Molex (MOLX)

 

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

 

 

 

 

Form 10-K

 

 

Commission File Number 0-07491

 

 

 

 

MOLEX INCORPORATED

(Exact name of registrant as specified in its charter)

 

 

2222 Wellington Court, Lisle, Illinois 60532

(Address of principal executive offices)

Registrant’s telephone number, including area code:

(630) 969-4550

 

 

 

 

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

 

 

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

 

 

 

 

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

 

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o

 

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

 

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

 

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

 

 

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

 

The aggregate market value of the voting and non-voting shares (based on the closing price of these shares on the NASDAQ Global Select Market on December 31, 2008) held by non-affiliates was approximately $1.8 billion.

 

On July 31, 2009, the following numbers of shares of the Company’s common stock were outstanding:

 

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the Proxy Statement for the Annual Meeting of Stockholders, to be held on October 30, 2009 are incorporated by reference into Part III of this annual report on Form 10-K.

 

 

TABLE OF CONTENTS

 

 

Molex Web Site

 

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

 

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

 

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

PART I

 

 

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

 

We are one of the world’s largest manufacturers of electronic connectors in terms of revenue. Net revenue was $2.6 billion for fiscal 2009. We operated 43 manufacturing locations located in 18 countries, and employed 25,240 people worldwide as of June 30, 2009.

 

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 Connector Industry

 

The global connector industry is highly competitive and fragmented and is estimated to represent approximately $36 billion in revenue for fiscal 2009. The industry has grown at a compounded annual rate of 6% over the past 25 years, but industry sales are expected to decline 25% in calendar year 2009.

 

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:

 

 

Markets and Products

 

The approximate percentage of our net revenue by market for fiscal 2009 is summarized below:

 

 

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 a wide range of interconnect devices for copiers, printers, scanners and projectors.

 

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 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 been awarded contracts 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 2.00 mm 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.

 

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 example, our Very High-Density Metric (VHDM) connector system to help assure signal integrity and overall reliability in high-speed applications such as chip testers.

 

Our industrial product line includes industrial networks and connectivity as well as industrial communication electronics and software. In addition, we offer compact robotic connectors and I/O connectors for servo motors, as well as identified factory uses for products we developed for other industries.

 

Automotive.  In the automotive market, we believe our strengths include new product development expertise, entertainment, safety and convenience product 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.

 

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. There is 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 are used in an increasing number of military applications.

Business Objectives and Strategies

 

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 improve 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:

 

 

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

 

 

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

Competition

 

We compete with many companies in each of our product categories. 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 Electronics Ltd. There are also 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 54% 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.

 

Customers, Demand Creation and Sales Channels

 

We sell products directly to OEMs, contract manufacturers and distributors. Our customers include global companies such as Arrow, Cisco, Dell, Ford, General Motors, Hewlett Packard, IBM, Matsushita, Motorola and Nokia. No customer accounted for more than 10% of net revenues in fiscal 2009, 2008 or 2007.

 

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 years 2009, 2008 and 2007.

 

In fiscal 2009, the share of net revenue from the different regions was approximately as follows:

 

 

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 26% of our net revenue in fiscal 2009.

 

We seek to provide customers one-to-one service tailored to their business. Our engineers work collaboratively with customers, often with 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 25 development centers in 15 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 operating segment appears in Note 18 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 $159.2 million in fiscal 2009, $163.7 million in fiscal 2008 and $159.1 million in fiscal 2007. We believe this investment, approximating 5-6% of net revenue, is among the highest level relative to the largest participants in the industry and helps us achieve a competitive advantage.

 

We strive to provide customers with the most advanced interconnection products through intellectual property development and participation in industry standards committees. Our engineers are active in many of these committees, helping give us a voice in shaping the technologies of the future. In fiscal 2009, we commercialized approximately 194 new products and received 413 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 and Singapore.

 

Manufacturing

 

Our core manufacturing expertise includes molding, stamping, plating and assembly operations. We use state of the art plastic injection molding machines and metal stamping and forming presses. We have created new processes to meet the ongoing challenge of manufacturing smaller 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, flexible circuit and harness assembly for our integrated products operations, which build devices that leverage our connector content. Because integrated products require labor-intensive assembly, we operate low-cost manufacturing centers in China, India, Mexico, Poland, and Thailand.

 

Continuous improvements achieved through a global lean/six sigma ongoing program have reduced our manufacturing costs. A trend of fewer but larger factories, such as our one million square foot (approximately 92 thousand square meters) facility in Chengdu, China, provide increasing economies of scale and efficiencies while also reaching record levels of on time delivery performance and quality.

 

Raw Materials

 

The principal raw materials that we purchase for the manufacture of our products include plastic resins for molding, metal alloys (primarily copper based) for stamping and gold and palladium salts for

use in the plating process. We also purchase molded and stamped components and connector assemblies. Most materials and components used in our products are available from several sources. To achieve economies of scale, we concentrate purchases from a limited number of suppliers, and therefore in the short term may be dependent upon certain suppliers to meet performance and quality specifications and delivery schedules. We 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, 2009 was approximately $253.0 million compared with backlog of $436.5 million at June 30, 2008. 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.

 

Employees

 

As of June 30, 2009, we had approximately 25,240 people working for us worldwide. Approximately 17,934 of these people were located in low cost regions. We believe that our relations with people working for us are satisfactory.

 

Acquisitions and Investments

 

Our strategy to provide a broad range of connectors requires a wide variety of technologies, products and capabilities. The rapid pace of technological development in the connector industry and the specialized expertise required in different markets make it difficult for a single company to organically develop all of the required products. Though a significant majority of our growth has come from internally developed products, we will seek to make future acquisitions or investments where we believe we can stimulate the development of, or acquire, new technologies and products to further our strategic objectives and strengthen our existing businesses. Information regarding our acquisitions appears in Note 4 of the Notes to Consolidated Financial Statements.

 

Intellectual Property

 

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

 

Environmental Matters

 

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

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 short and long-term targets to continually improve our environmental performance.

