Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
20549
FORM 10-Q/A
Amendment #1
(Mark
One)
|
|
|
|
|
|
x
|
|
Quarterly Report Pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934
|
|
|
|
|
|
For the quarterly period ended November 1,
2008
|
|
|
|
or
|
|
|
|
o
|
|
Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
|
Commission
file number 0-2816
METHODE ELECTRONICS, INC.
(Exact name of registrant as
specified in its charter.)
Delaware
|
|
36-2090085
|
(State or other jurisdiction of
|
|
(I.R.S. Employer
|
incorporation or organization)
|
|
Identification No.)
|
|
|
|
7401 West Wilson Avenue, Harwood Heights, Illinois
|
|
60706-4548
|
(Address of principal executive offices)
|
|
(Zip Code)
|
(Registrants telephone number, including area code)
(708) 867-6777
None
(Former name, former address, former fiscal
year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
x
No
o
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer or smaller reporting
company. See definitions of accelerated
filer, large accelerated filer and smaller reporting company in Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated filer
o
|
|
Accelerated filer
x
|
|
|
|
Non-accelerated filer
o
|
|
Smaller reporting company
o
|
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes
o
No
x
At December 9, 2008, Registrant had 37,838,970
shares of common stock outstanding.
Table of Contents
METHODE
ELECTRONICS, INC.
FORM 10-Q/A
November 1,
2008
TABLE
OF
CONTENTS
2
Table
of Contents
EXPLANATORY NOTE:
We are filing
this first amendment to our quarterly report on Form 10-Q for the six
months ended November 1, 2008 to restate our condensed consolidated
financial statements for the three and six months then ended. In the course of preparing our financial
statements for our annual report on Form 10-K to be filed with the
Securities and Exchange Commission (SEC) for the fiscal year ended May 2,
2009, we discovered an error related to unrealized currency exchange losses
arising from an intercompany loan between our corporate headquarters and one of
our foreign subsidiaries in conjunction with a recent acquisition of Hetronic,
L.L.C., purchased on September 30, 2008.
The loan amount was $20,858,304.
Due to the U.S. Dollar increasing versus the Euro, from 0.6923 on September 30,
2008 to 0.7850 on November 1, 2008, an unrealized currency loss of
$2,463,140 should have been recorded during the second quarter. The restatements to include this unrecorded
currency loss have a significant impact to our previously reported condensed
consolidated balance sheets and condensed consolidated statement of income for
the three and six months ended November 1, 2008. Note 2 of this Form 10-Q/A discloses
previously reported results as well as the restated results in our unaudited
Condensed Consolidated Financial Statements for the three and six months ended November 1,
2008.
No attempt has
been made in the Form 10-Q/A to update disclosures presented in the
original Form 10-Q as filed except those items affected by the recognition
of the previously unrecorded loan currency loss. Furthermore, this Form 10-Q/A does not
reflect events occurring after the original filing except as disclosed in the
original Form 10-Q, including any changes to the exhibits affected by
subsequent events. Therefore, the
exhibits have not been included with this Form 10-Q/A with the exception
of Exhibits 31.1, 31.2 and 32.1 new certificates by our principal executive
officer and principal financial officer as required by Rule 13a-14
promulgated under the Securities Exchange Act of 1934, as amended. Accordingly, this Form 10-Q/A should be
read in conjunction with our other filings made with the SEC subsequent to the
filing of the original Form 10-Q, including any amendments to those
filings.
