance of $5.2 million was recorded in fiscal 2006 to offset the recording of a deferred tax asset of $5.2 million related to certain European net operating losses.  The cumulative valuation allowance relating to net operating losses is approximately $33.9 million at June 30, 2006.

It is our policy to establish accruals for taxes that may become payable in future years as a result of examinations by tax authorities.  We establish the accruals based upon management’s assessment of probable income tax contingencies.  At June 30, 2006, we believe we have appropriately accrued for probable contingencies.  To the extent we were to prevail in matters for which accruals have been established or would be required to pay amounts in excess of accruals, our effective tax rate in a given financial statement period could be materially affected.

 Inventories are valued at the lower of first-in, first-out (FIFO) cost or market value. FIFO inventories recorded in our consolidated balance sheet are adjusted for an allowance covering inventories determined to be slow-moving or excess.  The allowance for slow-moving and excess inventories is maintained at an amount management considers appropriate based on factors such as historical usage of the product, open sales orders and future sales forecasts.  If our sales forecast for specific products is greater than actual demand and we fail to reduce manufacturing output accordingly, we could be required to write down additional inventory, which would have a negative impact on gross margin and operating results.  Such factors require judgment, and changes in any of these factors could result in changes to this allowance.

The costs and obligations of our defined benefit pension plans are dependent on actuarial assumptions.  Three critical assumptions used, which impact the net periodic pension expense (income) and two of which impact the benefit obligation, are the discount rate, expected return on plan assets and rate of compensation increase.  The discount rate is determined based on high-quality fixed income investments that match the duration of expected benefit payments.  We have typically used the market rate for AA/Aa rated corporate bonds for this assumption.  The expected return on plan assets represents a forward projection of the average rate of earnings expected on the pension assets.  We have estimated this rate based on historical returns of similarly diversified portfolios.  The rate of compensation increase represents the long-term assumption for expected increases to salaries for pay-related plans.  These key assumptions are evaluated annually.  Changes in these assumptions can result in different expense and liability amounts.

The effects of the indicated increase and decrease in selected assumptions for our pension plans as of June 30, 2006, assuming no changes in benefit levels and no amortization of gains or losses, is shown below (in thousands):

Increase (Decrease)

Increase (Decrease)

in PBO

in Pension Expense

U.S. Plan

Int’l Plans

U.S. Plan

Int’l Plans

Discount rate change:

Increase 50 basis points

$

(3,406)

$

(7,613)

$

(337)

$

(414)

Decrease 50 basis points

3,698 

8,639 

348 

95 

Expected rate of return change:

Increase 100 basis points

N/A

N/A

$

(381)

$

(357)

Decrease 100 basis points

N/A

N/A

381 

357 

We have retiree health care plans that cover the majority of our U.S. employees.  There are no significant postretirement health care benefit plans outside of the U.S.  The health care cost trend rate assumption has a significant effect on the amount of the accumulated postretirement benefit obligation (APBO) and retiree health care benefit expense.  A 100 basis-point change in the assumed health care cost trend rates would have the following effects (in thousands):      

2006

2005

2004

Effect on total service and interest cost:

Increase 100 basis points

$

1,476 

$

1,073 

$

714 

Decrease 100 basis points

(1,211)

(908)

(600)

Effect on APBO:

Increase 100 basis points

$

9,951 

$

8,655 

$

6,277 

Decrease 100 basis points

(8,164)

(7,325)

(5,279)

Goodwill is recorded when the purchase price paid for an acquisition exceeds the estimated fair value of the net identified tangible and intangible assets acquired.

We perform an annual goodwill impairment analysis as of May 31st, or earlier if indicators of potential impairment exist.  In assessing the recoverability of goodwill, we review both quantitative as well as qualitative factors to support our assumptions with regard to fair value.  Our impairment review process compares the fair value of the reporting unit in which goodwill resides to our carrying value.  Reporting units may be operating segments as a whole or an operation one level below an operating segment, referred to as a component.  Components are defined as operations for which discrete financial information is available and reviewed by segment management.

The fair value of a reporting unit is estimated using a discounted cash flow model for the evaluation of impairment.  The expected future cash flows are based on management’s estimates and are determined by looking at numerous factors including projected economic conditions and customer demand, revenue and margins, changes in competition, operating costs and new products introduced.  In determining fair value, we make certain judgments.  If these estimates or their related assumptions change in the future as a result of changes in strategy and/or market conditions, we may be required to record an impairment charge.

Although management believes its assumptions in determining the projected cash flows are reasonable, changes in those estimates could affect the evaluation.