 

The manufacture, assembly and testing of our products are subject to a broad array of laws and regulations, including restrictions on the use of hazardous materials. We have a program for compliance with the European Union RoHS and WEEE Directives, the China RoHS laws and similar laws.

Executive Officers

 

Our executive officers as of July 31, 2009 are set forth in the table below.

 

 

 

 

Code of Business Conduct and Ethics

 

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

 

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

 

 

Forward-looking Statements

 

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 them 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 filing of this report, whether as a result of new information, future events, changes in assumptions, or otherwise.

 

Risk Factors

 

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

 

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

 

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

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

 

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

 

We are dependent on the success of our customers.

 

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

 

We are subject to continuing pressure to lower our prices.

 

Over the past several years we have experienced, and we expect to continue to experience, pressure to lower our prices. In the last three years, we have experienced annual price erosion averaging from 3.8% to 4.0%. In order to maintain our margins, we must continue to reduce our costs by similar amounts. Continuing pressures to reduce our prices could have a material adverse effect on our financial condition, results of operations and cash flows.

 

We face rising costs of commodity materials.

 

The cost and availability of certain commodity materials used to manufacture our products, such as plastic resins, copper-based metal alloys, gold and palladium salts, molded and stamped components and connector assemblies, is critical to our success. The price of many of these raw materials, including copper and gold, has increased in recent years, and continues to fluctuate. In addition, many of these commodity materials are produced in a limited number of regions around the world or are only available from a limited number of suppliers. Volatility in the prices and shortages of such materials may result in increased costs and lower operating margins if we are unable to pass such increased costs through to our customers. Our results of operation, financial conditions and cash flows may be materially and adversely affected if we have difficulty obtaining these commodity materials, the quality of available commodity materials deteriorates, or there are continued significant price increases for these commodity materials. 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 forecast 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 face intense competition in our markets.

 

Our markets are highly competitive and we expect that both direct and indirect competition will increase in the future. Our overall competitive position depends on a number of factors including the price, quality and performance of our products, the level of customer service, the development of new technology and our ability to participate in emerging markets. Within each of our markets, we encounter direct competition from other electronic components manufacturers and suppliers ranging in size from large, diversified manufacturers to small, highly specialized manufacturers. Competition may intensify from various U.S. and non-U.S. competitors and new market entrants, some of which may be

our current customers. Our markets have continued to become increasingly concentrated and globalized in recent years, and our major competitors have significant financial resources and technological capabilities. Increased competition may result in price reductions, reduced margins or loss of market share, any of which could materially and adversely affect our business, operating results and financial condition.

 

We are dependent on new products.

 

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

 

We may need to license new technologies to respond to technological change and these licenses may not be available to us on terms that we can accept or may materially change the gross 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 face manufacturing challenges.

 

The volume and timing of sales to our customers may vary due to: variation in demand for our customers’ products; our customers’ attempts to manage their inventory; design changes; changes in our customers’ manufacturing strategy; and 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.

 

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

 

From time to time, we have underutilized our manufacturing lines. This excess capacity means we incur increased fixed costs in our products relative to the revenues we generate, which could have an

adverse effect on our results of operations, particularly during economic downturns. If we are unable to improve utilization levels at these facilities and correctly manage capacity, the increased expense levels will have an adverse effect on our business, financial condition and results of operations.

 

We face industry consolidation.

 

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

 

We depend on industries exposed to rapid technological change.

 

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

 

We face the possibility that our gross margins may decline.

 

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

 

We face risks associated with inventory.

 

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

 

We may encounter problems associated with our global operations.

 

For fiscal year 2009, 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:

 

 

We are exposed to fluctuations in currency exchange rates.

 

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. Approximately 73% of our net sales for fiscal year 2009 were invoiced in currencies other than the U.S. dollar, and we expect revenues from non-U.S. markets to continue to represent a significant portion of our net revenue. Price increases caused by currency exchange rate fluctuations may make our products less competitive or have an adverse effect on our margins. Our international revenues and expenses generally are derived from sales and operations in currencies other than the U.S. dollar. Accordingly, when the U.S. dollar strengthens in relation to the currencies of the countries in which we sell our products, our U.S. dollar reported net revenue and income will decrease. Currency exchange rate fluctuations may also disrupt the business of our suppliers by making their purchases of raw materials more expensive and more difficult to finance. We mitigate our foreign currency exchange rate risk principally through the establishment of local production facilities in the markets we serve. This creates a “natural hedge” since purchases and sales within a specific country are both denominated in the same currency and therefore no exposure exists to hedge with a foreign exchange forward or option contract (collectively, “foreign exchange contracts”). Natural hedges exist in most countries in which we operate, although the percentage of natural offsets, as compared with offsets that need to be hedged by foreign exchange contracts, will vary from country to country. To reduce our exposure to fluctuations in currency exchange rates when natural hedges are not effective, we may use financial instruments to hedge U.S. dollar and other currency commitments and cash flows arising from trade accounts receivable, trade accounts payable and fixed purchase obligations.

 

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

 

We may find that our products have quality issues.

 

The fabrication of the products we manufacture is a complex and precise process. Our customers specify quality, performance and reliability standards. If flaws in either the design or manufacture of our products were to occur, we could experience a rate of failure in our products that could result in

significant delays in shipment and product re-work or replacement costs. Although we engage in extensive product quality programs and processes, these may not be sufficient to avoid product failures, which could cause us to:

 

 

All of which could negatively affect our financial condition and results of operations.

 

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

 

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

 

 

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

 

We face risks arising from reorganizations of our operations.

 

In 2007, we announced plans to realign part of our manufacturing capacity in order to reduce costs and better optimize plant utilization. We recorded restructuring related charges of $219.6 million since we announced the plans, and we expect total charges to range from $240 to $250 million. The process of restructuring entails, among other activities, moving production between facilities, reducing staff levels, realigning our business processes, closing facilities, and reorganizing our management. During the course of executing the restructuring, we could incur material non-cash charges such as write-downs of inventories or other tangible assets. We test our goodwill and other intangible assets for impairment annually or when an event occurs indicating the potential for impairment. If we record an impairment charge as a result of this analysis, it could have a material impact on our results of operations. We continue to evaluate our operations and may need to undertake additional

restructuring initiatives in the future. If we incur additional restructuring related charges, our financial condition and results of operations may be adversely affected.

