EX-13 3 ex13fy03.txt EXHIBIT 13 EXHIBIT 13 Ten-Year Financial Highlights Summary (In thousands, except per share data) Operations 2003 2002 2001 2000 1999 ----------- ---------- ---------- ---------- ---------- Net revenue $ 1,843,098 $1,711,497 $2,365,549 $2,217,096 $1,711,649 Gross profit 609,741 542,035 858,489 854,889 673,338 Income before income taxes and minority interest 110,042 93,221 291,416 323,694 230,214 Income taxes 24,762 16,684 87,424 100,810 52,363 Net income 84,918 76,479 203,919 222,454 178,029 Earnings per common share:(1) Basic 0.44 0.39 1.04 1.13 0.92 Diluted 0.44 0.39 1.03 1.12 0.91 Net income as a percent of net revenue 4.6% 4.5% 8.6% 10.0% 10.4% Financial Position Current assets $ 962,113 $ 915,343 $ 891,865 $1,023,009 $ 881,338 Current liabilities 356,148 359,593 374,106 475,449 342,441 Working capital 605,965 555,750 517,759 547,560 538,897 Current ratio 2.7 2.5 2.4 2.2 2.6 Property, plant and equipment, net 1,007,948 1,067,590 1,092,567 980,775 809,602 Total assets 2,334,890 2,253,920 2,213,627 2,247,106 1,902,012 Long-term debt 13,137 14,223 19,351 21,593 20,148 Capital leases 3,731 3,626 6,114 - - Shareholders' equity 1,896,568 1,827,652 1,765,640 1,705,804 1,500,537 Return on beginning shareholders' equity 4.6% 4.3% 12.0% 14.8% 14.1% Dividends per common share(1) 0.10 0.10 0.10 0.09 0.05 Weighted average common shares outstanding:(1) Basic 191,873 194,327 195,471 196,060 194,340 Diluted 193,229 195,986 197,633 198,208 195,631 (1)Restated for the following stock dividends: 25%-January 2000; 25%-November 1997; 25%-February 1997; 25%-August 1995; 25%-November 1994. Management's Discussion of Financial Condition and Results of Operations (in thousands, except per share data) Financial Highlights Fiscal 2003 results marked a welcome turnaround from a most challenging prior fiscal year. Revenue for the current fiscal year of $1.84 billion increased 7.7 percent from last year. Net income for the year of $84.9 million, which included a fourth-quarter charge of $28.6 million (net of tax benefit of $11.5 million) increased 11.0 percent from the prior year. The prior year results included a special charge of $25.3 million (net of tax benefit of $8.9 million). Management remains focused on striving for efficiencies in costs and productivity while pushing for growth through continued investment in new product development. Investor Returns Molex is committed to providing shareholders with a high return on their investment. The Company's total shareholder return (including reinvestment of dividends) over the last five years has averaged an annual compounded return of 6.5 percent on Molex Common Stock and 4.7 percent on Molex Class A Common Stock. A $100 investment in Molex Common Stock at June 30, 1998, together with the reinvestment of dividends, would be worth $137 at June 30, 2003, and a similar investment in Molex Class A Common Stock would be worth $126 at June 30, 2003. Molex Common Stock / High-Low-Close by Quarter [GRAPHIC OMMITTED] Five-Year Cumulative Total Return [GRAPHIC OMITTED] Financial Position and Liquidity The strength of the Company's financial position is increasingly cited by customers as a major competitive advantage for choosing Molex. We are consistently able to fund capital projects and working capital needs principally out of operating cash flows and cash reserves. Cash and marketable securities at June 30, 2003 totaled $350.2 million, an increase of $36.9 million over the prior year. The Company's long-term financing strategy is to rely on internal sources of funds for investing in plant, equipment and acquisitions. Management remains confident that the Company's liquidity and financial flexibility are adequate to support both current, as well as future growth. Molex has historically used external borrowings only when a clear financial advantage exists. Long-term debt at June 30, 2003 totals $13.1 million. The Company has available lines of credit totaling $129.9 million, of which $127.3 million remain unused at June 30, 2003. Net cash provided from operations was $349.5 million during fiscal 2003. The decrease from the prior year was due mainly to a $58.7 million decline in cash flows from working capital. Cash flows generated by reductions in accounts receivable and inventory due to lower revenue in the prior year were not repeated in the current year. Contractual Obligations and Commercial Commitments Contractual Obligations Due by Year 2004 2005 2006 2007 2008 -------- ------- ------- ------- -------- Long-term debt $ 1,574 $1,578 $3,629 $1,498 $ 6,432 Capital lease obligations 4,246 2,056 1,181 610 596 Operating leases 7,245 4,084 2,466 1,982 5,469 Total contractual -------- ------- ------- ------- -------- cash obligations $13,065 $7,718 $7,276 $4,090 $12,497 Commercial commitments consist of $2.6 million drawn on the Company's existing lines of credit. Commitments expire as follows: $1.6 million in 2004 and $1.0 million after 2006. Net cash used for investing activities was $293.8 million in fiscal 2003, consisting of capital expenditures, an increase in our level of investment in marketable securities and other investments. During fiscal 2003, Molex added new facilities in China, India and Slovakia while closing one facility in the United States. In fiscal 2003, Molex facility floor space worldwide increased to 7.0 million square feet. Net cash used for financing activities was $92.3 million in fiscal 2003, primarily for the payment of dividends and the purchase of treasury stock. The Company purchased 3,352,500 shares of Class A Common Stock during fiscal 2003 and 2,902,000 shares during fiscal 2002. The Company's Board of Directors has authorized the purchase of as much as $100 million of Common and/or Class A Common Stock during fiscal 2004. Percentage of Net Revenue Fiscal year ended June 30, 2003 2002 2001 ------ ------ ------ Net revenue 100.0% 100.0% 100.0% Cost of sales 66.9 68.3 63.7 Gross profit 33.1 31.7 36.3 S, G & A expenses 27.2 25.8 24.5 Income from operations 5.9 5.9 11.8 Total other income 0.1 (0.4) 0.5 Income before income taxes 6.0 5.5 12.3 Income taxes 1.4 1.0 3.7 Net income 4.6% 4.5% 8.6% U.S. Dollar Percentage Change 2003-2002 2002-2001 --------- --------- Net revenue 7.7% (27.6)% Cost of sales 5.5 (22.4) Gross profit 12.5 (36.9) S, G & A expenses 13.4 (23.7) Income from operations 8.3 (64.2) Total other income 122.9 (158.4) Income before income taxes 18.0 (68.0) Income taxes 48.4 (80.9) Net income 11.0% (62.5)% Fiscal 2003 Compared with Fiscal 2002 Fiscal 2003 net revenue was $1.84 billion, a 7.7 percent increase from $1.71 billion reported last year. Excluding the favorable impact from exchange rates, the increase was 3.7 percent, with the strongest growth occurring during the first half of the year. International operations generated net revenue of $1.21 billion or 65.5 percent of total Molex net revenue. Net revenue in the Americas region declined 3 percent from last year. While we experienced growth in the connector products and industrial markets, the lack of demand in the telecommunications infrastructure and fiber optics markets impeded overall revenue growth in the region. During the year, the region focused on and was successful in reducing operating costs and achieving operating efficiencies through consolidating functions, streamlining processes, downsizing facilities and controlling discretionary spending. In the Far East North, net revenue rose 16 percent in U.S. dollars during fiscal 2003 and 10 percent in local currencies compared with the prior year. This growth, despite a sluggish economy, was driven by the successful design-in of new products serving the consumer electronics market in products such as digital still and video cameras, mobile phones and plasma TVs. This success confirms the importance of continued investment in new product development for the region, especially in newly emerging markets. Net revenue during fiscal 2003 in the Far East South region increased 23 percent in U.S. dollars and 22 percent in local currencies. Strong demand in the personal computer market led the growth as more motherboards, desktop and notebook PCs and peripherals were produced in the region. Successful new product developments in this area keep us well poised for continued growth. This is particularly important as customers continue transferring business into the region and competition grows for this business. The European region experienced a 3 percent net revenue increase in U.S. dollars, but an 11 percent decline in local currencies. This region remains our most difficult as it entered the global recession after our other regions and remains behind in the economic cycle. Cost-cutting measures implemented this year include the consolidation of our manufacturing facilities into five main plants, streamlining processes and controlling discretionary spending. Although the telecom market was severely impacted, we did realize growth in the automotive and industrial markets and look to those markets for our continued growth. As a result of continuing weak demand in the telecommunications infrastructure market, the Company recorded a pretax charge of $40.1 million ($28.6 million, net of tax benefit of $11.5 million) relating to this industry during the fourth quarter of fiscal 2003, comprising $23.1 million relating to write-offs of manufacturing assets and facilities, $11.9 million to reflect workforce reductions of 537 people and $5.1 million for the write-off of licenses and investments dedicated to the telecom industry. The majority of these charges impacted the Americas ($27.7 million) and European ($8.4 million) regions where the Company had its highest concentration of telecom business. The consolidated gross profit margin was 33.1 percent of net revenue in fiscal 2003, an increase from 31.7 percent reported in fiscal 2002, largely due to a more favorable product mix, as well as lower pricing for raw materials and purchased components. Fiscal 2003 gross profit was also impacted by $5.4 million of the aforementioned fourth quarter charge due to costs from the manufacturing-related employment reductions and inventory write-downs. Fiscal 2002 gross profit included a similar $7.1 million pretax charge. Selling, general and administrative expenses of $501.3 million were up 13.4 percent or $59.4 million over the prior year and as a percentage of net revenue increased from 25.8 percent in fiscal 2002 to 27.2 percent in fiscal 2003. The current year included the reinstatement of salaries and certain employee retirement benefits to normal levels, as well as increases in travel and other revenue-related expenses. Fiscal 2003 also included $29.6 million as part of the fourth quarter pretax charge related to asset and facility write-offs, as well as employment reductions in selling and administrative areas. Fiscal 2002 included a $15.6 million pretax charge related to employment reductions. Research and development expenditures were $117.0 million or 6.3 percent of net revenue during fiscal 2003, compared with $111.8 million or 6.5 percent of net revenue in the prior year. These expenditures contributed to the release of 339 new product families during the year. In fiscal 2003, 25.7 percent of net revenue was derived from the sale of products released by the Company within the last three years. Molex continued its long-term commitment to reinvesting its profits in new product design and tooling to maintain and enhance the Company's competitive position. The Company was granted 529 new patents during the year. Net interest income increased $2.2 million during fiscal 2003, primarily due to an interest benefit from the favorable closure of corporate tax audits in several U.S. jurisdictions, as well as additional interest on the Company's higher cash balances. The effective income tax rate was 22.5 percent for fiscal 2003 compared with 17.9 percent in fiscal 2002. The rate for the current year includes a $3.0 million benefit from the favorable closure of corporate tax audits in several U.S. jurisdictions. This benefit reduced the current year effective tax rate nearly three percentage points. The remaining increase in the effective tax rate from the prior year reflected an increase in the Company's pretax earnings from higher rate jurisdictions. The Company continues its ongoing global effort to reduce its income