| MOLEX INC Item 1A Risk Factors Forward-looking Statements This Annual Report on Form 10-K and other documents we file with the Commission contain forward-looking statements that are based on current expectations, estimates, forecasts and projections about our future performance, our business, our beliefs, and our management’s assumptions |
| In addition, we, or others on our behalf, may make forward-looking statements in press releases or written statements, or in our communications and discussions with investors and analysts in the normal course of business through meetings, web casts, phone calls, and conference calls |
| Words such as “expect,” “anticipate,” “outlook,” “forecast,” “could,” “project,” “intend,” “plan,” “continue,” “believe,” “seek,” “estimate,” “should,” “may,” “assume,” variations of such words and similar expressions are intended to identify such forward-looking statements |
| These statements are not guarantees of future performance and involve certain risks, uncertainties, and assumptions that are difficult to predict |
| We describe our respective risks, uncertainties, and assumptions that could affect the outcome or results of operations below |
| We have based our forward looking statements on our management’s beliefs and assumptions based on information available to our management at the time the statements are made |
| We caution you that actual outcomes and results may differ materially from what is expressed, implied, or forecast by our forward looking statements |
| Reference is made in particular to forward looking statements regarding growth strategies, industry trends, financial results, cost reduction initiatives, acquisition synergies, manufacturing strategies, product development and sales, regulatory approvals, and competitive strengths |
| Except as required under the federal securities laws, we do not have any intention or obligation to update publicly any forward-looking statements after the distribution of this report, whether as a result of new information, future events, changes in assumptions, or otherwise |
| Risk Factors You should carefully consider the risks described below |
| Such risks are not the only ones facing our Company |
| Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also impair our business operations |
| If any of the following risks occur, our business, financial condition or operating results could be materially adversely affected |
| We face intense competition in our markets |
| Our markets are highly competitive and we expect that both direct and indirect competition will increase in the future |
| Our overall competitive position depends on a number of factors including the price, quality and performance of our products, the level of customer service, the development of new technology and our ability to participate in emerging markets |
| Within each of our markets, we encounter direct competition from other electronic components manufacturers and suppliers and competition may intensify from various US and non-US competitors and new market entrants, some of which may be our current customers |
| The competition in the future may, in some cases, result in price reductions, reduced margins or loss of market share, any of which could materially and adversely affect our business, operating results and financial condition |
| In addition, market factors could ca use a decline in spending for the technology products manufactured by our customers |
| We are dependent on new products |
| We expect that a significant portion of our future revenue will continue to be derived from sales of newly introduced products |
| Rapidly changing technology, evolving industry standards and changes in customer needs characterize the market for our products |
| If we fail to modify or improve our products in response to changes in technology, industry standards or customer needs, our products could rapidly become less competitive or obsolete |
| We must continue to make investments in research and development in order to continue to develop new products, enhance existing products and achieve market acceptance for such products |
| However, there can be no assurance that development stage products will be successfully completed or, if developed, will achieve significant customer acceptance |
| 12 _________________________________________________________________ We may need to license new technologies to respond to technological change and these licenses may not be available to us on terms that we can accept or may materially change the gross profits that we are able to obtain on our products |
| We may not succeed in adapting our products to new technologies as they emerge |
| Development and manufacturing schedules for technology products are difficult to predict, and there can be no assurance that we will achieve timely initial customer shipments of new products |
| The timely availability of these products in volume and their acceptance by customers are important to our future success |
| We are dependent on the success of our customers |
| We are dependent on the continued growth, viability and financial stability of our customers |
| Our customers generally are original equipment manufacturers in the telecommunications, data product, automotive, consumer, and industrial industries |
| These industries are, to a varying extent, subject to rapid technological change, vigorous competition and short product life cycles |
| When our customers are adversely affected by these factors, we may be similar affected |
| We face manufacturing challenges |
| The volume and timing of sales to our customers may vary due to: variation in demand for our customers’ products; our customers’ attempts to manage their inventory; design changes; changes in our customers’ manufacturing strategy; and acquisitions of or consolidations among customers |
| Our inability to forecast the level of customer order with certainty makes it difficult to schedule production and maximize utilization of manufacturing capacity |
| We generally do not obtain firm, long-term purchase commitments from our customers and we continue to experience reduced lead-times in customer orders |
| Customers may cancel their orders, change production quantities or delay production for a number of reasons and such actions could negatively impact our operating results |
| In addition, we make significant operating decisions based on our estimate of customer requirements |
| The short-term nature of our customers’ commitments and the possibility of rapid changes in demand for their products reduce our ability to accurately estimate the future requirements of those customers |
| On occasion, customers may require rapid increases in production, which can stress our resources and reduce operating margins |
| In addition, because many of our costs and operating expenses are relatively fixed, a reduction in customer demand can harm our gross profit and operating results |