We have recorded charges in connection with restructuring our business.  In accordance with SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” we recognize a liability for restructuring costs at fair value when the liability is incurred.  The main components of our restructuring plans are related to workforce reductions and the closure and consolidation of excess facilities.  Workforce-related charges are accrued when it is determined that a liability has been incurred, which is generally after individuals have been notified of their termination dates and expected severance payments, but under certain circumstances may be recognized over a number of accounting periods.  Plans to consolidate excess facilities result in charges for lease termination fees, future commitments to pay lease charges, net of estimated future sublease income, and adjustments to the fair value of buildings and equipment to be sold. Charges for the consolidation of excess facilities are based on an estimate of the amounts and timing of future cash flows related to the expected future remaining use and ultimate sale or disposal of buildings and equipment.

As of June 30, 2006, we had substantially completed the restructuring plan announced in the fourth quarter of fiscal 2005.

In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” we assess the impairment of long-lived assets, other than goodwill and trade names, including property and equipment, and identifiable intangible assets subject to amortization, whenever events or changes in circumstances indicate the carrying value may not be recoverable.  Factors we consider important, which could trigger an impairment review, include significant changes in the manner of our use of the asset, changes in historical trends in operating performance, changes in projected operating performance, and significant negative economic trends.

Results of Operations

Year Ended June 30, 2006 Compared with Year Ended June 30, 2005

Year Ended

$ Change

% Change

Result as %

June 30,

Favorable

Favorable

of Net Revenue

(in thousands)

2006

2005

(Unfavorable)

(Unfavorable)

2006

2005

Net revenue

$

2,861,289

$

2,548,652

$

312,637 

12.3 

%

100.0

%

100.0

%

Cost of sales

1,862,477

1,675,308

(187,169)

(11.2)

65.1

65.7

Gross profit

998,812

873,344

125,468 

14.4 

34.9

34.3

Selling, general & administrative

661,384

622,954

(38,430)

(6.2)

23.1

24.5

Restructuring costs

26,354

27,875

1,521 

5.5 

0.9

1.1

Goodwill and asset impairments

–

25,169

25,169 

100.0 

–

1.0

Income from operations

311,074

197,346

113,728 

57.6 

10.9

7.7

Other income, net

18,229

19,541

(1,312)

(6.7)

0.6

0.8

Income before income taxes

329,303

216,887

112,416 

51.8 

11.5

8.5

Income taxes & minority interest

92,294

62,453

(29,841)

(47.8)

3.2

2.4

Net income

$

237,009

$

154,434

$

82,575 

53.5 

%

8.3

%

6.1

%

The increase in revenue was derived primarily from unit volume increases with existing customers and existing products and sales of new products.  We estimate that the impact of price erosion reduced revenue by approximately $79.0 million compared with the prior year.  We sell our products in five primary markets. A summary follows of the estimated change in revenue from each market during the fiscal years ended June 30:

2006

2005

Telecommunications

25

%

33 

%

Data Products

3

5 

Automotive

6

27 

Consumer

19

(3)

Industrial

12

2 

We operate in one product segment, the manufacture and sale of electronic components, and four regions. Revenue is recognized based on the location of the selling entity. The following table sets forth information on customer revenue by geographic region for the periods indicated (in thousands):

Year Ended

$ Change

% Change

Result as %

June 30,

Favorable

Favorable

of Net Revenue

2006

2005

(Unfavorable)

(Unfavorable)

2006

2005

Americas

$

793,296

$

701,470

$

91,826

13.1

%

27.7

%

27.5

%

Far East North

542,663

523,717

18,946

3.6

19.0

20.5

Far East South

945,089

769,218

175,871

22.9

33.0

30.2

Europe

511,375

504,453

6,922

1.4

17.9

19.8

Corporate and other

68,866

49,794

19,072

38.3

2.4

2.0

Total

$

2,861,289

$

2,548,652

$

312,637

12.3

%

100.0

%

100.0

%

The strengthening of the U.S. dollar against certain foreign currencies, principally the yen and euro, decreased revenue by approximately $30.8 million for fiscal 2006 from the prior year. The following table shows the effect on the change in net revenue from foreign currency translations to the U.S. dollar (in thousands):

Year Ended June 30, 2006

Local

Currency

Net

Currency

Translation

Change

Americas

$

82,322

$

9,504 

$

91,826

Far East North

42,611

(23,665)

18,946

Far East South

166,717

9,154 

175,871

Europe

32,458

(25,536)

6,922

Corporate and other

19,319

(247)

19,072

Net change

$

343,427

$

(30,790)

$

312,637

The change in revenue on a local currency basis is as follows:

Year Ended

Jun.30, 2006

Americas

11.7

%

Far East North

8.1

Far East South

21.7

Europe

6.4

Total

13.5

We continued our long-term commitment to reinvesting our profits in new product design and tooling to maintain and enhance our competitive position.  We believe that new products are essential to enable our customers to advance their solutions and their market leadership positions. Additionally, we believe that new

products tend to have a higher gross profit as a percentage of revenue, but may be subject to higher price erosion as unit volumes grow, production experience is accumulated and costs decrease.  Revenue derived from the sale of new products we released within the last 36 months as a percentage of net revenue was as follows for the fiscal years ended June 30:

2006

2005

Americas

25

%

22

%

Far East North

23

35

Far East South

33

36

Europe

27

27

Total

28

30

For fiscal 2006, revenue as compared with the prior year increased primarily due to a slight recovery in demand for general connector products, increased sales of integrated products and additional penetration in the automotive market in which we participate.  However, the overall trend toward  movement offshore of original equipment manufacturers and contract manufacturers continued and we believe that this trend contributed to sales in other regions of our business, especially in the Far East South region.  Customer revenue in the European region began improving during the third fiscal quarter and increased during the second half of fiscal 2006 as compared with the prior year period.

The region is focused on the strongest markets that we believe are most likely to remain in Europe.  These include connectors and integrated products for industrial, medical and automotive applications.

Gross profit increased primarily due to the increase in net revenue. Gross profit as a percentage of net revenue during fiscal 2006, as compared with the prior year period, was higher primarily due to operating efficiencies gained in the Far East South and focus on higher margin products in the Americas.

Gross profit for fiscal 2005 included the impact of corrections of errors that reduced gross profit by $8.0 million.  See Note 3 to the “Notes to Condensed Consolidated Financial Statements” for further discussion.

We estimate that we paid approximately $42.1 million more for metal alloys (primarily copper), gold and plastic resins in fiscal 2006 compared with the prior year period. These increases, along with the impact of price erosion, were partially offset by (i) an improved sales mix and product pruning, (ii) selective price increases that became effective during the second fiscal quarter of 2006, (iii) improvements in manufacturing efficiencies and (iv) favorable changes in currency exchange rates.

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 of a stronger U.S. dollar compared with the yen during the period, exchange rates reduced our cost of sales reported in U.S. dollars without a corresponding effect on net revenue.  We estimate that the impact from currency transactions increased gross profit by approximately $35.5 million for fiscal 2006 compared with the prior year period.  

Selling, general and administrative expenses increased in fiscal 2006 as compared with the prior year, but increased at a rate substantially lower than the rate of revenue growth.  The increase in selling, general and administrative expenses to support the higher levels of business and the additional compensation expense for stock options as described in the following paragraph was offset by cost reductions due to the restructuring activities initiated in the fourth quarter of fiscal 2005 and other cost containment measures, especially in the European Region.

Effective in fiscal 2006, we adopted SFAS No. 123(R) which resulted in additional compensation expense of approximately $13.7 million for fiscal 2006. Total share-based compensation recorded in the Consolidated Statements of Income was $29.2 million for fiscal 2006, of which $28.2 million is included in selling, general and administrative expenses and $1.0 million is included in restructuring costs.  In fiscal 2005, we recognized $14.9 million of share-based compensation in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” (See Note 19 of the “Notes to the Condensed Consolidated Financial Statements”).  

The impact of currency translation decreased selling, general and administrative expenses by approximately $11.8 million for fiscal 2006.

Research and development expenditures, which are classified as selling, general and administrative expense, increased to $140.9 million, or 4.9% of net revenue, for fiscal 2006, compared with 5.2% of net revenue last year.  

We recorded a pre-tax charge of $26.4 million during fiscal 2006 and $27.9 million in the fourth quarter of fiscal 2005 in connection with our restructuring to reduce costs, better optimize plant utilization and reduce selling, general and administrative expenses. The restructuring included facility closures that impacted our operations in the Americas and European regions.  We reduced headcount by approximately 500 people after additions at the facilities where production was transferred.

In the Americas region, we closed an industrial manufacturing facility in New England and ceased manufacturing in our Detroit area automotive facility. The automotive development center also located in the Detroit area will continue in operation. Production from these facilities was transferred to existing plants within the region.

In Europe, we closed manufacturing facilities in Portugal and Ireland and reduced the size of a development center in Germany since announcing the restructuring plan during the fourth quarter of fiscal 2005.  We also closed a manufacturing facility in Slovakia. Production from these manufacturing facilities was transferred to existing plants within the region.

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 Condensed Consolidated Financial Statements.”  See also “Forward-Looking Statements.”