3
Table of
Contents
PART I -
FINANCIAL INFORMATION
Item 1 - Financial
Statements
METHODE ELECTRONICS, INC AND
SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
|
|
Restated
|
|
|
|
|
|
(Note 2)
|
|
|
|
|
|
November 1, 2008
|
|
May 3, 2008
|
|
|
|
(Unaudited)
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
52,806
|
|
$
|
104,305
|
|
Accounts receivable, net
|
|
73,599
|
|
85,805
|
|
Inventories:
|
|
|
|
|
|
Finished products
|
|
17,369
|
|
15,384
|
|
Work in process
|
|
17,681
|
|
20,715
|
|
Materials
|
|
32,993
|
|
19,850
|
|
|
|
68,043
|
|
55,949
|
|
Deferred income taxes
|
|
8,485
|
|
8,730
|
|
Prepaid expenses and other current assets
|
|
6,082
|
|
6,028
|
|
TOTAL CURRENT ASSETS
|
|
209,015
|
|
260,817
|
|
|
|
|
|
|
|
PROPERTY, PLANT AND EQUIPMENT
|
|
288,166
|
|
308,264
|
|
Less allowances for depreciation
|
|
207,762
|
|
217,984
|
|
|
|
80,404
|
|
90,280
|
|
|
|
|
|
|
|
GOODWILL
|
|
68,085
|
|
54,476
|
|
INTANGIBLE ASSETS, net
|
|
54,184
|
|
41,282
|
|
OTHER ASSETS
|
|
26,144
|
|
23,365
|
|
|
|
148,413
|
|
119,123
|
|
|
|
$
|
437,832
|
|
$
|
470,220
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
Accounts payable
|
|
$
|
32,922
|
|
$
|
42,810
|
|
Other current liabilities
|
|
25,654
|
|
33,902
|
|
TOTAL CURRENT LIABILITIES
|
|
58,576
|
|
76,712
|
|
|
|
|
|
|
|
OTHER LIABILITIES
|
|
17,211
|
|
13,833
|
|
DEFERRED COMPENSATION
|
|
4,561
|
|
6,890
|
|
SHAREHOLDERS EQUITY
|
|
|
|
|
|
Common stock, $0.50 par value, 100,000,000 shares
authorized, 38,283,075 and
38,225,379 shares issued as of November 1, 2008 and May 3,
2008, respectively
|
|
19,141
|
|
19,113
|
|
Unearned common stock issuances
|
|
(4,257
|
)
|
(4,257
|
)
|
Additional paid-in capital
|
|
71,682
|
|
69,953
|
|
Retained earnings
|
|
268,363
|
|
265,838
|
|
Accumulated other comprehensive income
|
|
13,935
|
|
28,381
|
|
Treasury
stock, 1,342,588 and 702,708 shares as of November 1, 2008 and May 3, 2008,
respectively
|
|
(11,380
|
)
|
(6,243
|
)
|
|
|
357,484
|
|
372,785
|
|
|
|
$
|
437,832
|
|
$
|
470,220
|
|
See notes to condensed consolidated financial
statements.
4
Table of Contents
METHODE
ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(in thousands,
except per share data)
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
Restated
|
|
|
|
Restated
|
|
|
|
|
|
(Note 2)
|
|
|
|
(Note 2)
|
|
|
|
|
|
November 1,
|
|
October 27,
|
|
November 1,
|
|
October 27,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
121,304
|
|
$
|
133,239
|
|
$
|
255,818
|
|
$
|
258,248
|
|
Other
|
|
959
|
|
527
|
|
1,692
|
|
673
|
|
|
|
122,263
|
|
133,766
|
|
257,510
|
|
258,921
|
|
|
|
|
|
|
|
|
|
|
|
COSTS
AND EXPENSES
|
|
|
|
|
|
|
|
|
|
Cost
of products sold
|
|
97,815
|
|
105,900
|
|
203,245
|
|
204,235
|
|
Restructuring
|
|
6,284
|
|
|
|
11,201
|
|
|
|
Selling
and administrative expenses
|
|
18,650
|
|
16,107
|
|
35,102
|
|
32,071
|
|
|
|
122,749
|
|
122,007
|
|
249,548
|
|
236,306
|
|
Income/(loss)
from operations
|
|
(486
|
)
|
11,759
|
|
7,962
|
|
22,615
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income, net
|
|
469
|
|
611
|
|
1,003
|
|
1,047
|
|
Other,
net
|
|
(610
|
)
|
(941
|
)
|
(879
|
)
|
(1,161
|
)
|
Income
before income taxes
|
|
(627
|
)
|
11,429
|
|
8,086
|
|
22,501
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes/(benefit)
|
|
(865
|
)
|
2,623
|
|
1,032
|
|
5,423
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
$
|
238
|
|
$
|
8,806
|
|
$
|
7,054
|
|
$
|
17,078
|
|
|
|
|
|
|
|
|
|
|
|
Amounts
per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net income
|
|
$
|
0.01
|
|
$
|
0.24
|
|
$
|
0.19
|
|
$
|
0.46
|
|
Diluted
net income
|
|
$
|
0.01
|
|
$
|
0.24
|
|
$
|
0.19
|
|
$
|
0.46
|
|
|
|
|
|
|
|
|
|
|
|
Cash
dividends:
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
$
|
0.07
|
|
$
|
0.05
|
|
$
|
0.12
|
|
$
|
0.10
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of Common Shares outstanding:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
37,068
|
|
37,079
|
|
37,120
|
|
37,033
|
|
Diluted
|
|
37,551
|
|
37,467
|
|
37,584
|
|
37,476
|
|
See notes to
condensed consolidated financial statements.