 

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

 

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

 

Our future success depends partly on the continued contribution of our key employees, including executive, engineering, sales, marketing, manufacturing and administrative personnel. We 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 various laws and government regulations.

 

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 our intellectual property rights.

 

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

We could suffer significant business interruptions.

 

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

 

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

 

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

 

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

 

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

 

 

Changes in the mix of these items and other items may cause our effective tax rate to fluctuate between periods, which could have a material adverse effect on our results of operations and financial condition. Recently, the Obama administration proposed legislation that would change how U.S. multinational corporations are taxed on their foreign income. If such legislation is enacted, it may have a material adverse impact to our tax rate and in turn, our profitability.

 

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

 

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

 

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

 

Some provisions of our certificate of incorporation and bylaws may deter or prevent a takeover attempt, including a takeover that might result in a premium over the market price for our Common Stock and Class A Common Stock. Our governing documents establish a classified board, require shareholders to give advance notice prior to the annual meeting if they want to nominate a candidate for director or present a proposal, and contain a number of provisions subject to supermajority vote. In

addition, the Board may issue up to 25,000,000 shares of preferred stock without action by our stockholders, which could be used to make it more difficult and costly to acquire our company.

 

 

None.

 

 

We own and lease manufacturing, design, warehousing, sales and administrative space in locations around the world. The leases are of varying terms with expirations ranging from fiscal 2009 through fiscal 2018. The leases in aggregate are not considered material to the financial position of Molex.

 

As of June 30, 2009, we owned or leased a total of approximately 9.2 million square feet of space worldwide. We have vacated or plan to vacate several buildings in France, Germany, Ireland and Slovakia and are holding these buildings and related assets for sale. We own 91% of our manufacturing, design, warehouse and office space and lease the remaining 9%. Our manufacturing plants are equipped with machinery, most of which we own and which, in part, we developed to meet the special requirements of our manufacturing processes. We believe that our buildings, machinery and equipment are well maintained and adequate for our current needs.

 

Our principal executive offices are located at 2222 Wellington Court, Lisle, Illinois, United States of America. Molex owns 43 manufacturing locations, 18 of which are located in North America and 25 of which are located in other countries. A listing of the locations of our principal manufacturing facilities by region is presented below:

 

 

 

We have no material legal proceedings.

 

 

None.

PART II

 

 

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. Molex Class B Common Stock is not publicly traded.

 

The number of stockholders of record at June 30, 2009 was 2,381 for Common Stock, 8,302 for Class A Common Stock and 14 for Class B Common Stock.

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

 

 

 

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

 

 

On August 1, 2008, our Board of Directors authorized the purchase of up to $200.0 million of Common Stock and/or Class A Common Stock during the period ending June 30, 2009. Share purchases of Molex Common and/or Class A Common Stock for the quarter ended June 30, 2009 were as follows (in thousands, except price per share data):

 

 

 

 

We did not repurchase any shares under this plan during the six months ended June 30, 2009 as we temporarily suspended the program. The dollar value of shares not purchased under the plan was $123.7 million when the plan expired on June 30, 2009.

During the quarter ended June 30, 2009, 71,888 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 $1.1 million.

 

Descriptions of our Common Stock appear under the caption “Molex Stock” in our 2009 Proxy Statement and in Note 15 of the Notes to Consolidated Financial Statements.

 

Performance Graph

 

The performance graph set forth below shows the value of an investment of $100 on June 30, 2004 in each of Molex Common Stock, Molex Class A Common Stock, the S&P 500 Index, and a Peer Group Index. The Peer Group Index includes 50 companies (including Molex) classified in the Global Sub-industry Classifications “Electronic Equipment Manufacturers,” “Electronic Manufacturing Services,” and “Technology Distributors.” All values assume reinvestment of the pre-tax value of dividends paid by Molex and the companies included in these indices, and are calculated as of June 30 of each year. The historical stock price performance of Molex’s Common Stock and Class A Common Stock is not necessarily indicative of future stock price performance.

 

Comparison of Five-Year Cumulative Total Return
(Value of Investment of $100 on June 30, 2004)
Among Molex Incorporated, the S&P 500 Index
and a Peer Group

 

 

 

 

The material in this performance graph is not soliciting material, is not deemed filed with the Commission, and is not incorporated by reference in any filing of the Company under the Securities Act or the Exchange Act, whether made on, before or after the date of this filing and irrespective of any general incorporation language in such filing.

 

Molex Incorporated

 

Five-Year Financial Highlights Summary

(In thousands, except per share data)

 

 

 

 

 

See Notes 5 and 8 of the Notes to Consolidated Financial Statements for a discussion of our restructuring costs and goodwill impairments.

 

 

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

 

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

 

Overview

 

Our Business

 

Our core business is the manufacture and sale of electronic components. Our products are used by a large number of leading original equipment manufacturers (OEMs) throughout the world. We design, manufacture and sell more than 100,000 different products including terminals, connectors, planar cables, cable assemblies, interconnection systems, backplanes, integrated products and mechanical and electronic switches. 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, industrial and automotive markets. Our products are used in a wide range of applications including desktop and notebook computers, computer peripheral equipment, mobile phones, digital electronics such as cameras and flat panel display televisions, automobile engine control units and adaptive braking systems, factory robotics and diagnostic equipment.

 

We believe that our sales mix has growth prospects in each of our product markets. Net revenue by market can fluctuate based on various factors including new technologies within the industry, composition of customers and changes in their revenue levels and new products or model changes that we or our customers introduce. The following table sets forth, for fiscal years 2009, 2008 and 2007 the percentage relationship to net revenue of our sales by primary product markets.

 

In fiscal 2009, we reclassified our net revenue by market to reflect our current estimate of how revenue to distributors and contract manufacturers reach the end market. Previously reported net revenue by market for fiscal 2008 and 2007 was reclassified to reflect this change.