tax burden through a disciplined repatriation strategy and better planning. Net income grew 11.0 percent during fiscal 2003 to $84.9 million. Excluding the effect of foreign exchange rates, which had minimal impact, net income was up 10.5 percent. Fiscal 2003 net income includes a charge of $28.6 million (net of tax benefit of $11.5 million) to reflect costs associated with write-offs of manufacturing assets and facilities and related licenses and investments, and employment reductions. Fiscal 2002 net income includes a charge of $25.3 million (net of tax benefit of $8.9 million) related to employment reductions, the lower current value of investments in other companies and asset write-downs related to certain operations being closed. Earnings per share was $0.44 during fiscal 2003 compared with $0.39 during fiscal 2002. Comprehensive income includes all non-shareholder changes in equity and consists of net income, foreign currency translation adjustments, required minimum pension liabilities and unrealized gains and losses on available-for-sale securities. The change in comprehensive income for the year was primarily due to net income and foreign currency translation adjustments. During fiscal 2003, the U.S. dollar was weaker versus the euro when compared with the prior year, resulting in an increase in comprehensive income. Fiscal 2002 Compared with Fiscal 2001 Net revenue for fiscal 2002 was $1.71 billion, a 27.6 percent decline from $2.37 billion reported in fiscal 2001. Excluding the impact of exchange rates, the decline was 26.0 percent. All regions were impacted by this worldwide decline in business levels and all were required to take drastic measures to reduce costs and improve efficiency levels to be in line with the lower revenue. In fiscal 2002, international operations generated net revenue of $1.04 billion or 61.0 percent of total Molex net revenue. In the Americas region, net revenue was down 35 percent from fiscal 2001. The markets most severely impacted by the downturn were the telecommunications infrastructure and fiber optics markets. Automotive was flat to slightly down, as inventories in the channels and dealerships stayed lean and consumer spending on automobiles remained level despite the economy. Industrial division product revenue was impacted by the lower level of capital investment during fiscal 2002, while networking applications and other data-market-related high-end products such as storage systems, mainframes and servers were all down due to cutbacks in spending by original equipment manufacturers (OEMs). In addition, while the level of customer design activity continued, the conversion of design into production remained very slow as customers struggle with increasing their end-market new product sales. Overall, the region did experience sequential improvement in revenue during the latter two quarters of fiscal 2002 due to increased demand in several markets, but visibility remained very limited. Net revenue in the Far East North region during fiscal 2002 declined 29 percent in U.S. dollars and 23 percent in local currencies, compared with fiscal 2001. Molex Japan, the principal operating company in this region, was impacted by the Japanese economy, which was hit especially hard as its local markets continued to shrink overall. Exports were depressed by the weaker economies in Europe and the Americas, which historically have been strong areas for Japan microminiature and data products. Also, Japanese customers began to transfer more programs to the Far East South region. This set of events required the successful implementation of a number of programs focused on reducing costs and inventories. In addition, consumer programs were slower to develop than anticipated early in the year and, when finally implemented, had reduced connector content and were priced lower to be successful in the market. Data and telecom-related products were also adversely impacted in both Japan and across the export markets into which Japan has traditionally sold. The Korean economy faired better for our operations, with revenue in the second half of the fiscal year exceeding those in the comparable prior-year period. Investment in new product development remained a priority for the entire region, especially in newly emerging markets, to position Molex well for an economic recovery. In the Far East South, net revenue decreased 7 percent in U.S. dollars during fiscal 2002 and 5 percent in local currencies. New programs such as sockets for next generation microprocessors, cell phones and the transfer of Japanese consumer programs bolstered the region's growth in the face of slackened demand for its traditional desktop and notebook products. Wins in peripheral products such as storage disk drive devices and the growing concentration of contract manufacturers in the region both helped support revenue levels in the face of overall demand reductions. Also of benefit was the transfer of many customer programs from Europe and the Americas to this region. As demand fell across the world for electronics products, lower cost capacity in this region was used more extensively than capacity in higher cost areas in the Americas and Europe. Net revenue in the European region during fiscal 2002 declined 28 percent in U.S. dollars and 29 percent in local currencies from fiscal 2001. The disproportionate weighting in this region towards telecom made it more vulnerable to the downturn than in other regions. Sales of cell phones and telecommunications infrastructure were hurt by the slowdown in customer capital spending. The Company's careful credit evaluation of customers in financial difficulty also resulted in reduced revenue from telecom customers. General market and distribution sales were more stable during the year but could not compensate for the declining sales to OEMs throughout the region. Many of the Company's key OEM customers encountered significant difficulties during the year, further delaying the chance to turn an awarded contract into revenue-generating products. In addition, the closure of the France membrane switch business further hurt the region's revenue, as did price erosion, which was higher in this region than in the Company overall. During the second quarter of fiscal 2002, the Company recorded a pretax charge of $34.2 million ($25.3 million, net of tax benefit of $8.9 million) comprising $18.7 million to reflect costs associated with a reduction in the global workforce of approximately 800 people, $10.0 million to reflect the lower current value of investments in other companies and $5.5 million of asset write-down costs related to certain operations being closed. The consolidated gross profit declined to 31.7 percent of net revenue in fiscal 2002 from 36.3 percent during fiscal 2001, principally due to higher depreciation expense. Depreciation expense as a percent of net revenue was 10.9 percent compared with 7.5 percent in fiscal 2001. Inventory reductions made throughout the year to align production levels with revenue levels contributed to the decline in gross profit margin. Price erosion was more severe than in previous years, but was partially offset by the material cost reductions on most products due to more favorable pricing for raw materials and purchased components. In addition, many plants implemented four-day work weeks, extended vacations or other measures to reduce variable costs as much as possible to counteract lower revenue. Fiscal 2002 gross profit was also impacted by $7.1 million of the aforementioned second quarter charge due to costs from the manufacturing-related employment reductions. Fiscal 2001 gross profit included a $16.4 million pretax charge related to additional slow-moving and excess inventory write-offs and employment reductions. Selling, general and administrative expenses of $441.9 million declined 23.7 percent or $137.0 million from fiscal 2001, but as a percentage of net revenue increased from 24.5 percent in fiscal 2001 to 25.8 percent during fiscal 2002 due to lower revenue in fiscal 2002. Cost reductions in place during fiscal 2002 included across-the-board salary reductions from 6 percent to greater than 40 percent, no bonus provision and sharp reductions in discretionary spending. Fiscal 2002 also included $15.6 million as part of the second quarter pretax charge related to employment reductions in selling and administrative areas, while fiscal 2001 included a $27.1 million pretax charge related to employment reductions and asset write-offs. Research and development expenditures were $111.8 million or 6.5 percent of net revenue during fiscal 2002, compared with $134.6 million or 5.7 percent of net revenue in fiscal 2001. These expenditures contributed to the release of 403 new product families during the year. In fiscal 2002, 27.5 percent of net revenue was derived from the sale of products released by the Company within the last three years. Molex continued its long-term commitment to reinvesting its profits in new product design and tooling to enhance the Company's competitive position. The Company was granted 464 new patents during the year. Net interest income declined 12.8 percent during fiscal 2002 due to overall lower interest rates on invested cash balances, as well as higher interest expense due to capital lease payments. The effective income tax rate was 17.9 percent for fiscal 2002, compared with 30.0 percent in fiscal 2001. The rate for fiscal 2002 was affected by a $5.0 million one-time tax benefit related to certain operations being closed as a result of the second quarter charge. This tax benefit and the tax impact of the second quarter charge reduced the effective tax rate by 6 percentage points. The remaining reduction in the effective tax rate from fiscal 2001 reflected a change in the mix of the Company's pretax earnings from higher rate jurisdictions in which the Company operates to lower rate jurisdictions, principally in the Far East South, as well as the ongoing global effort to reduce its income tax burden through a disciplined repatriation strategy and better planning. Net income declined 62.5 percent to $76.5 million during fiscal 2002. Excluding the effect of foreign exchange rates, which decreased net income by $3.1 million, net income was down 61.0 percent. Fiscal 2002 net income includes a charge of $25.3 million (net of tax benefit of $8.9 million) to reflect costs associated with employment reductions, the lower current value of investments in other companies and asset write-downs related to certain operations being closed. Fiscal 2001 net income includes a charge of $30.3 million (net of tax benefit of $13.2 million) related to slow and excess inventory write-offs, employment reductions and asset write-offs. Earnings per share was $0.39 during fiscal 2002, compared with $1.03 during fiscal 2001. Comprehensive income includes all non-shareholder changes in equity and consists of net income, foreign currency translation adjustments and unrealized gains and losses on available-for-sale securities. The change in comprehensive income for the year was due mainly to net income and foreign currency translation adjustments. During fiscal 2002, the U.S. dollar was weaker versus the Japanese yen and the euro when compared with fiscal 2001, resulting in an increase in comprehensive income. New Accounting Pronouncements The Company adopted Statement of Financial Accounting Standards (SFAS) No. 143, "Accounting for Asset Retirement Obligations," and SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," as of July 1, 2002. These statements address the recognition and remeasurement of obligations associated with the retirement of tangible long-lived assets and the accounting and reporting for the impairment or disposal of long-lived assets, including discontinued operations, respectively. SFAS No. 144 establishes a single accounting model for long-lived assets to be disposed of by sale. The adoption of SFAS No. 143 and SFAS No. 144 had no material impact on the consolidated financial statements other than the asset write-downs included in the fiscal 2003 fourth quarter charge. In June 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. It also establishes that fair value is the objective for initial measurement of the liability. This statement is effective for exit or disposal activities that are initiated