5
Table of Contents
METHODE
ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)
|
|
Six Months Ended
|
|
|
|
Restated
|
|
|
|
|
|
(Note 2)
|
|
|
|
|
|
November 1, 2008
|
|
October 27, 2007
|
|
OPERATING ACTIVITIES
|
|
|
|
|
|
Net income
|
|
$
|
7,054
|
|
$
|
17,078
|
|
Adjustments to reconcile net income to net cash
provided by operating activities:
|
|
|
|
|
|
Non-cash translation loss
|
|
2,463
|
|
|
|
Provision for depreciation
|
|
12,489
|
|
9,939
|
|
Impairment of assets
|
|
3,177
|
|
|
|
Amortization of intangibles
|
|
3,052
|
|
2,739
|
|
Amortization of stock awards and stock options
|
|
1,605
|
|
1,602
|
|
Changes in operating assets and liabilities
|
|
(1,160
|
)
|
10,587
|
|
Other
|
|
735
|
|
174
|
|
NET CASH PROVIDED BY OPERATING ACTIVITIES
|
|
29,415
|
|
42,119
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES
|
|
|
|
|
|
Purchases of property, plant and equipment
|
|
(9,557
|
)
|
(10,082
|
)
|
Proceeds from sale of building
|
|
|
|
960
|
|
Acquisition of businesses
|
|
(56,785
|
)
|
(7,350
|
)
|
Acquisition of technology licenses
|
|
(225
|
)
|
(346
|
)
|
Joint venture dividend
|
|
|
|
(1,000
|
)
|
Other
|
|
(209
|
)
|
(346
|
)
|
NET CASH USED IN INVESTING ACTIVITIES
|
|
(66,776
|
)
|
(18,164
|
)
|
|
|
|
|
|
|
FINANCING ACTIVITIES
|
|
|
|
|
|
Repurchase of common stock
|
|
(5,137
|
)
|
|
|
Proceeds from exercise of stock options
|
|
110
|
|
1,145
|
|
Tax benefit from stock options and awards
|
|
46
|
|
190
|
|
Cash dividends
|
|
(4,528
|
)
|
(3,781
|
)
|
NET CASH USED IN FINANCING ACTIVITIES
|
|
(9,509
|
)
|
(2,446
|
)
|
|
|
|
|
|
|
Effect of foreign currency exchange rate changes on
cash
|
|
(4,629
|
)
|
1,250
|
|
|
|
|
|
|
|
INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
(51,499
|
)
|
22,759
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period
|
|
104,305
|
|
60,091
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD
|
|
$
|
52,806
|
|
$
|
82,850
|
|
|
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
6
Table of Contents
METHODE ELECTRONICS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollar amounts in
thousands, except share data)
November 1, 2008
1.
BASIS
OF PRESENTATION
Methode Electronics, Inc. was incorporated in 1946 as an Illinois
corporation and reincorporated in Delaware in 1966. As used herein, we, us, our, the Company
or Methode means Methode Electronics, Inc. and its subsidiaries. The condensed consolidated financial
statements and related disclosures as of November 1, 2008 and results of
operations for the three months and six months ended November 1, 2008 and October 27,
2007 are unaudited, pursuant to the rules and regulations of the
Securities and Exchange Commission (SEC).
The May 3, 2008 condensed consolidated balance sheet was derived
from audited financial statements, but does not include all disclosures
required by accounting principles generally accepted in the United States of
America (U.S. GAAP). Certain
information and footnote disclosures normally included in the financial
statements prepared in accordance with U.S. GAAP have been condensed or omitted
pursuant to such rules and regulations.