 

The following table sets forth, for fiscal years 2009, 2008 and 2007, the percentage relationship to net revenue of our sales by geographic region:

 

 

The following table sets forth, for fiscal years 2009, 2008 and 2007, the percentage relationship to net revenue of our sales by reporting segment:

 

 

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

 

As of June 30, 2009, we operated 43 manufacturing locations, located in 18 countries throughout the Americas, Europe and Asia-Pacific regions. In fiscal 2009, 54.4% of our revenue was derived from sales in the Asia-Pacific region. We expect greater economic growth in Asia, particularly in China, than in the Americas and Europe. We continue to move our manufacturing operations from the United States and Western Europe to lower cost regions. Approximately 52% of our manufacturing capacity is in lower cost areas such as China, Eastern Europe and Mexico. In addition, reduced trade barriers, lower freight cost and improved supply chain logistics have reduced our need to 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. We believe that our business is positioned to benefit from this strategy.

 

Business Environment

 

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

 

Our financial results are influenced by factors in the markets in which we operate and by our ability to successfully execute our business strategy. Marketplace factors include competition for customers, raw material prices, product and price competition, economic conditions in various geographic regions, foreign currency exchange rates, interest rates, changes in technology, fluctuations in customer demand, patent and intellectual property issues, litigation results and legal and regulatory developments. We expect that the marketplace environment will remain highly competitive. Our ability to execute our business strategy successfully will require that we meet a number of challenges, including our ability to accurately forecast sales demand and calibrate manufacturing to

such demand, manage rising raw material costs, develop, manufacture and successfully market new and enhanced products and product lines, control operating costs, and attract, motivate and retain key personnel to manage our operational, financial and management information systems.

 

Non-GAAP Financial Measures

 

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

 

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

 

Financial Highlights

 

Net revenue for fiscal 2009 of $2.6 billion decreased 22.4% from fiscal 2008. Organic net revenue declined 23.1% in fiscal 2009 compared with 2008. We recognized a net loss of $321.3 million in fiscal 2009 compared with net income of $215.4 million in fiscal 2008. Fiscal 2009 results include goodwill impairment charges of $264.1 million and restructuring costs of $131.3 million ($99.0 million after-tax), and intangible asset impairment costs of $16.3 million. Restructuring charges of $31.2 million ($21.0 million after-tax) were recorded in fiscal 2008. On June 25, 2009, we entered into a $195.0 million committed, unsecured, three-year revolving credit facility with an outstanding balance of $25.0 million as of June 30, 2009, which was used to pay down other unsecured debt balances.

Results of Operations

 

The following table sets forth, for fiscal years 2009, 2008 and 2007, certain consolidated statements of operations data as a percentage of net revenue (dollars in thousands):

 

 

Net Revenue

 

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

 

 

Revenue declined significantly during fiscal 2009 across all of the primary markets due to deterioration in global economic conditions starting in November 2008 and subsequent inventory reductions in the supply chain, which decreased demand for components and our production levels.

 

The increase in net revenue attributed to currency translation in fiscal 2009 compared with 2008 was principally due to the strengthening Japanese yen. The increase in net revenue attributed to currency translation in fiscal 2008 was principally due to the general weakening of the U.S. dollar

against other currencies. The following tables show the effect on the change in geographic net revenue from foreign currency translations to the U.S. dollar (in thousands):

 

 

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

 

 

We sell our products in five primary markets. The decline in organic revenue due to poor global economic conditions has impacted all of our market areas. Of our five primary markets, the automotive market has experienced the sharpest decline in demand during fiscal 2009 as consumers are not purchasing as many new automobiles in the current economic environment. Concerns about the global economy have also impacted our industrial market and telecommunications market for mobile devices as demand continues to be lower than in fiscal 2008. The following table sets forth, for fiscal years 2009 and 2008, changes in net revenue from each of our five primary product markets from the prior fiscal year:

 

 

Telecommunications market revenue decreased in fiscal 2009 compared with 2008 due to lower demand for mobile products and supply chain inventory reductions. This decline is partially offset by higher demand for smartphones and our customers’ introduction of new smartphone models, many of which include our connector and antenna products. Telecommunications market revenue increased in fiscal 2008 compared with 2007 due to higher demand for our networking products.

 

Consumer market revenue decreased in home entertainment and home appliance products in fiscal 2009. These declines were partially offset by increased demand for our products used in electronic gaming equipment. Demand increased in fiscal 2009 for our components in portable navigation devices and flat panel display televisions, although the increased demand in flat panel display televisions was offset by cost pressures and price erosion. Consumer market revenue increased in fiscal 2008 compared with 2007 due to higher demand for our connectors used in home entertainment products.

 

Data market revenue for fiscal 2009 decreased from 2008 due to lower customer demand for storage networking products and computer peripherals due to the global economic uncertainties. These declines were partially offset by increased demand due to our customers’ release of lower end computers and notebook computers. Data market revenue increased in fiscal 2008 compared with

2007 due to our customers’ releases of new high-end products and their expansion in new optical and high speed technologies, for which we offered a strong product line.

 

The industrial market revenue for fiscal 2009 decreased compared with 2008 due to declines in residential and commercial construction, lower demand in the industrial communications business worldwide, particularly in North America and Europe, and lower demand for factory automation due to worldwide excess manufacturing capacity. Declines in non-residential, commercial and industrial construction had a negative impact on temporary power and lighting products used on jobsites. The global decline in the manufacturing economy resulted in the delay or cancellation of many industrial automation projects. The industrial market declined in fiscal 2008 compared with 2007 due largely to our customer enhancing its product line for a cable assembly product.

 

Automotive market revenue declined in fiscal 2009 compared with 2008 due to a decrease in demand related to poor economic conditions during fiscal 2009. The number of automobiles manufactured by our customers decreased in fiscal 2009 as automotive manufacturing companies’ reduced inventories in the automotive supply chain. There were a number of extended closings and bankruptcy filings by automotive manufacturers and automotive suppliers during fiscal 2009 that negatively impacted our revenue. The automobile market began to show signs of stabilization late in fiscal 2009 as new car sales increased in Western Europe due to government incentives. Revenue in the U.S. automotive market was higher in fiscal 2008 compared with 2007 as the automotive market benefited from new products reflecting higher electronic content in automobiles.