The effective tax rate was 28.0% for fiscal 2006 compared with 28.8% for fiscal 2005. The overall decrease in the effective tax rate from the prior year reflects higher fiscal 2006 earnings in countries with tax rates that are lower than the U.S. rate offset by an increase in the valuation allowance for losses incurred for which no tax benefit could be recorded.  Fiscal 2005 reflects a charge for goodwill impairment and an increase in the valuation allowance.

Our order backlog on June 30, 2006 was approximately $370.0 million, an increase of $110.5 million compared with $259.5 million at June 30, 2005.  New orders for fiscal 2006 were $2,951.1 million, an increase of 18.5% compared with $2,489.8 million last year.

Year Ended June 30, 2005 Compared with Year Ended June 30, 2004

Year Ended

$ Change

% Change

Result as %

June 30,

Favorable

Favorable

of Net Revenue

(in thousands)

2005

2004

(Unfavorable)

(Unfavorable)

2005

2004

Net revenue

$

2,548,652 

$

2,246,715 

$

301,937 

13.4 

%

100.0

%

100.0

%

Cost of sales

1,675,308 

1,469,969 

(205,339)

(14.0)

65.7

65.4

Gross profit

873,344 

776,746 

96,598 

12.4 

34.3

34.6

Selling, general & administrative

622,954 

555,563 

(67,391)

(12.1)

24.5

24.7

Restructuring costs

27,875 

– 

(27,875)

(100.0)

1.1

–

Goodwill and asset impairments

25,169 

– 

(25,169)

(100.0)

1.0

–

Income from operations

197,346 

221,183 

(23,837)

(10.8)

7.7

9.9

Other income, net

19,541 

18,709 

832 

4.4 

0.8

0.8

Income before income taxes

216,887 

239,892 

(23,005)

(9.6)

8.5

10.7

Income taxes & minority interest

62,453 

63,942 

1,489 

2.3 

2.4

2.9

Net income

$

154,434 

$

175,950 

$

(21,516)

(12.2)

%

6.1

%

7.8

%

The acquisition of French-based Connecteurs Cinch S.A. and its subsidiaries (Cinch) completed in April, 2004, added $30.2 million of incremental revenue for fiscal 2005.  The strengthening of certain foreign currencies, principally the euro and the yen, compared with the U.S. dollar increased revenue by approximately $72.1 million over the prior year period.  We estimate that the impact of price erosion reduced revenue by approximately $88 million for fiscal 2005, compared with the prior year.  The balance of the revenue increase came primarily from unit volume increases with existing customers and existing products, and sales of new products.  Revenue derived from the sale of new products we released within the last 36 months was $764 million, or 30% of total revenue, in the current year, compared with $563 million, or 25% of revenue, for the prior year.

A summary follows of the estimated change in revenue from each market during the fiscal years ended June 30:

2005

2004

Telecommunications

33 

%

34 

%

Data Products

5 

17 

Automotive

27 

9 

Consumer

(3)

22 

Industrial

2 

35 

The following table sets forth information on our net revenue by geographic regions for the periods indicated (in thousands):      

Year Ended

$ Change

% Change

Result as %

June 30,

Favorable

Favorable

of Net Revenue

2005

2004

(Unfavorable)

(Unfavorable)

2005

2004

Americas

$

701,470

$

686,129

$

15,341 

2.2 

%

27.5

%

30.5

%

Far East North

523,717

499,348

24,369 

4.9 

20.5

22.2

Far East South

769,218

623,619

145,599 

23.3 

30.2

27.8

Europe

504,453

385,051

119,402 

31.0 

19.8

17.1

Corporate and other

49,794

52,568

(2,774)

(5.3)

2.0

2.4

Total

$

2,548,652

$

2,246,715

$

301,937 

13.4 

%

100.0

%

100.0

%

The weakening of the U.S. dollar against certain foreign currencies, principally the yen and euro, increased revenue by approximately $72.1 million for fiscal 2005 over the prior year. The following table shows the effect on the change in net revenue from foreign currency translations to the U.S. dollar (in thousands):

Year Ended June 30, 2005

Local

Currency

Net

Currency

Translation

Change

Americas

$

13,011 

$

2,330

$

15,341 

Far East North

87 

24,282

24,369 

Far East South

137,501 

8,098

145,599 

Europe

84,851 

34,551

119,402 

Corporate and other

(5,656)

2,882

(2,774)

Net change

$

229,794 

$

72,143

$

301,937 

The change in revenue on a local currency basis is as follows:

Year Ended

Jun.30, 2005

Americas

1.9

%

Far East North

–

Far East South

22.0

Europe

22.0

Total

10.2

We continued our long-term commitment to reinvesting our profits in new product design and tooling to maintain and enhance our competitive position.  Revenue derived from the sale of new products we released within the last 36 months as a percentage of net revenue was as follows for fiscal years ended June 30:

2005

2004

Americas

22

%

18

%

Far East North

35

33

Far East South

36

28

Europe

27

24

Total

30

25

robust business environment in Japan, a recovering economy in Korea and a steady flow of new products stimulated sales.  