| We face industry consolidation |
| In the current economic climate, consolidation in industries that utilize electronics components may further increase as companies combine to achieve further economics of scale and other synergies |
| Consolidation in industries that utilize electronics components could result in an increase in excess manufacturing capacity as companies seek to divest manufacturing operations or eliminate duplicative product lines |
| Excess manufacturing capacity has increased, and may continue to increase, pricing and competitive pressures for our industry as a whole and for us in particular |
| Consolidation could also result in an increasing number of very large companies offering products in multiple industries |
| The significant purchasing power and market power of these large companies could increase pricing and competitive pressures for us |
| We depend on industries exposed to rapid technological change |
| Our customers compete in markets that are characterized by rapidly changing technology, evolving industry standards and continuous improvements in products and services |
| These conditions frequently result in short product life cycles |
| If technologies or standards supported by our customers’ products become obsolete or fail to gain widespread commercial acceptance, our business could be materially adversely affected |
| In addition, if we are unable to offer technologically advanced, cost effective, quick response manufacturing services to customers, demand for our products may also decline |
| 13 _________________________________________________________________ We face the possibility that our gross margins may decline |
| In response to changes in product mix, competitive pricing pressures, increased sales discounts, introductions of new competitive products, product enhancements by our competitors, increases in manufacturing or labor costs or other operating expenses, we may experience declines in prices, gross margins and profitability |
| To maintain our gross margins we must maintain or increase current shipment volumes, develop and introduce new products and product enhancements and reduce the costs to produce our products |
| If we are unable to accomplish this, our revenue, gross profit and operating results may be below our expectations and those of investors and analysts |
| We face risks associated with inventory |
| The value of our inventory may decline as a result of surplus inventory, price reductions or technological obsolescence |
| We must identify the right product mix and maintain sufficient inventory on hand to meet customer orders |
| Failure to do so could adversely affect our revenue and operating results |
| However, if circumstances change (for example, an unexpected shift in market demand, pricing or customer defaults) there could be a material impact on the net realizable value of our inventory |
| We maintain an inventory valuation reserve account against diminution in the value or salability of our inventory |
| However, there is no guaranty that these arrangements will be sufficient to avoid write-offs in excess of our reserves in all circumstances |
| We may encounter problems associated with our global operations |
| Currently, more than 70prca of our revenues come from international sales |
| In addition, a significant portion of our operations consists of manufacturing and sales activities outside of the US Our ability to sell our products and conduct our operations globally is subject to a number of risks |
| Local economic, political and labor conditions in each country could adversely affect demand for our products and services or disrupt our operations in these markets |
| We may also experience reduced intellectual property protection or longer and more challenging collection cycles as a result of different customary business practices in certain countries where we do business |
| Additionally, we face the following risks: · International business conditions including the relationships between the US, Chinese and other governments; · Unexpected changes in laws, regulations, trade, monetary or fiscal policy, including interest rates, foreign currency exchange rates and changes in the rate of inflation in the US, China or other foreign countries; · Tariffs, quotas and other import or export restrictions and other trade barriers; · Difficulties in staffing and management; · Language and cultural barriers; and · Potentially adverse tax consequences |
| We are exposed to fluctuations in currency exchange rates |
| Since a significant portion of our business is conducted outside the US, we face substantial exposure to movements in non-US currency exchange rates |
| This may harm our results of operations, and any measures that we may implement to reduce the effect of volatile currencies and other risks of our global operations may not be effective |
| We mitigate our foreign currency exchange rate risk principally through the establishment of local production facilities in the markets we serve |
| This creates a “natural hedge” since purchases and sales within a specific country are both denominated in the same currency and therefore no exposure exists to hedge with a foreign exchange forward or option contract (collectively, “foreign exchange contracts”) |
| Natural hedges exist in most countries in which we operate, although the percentage of natural offsets, as compared with offsets that need to be hedged by foreign exchange contracts, will vary from country to country |
| To reduce our exposure to fluctuations in currency exchange rates when natural hedges are not effective, we may use financial instruments to hedge US dollar and other currency commitments and cash flows arising from trade accounts receivable, trade accounts payable and fixed purchase obligations |
| 14 _________________________________________________________________ If these hedging activities are not successful or we change or reduce these hedging activities in the future, we may experience significant unexpected expenses from fluctuations in exchange rates or financial instruments which become ineffective |
| The success of our hedging program depends on accurate forecasts of transaction activity in the various currencies |
| To the extent that these forecasts are over or understated during periods of currency volatility, we could experience unanticipated currency or hedge gains or losses |
| We may find that our products have quality issues |
| If flaws in either the design or manufacture of our products were to occur, we could experience a rate of failure in our products that could result in significant delays in shipment and product re-work or replacement costs |
| While we engage in extensive product quality programs and processes, these may not be sufficient to avoid a product failure rate that results in substantial delays in shipment, significant repair or replacement costs, or potential damage to our reputation |