after December 31, 2002. The fiscal 2003 fourth quarter charge was recorded in accordance with SFAS No. 146. In November 2002, the FASB issued Financial Interpretation No. (FIN) 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." This Interpretation establishes accounting and disclosure requirements for a company's obligations under certain guarantees that it has issued. A guarantor is required to recognize a liability for the obligation it has undertaken in issuing a guarantee, including the ongoing obligation to stand ready to perform over the term of the guarantee in the event that the specified triggering events or conditions occur. The objective of the initial measurement of that liability is the fair value of the guarantee at its inception. The initial recognition and measurement provisions of this Interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The adoption of FIN 45 had no material impact on the Company. In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest Entities." It requires that the assets, liabilities and results of the activity of variable interest entities be consolidated into the financial statements of the company that has the controlling financial interest. It also provides the framework for determining whether a variable interest entity should be consolidated based on voting interest or significant financial support provided to it. For the Company, this Interpretation is effective immediately for variable interest entities created after January 31, 2003 and effective July 1, 2003 for variable interest entities acquired before February 1, 2003. The Company does not expect the adoption of this Interpretation to have any impact on its fiscal 2004 consolidated financial statements. In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." This statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133. The statement is effective for and should be prospectively applied to contracts entered into or modified and for hedging relationships designated after June 30, 2003. The Company does not expect the adoption of this statement to have any impact on its fiscal 2004 consolidated financial statements. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." This statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. This statement is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective in the first interim period beginning after June 15, 2003. The Company does not expect the adoption of this statement to have any impact on its fiscal 2004 consolidated financial statements. Outlook Visibility beyond the short term remains difficult with customers ordering only for their short-term requirements with little advance notice, but we do expect a modest improvement during fiscal 2004. With our continued emphasis during the past year on cost reductions and operating efficiencies, as well as expanding our capabilities in lower-cost locations, we expect to benefit from increased profit leverage as business improves. The Company continues to invest in new product development and is positioned with many new products for both our core markets, as well as a number of new markets. We remain focused on serving our customers, increasing our profits and gaining marketshare primarily through reinvestment. We expect modest revenue growth of 7 percent to 11 percent during fiscal 2004 and for profits to grow faster than revenue, due to our profit leverage. To further expand the Company's global presence, offer innovative products at an accelerated pace and position itself for growth as the global economy improves, Molex plans to invest $160 million to $170 million in capital expenditures for the fiscal year ending June 30, 2004. The Company continues to emphasize expansion in markets such as automotive, integrated products, industrial and medical, while working to further strengthen its significant position as a leader in the computer and digital consumer markets. Molex remains committed to providing high quality products and a full range of services to customers wherever they may be located in the world. Critical Accounting Policies The consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the use of estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. In preparing these financial statements, management has made its best estimates and judgments of certain amounts included in the financial statements. The significant accounting principles that management believes are the most important to aid in fully understanding the Company's financial results are included below. See Notes to the Financial Statements for a more detailed description of these and other accounting policies of the Company. Revenue Recognition The Company recognizes revenue when title and risk of ownership transfers to the buyer. The impact of judgments and estimates on revenue recognition is minimal. A reserve for estimated returns is established at the time of sale based on historical return experience to cover returns of defective product and is recorded as a reduction of revenue. A reserve for doubtful accounts is recorded generally based on a percentage of aged receivables and management's evaluation of customer credit risk. Management judgment is utilized in assessing customer creditworthiness, changes in customer payment history, historical bad debt experience and economic and market trends. Different assumptions or changes in economic circumstances could result in changes to these reserves. Income Taxes The provision for income taxes is determined under the liability method pursuant to SFAS No. 109. Under this method, deferred tax assets and liabilities are recognized based on differences between the financial statement and tax bases of assets and liabilities using presently enacted tax rates. The Company has net deferred tax assets of $128 million at June 30, 2003. In assessing the need for valuation allowances, the Company considers future forecasted taxable income and tax planning strategies. The Company has determined that it is unlikely that it will be able to realize a net deferred asset in the future relating to certain European net operating losses. A valuation allowance of $10 million was recorded in the current fiscal year to offset the recording of a deferred tax asset of $10 million in the current fiscal year related to certain European net operating losses. The cumulative valuation allowance relating to these European net operating losses is approximately $19 million at June 30, 2003. The Company has operations in several countries around the world that are subject to income and other similar taxes in these countries. The estimation of the amounts of income tax to be recorded by the Company involves the interpretation of complex tax laws and regulations, evaluation of tax audit findings and assessment of how the foreign taxes may affect domestic taxes. Although the Company's management believes its tax accruals are adequate, differences may occur in the future depending on the resolution of pending and new tax matters. Allowance for Inventory Inventories are valued at lower of the first-in, first-out (FIFO) cost or market value. FIFO inventories recorded on the Company's consolidated balance sheet are adjusted for an allowance covering inventories determined to be slow-moving, excessive, or subject to quality inspection or other potential adjustments. The allowance is maintained at an amount management considers appropriate based on factors such as historical usage of the product, open sales orders and future sales forecasts. Such factors require judgment, and changes in any of these factors could result in changes to this allowance. Pension and Other Postretirement Benefits The Company's employee pension and other postretirement benefit costs and obligations are dependent on management's assumptions used by actuaries in calculating such amounts. These assumptions include discount rates, health care cost trend rates, inflation, long-term returns on plan assets, retirement rates, mortality rates and other factors. Management bases the discount rate assumption on investment yields available on corporate long-term bonds. Health care cost trend assumptions are developed based on historical cost data, the near-term outlook and an assessment of likely long-term trends. The inflation assumption is based on an evaluation of external market indicators. Retirement and mortality rates are based primarily on actual plan experience. Actual results that differ from the assumptions are accumulated and amortized over future periods and, therefore, generally affect the recognized expense and recorded obligation in such future periods. While management believes that the assumptions used are appropriate, significant differences in actual experience or significant changes in assumptions would affect pension and other postretirement benefit costs and obligations. There was a significant increase in the projected benefit obligation for postretirement benefits at June 30, 2003. This increase was due to higher than expected health care costs and actual claims experience greater than previously projected. The Company contributed $18.8 million to its pension plans during fiscal 2003, compared with $4.4 million in the prior year. Goodwill and Intangible Assets The Company reviews at least annually the realizability of goodwill and other intangible assets. The Company uses a discounted cash flow model for the evaluation of impairment. The expected future cash flows are based on management's estimates and are determined by looking at numerous factors including, but not limited to, projected economic conditions and customer demand, manufacturing capacity, operating costs and new products introduced. Although management believes its assumptions in determining the projected cash flows are reasonable, changes in those estimates could affect the evaluation. Quantitative and Qualitative Disclosures about Market Risk The Company is subject to market risk associated with changes in foreign currency exchange rates, interest rates and certain commodity prices. The Company mitigates its foreign currency exchange rate risk principally through the establishment of local production facilities in the markets it serves and invoicing of customers in the same currency as the source of the products. Molex also monitors its foreign currency exposure in each country and implements strategies to respond to changing economic and political environments. Examples of these strategies include the prompt payment of intercompany balances utilizing a global netting system, the establishing of contra-currency accounts in several international subsidiaries, development of natural hedges and occasional use of foreign exchange contracts to protect or preserve the value of intercompany cash flows. No material foreign exchange contracts were in use at June 30, 2003 and 2002. The Company has implemented a formalized treasury risk management policy that describes the procedures and controls over derivative financial and commodity instruments. Under the policy, the Company does not use derivative financial or commodity instruments for speculative purposes, and the use of such instruments is subject to strict approval levels by senior officers. Typically, the use of derivative instruments is limited to hedging activities related to specific foreign currency cash flows. The Company's $171.2 million of marketable securities are principally debt instruments that generate interest income for the Company on temporary excess cash balances. These instruments contain embedded derivative features that enhance the liquidity of the portfolio by enabling the Company to liquidate the instrument prior to the stated maturity date. The Company's exposure related to derivative instrument transactions is, in the aggregate, not material to Molex's financial position, results of operations or cash flows. Interest rate exposure is principally limited to the $171.2 million of marketable securities owned by the Company and $13.1 million of long-term debt. The Company does not actively manage the risk of interest rate fluctuations. However, such risk is mitigated by the relatively short-term nature of its investments-less than 12 months-and the fixed-rate nature of its long-term debt. Molex does not have material exposure to off-balance-sheet arrangements, including