The most significant growth in fiscal 2005 for Japan came from advanced digital home entertainment products such as digital still cameras and portable audio players and from consumer electronics products such as game machines and plasma display panels for flat screen TVs.  Growth also came from hard disk drives and printers for the computer market.

During the year, the region further capitalized on its ability to design more compact, higher performance products for the sophisticated end of the mobile phone business in the telecommunications market.  The region is developing new connectors for third generation (3G) phones, which in Japan include such high-speed capabilities as TV and camera functionality.   As more global phone makers move to 3G technology, we believe the region is well positioned to grow.

Revenue to the industrial market increased, largely due to servo motor demand and customer investment in new semiconductor equipment.  Automotive design wins in Japan were offset by decreased demand from Korean automakers due to Korea’s sluggish economy.  In Korea, modest strength in the electronics industry and the overall connector market was offset by reduced sales of personal computers.

Revenue from integrated products grew at a faster rate than connector products in fiscal 2005.  To counter pricing pressure, most integrated products are manufactured in our plant in Dalian, China, which underwent a 60% capacity expansion in fiscal 2005.

Consistent with the migration of business from the Americas, Europe and Far East North regions to the Far East South region, customer revenue in the Far East South region increased 23.3% in fiscal 2005 in U.S. dollars, compared with the prior year.  This region is now our largest and fastest growing segment.  The revenue growth in this region was driven by strong demand across the consumer products and computer markets, as well as the mobile phone sector of the telecommunications market.  

Our sales in China increased by 23% as a result of customer demand supported by increased production capacity.  The biggest drivers of this growth were American, European and Japanese companies moving their design and production to China and greater penetration of Taiwanese multinational accounts.  We experienced strong demand in the mobile phone, notebook and desktop computer, consumer electronics and automotive markets.

Products used in mobile phones constitute nearly one-third of Far East South sales. Consumer electronics is another important market for the region.  During the year, new products were introduced to keep pace with the ongoing migration from analog to digital technology.  The region is coordinating opportunities with our Molex counterparts in Japan to have these products designed in the Far East North and produced in China.

In the data, networking and computing arena, we shifted our focus from telecommunications infrastructure equipment to the far stronger server market.  The region also grew in its traditional niche of personal computers and notebooks.

The automotive business in the Far East South region, although still in its early stages, is accelerating.  Our product pipeline grew to five times the 2004 level.  The Big 3 (Daimler Chrysler, Ford and General Motors) and their suppliers moving to China want local design, procurement and production, which the region can provide.  We plan to open a new plant in summer 2007 in Chengdu, considered the Detroit of China.  The new plant is expected to be our largest worldwide and manufacture products for the automotive industry and for other industries as well.  To offer customers a complete solution, the region maintains a balance between high precision, high technology manufacturing in Singapore and commoditized capability in China.

Customer revenue in Europe for fiscal 2005 increased 31.0% from the prior year in U.S. dollars.  Our Cinch automotive acquisition, which occurred during the fourth fiscal quarter of 2004, accounted for $30.2 million of the $119.4 million in growth.  The remaining revenue growth in this region was primarily driven by demand for mobile phones in the telecommunications market and products in the industrial market.

The European connector market has been growing, albeit at a single-digit pace.  The region is focused on the strongest markets that we believe are most likely to stay in Europe.  These include connectors and integrated products for industrial, medical and automotive applications.  Integrated products now account for approximately 25% of the region’s revenue.

During the year, the region won projects from customers engaged in land- and marine-based oil exploration, as well as manufacturers requiring our products for industrial controls, testing equipment and power management.  The region also increased its business with Nokia, the only major mobile phone company still producing in Europe.

Management believes that the trend for European automakers, at least for the next five years, will be locally based and will rely on local distribution.  We believe the region is in a good position to fulfill this need with a broad connector product offering and a robust new product pipeline.

Key initiatives in the region include improving capacity utilization, shifting more manufacturing to the region’s Eastern European locations, and using Six Sigma methodology to eliminate waste and enhance quality.  Additionally, we are ahead of schedule with introducing lead-free products and expect that we will deliver well in advance of the European compliance deadline.