In our opinion, these financial statements include all adjustments
(consisting only of normal recurring adjustments) necessary for the fair
statement of the results for the interim periods. These financial statements should be read in
conjunction with the financial statements included in our latest Form 10-K
for the year ended May 3, 2008 filed with the SEC on July 17,
2008. Results may vary from quarter to
quarter for reasons other than seasonality.
2.
RESTATEMENT
OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
We have restated our balance sheet as of November 1,
2008 and the related statement of income and cash flows. We
discovered an error related to unrealized currency exchange losses arising from
an intercompany loan between our corporate headquarters and one of our foreign
subsidiaries in conjunction with a recent acquisition of Hetronic, L.L.C.,
purchased on September 30, 2008.
The loan amount was $20,858. Due
to the U.S. Dollar increasing versus the Euro, from 0.6923 on September 30,
2008 to 0.7850 on November 1, 2008, an unrealized currency loss of $2,463
should have been recorded during the second quarter.
The effects of the restatement are as follows:
·
Adjustment to the November 1,
2008 condensed consolidated balance sheet decreases retained earnings by $2,463
from $270,826 as previously reported, to $268,363 and increases the accumulated
other comprehensive income by $2,463 from $11,472 as previously reported, to
$13,935.
·
Adjustment to the three
months ended November 1, 2008 condensed consolidated statement of income
decreases other income by $2,463 from $1,853 as previously reported to an
expense of $610. Net income for the
three months ended November 1, 2008 decreased $2,463 from $2,701 as
previously reported to $238. Basic and
diluted earnings per share both decreased $0.06, from $0.07 as previously
reported to $0.01.
·
Adjustment to the six months
ended November 1, 2008 condensed consolidated statement of income
decreases other income by $2,463 from $1,584 as previously reported to an
expense of $879. Net income for the six
months ended November 1, 2008 decreased $2,463 from $9,517 as previously
reported to $7,054. Basic earnings per
share decreased $0.07, from $0.26 as previously reported to $0.19. Diluted earnings per share decreased $0.06,
from $0.25 as previously reported to $0.19.
·
Adjustment
to the six months ended November 1, 2008 condensed consolidated statement
of cash flows decreases net income by $2,463, from $9,517 as previously
reported to $7,054. In addition, a
non-cash charge of $2,463 was added back to the operating activities section of
the condensed consolidated statement of cash flows.
7
Table of Contents
METHODE ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Unaudited)
(Dollar amounts in thousands, except share
data)
The effect of the adjustments discussed on the
previous page for the Condensed Consolidated Balance Sheet at November 1,
2008 is illustrated below:
METHODE ELECTRONICS, INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
|
|
As Reported
|
|
|
|
Restated
|
|
|
|
November 1, 2008
|
|
Adjustment
|
|
November 1, 2008
|
|
|
|
(Unaudited)
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
CURRENT ASSETS
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
52,806
|
|
$
|
|
|
$
|
52,806
|
|
Accounts receivable, net
|
|
73,599
|
|
|
|
73,599
|
|
Inventories:
|
|
|
|
|
|
|
|
Finished products
|
|
17,369
|
|
|
|
17,369
|
|
Work in process
|
|
17,681
|
|
|
|
17,681
|
|
Materials
|
|
32,993
|
|
|
|
32,993
|
|
|
|
68,043
|
|
|
|
68,043
|
|
Deferred income taxes
|
|
8,485
|
|
|
|
8,485
|
|
Prepaid expenses and other current assets
|
|
6,082
|
|
|
|
6,082
|
|
TOTAL CURRENT ASSETS