special purpose entities and activities that include non-exchange traded contracts accounted for at fair value. Due to the nature of its operations, Molex is not subject to significant concentration risks relating to customers, products or geographic locations. The Company monitors the environmental laws and regulations in the countries in which it operates. Molex has implemented an environmental program to reduce the generation of potentially hazardous materials during its manufacturing process and believes it continues to meet or exceed local government regulations. Management's Statement of Responsibility The management of the Company is responsible for the information contained in the consolidated financial statements and in the other parts of this report. The accompanying consolidated financial statements of Molex Incorporated and its subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America. In preparing these statements, management has made judgments based upon available information. The Company's internal control is designed to ensure that transactions are executed in accordance with management's authorization and properly recorded, and to provide reasonable assurance for the safeguarding of assets against loss from unauthorized use or disposition and for the reliability of financial records for the preparation of the consolidated financial statements. Management believes that through the careful selection of employees, the division of responsibilities and the application of formal policies and procedures, the Company has an effective and responsive internal control structure that is intended, consistent with reasonable cost, to provide reasonable assurance that transactions are executed as authorized. The Company's independent auditors, Deloitte & Touche LLP, are responsible for conducting an audit of the Company's consolidated financial statements in accordance with auditing standards generally accepted in the United States of America and for expressing their opinion as to whether these consolidated financial statements present fairly, in all material respects, the financial position, results of operations and cash flows of Molex Incorporated and its subsidiaries in conformity with accounting principles generally accepted in the United States of America. Management has made available to Deloitte & Touche LLP all the Company's financial records and related data, as well as minutes of the Board of Directors' meetings. Management believes that all representations made to Deloitte & Touche LLP during its audit were valid and appropriate. J. Joseph King Fred A. Krehbiel John H. Krehbiel Robert B. Mahoney Vice Chairman and Co-Chairman of Co-Chairman of Executive Vice Chief Executive Officer the Board the Board President, Treasurer and Chief Financial Officer Independent Auditors' Report To the Shareholders and Board of Directors, Molex Incorporated, Lisle, Illinois We have audited the accompanying consolidated balance sheets of Molex Incorporated and its subsidiaries as of June 30, 2003 and 2002 and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended June 30, 2003. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Molex Incorporated and its subsidiaries as of June 30, 2003 and 2002 and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2003, in conformity with accounting principles generally accepted in the United States of America. Deloitte & Touche LLP Chicago, Illinois July 21, 2003 Consolidated Balance Sheets (in thousands, except per share data) Assets June 30, 2003 June 30, 2002 ------------- ------------- Current assets: Cash and cash equivalents $ 178,976 $ 213,477 Marketable securities (Note 2) 171,235 99,848 Accounts receivable, less allowance of $18,404 in 2003 and $18,697 in 2002 for returns and doubtful accounts 396,780 386,150 Inventories (Note 2) 179,256 167,253 Deferred income taxes (Note 4) 19,632 27,307 Prepaid expenses 16,234 21,308 --------- --------- Total current assets 962,113 915,343 Property, plant and equipment at cost (Note 2) 2,607,930 2,482,105 Less accumulated depreciation and amortization (1,599,982) (1,414,515) Net property, plant and equipment 1,007,948 1,067,590 Goodwill (Note 2) 160,732 160,180 Non-current deferred income taxes (Note 4) 113,333 61,000 Other assets 90,764 49,807 ---------- ---------- $2,334,890 $2,253,920 ---------- ---------- Liabilities and Shareholders' Equity Current liabilities: Short-term loans and current portions of long-term debt and capital leases (Notes 7 and 8) $ 6,088 $ 10,128 Accounts payable 175,815 184,630 Accrued expenses: Salaries, commissions and bonuses 45,318 37,943 Severance 12,714 16,105 Other 59,962 67,894 Income taxes payable (Note 4) 51,251 37,893 Dividends payable 5,000 5,000 --------- --------- Total current liabilities 356,148 359,593 Other non-current liabilities 6,123 6,346 Accrued pension and postretirement benefits (Note 6) 58,430 41,999 Long-term debt (Note 8) 13,137 14,223 Obligations under capital leases (Note 7) 3,731 3,626 Minority interest in subsidiaries 753 481 Commitments and contingencies (Notes 5 and 7) - - Shareholders' equity (Notes 3 and 10): Common Stock, $0.05 par value; 200,000 shares authorized; 110,124 shares issued at 2003 and 109,451 shares issued at 2002 5,506 5,473 Class A Common Stock, $0.05 par value; 200,000 shares authorized; 103,390 shares issued at 2003 and 103,008 shares issued at 2002 5,169 5,150 Class B Common Stock, $0.05 par value; 146 shares authorized; 94 shares issued at 2003 and 2002 5 5 Paid-in capital 341,530 311,631 Retained earnings 2,003,440 1,937,488 Treasury stock (Common Stock, 9,855 shares at 2003 and 9,893 shares at 2002; Class A Common Stock, 12,976 shares at 2003 and 9,624 shares at 2002), at cost (437,234) (362,479) Deferred unearned compensation (Note 10) (32,094) (27,262) Accumulated other comprehensive income: Cumulative translation and other adjustments 10,246 (42,354) --------- --------- Total shareholders' equity 1,896,568 1,827,652 ---------- ---------- $2,334,890 $2,253,920 ---------- ---------- The accompanying notes are an integral part of these consolidated financial statements. Consolidated Statements of Income (in thousands, except per share data) For the year ended June 30, 2003 2002 2001 ---------- ---------- ---------- Net revenue $1,843,098 $1,711,497 $2,365,549 Cost of sales 1,233,357 1,169,462 1,507,060 ---------- ---------- ---------- Gross profit 609,741 542,035 858,489 ---------- ---------- ---------- Selling, general and administrative expenses: Selling 161,519 145,004 180,485 General and administrative 339,760 296,903 398,414 Total selling, general and ---------- ---------- ---------- administrative expenses 501,279 441,907 578,899 ---------- ---------- ---------- Income from operations 108,462 100,128 279,590 ---------- ---------- ---------- Other income (expense): Impairment and write-down of investments (5,089) (12,570) (2,763) Interest, net 8,166 5,986 6,854 Other (1,497) (323) 7,735 ---------- ---------- ---------- Total other income (expense) 1,580 (6,907) 11,826 ---------- ---------- ---------- Income before income taxes and minority interest 110,042 93,221 291,416 Income taxes (Note 4) 24,762 16,684 87,424 ---------- ---------- ---------- Income before minority interest 85,280 76,537 203,992 Minority interest (362) (58) (73) ---------- ---------- ---------- Net income $ 84,918 $ 76,479 $ 203,919 ---------- ---------- ---------- Earnings per common share (Based upon weighted average common shares outstanding) (Notes 2 and 3): Basic $ 0.44 $ 0.39 $ 1.04 Diluted $ 0.44 $ 0.39 $ 1.03 Dividends per common share (Note 3)$ 0.10 $ 0.10 $ 0.10 Weighted average common shares outstanding (Notes 2 and 3): Basic 191,873 194,327 195,471 Diluted 193,229 195,986 197,633 The accompanying notes are an integral part of these consolidated financial statements. Consolidated Statements of Shareholders' Equity (in thousands)
Accumulated Class A Class B Deferred Other Total Common Common Common Paid-In Retained Treasury Unearned Comprehensive Shareholders' Stock Stock Stock Capital Earnings Stock Compensation Income Equity -------- -------- ------ -------- ---------- ---------- ----------- ------------- ------------ Balance, June 30, 2000 $ 5,418 $ 5,132 $ 5 $259,806 $1,696,162 $(241,893) $(25,788) $ 6,962 $ 1,705,804 Comprehensive income: Net income 203,919 203,919 Translation adjustments (110,583) (110,583) Unrealized investment loss (1,593) (1,593) Total comprehensive income 91,743 Cash dividends declared (19,631) (19,631) Stock options -granted 13,787 (13,787) - -exercised 35 5 10,449 (921) 9,568 -cancelled (1,544) 1,770 226 Stock bonus 2 974 976 Treasury stock -purchases (39,908) (39,908) -reissuances 1,907 1,253 3,160 Deferred unearned compensation amortization 9,398 9,398 Stock option tax benefit 4,304 4,304 -------- -------- ------ -------- ---------- ---------- ----------- ------------- ----------- Balance, June 30, 2001 5,455 5,137 5 289,683 1,880,450 (281,469) (28,407) (105,214) 1,765,640 Comprehensive income: Net income 76,479 76,479 Translation adjustments 61,512 61,512 Reclass of unrealized investment loss 1,348 1,348 Total comprehensive income 139,339 Cash dividends declared (19,441) (19,441) Stock options -granted 10,280 (10,280) - -exercised 17 13 7,322 (1,332) 6,020 -cancelled (3,059) 2,925 (134) Stock bonus 1 3,463 (2,610) 854 Treasury stock -purchases (80,165) (80,165) -reissuances 1,084 1,294 2,378 Deferred unearned compensation amortization 11,110 11,110 Stock option tax benefit and other 2,858 (807) 2,051 -------- -------- ------ -------- ---------- ---------- ----------- ------------- ----------- Balance, June 30, 2002 5,473 5,150 5 311,631 1,937,488 (362,479) (27,262) (42,354) 1,827,652 Comprehensive income: Net income 84,918 84,918 Translation adjustments 56,982 56,982 Minimum pension liability (4,503) (4,503) Reclass of unrealized investment loss 121 121 Total comprehensive income 137,518 Cash dividends declared (19,202) (19,202) Stock options -granted 12,552 (12,552) - -exercised 33 19 9,173 (645) 8,580 -cancelled (939) 942 3 Stock bonus 6,564 (6,029) 535 Treasury stock -purchases (74,997) (74,997) -reissuances 635 1,450 2,085 Deferred unearned compensation amortization 12,807 12,807 Stock option tax benefit and other 1,914 236 (563) 1,587 -------- -------- ------ -------- ---------- ---------- ----------- ------------- ----------- Balance, June 30, 2003 $ 5,506 $ 5,169 $ 5 $341,530 $2,003,440 $(437,234) $(32,094) $ 10,246 $ 1,896,568 -------- -------- ------ -------- ---------- ---------- ----------- ------------- -----------
The accompanying notes are an integral part of these consolidated financial statements. Consolidated Statements of Cash Flows (in thousands)
For the year ended June 30, 2003 2002 2001 --------- --------- --------- Cash and cash equivalents, beginning of year $ 213,477 $ 138,438 $ 164,288 Cash and cash equivalents were provided from (used for): Operations: Net income 84,918 76,479 203,919 Add (deduct) non-cash items included in net income: Depreciation and amortization 228,730 223,687 217,954 Impairment and write-downs of investments 5,089 12,570 2,763 Deferred income taxes (31,412) (19,785) (3,804) Loss on sale of property, plant and equipment 5,394 1,654 2,450 Fixed asset write-downs included in special charges 23,070 5,452 3,043 Minority interest 362 58 73 Amortization of deferred unearned compensation 12,807 11,110 9,398 Amortization of deferred investment grants (32) (195) (514) Other debits (credits) to earnings, net (4,729) 664 (3,571) Current items: Accounts receivable 836 46,841 63,463 Inventories (6,734) 52,798 11,358 Prepaid expenses 14,050 7,034 (24,663) Accounts payable (11,730) (408) (77,164) Accrued expenses 15,164 (21,069) 30,612 Income taxes payable 13,690 (1,261) (18,765) --------- --------- --------- Net cash provided from operations 349,473 395,629 416,552 --------- --------- --------- Investments: Purchases of property, plant and equipment (171,193) (172,497) (376,300) Proceeds from sale of property, plant and equipment 3,851 4,751 5,731 Purchases of businesses, net of cash acquired - (4,702) - (Increase) decrease in marketable securities (71,387) (30,454) 7,561 Increase in other assets (55,097) (20,725) (14,002) --------- --------- --------- Net cash used for investments (293,826) (223,627) (377,010) --------- --------- --------- Financing: Increase (decrease) in short-term loans (794) (853) 187 Decrease in long-term debt (927) (5,447) (1,678) Increase in long-term debt 11 318 308 Cash dividends paid (19,214) (19,462) (19,555) Principal payments on capital leases (7,075) (8,926) - Exercise of stock options 8,580 6,020 9,568 Purchase of treasury stock (74,997) (80,165) (39,908) Reissuance of treasury stock 2,085 2,378 3,160 --------- --------- --------- Net cash used for financing (92,331) (106,137) (47,918) --------- --------- --------- Effect of exchange rate changes on cash 2,183 9,174 (17,474) --------- --------- --------- Net increase (decrease) in cash and cash equivalents (34,501) 75,039 (25,850) --------- --------- --------- Cash and cash equivalents, end of year $ 178,976 $ 213,477 $ 138,438 --------- --------- --------- Supplemental disclosure of cash flow information Cash paid during the year for: Interest $ 1,835 $ 2,225 $ 2,837 Income taxes $ 41,776 $ 45,406 $ 87,862