We were not able to fully offset the negative impact of price erosion discussed earlier with the leverage on the higher sales volume.  The gross profit margin was also negatively impacted by higher raw material costs.  We estimate that we paid approximately $17 million more for metal alloys (primarily copper), gold and plastic resins in the current year compared with the same period last year.   Although we implemented offsetting price increases to our distribution sales channel, we have not been as successful with the majority of our business.  Our client mix skews toward large global customers and industries that make raising prices more difficult. 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.  The gross profit margin was negatively impacted as the yen and euro strengthened relative to the U.S. dollar.  We estimate this currency transaction impact to be approximately $6.5 million compared with the prior year.

Also included in the results for fiscal 2005 are corrections of errors that reduced gross profit by $8.0 million.  See Note 3 to the “Notes to Consolidated Financial Statements” for further discussion.

The Cinch acquisition added incremental selling, general and administrative expenses of approximately $16.0 million as compared with the prior year.  The currency translation impact further increased selling, general and administrative expenses by approximately $16.9 million.  Also, in connection with the resignation of our former auditor, responses to SEC comment inquiries, and internal investigations authorized by our Audit Committee, we estimate that legal, accounting and other costs during fiscal 2005 increased by approximately $9.9 million.  Research and development expenditures for the year increased $14.6 million to $133.6 million, or 5.2% of net revenue, compared with 5.3% of net revenue last year.

Research and development expenditures in fiscal 2005 contributed to the release of approximately 384 new products during the year.  In fiscal 2005, 30% of net revenue was derived from the sale of products we released within the last three years. We continued our long-term commitment to reinvesting our profits in new product design and tooling to maintain and enhance our competitive position.  We were granted 775 new patents during the year, an increase of 36% over the prior year.

Also included in the results for fiscal 2005 are corrections of errors that increased selling, general and administrative expense by $1.5 million.  See Note 21 to the “Notes to Consolidated Financial Statements” for further discussion.

We recorded a pre-tax restructuring charge of $27.9 million in fiscal 2005. We did not have material restructuring activity during fiscal 2004.

We also recorded a pre-tax non-cash goodwill impairment charge of $22.9 million, during fiscal 2005.  We did not record any material impairments during fiscal year 2004.

Total other income was $19.5 million for fiscal 2005, compared with $18.7 million in the prior year.  Fiscal 2004 results included a $10.4 million gain resulting from an IPO completed by an affiliate and the sale of stock of this affiliate, as well as a loss on investment of $5.0 million.

Interest income, net of interest expense, was $6.4 million for fiscal 2005 compared with $3.7 million in the prior year period due to both higher cash balances held in the current year as well as higher interest rates.

The effective tax rate was 28.8% for fiscal 2005 compared with 26.5% in fiscal 2004.  The increase in the effective tax rate from the prior year reflects the charge for the goodwill impairment we recognized in fiscal 2005 and an increase in the valuation allowance for net operating losses in foreign countries for which no tax benefit was recognized.  These items were offset to some extent by the favorable resolution of various tax matters with tax authorities as well as the correction of accruals for income tax exposures and other income tax adjustments (see Note 11 to the “Notes to Consolidated Financial Statements”).  We also reflected a tax benefit related to the recording of state deferred taxes in fiscal 2005.

Our order backlog on June 30, 2005 was approximately $259.5 million, a decline of $73.1 million compared with $332.6 million at June 30, 2004.  The decrease in backlog was partially attributable to an increase in distribution bookings in June 2004 of approximately $36 million placed in advance of a price increase.  In addition, during fiscal 2005 we provided vendor-managed inventory programs to customers.  Under this method, the new order and shipment occur simultaneously and without impacting reported backlog.  New orders for fiscal 2005 were $2,489.8 million, compared with $2,366.0 million last year.

Our financial position remains strong and we continue to be able to fund capital projects and working capital needs principally out of operating cash flows and cash reserves.  Cash, cash equivalents and marketable securities totaled $485.5 million and $497.6 million at June 30, 2006 and 2005, respectively.  In the first quarter of fiscal 2007, we expect to utilize a portion of our existing cash to fund the acquisition of Woodhead.  Our long-term financing strategy is to primarily rely on internal sources of funds for investing in plant, equipment and acquisitions.  Management believes that our liquidity and financial flexibility are adequate to support both current and future growth.  We have historically used external borrowings only when a clear financial advantage exists. Long-term debt and obligations under capital leases at June 30, 2006 totaled $8.8 million.  We have available lines of credit totaling $123.0 million at June 30, 2006.  