|
|
209,015
|
|
|
|
209,015
|
|
|
|
|
|
|
|
|
|
PROPERTY, PLANT AND EQUIPMENT
|
|
288,166
|
|
|
|
288,166
|
|
Less allowances for depreciation
|
|
207,762
|
|
|
|
207,762
|
|
|
|
80,404
|
|
|
|
80,404
|
|
|
|
|
|
|
|
|
|
GOODWILL
|
|
68,085
|
|
|
|
68,085
|
|
INTANGIBLE ASSETS, net
|
|
54,184
|
|
|
|
54,184
|
|
OTHER ASSETS
|
|
26,144
|
|
|
|
26,144
|
|
|
|
148,413
|
|
|
|
148,413
|
|
|
|
$
|
437,832
|
|
$
|
|
|
$
|
437,832
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
32,922
|
|
$
|
|
|
$
|
32,922
|
|
Other current liabilities
|
|
25,654
|
|
|
|
25,654
|
|
TOTAL CURRENT LIABILITIES
|
|
58,576
|
|
|
|
58,576
|
|
|
|
|
|
|
|
|
|
OTHER LIABILITIES
|
|
17,211
|
|
|
|
17,211
|
|
DEFERRED COMPENSATION
|
|
4,561
|
|
|
|
4,561
|
|
SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
Common stock, $0.50 par value, 100,000,000 shares
authorized, 38,283,075 and
38,225,379 shares issued as of November 1, 2008 and May 3,
2008, respectively
|
|
19,141
|
|
|
|
19,141
|
|
Unearned common stock issuances
|
|
(4,257
|
)
|
|
|
(4,257
|
)
|
Additional paid-in capital
|
|
71,682
|
|
|
|
71,682
|
|
Retained earnings
|
|
270,826
|
|
(2,463
|
)
|
268,363
|
|
Accumulated other comprehensive income
|
|
11,472
|
|
2,463
|
|
13,935
|
|
Treasury stock, 1,342,588 and 702,708 shares as of
November 1, 2008 and May 3, 2008, respectively
|
|
(11,380
|
)
|
|
|
(11,380
|
)
|
|
|
357,484
|
|
|
|
357,484
|
|
|
|
$
|
437,832
|
|
$
|
|
|
$
|
437,832
|
|
See notes to condensed consolidated financial statements.
8
Table of Contents
METHODE ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Unaudited)
(Dollar amounts in thousands, except share
data)
The effect of the
adjustments discussed above on the Condensed Consolidated Income Statement for
the three months ended as of November 1, 2008 is illustrated below.
METHODE
ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(in thousands,
except per share data)
|
|
Three Months Ended
|
|
|
|
As Reported
|
|
|
|
Restated
|
|
|
|
November 1,
|
|
|
|
November 1,
|
|
|
|
2008
|
|
Adjustment
|
|
2008
|
|
|
|
|
|
|
|
|
|
INCOME
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
121,304
|
|
$
|
|
|
$
|
121,304
|
|
Other
|
|
959
|
|
|
|
959
|
|
|
|
122,263
|
|
|
|
122,263
|
|
|
|
|
|
|
|
|
|
COSTS
AND EXPENSES
|
|
|
|
|
|
|
|
Cost
of products sold
|
|
97,815
|
|
|
|
97,815
|
|
Restructuring
|
|
6,284
|
|
|
|
6,284
|
|
Selling
and administrative expenses
|
|
18,650
|
|
|
|
18,650
|
|
|
|
122,749
|
|
|
|
122,749
|
|
Income/(loss)
from operations
|
|
(486
|
)
|
|
|
(486
|
)
|
|
|
|
|
|
|
|
|
Interest
income, net
|
|
469
|
|
|
|
469
|
|
Other,
net
|
|
1,853
|
|
(2,463
|
)
|
(610
|
)
|
Income
before income taxes
|
|
1,836
|
|
(2,463
|
)
|
(627
|
)
|
|
|
|
|
|
|
|
|
Income
taxes/(benefit)
|
|
(865
|
)
|
|
|
(865
|
)
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
$
|
2,701
|
|
$
|
(2,463
|
)
|
$
|
238
|
|
|
|
|
|
|
|
|
|
Amounts
per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net income
|
|
$
|
0.07
|
|
$
|
(0.06
|
)
|
$
|
0.01
|
|
Diluted
net income
|
|
$
|
0.07
|
|
$
|
(0.06
|
)
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
Cash
dividends:
|
|
|
|
|
|
|
|
Common
stock
|
|
$
|
0.07
|
|
|
|
$
|
0.07
|
|
|
|
|
|
|
|
|
|
Weighted
average number of
Common Shares outstanding:
|
|
|
|
|
|
|
|
Basic
|
|
37,068
|
|
|
|
37,068
|
|
Diluted
|
|
37,551
|
|
|
|
37,551
|
|
See notes to
condensed consolidated financial statements.
9
Table of Contents
METHODE ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Unaudited)
(Dollar amounts in thousands, except share
data)
The effect of the
adjustments discussed above on the Condensed Consolidated Income Statement for
the six months ended November 1, 2008 is illustrated below.