| We face rising costs of commodity materials |
| The cost and availability of certain commodity materials used to manufacture our products, such as plastic resins, copper-based metal alloys, gold and palladium salts, molded and stamped components and connectors assemblies, is critical to our success |
| Volatility in the prices and shortages of such materials may result in increased costs and lower operating margins if we are unable to pass such increased costs through to our customers |
| From time to time, we use financial instruments to hedge the volatility of commodity material costs |
| The success of our hedging program depends on accurate forecasts of transaction activity in the various commodity materials |
| To the extent that these forecasts are over or understated during periods of volatility, we could experience unanticipated commodity materials or hedge gains or losses |
| We face risks in integrating acquisitions |
| We expect to continue to make investments in companies, products and technologies through acquisitions |
| While we believe that such acquisitions are an integral part of our long-term strategy, there are risks and uncertainties related to acquiring companies |
| Such risks and uncertainties include: · Difficulty in integrating acquired operations, technology and products or realizing cost savings or other anticipated benefits from integration; · Retaining customers and existing contracts; · Retaining the key employees of the acquired operation; · Potential disruption of our or the acquired company’s ongoing business; · Unanticipated expenses related to integration; and · Potential unknown liabilities associated with the acquired company |
| We face risks arising from reorganizations of our operations |
| In 2005, we announced plans to realign part of our manufacturing capacity in order to reduce costs and better optimize plan utilization |
| The process of restructuring entails, among other activities, moving production between facilities, reducing staff levels, realigning our business processes and reorganizing our management |
| We continue to evaluate our operations and may need to undertake additional restructuring initiatives in the future |
| If we incur additional restructuring related charges, our financial condition and results of operation may suffer |
| In addition, we recently announced that we would begin the transition to a global organizational structure that consists of market-focused divisions that will enable us to work more effectively as a global team to meet customer needs, as well as to better leverage design expertise and the low-cost production centers we have around the world |
| This reorganization entails risks, including: the need to implement financial and other systems and add management resources; in the short-term we may fail to maintain the quality of products and services we have historically provided; diversion of management’s attention to the reorganization; potential disruption of our ongoing business; and unanticipated expenses related to such reorganization |
| 15 _________________________________________________________________ We depend on our key employees and face competition in hiring and retaining qualified employees |
| Our future success depends partly on the continued contribution of our key employees, including executive, engineering, sales, marketing, manufacturing and administrative personnel |
| We currently do not have employment agreements with any of our key executive officers |
| We face intense competition for key personnel in several of our product and geographic markets |
| Our future success depends in large part on our continued ability to hire, assimilate and retain key employees, including qualified engineers and other highly skilled personnel needed to compete and develop successful new products |
| We may not be as successful as competitors at recruiting, assimilating and retaining highly skilled personnel |
| We are subject to various laws and government regulations |
| We are subject to a wide and ever-changing variety of US and foreign federal, state and local laws and regulations, compliance with which may require substantial expense |
| Of particular note are two recent European Union (EU) directives known as the Restriction on Certain Hazardous Substances Directive (RoHS) and the Waste Electrical and Electronic Equipment Directive |
| These directives restrict the distribution of products within the EU of certain substances and require a manufacturer or importer to recycle products containing those substances |
| Failure to comply with these directives could result in fines or suspension of sales |
| Additionally, RoHS may result in our having non-compliant inventory that may be less readily salable or have to be written off |
| In addition, some environment laws impose liability, sometimes without fault, for investigating or cleaning up contamination on or emanating from our currently or formerly owned, leased or operated property, as well as for damages to property or natural resources and for personal injury arising out of such contamination |
| We rely on our intellectual property rights |
| We rely on a combination of patents, copyrights, trademarks and trade secrets and confidentiality provisions to establish and protect our proprietary rights |
| To this end, we hold rights to a number of patents and registered trademarks and regularly file applications to attempt to protect our rights in new technology and trademarks |
| Even if approved, our patents or trademarks may be successfully challenged by others or otherwise become invalidated for a variety of reasons |
| Also, to the extent a competitor is able to reproduce or otherwise capitalize on our technology, it may be difficult, expensive or impossible for us to obtain necessary legal protection |
| Third parties may claim that we are infringing their intellectual property rights |
| Such claims could have an adverse affect on our business and financial condition |
| From time to time we receive letters alleging infringement of patents |
| Litigation concerning patents or other intellectual property is costly and time consuming |
| We may seek licenses from such parties, but they could refuse to grant us a license or demand commercially unreasonable terms |
| Such infringement claims could also cause us to incur substantial liabilities and to suspend or permanently cease the manufacture and sale of affected products |
| We could suffer significant business interruptions |
| Our operations and those of our suppliers may be vulnerable to interruption by natural disasters such as earthquakes, tsunamis, typhoons, or floods, or other disasters such as fires, explosions, acts of terrorism or war, or failures of our management information or other systems |
| If a business interruption occurs, our business could be materially and adversely affected |