 

Gross Profit

 

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

 

The following table sets forth gross profit and gross margin for fiscal years 2009, 2008 and 2007 (dollars in thousands):

 

 

The reduction in gross margin during fiscal 2009 was primarily due to lower absorption from the rapid drop in our production caused by the poor global economic conditions. While we were unable to reduce factory-related costs as quickly as production declined, the expansion of our restructuring program should improve our gross margins over time. The reduction in gross margin in fiscal 2008 compared with 2007 was primarily related to higher commodity cost and price erosion partially offset by general cost reductions, a portion of which is related to restructuring activities.

 

A significant portion of our material cost consists of copper and gold costs. We purchased approximately 16 million pounds of copper and approximately 87,000 troy ounces of gold in fiscal 2009 compared with approximately 25 million pounds of copper and approximately 135,000 troy ounces of gold in fiscal 2008 and 2007. The following table sets forth the average prices of copper and gold we purchased in fiscal 2009, 2008 and 2007:

 

 

Generally, we are able to pass through to our customers only a small a portion of the changes in the cost of copper and gold. However, we mitigated the impact of the change in copper and gold

prices by hedging with call options a portion of our projected net global purchases of copper and gold. The hedges did not materially affect operating results for fiscal 2009 and 2008.

 

In addition to commodity costs, the following table sets forth, for fiscal years 2009 and 2008, the effects of certain significant impacts on gross profit from the prior year (in thousands):

 

 

Price erosion is measured as the reduction in prices of our products year over year, which reduces our gross profit. A significant portion of the price erosion occurred in our mobile phone connector products, which are part of our telecommunications market.

 

The increase in gross profit due to currency translation gains in fiscal 2009 compared with 2008 was primarily due to a stronger Japanese yen against other currencies, partially offset by a general strengthening U.S. dollar against other currencies. The increase in gross profit due to currency translation gains in fiscal 2008 compared with fiscal 2007 was primarily due to a general weakening of the U.S. dollar against other currencies.

 

Certain products that we manufacture in Japan and Europe are sold in other regions of the world at selling prices primarily denominated in or closely linked to the U.S. dollar. As a result, changes in currency exchange rates may affect our cost of sales reported in U.S. dollars without a corresponding effect on net revenue. The decrease in gross profit due to currency transactions in fiscal 2009 was primarily due to a stronger Japanese yen, partially offset by a weaker euro against the U.S. dollar. The decrease in gross profit due to currency transaction losses in fiscal 2008 was primarily due to a general weakening of the U.S. dollar against other currencies.

 

Operating Expenses

 

The following table sets forth our operating expenses for fiscal years 2009, 2008 and 2007 (dollars in thousands):

 

 

Selling, general & administrative expenses

 

Selling, general and administrative expense increased as a percentage of revenue in fiscal 2009 compared with prior year periods primarily due to the significant drop in revenue. Selling, general and administrative expenses declined by $78.3 million or 11.8% primarily due to our restructuring efforts and cost- cutting initiatives in response to the significant drop in revenue. These initiatives included salary reductions and a $9.1 million decrease in expense related to reductions in employee benefits. We also reduced selling, general and administrative expenses through a lower cost structure resulting from our restructuring initiative and specific cost containment activities. Selling, general and administrative expense as a percentage of revenue was relatively consistent in fiscal 2008 compared with 2007 while organic net revenue declined. The impact of currency translation decreased selling, general and administrative expenses by approximately $4.1 million for fiscal 2009 compared with 2008 and increased selling, general and administrative expenses by approximately $35.4 million for fiscal 2008 compared with 2007.

Research and development expenditures, which are classified as selling, general and administrative expense, was $159.2 million, or 6.2% of net revenue, for fiscal 2009 compared with $163.7 million, or 4.9% of net revenue, for fiscal 2008 and $159.1 million, or 4.9% of net revenue, for fiscal 2007. The increase in expense as a percent of revenue is primarily due to the drop in revenue in fiscal 2009. Total research and development expenditures in fiscal 2009 were consistent with fiscal 2008, but increased as a percent of net revenue.

 

Restructuring costs and asset impairments

 

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

 

 

During fiscal 2007, we undertook a multi-year restructuring plan designed to reduce costs, increase efficiencies and to improve customer service and return on invested capital in connection with a new global organization that was effective July 1, 2007. A majority of the plan relates to facilities located in North America, Europe and Japan and, in general, the movement of manufacturing activities at these plants to other lower-cost facilities. Restructuring costs during fiscal 2009 was $131.3 million, consisting of $110.2 million of severance costs and $21.1 million for asset impairments. The cumulative expense since we announced the restructuring plan totals $197.9 million.

 

We expect to incur total restructuring and asset impairment costs related to these actions ranging from $240 to $250 million, of which the impact on each segment will be determined as the actions become more certain. Management approved several actions related to this plan. The total cost estimates increased as we formulated detailed plans for the latest restructuring actions, which included a reduction from five product-focused divisions to three product-focused divisions. A portion of this plan involves cost savings or other actions that do not result in incremental expense, such as better utilization of assets, reduced spending and organizational efficiencies. This plan includes employee reduction targets throughout the company, and we expect to achieve these targets through ongoing employee attrition and terminations. We expect to complete the actions under this plan by June 30, 2010 with estimated annual cost savings ranging from $190 to $210 million.

 

In 2009, we recognized net restructuring costs related to employee severance and benefit arrangements for approximately 6,600 employees, resulting in a charge of $110.1 million. A large part of these employee terminations resulted from plant closings in Europe and Asia. We recognized asset impairment charges of $41.4 million to write-down assets to fair value less the cost to sell. Restructuring costs and asset impairments in fiscal 2009 include intangible asset impairments of $16.3 million due to lower projected future revenue and profit in our Transportation and Automation & Electrical business units.