METHODE
ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(in thousands,
except per share data)
|
|
Six Months Ended
|
|
|
|
As Reported
|
|
|
|
Restated
|
|
|
|
November 1,
|
|
|
|
November 1,
|
|
|
|
2008
|
|
Adjustment
|
|
2008
|
|
|
|
|
|
|
|
|
|
INCOME
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
255,818
|
|
$
|
|
|
$
|
255,818
|
|
Other
|
|
1,692
|
|
|
|
1,692
|
|
|
|
257,510
|
|
|
|
257,510
|
|
|
|
|
|
|
|
|
|
COSTS
AND EXPENSES
|
|
|
|
|
|
|
|
Cost
of products sold
|
|
203,245
|
|
|
|
203,245
|
|
Restructuring
|
|
11,201
|
|
|
|
11,201
|
|
Selling
and administrative expenses
|
|
35,102
|
|
|
|
35,102
|
|
|
|
249,548
|
|
|
|
249,548
|
|
Income/(loss)
from operations
|
|
7,962
|
|
|
|
7,962
|
|
|
|
|
|
|
|
|
|
Interest
income, net
|
|
1,003
|
|
|
|
1,003
|
|
Other,
net
|
|
1,584
|
|
(2,463
|
)
|
(879
|
)
|
Income
before income taxes
|
|
10,549
|
|
(2,463
|
)
|
8,086
|
|
|
|
|
|
|
|
|
|
Income
taxes/(benefit)
|
|
1,032
|
|
|
|
1,032
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
$
|
9,517
|
|
$
|
(2,463
|
)
|
$
|
7,054
|
|
|
|
|
|
|
|
|
|
Amounts
per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net income
|
|
$
|
0.26
|
|
$
|
(0.07
|
)
|
$
|
0.19
|
|
Diluted
net income
|
|
$
|
0.25
|
|
$
|
(0.06
|
)
|
$
|
0.19
|
|
|
|
|
|
|
|
|
|
Cash
dividends:
|
|
|
|
|
|
|
|
Common
stock
|
|
$
|
0.07
|
|
|
|
$
|
0.07
|
|
|
|
|
|
|
|
|
|
Weighted
average number of Common Shares outstanding:
|
|
|
|
|
|
|
|
Basic
|
|
37,120
|
|
|
|
37,120
|
|
Diluted
|
|
37,584
|
|
|
|
37,584
|
|
See notes to
condensed consolidated financial statements.
10
Table of Contents
METHODE ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Unaudited)
(Dollar
amounts in thousands, except share data)
The effect of the
adjustments discussed above on the
c
ondensed
c
onsolidated
c
ash
f
low
s
tatement for the six months
ended as of November 1, 2008 is illustrated below.
METHODE
ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)
|
|
Six Months Ended
|
|
|
|
As Reported
|
|
|
|
Restated
|
|
|
|
November 1, 2008
|
|
Adjustment
|
|
November 1, 2008
|
|
OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
Net income
|
|
$
|
9,517
|
|
$
|
(2,463
|
)
|
$
|
7,054
|
|
Adjustments to reconcile net income to net cash
provided by operating activities:
|
|
|
|
|
|
|
|
Non-cash translation loss
|
|
|
|
2,463
|
|
2,463
|
|
Provision for depreciation
|
|
12,489
|
|
|
|
12,489
|
|
Impairment of assets
|
|
3,177
|
|
|
|
3,177
|
|
Amortization of intangibles
|
|
3,052
|
|
|
|
3,052
|
|
Amortization of stock awards and stock options
|
|
1,605
|
|
|
|
1,605
|
|
Changes in operating assets and liabilities
|
|
(1,160
|
)
|
|
|
(1,160
|
)
|
Other
|
|
735
|
|
|
|
735
|
|
NET CASH PROVIDED BY OPERATING ACTIVITIES
|
|
29,415
|
|
|
|
29,415
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment
|
|
(9,557
|
)
|
|
|
(9,557
|
)
|
Proceeds from sale of building
|
|
|
|
|
|
|
|
Acquisition of businesses
|
|
(56,785
|
)
|
|
|
(56,785
|
)
|
Acquisition of technology licenses
|
|
(225
|
)
|
|
|
(225
|
)
|
Joint venture dividend
|
|
|
|
|
|
|
|
Other
|
|
(209
|
)
|
|
|
(209
|
)
|
NET CASH USED IN INVESTING ACTIVITIES
|
|
(66,776
|
)
|
|
|
(66,776
|
)
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
Repurchase of common stock
|
|
(5,137
|
)
|
|
|
(5,137
|
)
|
Proceeds from exercise of stock options
|
|
110
|
|
|
|
110
|
|
Tax benefit from stock options and awards
|
|
46
|
|
|
|
46
|
|
Cash dividends
|
|
(4,528
|
)
|
|
|
(4,528
|
)
|
NET CASH USED IN FINANCING ACTIVITIES
|
|
(9,509
|
)
|
|
|
(9,509
|
)
|
|
|
|
|
|
|
|
|
Effect of foreign currency exchange rate changes on
cash
|
|
(4,629
|
)
|
|
|
(4,629
|
)
|
|
|
|
|
|
|
|
|
INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