The accompanying notes are an integral part of these consolidated financial statements. Notes to Consolidated Financial Statements (in thousands, except per share data) (1) Nature of Operations Molex Incorporated manufactures electronic components, including electrical and fiber optic interconnection products and systems; switches; integrated products; and application tooling in 58 plants in 19 countries throughout the world. (2) Summary of Significant Accounting Policies The following is a summary of the major accounting policies and practices of Molex Incorporated and subsidiaries that affect significant elements of the accompanying consolidated financial statements. (A) Principles of Consolidation The consolidated financial statements include the accounts of Molex Incorporated and its majority-owned subsidiaries (the Company or Molex). All material intercompany balances and transactions have been eliminated. Subsidiaries in which the Company's ownership is 20 percent to 50 percent are accounted for using the equity method. Molex does not have material exposure to off-balance-sheet arrangements, including special purpose entities and activities that include non-exchange-traded contracts accounted for at fair value. Due to the nature of its operations, Molex is not subject to significant concentration risks relating to customers, products or geographic locations. (B) Use of Estimates in Financial Statement Preparation The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. (C) Cash and Cash Equivalents The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. (D) Currency Translation Assets and liabilities of international entities have been translated at period-end exchange rates and income and expenses have been translated using weighted average exchange rates for the period. Translation adjustments are included as a component of accumulated other comprehensive income. (E) Marketable Securities Marketable securities consist of government and municipal debt securities. These instruments contain embedded derivative features that enhance the liquidity of the portfolio by enabling the Company to liquidate the instrument prior to the stated maturity date. The Company generally holds these instruments for three months to 12 months, and they are carried at fair value. These marketable securities are classified as trading securities and, accordingly, marked-to-market adjustments are recorded in the income statement. (F) Fair Value of Financial Instruments The Company's financial instruments include accounts receivable and payable, marketable securities and long-term debt. The carrying amounts of the financial instruments approximate their fair value. (G) Inventories Inventories are valued at the lower of first-in, first-out cost or market. Net inventories at June 30 consist of the following: 2003 2002 --------- --------- Raw materials $ 26,155 $ 25,753 Work in progress 63,807 63,180 Finished goods 89,294 78,320 --------- --------- $ 179,256 $ 167,253 The inventory allowance was $40,386 at June 30, 2003 and $46,916 at June 30, 2002. (H) Property, Plant and Equipment Property, plant and equipment are reported at cost less accumulated depreciation, which is provided substantially on a straight-line basis for financial statement purposes and on accelerated methods for tax purposes. At June 30, property, plant and equipment consist of the following: 2003 2002 --------- --------- Land and improvements $ 79,844 $ 77,331 Buildings and leasehold improvements 519,611 478,100 Machinery and equipment 1,341,032 1,279,372 Molds and dies 590,794 540,749 Construction in progress 76,649 106,553 ----------- ----------- $ 2,607,930 $ 2,482,105 Accumulated depreciation and amortization (1,599,982) (1,414,515) ----------- ----------- Net property, plant and equipment $ 1,007,948 $ 1,067,590 ----------- ----------- The estimated useful lives are as follows: Buildings 25-45 years Machinery and equipment 3-10 years Molds and dies 3-4 years Costs of leasehold improvements are amortized over the terms of the related leases using various methods. The Company performs reviews for impairment of long-lived assets whenever events or circumstances indicate that the carrying value of an asset may not be recoverable. An impairment loss would be recognized when estimated future cash flows expected to result from the use of the asset and the eventual disposition are less than the carrying amount. Depreciation and amortization expense for property, plant and equipment was $223,867 in 2003; $217,714 in 2002; and $202,230 in 2001. (I) Research and Development and Patent Costs Costs incurred in connection with the development of new products and applications are charged to operations as incurred. Total research and development costs equaled $116,986 in 2003; $111,771 in 2002; and $134,637 in 2001. Total patent costs were $3,949 in 2003; $4,564 in 2002; and $6,740 in 2001. (J) Revenue Recognition The Company recognizes revenue when title and risk of ownership transfers to the buyer. A reserve for estimated returns is established at the time of sale based on historical return experience to cover returns of defective product and is recorded as a reduction of revenue. A reserve for doubtful accounts is recorded generally based on a percentage of aged receivables and management's evaluation of customer credit risk. Management judgment is utilized in assessing customer creditworthiness, changes in customer payment history, historical bad debt experience and economic and market trends. (K) Derivative Instruments and Hedging Activities The use of derivative instruments is limited primarily to hedging activities related to specific foreign currency cash flows. The Company had no derivatives outstanding at June 30, 2003. The impact of gains and losses on such instruments was not material to the results of operations for years ending June 30, 2003, 2002 and 2001. (L) Earnings Per Share (EPS) Basic EPS is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted EPS is computed by dividing net income by the weighted average number of common shares and dilutive securities outstanding during the period. The basic weighted-average shares outstanding reconciles to diluted weighted-average shares outstanding as follows: 2003 2002 2001 ------- ------- ------- Basic 191,873 194,327 195,471 Effect of dilutive stock options 1,356 1,659 2,162 Diluted 193,229 195,986 197,633 Anti-dilutive shares 2,103 971 1,099 (M) Goodwill and Intangible Assets The Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets," as of July 1, 2001. This statement changed the accounting for goodwill and intangible assets, which are no longer amortized unless, in the case of intangible assets, the asset has a finite life. Goodwill, as well as intangible assets with indefinite lives, are now subject to an annual test for impairment. An annual review was performed at May 31, 2003 resulting in no impairment in the value of the Company's goodwill and other intangible assets. During the years ended June 30, 2003 and 2002, the carrying amount of the Company's goodwill changed solely due to goodwill resulting from business acquisitions. The Company did not record a goodwill impairment loss in either year. Comparative information for prior years as if goodwill had not been amortized in those periods is as follows: For the years ended June 30, 2003 2002 2001 -------- -------- -------- Reported net income $ 84,918 $ 76,479 $203,919 Add back: Goodwill amortization - - 10,058 -------- -------- -------- Adjusted net income $ 84,918 $ 76,479 $213,977 -------- -------- -------- Basic earnings per share: Reported net income $ 0.44 $ 0.39 $ 1.04 Add back: Goodwill amortization - - 0.05 -------- -------- -------- Adjusted net income $ 0.44 $ 0.39 $ 1.09 -------- -------- -------- Diluted earnings per share: Reported net income $ 0.44 $ 0.39 $ 1.03 Add back: Goodwill amortization - - 0.05 -------- -------- -------- Adjusted net income $ 0.44 $ 0.39 $ 1.08 -------- -------- -------- All of the Company's intangible assets are recorded in "Other Assets" and are subject to amortization as follows: License fees Patents Total ------------ -------- -------- At June 30, 2003: Gross carrying value $ 12,765 $ 1,358 $ 14,123 Accumulated amortization (6,254) (399) (6,653) ------------ -------- -------- Net carrying value $ 6,511 $ 959 $ 7,470 ------------ -------- -------- At June 30, 2002: Gross carrying value $ 17,028 $ 565 $ 17,593 Accumulated amortization (7,593) (410) (8,003) ------------ -------- -------- Net carrying value $ 9,435 $ 155 $ 9,590 ------------ -------- -------- Total amortization expense for intangible assets was $4,013 in 2003; $4,887 in 2002; and $2,414 in 2001. Estimated aggregate amortization expense for intangible assets is as follows: $2,170 in 2004; $1,921 in 2005; $1,316 in 2006; $837 in 2007; and $374 in 2008. (N) Income Taxes The provision for income taxes is determined under the liability method pursuant to SFAS No. 109. Under this method, deferred tax assets and liabilities are recognized based on differences between the financial statement and tax bases of assets and liabilities using presently enacted tax rates. The Company has operations in several countries around the world that are subject to income and other similar taxes in these countries. The estimation of the amounts of income tax to be recorded by the Company involves the interpretation of complex tax laws and regulations, evaluation of tax audit findings and assessment of how the foreign taxes may affect domestic taxes. Although the Company's management believes Molex's tax accruals are adequate, differences may occur in the future depending on the resolution of pending and new tax matters. (O) Stock-Based Compensation Stock-based employee compensation plans are acccounted for under the recognition and measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees." As permitted by SFAS No. 123, "Accounting for Stock-based Compensation" and amended by SFAS No. 148, "Accounting for Stock-based Compensation-Transition and Disclosure, an amendment of SFAS No. 123," the effect on net income, basic earnings per share and diluted earnings per share of accounting for stock-based compensation in accordance with SFAS No. 123 is disclosed. See Note 10 for a description of the stock-based compensation plans and the aforementioned disclosures. (P) New Accounting Pronouncements The Company adopted SFAS No. 143, "Accounting for Asset Retirement Obligations," and SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," as of July 1, 2002. These statements address the recognition and remeasurement of obligations associated with the retirement of tangible long-lived assets and the accounting and reporting for the impairment or disposal of long-lived assets, including discontinued operations, respectively. SFAS No. 144 establishes a single accounting model for long-lived assets to be disposed of by sale. The adoption of SFAS No. 143 and SFAS No. 144 had no material impact on the consolidated financial statements, other than the asset write-downs included in the fiscal 2003 fourth quarter charge. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. It also establishes that fair value is the objective for initial measurement of the liability. This statement is effective for exit or disposal activities that are initiated after December 31, 2002. The fiscal 2003 fourth quarter charge was recorded in accordance with SFAS No. 146. In November 2002, the FASB issued FIN 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." This Interpretation establishes accounting and disclosure requirements for a company's obligations under certain guarantees that it has issued. A guarantor is required to recognize a liability for the obligation it has undertaken in issuing a guarantee, including the ongoing obligation to stand ready to perform over the term of the guarantee in the event that the specified triggering events or conditions occur. The objective of the initial measurement of that liability is the fair value of the guarantee at its inception. The initial recognition and measurement provisions of this Interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The adoption of FIN 45 had no material impact on the Company. In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest Entities." It requires that the assets, liabilities and results of the activity of variable interest entities be consolidated into the financial statements of the company that has the controlling financial interest. It also provides the framework for determining whether a variable interest entity should be consolidated based on voting interest or significant financial support provided to it. For the Company, this Interpretation is effective immediately for variable interest entities created after January 31, 2003 and effective July 1, 2003 for variable interest entities acquired before February 1, 2003. The Company does not expect the adoption of this Interpretation to have any impact on its fiscal 2004 consolidated financial statements. In April 2003 the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." This statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133. The statement is effective for and should be prospectively applied to contracts entered into or modified and for hedging relationships designated after June 30, 2003. The Company does not expect the adoption of this statement to have any impact on its fiscal 2004 consolidated financial statements. In May 2003 the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." This statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective in the first interim period beginning after June 15, 2003. The Company does not expect the adoption of this statement to have any impact on its fiscal 2004 consolidated financial statements. (Q) Reclassifications Certain reclassifications have been made to the prior years' financial statements to conform to the 2003 classifications. (3) Capital Stock The shares of Common Stock, Class A Common Stock and Class B Common Stock are identical except as to voting rights. Class A Common Stock has no voting rights except in limited circumstances. So long as more than 50 percent of the authorized number of shares of Class B Common Stock continues to be outstanding, all matters, other than the election of directors, submitted to a vote of the shareholders must be approved by a majority of the Class B Common Stock, voting as a class, and by a majority of the Common Stock, voting as a class. During such period, holders of a majority of the Class B Common Stock could veto corporate action, other than the election of directors, that requires shareholder approval. There are 25 million shares of preferred stock authorized, none of which were issued or outstanding during the three years ended June 30, 2003. The Class B Common Stock can be converted into Common Stock on a share-for-share basis at any time at the option of the holder. The authorized Class A Common Stock would automatically convert into Common Stock on a share-for-share basis at the discretion of the Board of Directors upon the occurrence of certain events. Upon such conversion, the voting interests of the holders of Common Stock and Class B Common Stock would be diluted. The Company's Class B Common Stock outstanding has remained at 94,255 shares throughout the three-year period ended June 30, 2003. The holders of the Common Stock, Class A Common Stock and Class B Common Stock participate equally, share-for-share, in any dividends that may be paid thereon, if, as and when declared by the Board of Directors or in any assets available upon liquidation or dissolution of the Company. Changes in shares of common stock for the years ended June 30 are as follows: Class A Common Common Treasury Stock Stock Stock ------- ------- ------- Shares outstanding at June 30, 2000 108,363 102,629 15,431 Exercise of stock options 704 123 22 Purchase of treasury stock - - 1,230 Issuance of stock bonus - - (77) Other 30 - 26 ------- ------- ------- Shares outstanding at June 30, 2001 109,097 102,752 16,632 Exercise of stock options 330 256 42 Purchase of treasury stock - - 2,902 Issuance of stock bonus 24 - (76) Other - - 17 ------- ------- ------- Shares outstanding at June 30, 2002 109,451 103,008 19,517 Exercise of stock options 662 377 8 Purchase of treasury stock - - 3,353 Issuance of stock bonus 11 - (82) Other - 5 35 ------- ------- ------- Shares outstanding at June 30, 2003 110,124 103,390 22,831 ------- ------- ------- (4) Income Taxes Income before income taxes and minority interest is summarized as follows: 2003 2002 2001 -------- -------- -------- United States $ 11,472 $ (5,686) $ 98,435 International 98,570 98,907 192,981 -------- -------- -------- $110,042 $ 93,221 $291,416 -------- -------- -------- The components of income tax expense (benefit) were as follows: 2003 2002 2001 -------- -------- -------- Currently payable: U.S. Federal $ 3,675 $ (2,829) $ 17,339 State (2,250) (525) 1,067 International 54,749 39,823 72,822 -------- -------- -------- 56,174 36,469 91,228 Deferred: United States (26,525) (22,185) (6,013) International (4,887) 2,400 2,209 -------- -------- -------- (31,412) (19,785) (3,804) -------- -------- -------- Total provision for income taxes $ 24,762 $ 16,684 $ 87,424 -------- -------- -------- The Company's tax rate differs from the U.S. Federal income tax rate as follows: 2003 2002 2001 -------- -------- -------- U.S. Federal income tax rate 35.0% 35.0% 35.0% Permanent tax exemptions (8.5) (8.4) (2.6) Foreign tax credits (8.7) (5.4) (0.6) Investments - (5.0) - Valuation allowance 9.1 8.7 - State income taxes, net of Federal tax benefit (2.0) (0.6) 0.4 Foreign tax rates less than U.S. Federal rate (net) (2.5) (6.0) (2.0) Other 0.1 (0.4) (0.2) -------- -------- -------- 22.5% 17.9% 30.0% -------- -------- -------- At June 30, 2003, the Company had approximately $42,000 of non-U.S. net operating loss carryforwards and $17,000 of U.S. capital loss carryforwards. The capital loss carryforwards can be carried forward to offset future U.S. capital gains through the year ended June 30, 2007. The non-U.S. net operating losses can be carried forward indefinitely. A valuation allowance is provided for when it is more likely than not that some portion of the deferred tax asset will not be realized. As of June 30, 2003 and 2002, the Company has recorded valuation allowances of $18,557 and $8,581, respectively, against the non-U.S. net operating loss carryforwards. The components of deferred tax assets and liabilities are as follows: 2003 2002 -------- -------- Deferred income tax assets: Foreign tax credits $ 47,617 $ 23,570 Employee benefit programs 35,894 27,396 Net operating losses 18,557 8,581 Depreciation and amortization 16,782 - Inventory reserves 9,752 12,466 Allowance for doubtful accounts 5,283 5,398 Inventory-other 4,771 4,620 Minimum tax credit 4,736 - Patent costs 4,656 4,512 Severance 1,990 4,211 Other, net 1,330 6,022 Valuation allowance (18,557) (8,581) -------- -------- Total deferred tax assets 132,811 88,195 -------- -------- Deferred income tax liabilities: Investments (4,866) (1,094) Depreciation and amortization - (4,010) -------- -------- Total deferred tax liabilities (4,866) (5,104) -------- -------- $127,945 $ 83,091 -------- -------- The net deferred tax accounts reported on the balance sheet as of June 30 are as follows: 2003 2002 -------- -------- Net deferred: Current asset $ 19,632 $ 27,307 Non-current asset 113,333 61,000 Current liability - - Non-current liability (5,020) (5,216) -------- -------- $127,945 $ 83,091 -------- -------- The Company has not provided for U.S. deferred income taxes or foreign withholding taxes on $430,000 of undistributed earnings of its non-U.S. subsidiaries as of June 30, 2003. Should these earnings be distributed, no additional U.S. income tax expense would be incurred due to the availability of foreign tax credits. (5) Commitments and Contingencies In the normal course of business, the Company is a party to various matters involving disputes and litigation. While it is not possible at this time to determine the ultimate outcome of these matters, management believes that the ultimate liability, if any, will not be material to the consolidated results of operations, financial condition or liquidity of the Company. The Company does not offer product warranties or other performance guarantees. (6) Pension and Other Postretirement Benefits Pension and Other Plans The Company sponsors and/or contributes to pension plans, including defined benefit plans, covering substantially all U.S. hourly employees and certain employees in international subsidiaries. The benefits are primarily based on years of service and the employees' compensation for certain periods during their last years of employment. The Company and certain of its subsidiaries also provide discretionary savings and other defined contribution plans covering substantially all of their salaried employees. Employer contributions to such plans of $15,438; $10,801; and $9,382 were charged to operations during 2003, 2002 and 2001, respectively. Other Postretirement Benefits The Company provides certain retiree health care and life insurance benefits to its employees. The cost of retiree insurance benefits is accrued over the period in which the employees become eligible for such benefits. The majority of the Company's U.S. employees may become eligible for these benefits if they reach age 55, with age plus years of service equal to 70. There are no significant postretirement health care benefit plans outside of the United States. The Company continues to fund benefit costs primarily as claims are paid. The assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation was 10 percent in 2003, declining annually to an ultimate rate of 5 percent by 2008. The health care cost trend rate assumption has a significant effect on the amount of the obligation and periodic cost reported. A one-percentage-point change in assumed health care cost trend rates would have the following effects: 1 Percentage 1 Percentage Point Point Increase Decrease ------------ ------------ Effect on total of service and interest cost components $ 407 $ (317) Effect on postretirement benefit obligation $ 5,942 $ (4,654) As a result of Molex's global workforce reduction in fiscal 2002, the Company recognized net curtailment gains for its U.S. pension and postretirement plans in fiscal 2002 of $640 and $113, respectively. Internationally, the Company experienced curtailment and settlement losses in fiscal 2002 of $392 and $718 in its pension plans. The weighted average assumptions used in computing the following information are presented below:
2003 2003 2003 2002 2002 2002 Pension Pension Postretirement Pension Pension Postretirement U.S. Plans Int'l Plans Other Plans U.S. Plans Int'l Plans Other Plans ---------- ----------- -------------- ---------- ----------- -------------- Discount rates 6.25% 3.1% 6.25% 7.25% 3.6% 7.25% Rates of increase in compensation 3.5% 2.9% - 4.0% 3.2% - Expected long-term rates of return on plan assets 8.5% 6.5% - 9.0% 6.4% -
Net periodic pension and postretirement benefit costs for the Company's plans consist of the following for the year ended June 30:
Interest Costs Amortization of on Projected Expected Recognized Unrecognized Recognized Net Periodic Service Benefit Return on Prior Transition (Gains) Other Pension Costs Obligation Plan Assets Service Cost Obligation Losses Items Expense ------- ------------ --------- ---------- ------------ -------- ------- ---------- 2003 Pension: U.S. plans $ 1,962 $ 1,613 $ (1,661) $ 202 $ - $ - $ - $ 2,116 International plans 4,107 1,960 (1,377) - 57 (286) - 5,033 Postretirement Other plans 889 1,071 - (262) - (32) 766 2,432 2002 Pension: U.S. plans 2,376 1,572 (1,611) 231 - - (640) 1,928 International plans 3,372 1,729 (1,463) - 56 (722) 1,110 4,082 Postretirement Other plans 1,019 1,000 - (292) - (11) (113) 1,603 2001 Pension: U.S. plans 1,621 1,282 (1,661) 231 - (200) - 1,273 International plans 4,234 1,922 (1,442) - 87 (432) - 4,369 Postretirement Other plans 781 927 - (292) - 396 - 1,812