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

2006

2005

2004

Cash provided from operating activities

$

443,081 

$

430,835 

$

292,031 

Cash used for investing activities

(240,779)

(286,232)

(158,358)

Cash used for financing activities

(189,039)

(75,689)

(86,108)

Effect of exchange rate changes on cash

9,796 

6,411 

7,890 

Net increase in cash

$

23,059 

$

75,325 

$

55,455 

Cash provided from operating activities increased by $12.2 million for fiscal 2006 from fiscal 2005 primarily due to higher net income as adjusted for non-cash items in fiscal 2006 offset by an increase in working capital.  The working capital increase was primarily due to the revenue growth for fiscal 2006 as compared with the prior year and reflects severance payments approximating $17.8 million in connection with the restructuring costs recorded in fiscal 2005.  Working capital is defined as current assets minus current liabilities.

Cash provided from operating activities increased by $138.8 million for fiscal 2005 from fiscal 2004 due mainly to higher net income as adjusted for non-cash items in fiscal 2005 with steady working capital levels.

Capital expenditures increased $45.9 million for fiscal 2006 compared with fiscal 2005 in order to provide increased capability in the Far East North region and increased capability and capacity in the Americas and Far East South regions. Capital expenditures increased $41.1 million for fiscal 2005 compared with fiscal 2004 primarily due to investments in increasing capability in the Far East North region. During 2005, we also sold our investment in an affiliate and generated cash from this transaction of $14.1 million.

Cash flow from investing activities also includes proceeds from marketable securities in the net amount of $37.3 million in fiscal 2006 and $67.0 million in fiscal 2004 and investments in marketable securities in the net amount of $83.5 million in fiscal 2005. Our marketable securities generally have a term of less than one year. Our uses of or investments in marketable securities are primarily based on our uses of cash in operating, other investing and financing activities.

Cash was used primarily for the payment of dividends and the purchase of treasury stock.  We purchased shares of Common Stock and Class A Common Stock totaling 6.0 million shares, 2.4 million shares and 2.7 million shares during fiscal years 2006, 2005 and 2004, respectively. The aggregate cost of these purchases was $165.3 million, $58.2 million and $70.2 million in fiscal years 2006, 2005 and 2004, respectively.

Our Board of Directors previously authorized the repurchase of up to an aggregate $250.0 million of common stock though December 31, 2006. Approximately $50.1 million was remaining under the authorization as of June 30, 2006.

We have a strong cash balance and cash flow and a low level of debt.  We believe at this time that share repurchases are a good investment as compared with investing our cash in short-term money instruments or marketable securities, particularly with the current low interest rates.  We also use shares repurchased to replenish stock used for exercises of employee stock options and employee stock awards.

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 impact our cash and borrowing requirements.

The following table summarizes our significant contractual obligations at June 30, 2006, and the effect such obligations are expected to have on liquidity and cash flows in future periods (in thousands).

 Less Than

 1–3

 3–5

 More Than

 Total

 1 Year

 Years

 Years

 5 Years

Operating lease obligations

$

24,061

$

10,847

$

6,562

$

2,802

$

3,850

Capital lease obligations

4,306

2,555

1,661

73

17

Other long–term liabilities

13,117

533

2,108

2,238

8,238

Debt obligations

8,061

968

2,193

4,732

168

Tota1 ⁽¹⁾

$

49,545

$

14,903

$

12,524

$

9,845

$

12,273

⁽¹⁾ Total does not include contractual obligations recorded on the balance sheet as current liabilities or certain purchase obligations, as discussed below.

Contractual obligations for purchases of goods or services are defined as agreements that are enforceable and legally binding on us and that specify all significant terms, including fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction.  Our purchase orders are based on current manufacturing needs and are fulfilled by vendors within short time horizons.  In addition, some purchase orders represent authorizations to purchase rather than binding agreements.  We do not generally have significant agreements for the purchase of raw materials or other goods specifying minimum quantities and set prices that exceed expected requirements for three months.  Agreements for outsourced services generally contain clauses allowing for cancellation without significant penalty, and are therefore not included in the table above.

The expected timing of payments of the obligations above is estimated based on current information.  Timing of payments and actual amounts paid may be different, depending on the time of receipt of goods or services, or changes to agreed-upon amounts for some obligations. 

An off-balance sheet arrangement is any contractual arrangement involving an unconsolidated entity under which a company has (i) made guarantees, (ii) a retained or a contingent interest in transferred assets, (iii) any obligation under certain derivative instruments or (iv) any obligation under a material variable interest in an unconsolidated entity that provides financing, liquidity, market risk, or credit risk support to a company, or engages in leasing, hedging, or research and development services within a company.