(51,499
|
)
|
|
|
(51,499
|
)
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period
|
|
104,305
|
|
|
|
104,305
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD
|
|
$
|
52,806
|
|
|
|
$
|
52,806
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
11
Table
of Contents
METHODE ELECTRONICS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollar amounts in
thousands, except share data)
3.
RECENT
ACCOUNTING PRONOUNCEMENTS
We adopted Financial Accounting Standards Board (FASB)
Statement of Financial Accounting Standard (SFAS) No. 157, Fair Value
Measurements (SFAS No. 157) as of May 4, 2008 for financial
assets and liabilities, and non-financial assets and liabilities that are
recognized or disclosed at fair value in the financial statements on a
recurring basis. SFAS No. 157 defines fair value, establishes a
framework for measuring fair value as required by other accounting pronouncements
and expands fair value measurement disclosures. The provisions of SFAS No. 157
are applied prospectively upon adoption and did not have a material impact on
our condensed consolidated financial statements. The disclosures required by
SFAS No. 157 are included in Note 12, Fair Value Measurements,
to our condensed consolidated financial statements.
In February 2008,
the FASB issued FASB Staff Position No. 157-2, which delays the effective
date of SFAS No. 157 for non-financial assets and liabilities, which
are not measured at fair value on a recurring basis (at least annually) until
fiscal years beginning after November 15, 2008, which is our fiscal year
2010 that begins May 3, 2009. We
are currently assessing the impact of adopting SFAS No. 157 for non-financial
assets and liabilities on our condensed consolidated financial statements.
We adopted
SFAS No. 159, The Fair Value Option for Financial Assets and
Financial LiabilitiesIncluding an Amendment of FASB Statement No. 115 (SFAS No. 159)
as of May 4, 2008. SFAS No. 159 permits entities to elect to
measure many financial instruments and certain other items at fair value. We
did not elect the fair value option for any assets or liabilities, which were
not previously carried at fair value. Accordingly, the adoption of SFAS No. 159
had no impact on our condensed consolidated financial statements.
We adopted
Emerging Issues Task Force (EITF) No. 06-4, Accounting for Deferred
Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar
Life Insurance Arrangements (EITF No. 06-4) as of May 4,
2008. EITF No. 06-4 requires that endorsement split-dollar life
insurance arrangements, which provide a benefit to an employee beyond the
postretirement period be recorded in accordance with SFAS No. 106, Employers
Accounting for Postretirement Benefits Other Than Pensions or Accounting
Principle Board (APB) Opinion No. 12, Omnibus Opinion1967 based on
the substance of the agreement with the employee. The adoption of EITF No. 06-4 had no
impact on our condensed consolidated financial statements.
In December 2007,
the FASB issued SFAS No. 141 (revised 2007) (SFAS No. 141R),
a revision of SFAS No. 141, Business Combinations. SFAS No. 141R
establishes requirements for the recognition and measurement of acquired
assets, liabilities, goodwill and non-controlling interests. SFAS No. 141R
also provides disclosure requirements related to business combinations.
SFAS No. 141R is effective for fiscal years beginning after December 15,
2008, which is our fiscal year 2010 that begins May 3, 2009. SFAS No. 141R
will be applied prospectively to business combinations with an acquisition date
on or after the effective date. This
statement will generally affect acquisitions occurring after the adoption date.