 

In 2008, we recognized net restructuring costs related to employee severance and benefit arrangements for approximately 900 employees, resulting in a charge of $17.6 million. A large part of these employee terminations occurred in our corporate headquarters and U.S. and Mexican manufacturing operations. In accordance with our planned restructuring actions, we recorded additional asset impairment charges of $13.6 million to write-down assets to fair value less the cost to sell.

 

In 2007, we recognized net restructuring costs related to employee severance and benefit arrangements for approximately 335 employees. A substantial majority of these employee terminations occurred within our Ireland manufacturing operations and various administrative functions in the

Americas and European regions. In addition, we have vacated or plan to vacate several buildings and are holding these buildings and related assets for sale. This plan resulted in an impairment charge of $8.7 million to write-down these assets to fair value less the cost to sell these assets. The fair value of the asset groupings was determined using various valuation techniques.

 

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 5 of the Notes to Consolidated Financial Statements.

 

During fiscal 2009, we recorded an impairment charge of $16.3 million to our indefinite lived intangible assets on lower projected future revenue and profit growth in the Automation & Electrical business unit of our Custom & Electrical segment.

 

Goodwill

 

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

 

Other Income (net)

 

Other income consists primarily of net interest income, investment income and currency exchange gains or losses. Currency exchange gains for fiscal 2009 were $11.8 million. The increase in currency exchange gains in fiscal 2009 was due to a stronger U.S. dollar and Japanese yen against most other currencies. Prior to fiscal 2009, currency gains and losses were classified as selling, general and administrative expense. We recognized a $9.3 million and $6.7 million exchange losses in fiscal 2008 and 2007, respectively.

 

Effective Tax Rate

 

The effective tax rate for the three years ended June 30, was as follows:

 

 

The effective tax rate for fiscal 2009 was negative due to (1) a second quarter charge of $93.1 million to impair goodwill for which no tax benefit is available, (2) a fourth quarter charge of $171.0 million to impair goodwill for which no tax benefit is available, (3) increases in tax reserves based on evaluation of certain tax positions taken, and (4) tax losses generated in non-US jurisdictions for which no tax benefit has been recognized. The effective tax rate in fiscal 2008 was higher than fiscal 2007 due to changes in foreign tax credit estimates and carryforwards.

 

Results by Product Segment

 

During fiscal 2009, we reorganized our operations, which changed the configuration of our reportable segments into the Connector and Custom & Electrical segments. Our former Transportation segment was operationally merged into the Connector segment under the direction of one global Executive Vice President.

Connector.  The following table sets forth the change in net revenue for fiscal years 2009 and 2008 (dollars in thousands):

 

 

The Connector segment sells primarily to the telecommunications, data, automotive and consumer markets, which are discussed above. Segment revenue decreased in fiscal 2009 with currency translation partially offsetting an organic revenue decline. Connector organic revenue decreased in fiscal 2009 primarily due to the significant drop in consumer spending in the current economic conditions, particularly the mobile phone sector of the telecommunications market and the automotive market. Connector organic revenue decreased in fiscal 2008 primarily due to general weakness in these markets, particularly the mobile phone sector. Additionally, price erosion, which is generally higher in the Connector segment compared with our other segments, was 4.6% and 5.7% in fiscal 2009 and 2008, respectively. We also completed an asset purchase of a company in Japan during fiscal 2009.

 

The following table sets forth information on income from operations and operating margins for fiscal years 2009, 2008 and 2007 (dollars in thousands):

 

 

Connector segment income from operations decreased in fiscal 2009 compared with the prior year periods due to the decrease in revenue and a goodwill impairment charge. Fiscal 2009 income from operations was unfavorably impacted by restructuring charges of $93.9 million and a goodwill impairment charge of $93.1 million in our Transportation business unit due to lower projected future revenue and profit. The sharp decline was partially offset by reduced selling, general and administrative expenses against the prior year periods.

 

Custom & Electrical.  The following table sets forth net revenue for fiscal years 2009 and 2008 (dollars in thousands):

 

The sale of Custom and Electrical segment’s products is concentrated in the industrial, telecommunications and data markets. Custom and Electrical segment revenue declined in fiscal 2009 due to the decline in these markets discussed above. We also acquired a flexible circuit manufacturing business during fiscal 2009.

 

The following table sets forth income from operations and operating margins for the fiscal years 2009, 2008 and 2007 (dollars in thousands):

 

 

Segment operating income decreased in fiscal 2009 from prior years due to slowing global demand and impairment charges for goodwill and intangible assets. Fiscal 2009 income from operations was unfavorably impacted by restructuring charges of $23.0 million, and a goodwill impairment charge of $171.0 million and intangible asset impairment charge of $16.3 million in our Automation & Electrical business unit due to lower projected future revenue and profit. Demand in our Automation & Electrical business unit declined significantly due to our customers’ global excess manufacturing capacity. Segment operating income increased in fiscal 2008 compared with 2007 due to efficiencies achieved with the Woodhead integration and an increase in revenue in the telecommunications market.

 

Financial Condition and Liquidity

 

We fund capital projects and working capital needs principally out of operating cash flows and cash reserves. Cash, cash equivalents and marketable securities totaled $467.9 million and $509.8 million at June 30, 2009 and 2008, respectively, of which approximately $457.4 million was in non-U.S. accounts as of June 30, 2009. Transferring cash, cash equivalents or marketable securities to U.S. accounts from non-U.S. accounts could subject us to additional U.S. income tax.

 

Our long-term financing strategy is to primarily rely on internal sources of funds for investing in plant, equipment and acquisitions. Long-term debt and obligations under capital leases totaled $242.1 million and $151.8 million at June 30, 2009 and 2008, respectively. We had available lines of credit totaling $282.5 million at June 30, 2009, including a $195.0 million committed, unsecured, three-year revolving credit facility with $170.0 million available as of June 30, 2009.