The following provides a reconciliation of benefit obligations, plan assets and funded status of the plans:
2003 2003 2003 2002 2002 2002 Pension Pension Postretirement Pension Pension Postretirement U.S. Plans Int'l Plans Other Plans U.S. Plans Int'l Plans Other Plans ---------- ----------- -------------- ---------- ----------- -------------- Change in benefit obligation Benefit obligation at beginning of year $ 22,511 $ 54,095 $ 15,117 $ 21,929 $ 42,399 $ 14,070 Service cost 1,962 4,107 889 2,376 3,372 1,019 Interest cost 1,613 1,960 1,071 1,572 1,729 1,000 Participants contributions - 173 266 - 171 129 Special termination benefits - - 766 - - - Effect of curtailment - - - (845) (704) (867) Effect of settlement - - - - 554 - Benefits paid (716) (2,859) (714) (520) (4,629) (508) Liability (gains) losses 4,190 5,700 14,098 (2,001) 7,060 274 Changes in foreign currency - 3,318 - - 4,143 - ---------- ----------- -------------- ---------- ----------- -------------- Benefit obligation at end of year $ 29,560 $ 66,494 $ 31,493 $ 22,511 $ 54,095 $ 15,117 ---------- ----------- -------------- ---------- ----------- -------------- Change in plan assets Fair value of plan assets at beginning of year $ 18,441 $ 19,522 $ - $ 18,143 $ 19,604 $ - Actual return on plan assets (1,260) (1,212) - 518 (2,209) - Employer contributions 12,600 5,774 448 300 3,702 379 Participants contributions - 173 266 - 171 129 Effect of settlement - - - - (164) - Benefits paid (716) (2,619) (714) (520) (4,287) (508) Changes in foreign currency - 2,901 - - 2,705 - ---------- ----------- -------------- ---------- ----------- -------------- Fair value of plan assets at end of year $ 29,065 $ 24,538 $ - $ 18,441 $ 19,522 $ - ---------- ----------- -------------- ---------- ----------- -------------- Funded status $ (495) $ (41,956) $ (31,493) $ (4,070) $ (34,573) $ (15,117) Unrecognized net transition liability - 705 - - 757 - Unrecognized net actuarial loss 7,081 16,986 14,757 96 10,668 1,495 Unrecognized prior service cost 551 - (752) 831 - (1,127) Effect of curtailment - - - (205) - (754) ---------- ----------- -------------- ---------- ----------- -------------- Net amount recognized $ 7,137 $ (24,265) $ (17,488) $ (3,348) $ (23,148) $ (15,503) Amounts recognized in the consolidated ---------- ----------- -------------- ---------- ----------- -------------- balance sheet consist of: Prepaid benefit cost $ 12,000 $ 4,341 $ - $ - $ - $ - Accrued benefit liability (8,487) (32,455) (17,488) (3,348) (23,148) (15,503) Intangible asset 551 - - - - - Accumulated other comprehensive (income) loss 3,073 3,849 - - - - ---------- ----------- -------------- ---------- ----------- -------------- Net amount recognized $ 7,137 $ (24,265) $ (17,488) $ (3,348) $ (23,148) $ (15,503) ---------- ----------- -------------- ---------- ----------- --------------
The minimum pension liability adjustment included in accumulated other comprehensive (income) loss is recorded on the consolidated balance sheet net of deferred income taxes of $2,419 at June 30, 2003. (7) Leases The Company rents certain facilities and equipment under lease arrangements classified as both capital and operating leases. Some of the leases have renewal options. Assets under capital leases consist primarily of data processing equipment. Future minimum lease payments are presented below: Capital Operating Fiscal Year Leases Leases ---------------------- ---------- --------- 2004 $ 4,246 $ 7,245 2005 2,056 4,084 2006 1,181 2,466 2007 610 1,982 2008 and thereafter 596 5,469 ---------- --------- $ 8,689 $ 21,246 Less amount representing interest, at 2% to 9.7% 1,100 ---------- Present value of minimum lease payments (includes current portion of $3,858) $ 7,589 ---------- Rental expense was $8,720 in 2003; $9,949 in 2002; and $11,005 in 2001. (8) Debt The details relative to long-term debt are as follows: 2003 2002 -------- -------- Mortgages $ 6,672 $ 7,250 Bank loans 3,407 3,706 Industrial development bonds 4,350 4,350 Other 282 322 -------- -------- 14,711 15,628 Less current portion 1,574 1,405 -------- -------- Total long-term debt $ 13,137 $ 14,223 -------- -------- Mortgages consist of two loans that certain buildings, carry an annual interest rate of 7.79 percent and require periodic principal payments through 2012. The Company has two bank loans with annual interest rates of 4.5 percent and 4.75 percent, respectively, payable in periodic installments through March 2007. Industrial development bonds, secured by certain land, buildings, and equipment, have annual interest rates ranging from 1.5 percent to 2.7 percent, with periodic principal payments through March 2011. The long-term debt as of June 30, 2003 matures as follows: $1,574 in 2004; $1,578 in 2005; $3,629 in 2006; $1,498 in 2007; and $6,432 thereafter. At June 30, 2003, the Company had available lines of credit of $129,900, of which $127,300 remained unused at June 30, 2003. Short-term loans at June 30, 2003 of $656 are held in Brazil, bear the prevailing annual market interest rate of 19 percent and mature within a 12-month period. (9) Special Charges During the fourth quarter of fiscal 2003, the Company recorded a pretax charge of $40.1 million ($28.6 million, net of a tax benefit of $11.5 million) comprising $23.1 million relating to write-offs of manufacturing assets and facilities, $11.9 million to reflect workforce reductions of 537 people and $5.1 million for the write-off of licenses and investments. The majority of these charges impacted the Americas region by $27.7 million and the European region by $8.4 million. Of the 537 people included in the workforce reduction, 376 were directly involved in manufacturing operations and 161 were involved in manufacturing support and sales, general and administrative positions. Some employment reductions occurred during fiscal 2003, and all remaining employment reductions are expected to occur in the first half of fiscal 2004. Most severance payments will continue for up to a year, with some extending beyond that period. Pretax charges of $5.4 million were recorded in cost of sales; $29.6 million in selling, general and administrative expenses; and $5.1 million in other expenses. The charges relating to facility, asset, license and investment write-downs were credited to the respective items on the balance sheet, and the unpaid amounts relating to employment reductions were included in accrued expenses. During the second quarter of fiscal 2002, the Company recorded a pretax charge of $34.2 million ($25.3 million, net of tax benefit of $8.9 million) comprising $18.7 million to reflect costs associated with a reduction in the global workforce of approximately 800 people, $10.0 million to reflect the lower current value of investments in other companies and $5.5 million of asset write-down costs related to certain operations being closed. Of the approximately 800 people included in the workforce reduction, approximately 400 were directly involved in manufacturing operations and approximately 400 were involved in sales and administrative positions. Employment reductions of approximately 600 occurred during the second quarter of fiscal 2002, resulting in cash payments of $5.7 million . The remaining employment reductions occurred during the second half of fiscal 2002, and any remaining severance payments will be completed by the end of fiscal 2004. Pretax charges of $7.1 million were recorded in cost of sales; $15.6 million in selling, general and administrative expenses; and $11.5 million in other expenses. The charges relating to asset and investment write-downs were credited to the respective items on the balance sheet, and the unpaid amounts relating to employment reductions were included in accrued expenses. In addition, during the second quarter of fiscal 2002, a one-time positive tax planning adjustment of $5.0 million related to certain operations being closed was recorded. During the fourth quarter of fiscal 2001, the Company recorded a pretax charge of $43.5 million ($30.3 million, net of tax benefit of $13.2 million) to reflect costs associated with a reduction in the global workforce of approximately 950 people ($27.7 million), write-off of slow-moving and excess inventories ($12.7 million) and asset write-offs related to operations being closed ($3.1 million). Of the approximately 950 people included in the workforce reduction, approximately 400 were directly involved in manufacturing operations and approximately 550 were involved in sales and administrative positions. Employment reductions of approximately 100 occurred during the fourth quarter of fiscal 2001, resulting in cash payments of $2.4 million. The majority of the remaining employment reductions occurred during the first quarter of fiscal 2002, and substantially all remaining severance payments were made by the end of fiscal 2003. The inventory written off was disposed of during the first quarter of fiscal year 2002. Pretax charges of $16.4 million were included in cost of sales and $27.1 million in selling, general and administrative expenses. The charges relating to fixed asset and inventory write-offs were credited to the respective items on the balance sheet, and the employment reductions were included in accrued expenses. Total spending and use of reserves during fiscal 2003 were $13.5 million. The major components of the fiscal 2001 fourth quarter and fiscal 2002 second quarter charges and the remaining accrual balance as of June 30, 2003 were as follows:
June December Cash Assets Accrued 2001 2001 Payments Disposed Balance at Charge Charge Made and Other June 30, 2003 -------- -------- -------- --------- ----------- Severance and other benefits $ 27,690 $ 18,675 $(37,476) $ (6,301) $ 2,588 Inventory write-offs 12,714 - - (12,714) - Asset write-offs 3,043 15,483 - (18,526) - -------- -------- -------- --------- ----------- Total $ 43,447 $ 34,158 $(37,476) $(37,541) $ 2,588 -------- -------- -------- --------- -----------
The major components of the fiscal 2003 fourth quarter charges and the remaining accrual balance as of June 30, 2003 were as follows: June Cash Assets Accrued 2003 Payments Disposed Balance at Charge Made and Other June 30, 2003 -------- -------- -------- --------- Severance and other benefits $ 11,960 $ (1,834) $ - $ 10,126 Asset write-offs 28,156 - (28,156) - -------- -------- -------- --------- Total $ 40,116 $ (1,834) $(28,156) $ 10,126 -------- -------- -------- --------- (10) Stock Option Plans The Company has five stock option plans currently in effect, three of which may issue future grants: the 1990 Stock Option Plan (1990 Plan), the 1991 Stock Option Plan (1991 Plan), the 1998 Stock Option Plan (1998 Plan), the Incentive Stock Option Plan (ISO Plan) and the Long-Term Stock Plan (LT Plan). 1990 Plan: This plan expired as of June 30, 1999. Future grants cannot be issued from this plan, but all grants issued prior to this date can be exercised. The most significant terms of this plan provided that (1) options were authorized to be granted for 6.875 million shares of Common Stock and (2) the option price was 50 percent of the fair market value of the stock of the Company on the date of grant. The option term was five years to nine years from the date of grant. Under the 1990 Plan, all shares issued were nonqualified. 1991 Plan: This plan expired as of June 30, 2000. Future grants cannot be issued from this plan, but all grants issued prior to this date can be exercised. The most significant terms of this plan provided that (1) options were authorized to be granted for 3.8 million shares of Common Stock and (2) the option price was the fair market value of the stock on date of grant. The option term was five years to 11 years from date of grant. 1998 Plan: The most significant terms of this plan provide that (1) options may be granted for 12.5 million shares of Class A Common Stock and (2) the option price shall be not less than 10 percent nor more than 100 percent of the fair market value of the Class A Common Stock of the Company on the date of grant. The option term is five years to nine years from the date of grant. The option price per share for certain options in the 1990 and 1998 plans was less than the fair market value at the date of grant, thus creating deferred unearned compensation. Deferred unearned compensation is charged to operations over the term of the option and was $12,807 in 2003; $11,110 in 2002; and $9,398 in 2001. Stock option transactions relating to the 1990, 1991 and 1998 Plans are summarized as follows (shares are in thousands):