We do not have material exposure to any off-balance sheet arrangements.  We do not have any unconsolidated special purpose entities.

We are subject to market risk associated with changes in foreign currency exchange rates, interest rates and certain commodity prices.

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.

We also monitor our foreign currency exposure in each country and implement strategies to respond to changing economic and political environments.  Examples of these strategies include the prompt payment of intercompany balances utilizing a global netting system, the establishing of contra-currency accounts in several international subsidiaries, development of natural hedges and use of foreign exchange contracts to protect or preserve the value of cash flows.  No material foreign exchange contracts were in use at June 30, 2006 and 2005.

We have implemented a formalized treasury risk management policy that describes the procedures and controls over derivative financial and commodity instruments.  Under the policy, we do not use derivative financial or commodity instruments for speculative or trading purposes, and the use of such instruments is subject to strict approval levels by senior management.  Typically, the use of derivative instruments is limited to hedging activities related to specific foreign currency cash flows and net receivable and payable balances.

The translation of the financial statements of the non-North American operations is impacted by fluctuations in foreign currency exchange rates.  The increase in consolidated net revenue and income from operations was impacted by the translation of our international financial statements into U.S. dollars resulting in decreased net revenue of $30.8 million and decreased income from operations of $10.2 million for 2006, compared with the estimated results for 2006 using the average rates for 2005.

Our $152.7 million of marketable securities at June 30, 2006 are principally debt instruments that generate interest income for us on temporary excess cash balances.  These instruments contain embedded derivative features that enhance the liquidity of the portfolio by enabling us to liquidate the instrument prior to the stated maturity date.  Our exposure related to derivative instrument transactions is, in the aggregate, not material to our financial position, results of operations or cash flows.

Interest rate exposure is limited to our marketable securities and long-term debt.  We do not actively manage the risk of interest rate fluctuations.  However, such risk is mitigated by the relatively short-term nature of our investments (less than 12 months) and the fixed-rate nature of our long-term debt.

Due to the nature of our operations, we are not subject to significant concentration risks relating to customers, products or geographic locations.

We monitor the environmental laws and regulations in the countries in which we operate.  We have implemented an environmental program to reduce the generation of potentially hazardous materials during our manufacturing process and believe we continue to meet or exceed local government regulations.

Item 8.  Financial Statements and Supplementary Data

Molex Incorporated

Page

Consolidated Balance Sheets

39 

Consolidated Statements of Income

40 

Consolidated Statements of Cash Flows

41 

Consolidated Statements of Stockholders’ Equity

42 

Notes to Consolidated Financial Statements

43 

Report of Independent Registered Public Accounting Firm

63 

Report of Independent Registered Public Accounting Firm on Internal Control

        Over Financial Reporting

64 

Molex Incorporated

(in thousands, except per share data)

June 30,

2006

2005

Current assets:

Cash and cash equivalents

 $

332,815 

 $

309,756 

Marketable securities

152,728 

187,835 

Accounts receivable, less allowances

of $26,513 in 2006 and $20,293 in 2005

660,665 

539,533 

Inventories

347,312 

290,100 

Deferred income taxes

19,054 

16,518 

Prepaid expenses

35,659 

30,321 

Total current assets

1,548,233 

1,374,063 

Property, plant and equipment, net

1,025,852 

984,237 

Goodwill

149,458 

143,872 

Non-current deferred income taxes

129,292 

126,987 

Other assets

120,406 

98,513 

Total assets

 $

2,973,241 

 $

2,727,672 

Current liabilities:

Short-term loans and current portions of long-term debt

and capital leases

 $

3,312 

 $

5,771 

Accounts payable

305,876 

252,370 

Accrued expenses:

Salaries, commissions and bonuses

92,730 

73,652 

Other

96,660 

85,407 

Income taxes payable

96,234 

52,304 

Total current liabilities

594,812 

469,504 

Other non-current liabilities

12,987 

10,788 

Accrued pension and postretirement benefits

75,055 

67,063 

Long-term debt and obligations under capital leases

8,815 

9,975 

Minority interest in subsidiaries

882 

2,078 

Total liabilities

692,551 

559,408 

Commitments and contigencies

Stockholders’ equity:

Common Stock, $0.05 par value; 200,000 shares authorized;

111,297 shares issued at 2006 and 110,814 shares issued at 2005

5,565 

5,541 

Class A Common Stock, $0.05 par value; 200,000 shares authorized;

106,598 shares issued at 2006 and 104,998 shares issued at 2005

5,330 

5,250 

Class B Common Stock, $0.05 par value; 146 shares authorized;