 

Cash Flows

 

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

 

 

Operating Activities

 

Cash provided from operating activities in fiscal 2009 decreased by $109.2 million from the prior year due mainly to lower revenue and income, partially offset by a related decline in working capital needs in fiscal 2009 compared with fiscal 2008. Working capital is defined as current assets minus current liabilities. Net income in fiscal 2009 included non-cash impairment charges approximating $308.0 million. Our restructuring accrual as of June 30, 2009 was $69.9 million, which we expect to

reduce through cash outlays during fiscal 2010 and 2011. In addition, we anticipate additional cash outlays of approximately $30.0 million during fiscal 2010 and 2011 related to restructuring charges that we expect to recognize in fiscal 2010.

 

Cash provided from operating activities in fiscal 2008 increased by $27.7 million from fiscal 2007 due primarily to lower use of funds to finance working capital needs in fiscal 2008 compared with fiscal 2007, partially offset by lower net income.

 

Investing Activities

 

During fiscal 2009, we completed the acquisition of two companies and a joint venture in cash transactions approximating $74.8 million. We recorded additional goodwill of $27.9 million in connection with the acquisitions. The purchase price allocation for the acquisitions is substantially complete. On July 19, 2007, we completed an acquisition of a U.S.-based company in an all cash transaction approximating $42.5 million. On August 9, 2006, we completed the acquisition of Woodhead in an all cash transaction for approximately $238.1 million, including the assumption of debt and net of cash acquired.

 

Capital expenditures declined $56.7 million and $62.2 million during fiscal 2009 and fiscal 2008, respectively, compared with prior year periods. The decrease in capital expenditures reflects our efforts to increase asset efficiency by lowering the incremental investment required to drive future growth.

 

Cash flow from investing activities also includes net purchases of marketable securities of $13.2 million in fiscal 2009, and proceeds in the amount of $46.8 million in fiscal 2008 and $71.2 million in fiscal 2007. Our marketable securities generally have a term of less than one year. Our investments in marketable securities are primarily based on our uses of cash in operating, other investing and financing activities.

 

Financing Activities

 

On June 25, 2009, we entered into a $195.0 million committed, unsecured, three-year revolving credit facility. Borrowings were $25.0 million as of June 30, 2009, which was used to pay down other uncommitted debt balances.

 

On August 1, 2008, our Board of Directors authorized the repurchase of up to an aggregate $200.0 million of common stock through June 30, 2009. We purchased shares of Common Stock and Class A Common Stock totaling 4.5 million shares, 8.0 million shares and 1.2 million shares during fiscal years 2009, 2008 and 2007, respectively. The aggregate cost of these purchases was $76.3 million, $199.6 million and $34.9 million in fiscal years 2009, 2008 and 2007, respectively.

 

In order to fund stock repurchases during fiscal 2008, we borrowed $125.0 million on our unsecured lines of credit, $75.0 million of which was repaid during fiscal 2008. In order to fund the cash portion of our investment in Woodhead made during fiscal 2007, we entered into two term notes aggregating 15 billion Japanese yen ($141.3 million) and borrowed $44.0 million on our unsecured lines of credit that was repaid the same year. The term notes are due in September 2009, with weighted-average fixed interest rates approximating 1.3%. We plan to refinance the term notes upon their expiration in September 2009.

 

Sources of Liquidity

 

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

We had available lines of credit totaling $307.5 million at June 30, 2009 expiring between 2009 and 2013. On June 25, 2009, we entered into a $195.0 million committed, unsecured, three-year revolving credit facility with interest rates equivalent to the London interbank offered rate (LIBOR) plus 250 basis points. The revolving line of credit also includes an accordion feature allowing us to increase the balance of the credit line by an amount not to exceed $75.0 million. The current portion of our long-term debt as of June 30, 2009 consists principally of three unsecured term loans approximating 20 billion Japanese yen ($208.0 million) due in September 2009, with weighted-average fixed interest rates approximating 1.3%. We plan to refinance the term notes upon their expiration in September 2009. Our long-term debt approximates $30.3 million, including an outstanding balance of $25.0 million on the revolving credit line at June 30, 2009. Our remaining long-term debt generally consists of mortgages and industrial development bonds with interest rates ranging from 5.9% to 7.8% and maturing through 2013. Certain assets, including land, buildings and equipment, secure our long-term debt. Principal payments on long-term debt obligations, including interest, are due as follows: fiscal 2010, $208.9 million; fiscal 2011, $3.9 million; fiscal 2012, $25.6 million; fiscal 2013, $0.6 million; and thereafter, $0.1 million.

 

The instrument governing our credit facility contains customary covenants regarding liens, debt, substantial asset sales and mergers, dividends and investments. Our credit facility also requires us to maintain financial covenants pertaining to, among other things, our consolidated leverage, fixed charge coverage and liquidity. As of June 30, 2009, we were in compliance with all of these covenants.

 

Contractual Obligations and Commercial Commitments

 

The following table summarizes our significant contractual obligations at June 30, 2009, and the effect such obligations are expected to have on liquidity and cash flows in future periods (in thousands):

 

 

 

 

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.

Off-Balance Sheet Arrangements

 

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.

 

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.

 

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.

 

Revenue Recognition

 

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.

 

Income Taxes

 

As a result of the implementation of Financial Accounting Standards Board (FASB) interpretation No. 48, “Accounting for the Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (FIN 48), effective July 1, 2007, we recognize liabilities for uncertain tax positions based on the two-step process prescribed within the interpretation. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step requires us to estimate and measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. It is inherently difficult and subjective to estimate such amounts, as this requires us to determine the probability of various possible outcomes. We re-evaluate these uncertain tax positions on a quarterly basis. This evaluation is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit and new audit activity. Such a change in recognition or measurement would result in the recognition of a tax benefit or an additional charge to the tax provision in the period.

Prior to adoption of FIN 48, our policy was to establish accruals for taxes that may become payable in future years as a result of examinations by tax authorities. We established the accruals based upon management’s assessment of probable income tax contingencies.

 

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 $117.3 million at June 30, 2009.

 

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 we believe 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. The cumulative valuation allowance relating to net operating losses is approximately $70 million at June 30, 2009. Entities with net operating losses were able to utilize $0.3 million of these losses during fiscal 2009.

 

Inventory

 

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.