1990 Plan 1991 Plan 1998 Plan Wtd. Avg. Wtd. Avg. Wtd. Avg. Price Price Price ----------------- ----------------- ----------------- Shares Per Share Shares Per Share Shares Per Share ------ --------- ------ --------- ------ --------- Outstanding at June 30, 2000 2,149 $ 9.40 2,156 $ 19.96 1,738 $ 11.64 Granted - - - - 781 13.44 Exercised 360 9.47 298 17.40 117 11.13 Canceled 60 9.27 5 17.55 64 12.68 ------ --------- ------ --------- ------ --------- Outstanding at June 30, 2001 1,729 $ 9.39 1,853 $ 20.38 2,338 $ 12.27 Granted - - - - 829 11.73 Exercised 230 10.68 100 21.63 236 12.15 Canceled 127 9.48 - - 152 12.27 ------ --------- ------ --------- ------ --------- Outstanding at June 30, 2002 1,372 $ 9.16 1,753 $ 20.30 2,779 $ 12.12 Granted - - - - 1,298 9.67 Exercised 650 7.89 11 23.96 327 11.67 Canceled 2 12.36 18 28.13 83 11.68 ------ --------- ------ --------- ------ --------- Outstanding at June 30, 2003 720 $ 10.31 1,724 $ 20.20 3,667 $ 11.30 Options exercisable at June 30, 2002 161 $ 11.37 212 $ 23.74 476 $ 12.56 Options exercisable at June 30, 2003 103 $ 6.77 352 $ 22.73 779 $ 12.70 ------ --------- ------ --------- ------ ---------
ISO Plan: The most significant terms of this plan, available to executives and directors, provide that (1) options may be granted for 500,000 shares of Class A Common Stock and (2) the option price shall be the fair market value of the stock on the date of grant. The option term is four years to 10 years from the date of grant. Under the ISO Plan, the options granted can be either incentive or nonqualified. Unless specifically stated otherwise, all options granted shall be incentive. Stock option transactions relating to the ISO Plan are summarized as follows (shares are in thousands): Wtd. Avg. Price Shares Per Share ------ --------- Outstanding at June 30, 2001 65 $ 34.22 Granted 61 26.99 Exercised - - Canceled - - ------ --------- Outstanding at June 30, 2002 126 $ 30.71 Granted 58 21.57 Exercised - - Canceled - - ------ --------- Outstanding at June 30, 2003 184 $ 27.84 Options exercisable at June 30, 2002 16 $ 34.22 Options exercisable at June 30, 2003 48 $ 31.91 ------ --------- LT Plan: The most significant terms of this plan, available to executives and management, provide that (1) options may be granted for three million shares of Class A Common Stock and (2) the option price shall be the fair market value of the stock on the date of grant. The options vest over their terms, which are four years to seven years from the date of grant. The LT Plan also allows for the grant of stock awards to certain executives based on meeting performance targets established in the Company's stock bonus plans. The awards vest over a period of generally four years and are valued at fair market value at date of grant. Stock option transactions and stock awards relating to the LT Plan are summarized as follows (shares are in thousands): Wtd. Avg. Price Shares Per Share ------ --------- Outstanding at June 30, 2001 657 $ 27.90 Granted 620 22.89 Exercised 25 - Canceled - - ------ --------- Outstanding at June 30, 2002 1,252 $ 25.99 Granted 1,485 17.12 Exercised 49 - Canceled - - ------ --------- Outstanding at June 30, 2003 2,688 $ 21.57 Options exercisable at June 30, 2002 139 $ 33.00 Options exercisable at June 30, 2003 409 $ 31.11 ------ --------- The following table summarizes information about options outstanding at June 30, 2003:
Wtd. Avg. Number Remaining Number Range of Outstanding Contractual Wtd. Avg. Exercisable Wtd. Avg. Exercise Prices (thousands) Life (in years) Exercise Price (thousands) Exercise Price --------------- ------------ --------------- -------------- ----------- -------------- Common $ 2.56 - 10.81 720 1.9 $ 9.83 102 $ 6.72 11.20 - 18.94 687 3.7 15.59 1 11.20 20.80 - 20.80 551 5.0 20.80 248 20.80 23.60 - 27.95 473 5.2 26.65 93 27.08 30.03 - 30.03 13 1.1 30.03 10 30.03 Class A Common $ 0.00 - 9.28 1,871 5.6 $ 7.26 8 $ 9.24 9.33 - 13.00 1,821 2.9 11.91 613 11.76 13.08 - 23.62 1,622 5.5 19.98 158 16.51 23.92 - 36.30 1,209 4.4 30.01 449 31.08 38.19 - 38.19 16 2.3 38.19 9 38.19 --------------- ------------ --------------- -------------- ----------- -------------- 8,983 1,691
As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation," the Company has elected to account for its stock-based compensation programs according to the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." During its fiscal third quarter, the Company adopted the disclosure provisions of SFAS No.148, "Accounting for Stock-Based Compensation - Transition and Disclosure." Had the Company elected to apply the provisions of SFAS No. 123 as amended by SFAS No. 148 regarding recognition of compensation expense to the extent of the calculated fair value of stock options granted, the effects on reported net income and earnings per common share would have been as follows: 2003 2002 2001 --------- --------- --------- Net income, as reported $ 84,918 $ 76,479 $ 203,919 Add: Stock-based employee compensation expense included in reported net income, net of related tax effects 9,925 9,122 6,578 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (17,433) (14,842) (10,831) Pro forma net income 77,410 70,759 199,666 Earnings per share: Basic 0.44 0.39 1.04 Diluted 0.44 0.39 1.03 Pro forma earnings per share: Basic 0.40 0.36 1.02 Diluted 0.40 0.36 1.01 Weighted average fair value of options granted during the year - at fair value 7.79 14.69 19.00 - at less than fair value 11.89 16.04 19.41 For purposes of computing pro forma net income and earnings per common share, the fair value of each option grant is estimated as of the date of grant using the Black-Scholes option pricing model with the following assumptions: 2003 2002 2001 --------- --------- --------- Dividend yield 0.4% 0.2% 0.2% Expected volatility 46.18% 52.02% 58.93% Risk-free interest rate 4.48% 5.56% 5.89% Expected life of option (years) 3.65 4.65 4.31 (11) Segment and Related Information The Company operates in one product segment: the manufacture and sale of electrical components. Revenue is recognized based on the location of the selling entity. Management operates the business by geographic segments. The Americas region consists primarily of operations in North America. The Far East North region is substantially Japan, but also includes Korea, while the Far East South region includes China, Singapore and the remaining countries in Asia. European operations are located in both eastern and western Europe. Information by geographic area is summarized in the following table:
United Americas Far East Far East Corporate States (Non-U.S.) North South Europe and Other Eliminations Total ---------- -------- -------- -------- -------- --------- ------------ ---------- 2003 Customer revenue $ 635,332 $19,850 $407,821 $469,342 $310,685 $ 68 $ - $1,843,098 Intercompany revenue 84,078 28,417 153,845 55,153 28,408 - (349,901) - Total revenue 719,410 48,267 561,666 524,495 339,093 68 (349,901) 1,843,098 Depreciation and amortization 76,911 2,063 75,282 23,515 31,318 19,641 - 228,730 Tax expense 4,524 901 15,438 13,466 (2,449) (7,118) - 24,762 Net income 16,234 2,323 40,080 61,436 (10,984) (24,171) - 84,918 Identifiable assets 851,512 57,665 489,509 475,458 468,809 179,315 (187,378) 2,334,890 Capital expenditures 36,962 2,586 62,538 30,036 24,835 14,236 - 171,193 2002 Customer revenue $ 668,047 $10,018 $351,542 $380,882 $300,951 $ 57 $ - $1,711,497 Intercompany revenue 92,409 36,643 124,976 48,901 27,685 - (330,614) - Total revenue 760,456 46,661 476,518 429,783 328,636 57 (330,614) 1,711,497 Depreciation and amortization 81,722 640 74,996 21,081 29,939 15,309 - 223,687 Tax expense 5,939 - 13,496 10,197 2,026 (14,974) - 16,684 Net income 19,543 (541) 34,843 55,182 1,400 (33,948) - 76,479 Identifiable assets 973,847 69,599 513,282 413,068 432,259 150,664 (298,799) 2,253,920 Capital expenditures 44,459 618 44,823 32,370 26,732 23,495 - 172,497 2001 Customer revenue $ 984,754 $71,514 $499,271 $404,955 $404,985 $ 70 $ - $2,365,549 Intercompany revenue 119,973 12,469 172,473 56,132 50,138 - (411,185) - Total revenue 1,104,727 83,983 671,744 461,087 455,123 70 (411,185) 2,365,549 Depreciation and amortization 73,682 3,346 78,440 19,079 27,077 16,330 - 217,954 Tax expense 45,569 (585) 38,394 11,304 6,759 (14,017) - 87,424 Net income 91,750 (724) 79,188 52,099 20,124 (38,518) - 203,919 Identifiable assets 1,013,701 49,736 497,381 337,280 387,578 149,865 (221,914) 2,213,627 Capital expenditures 156,531 1,747 111,251 40,983 43,507 22,281 - 376,300
Intercompany net revenue is generally recorded at cost plus the normal mark-up charged to unaffiliated customers. Identifiable assets are those assets of the Company that are identified with operations in each country. During 2003, 2002 and 2001, no customer accounted for more than 10 percent of consolidated net revenue. Fiscal 2003, 2002 and 2001 by Quarter (in thousands, except per share data-unaudited) Quarter 2003 2002 2001 Net revenue 1st $ 469,246 $ 430,453 $ 625,925 2nd 454,609 416,460 629,319 3rd 443,177 408,307 599,801 4th 476,066 456,277 510,504 Gross profit 1st 159,556 137,304 244,690 2nd 146,394 125,345 240,849 3rd 148,532 132,272 219,036 4th 155,259 147,114 153,914 Income/(loss) before income taxes and minority interest 1st 39,515 35,129 93,637 2nd 37,150 (3,757) 98,451 3rd 32,737 25,879 85,793 4th 640 35,970 13,535 Income taxes 1st 9,483 9,840 29,027 2nd 8,916 (8,005) 30,520 3rd 7,857 6,211 24,880 4th (1,494) 8,638 2,997 Net income 1st 29,962 25,196 64,522 2nd 28,188 4,264 67,834 3rd 24,804 19,683 60,735 4th 1,964 27,336 10,828 Basic earnings per common share 1st 0.16 0.13 0.33 2nd 0.15 0.02 0.35 3rd 0.13 0.10 0.31 4th 0.01 0.14 0.06 Diluted earnings per common share 1st 0.15 0.13 0.33 2nd 0.15 0.02 0.34 3rd 0.13 0.10 0.31 4th 0.01 0.14 0.05 LOW HIGH LOW HIGH LOW HIGH National Market System Price of Common Stock 1st $22.85 $33.75 $25.76 $36.59 $43.69 $56.00 2nd 19.43 29.62 26.46 32.97 34.19 57.63 3rd 19.98 25.50 27.94 36.65 34.13 48.00 4th 21.15 29.36 30.45 39.61 31.60 42.49 Price of Class A 1st 19.79 28.94 22.40 29.55 32.50 42.31 Common Stock 2nd 17.95 26.12 22.80 28.35 24.63 43.94 3rd 17.02 22.12 24.47 32.29 25.44 34.81 4th 18.01 25.73 25.05 33.80 25.25 32.40 During the fourth quarter of fiscal 2003, gross profit was impacted by a pretax charge of $5.4 million relating to employment reductions. Selling, general and administrative expenses included a pretax charge of $29.6 million related to the write-off of assets and facilities, as well as employment reductions. Other expenses included a pretax charge of $5.1 million for the write-off of licenses and investments. These combined charges reduced net income by $28.6 million (net of tax benefit of $11.5 million). During the second quarter of fiscal 2002, gross profit was impacted by a pretax charge of $7.1 million relating to employment reductions. Selling, general and administrative expenses included a pretax charge of $15.6 million related to employment reductions and asset write-offs. Other expenses included a pretax charge of $11.5 million, reflecting the lower current value of investments in other companies. These combined charges reduced net income by $25.3 million (net of tax benefit of $8.9 million). The second quarter was also impacted by a $5.0 million one-time tax benefit related to certain operations being closed. During the fourth quarter of fiscal 2001, gross profit was impacted by a pretax charge of $16.4 million relating to the write-off of slow-moving and excess inventory and employment reductions. Selling, general and administrative expenses included a pretax charge of $27.1 million related to employment reductions and asset write-offs. These combined charges reduced net income by $30.3 million (net of tax benefit of $13.2 million).