 

Pension Plans

 

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 pension benefit obligation (PBO), 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. The discount rate used to determine the present value of our future U.S. pension obligations is based on a yield curve constructed from a portfolio of high quality corporate debt securities with various maturities. Each year’s expected future benefit payments are discounted to their present value at the appropriate yield curve rate, thereby generating the overall discount rate for U.S. pension obligations. The discount rates for our foreign pension plans are selected by using a yield curve approach or by reference to high quality corporate bond rates in those countries that have developed corporate bond markets. In those countries where developed corporate bond markets do not exist, the discount rates are selected by reference to local government bond rates with a premium added to reflect the additional risk for corporate bonds. 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, 2009, assuming no changes in benefit levels and no amortization of gains or losses, is shown below (in thousands):

 

 

Other Postretirement Benefits

 

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. The effects of the indicated increase and decrease in the discount rate assumption for our retiree healthcare plans as of June 30, 1009, assuming no change in benefit levels is shown below (in thousands):

 

 

Stock Options

 

We use the Black-Scholes option-pricing model to estimate the fair value of each option grant as of the date of grant. Expected volatilities are based on historical volatility of our common stock. We estimate the expected life of the option using historical data pertaining to option exercises and employee terminations. Separate groups of employees that have similar historical exercise behavior are considered separately for estimating the expected life. The risk-free interest rate is based on U.S. Treasury yields in effect at the time of grant.

 

Fair Value of Financial Assets and Liabilities

 

The following table summarizes our financial assets and liabilities which are measured at fair value on a recurring basis and subject to the disclosure requirements of SFAS 157 as of June 30, 2009 (in thousands):

 

We determine the fair value of our available for sale securities based on quoted market prices (Level 1). We generally use derivatives for hedging purposes pursuant to SFAS No. 133 and SFAS No. 149, which are valued based on Level 2 inputs in the SFAS 157 fair value hierarchy. The fair value of our financial instruments is determined by a mark to market valuation based on forward curves using observable market prices.

 

Goodwill

 

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 31, 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 estimated 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 generally 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 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.

 

Restructuring Costs and Asset Impairments

 

We have recorded charges in connection with restructuring our business. 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 expensed and accrued when it is determined that a liability is probable, which is generally after individuals have been notified of their termination dates and expected severance payments, but under certain circumstances may be recognized upon approval of a restructuring plan by management or in future accounting periods when terminated employees continue to provide service. 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.

 

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 5 of the Notes to Consolidated Financial Statements. See also “Forward-Looking Statements.”

 

Other-Than-Temporary Impairments (OTTI)

 

For available-for-sale securities, we presume an OTTI decline in value if the quoted market price of the security is 20% or more below the investment’s cost basis for a continuous period of six months or more. However, the presumption of an OTTI decline in value may be overcome if there is persuasive evidence indicating that the decline is temporary in nature. For investments accounted for

under the equity method, we evaluate all known quantitative and qualitative factors in addition to quoted market prices in determining whether an OTTI decline in value exists. Factors that we consider important in evaluating for a potential OTTI, include historical operating performance, future financial projections, business plans for new products or concepts and strength of balance sheet.

 

Impairment of Long-Lived Assets

 

In accordance with Statement of Financial Accounting Standards (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.

 

New Accounting Pronouncements

 

In December 2007, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 141R, “Business Combinations” (SFAS 141R). SFAS 141R states that acquisition-related costs are to be recognized separately from the acquisition and expensed as incurred with restructuring costs being expensed in periods after the acquisition date. SFAS 141R also states that business combinations will result in all assets and liabilities of the acquired business being recorded at their fair values. We are required to adopt SFAS No. 141R effective July 1, 2009. The impact of the adoption of SFAS No. 141R will depend on the nature and extent of business combinations occurring on or after the effective date.

 

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (SFAS 160) — an amendment of ARB No. 51. SFAS 160 requires identification and presentation of ownership interests in subsidiaries held by parties other than us in the consolidated financial statements within the equity section but separate from the equity. It also requires that (1) the amount of consolidated net income attributable to the parent and to the noncontrolling interest be clearly identified and presented on the face of the consolidated statement of income, (2) changes in ownership interest be accounted for similarly, as equity transactions, and (3) when a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary and the gain or loss on the deconsolidation of the subsidiary be measured at fair value. This statement is effective for us on July 1, 2009. We are currently evaluating the requirements of SFAS 160, but do not expect it to have a material impact on our financial statements.

 

In February 2008, the FASB issued FASB Staff Position No. 157-2, which delays the effective date of SFAS 157 for nonfinancial assets and liabilities, which are not measured at fair value on a recurring basis (at least annually) until fiscal years beginning after November 15, 2008. This statement is effective for us on July 1, 2009. We are currently evaluating the requirements of SFAS 157 for nonfinancial assets and liabilities, but do not expect it to have a material impact on our financial statements.

 

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (SFAS 161) — an amendment of FASB Statement No. 133. SFAS 161 requires enhanced disclosures about an entity’s derivative and hedging activities and thus improves the transparency of financial reporting. This statement is effective for us on July 1, 2009. We are currently evaluating the requirements of SFAS 161, but do not expect it to have a material impact on our financial statements.

 

In December 2008, the FASB issued FASB Staff Position No. 132(R)-1, Employers’ Disclosures about Postretirement Benefit Plan Assets (FAS 132R-1). FAS 132R-1 requires disclosures about plan assets of a defined benefit pension or other postretirement plan. This statement is effective for us on

July 1, 2009. The adoption of FAS 132R-1 will result in enhanced disclosures, but will not otherwise have an impact on our financial statements.

 

Forward-looking Statements

 

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. 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 them 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, restructuring and other 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 filing of this report, whether as a result of new information, future events, changes in assumptions, or otherwise.

 

 

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

 

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, 2009 and 2008.

 

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 increased net revenue of $5.2 million and increased income from operations of $1.7 million for 2009, compared with the estimated results for 2008 using the average rates for 2008.

 

Our $43.2 million of marketable securities at June 30, 2009 are principally invested in time deposits.

 

Interest rate exposure is limited to our 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.

 

Molex Incorporated

 

Index to Consolidated Financial Statements