In December 2007,
the FASB issued SFAS No. 160, Non-Controlling Interests in
Consolidated Financial Statements an amendment of ARB No. 51 (SFAS No. 160).
SFAS No. 160 establishes new standards for the accounting for and
reporting of non-controlling interests (formerly minority interests) and for
the loss of control of partially owned and consolidated subsidiaries.
SFAS No. 160 does not change the criteria for consolidating a
partially owned entity. SFAS No. 160 is effective for fiscal years
beginning after December 15, 2008, which is our fiscal year 2010 that
begins May 3, 2009. The provisions of SFAS No. 160 will be
applied prospectively upon adoption except for the presentation and disclosure
requirements, which will be applied retrospectively. We do not expect the
adoption of SFAS No. 160 to have a material impact on our condensed
consolidated financial statements.
In March 2008,
the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities, an amendment of SFAS No. 133 (SFAS No. 161).
SFAS No. 161 requires enhanced disclosures about an entitys
derivative and hedging activities and is effective for fiscal years and interim
periods beginning after November 15, 2008, which is our fiscal year 2010
that begins May 3, 2009. We do not believe the adoption of SFAS No. 161
will have a material impact on our condensed consolidated financial statements.
12
Table of Contents
METHODE ELECTRONICS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollar amounts in thousands, except share data)
3. RECENT ACCOUNTING PRONOUNCEMENTS - Continued
In April 2008,
the FASB issued FASB Staff Position No. FAS 142-3, Determination of the
Useful Life of Intangible Assets (FSP 142-3). FSP 142-3 amends the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset under FASB Statement No. 142,
Goodwill and Other Intangible Assets.
This provision of FSP 142-3 will be effective for financial statements
issued for fiscal years beginning after December 15, 2008, which is our
fiscal year 2010 that begins May 3, 2009.
Early adoption is prohibited.
Since this guidance will be applied prospectively, on adoption, there
will be no impact to our financial position, results of operations or cash
flows.
In May 2008,
the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles (SFAS No 162).
SFAS No. 162 identifies the sources of accounting principles and
the framework for selecting the principles to be used in the preparation of
financial statements. SFAS No. 162
is effective 60 days following the SECs approval of the Public Company
Accounting Oversight Board (PCAOB) amendments to AU Section 411, The
Meaning of Present Fairly in Conformity With Generally Accepted Accounting
Principles . We do not believe the
adoption of this standard will have a material impact on our condensed
consolidated financial statements.
4.
RESTRUCTURING
On January 24, 2008, we announced a restructuring of our
U.S.-based automotive operations and a decision to discontinue producing
certain legacy products in the Interconnect segment. The Automotive and Interconnect restructuring
is expected to be completed during fiscal 2010.
We record the expense in the restructuring section of our condensed
consolidated statement of income. We estimate that we will record additional
pre-tax charges through fiscal 2010 of between $5,000 and $10,000, of which
$2,000 to $3,000 will relate to the termination of approximately 550 employees
and the cost of one-time employee benefits, retention, COBRA and outplacement
services. During the second quarter of
fiscal 2009, we recorded impairment charges on our fixed assets of $2,705 and
$472 for the Automotive and Interconnect segments, respectively. Based on the rules of
SFAS No. 144, we concluded that the future estimated cash flows did not
support the current net book values of the assets (before the impairment
adjustment) due to lower forecasted sales in the Automotive and Interconnect
segments. We will continue to perform
periodic impairment testing, if indicators exist, and will record any charges incurred as per
SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, (SFAS No. 144) in the period when impairment is incurred.
During
the fiscal quarter ended November 1, 2008, we recorded a restructuring
charge of $6,284, which consisted of $1,609 for employee severance, $4,350 in
impairment and accelerated depreciation for buildings and improvements and
machinery and equipment and $325 relating to professional fees. As of November 1, 2008, we had an
accrued restructuring liability of $5,297 reflected in the current liabilities
section of our condensed consolidated balance sheet. We expect the majority of this liability to
be paid out during fiscal 2010.
During
the six months ended November 1, 2008, we recorded a restructuring charge
of $11,201, which consisted of $4,430 for employee severance, $5,900 in
impairments and accelerated depreciation for buildings and improvements and
machinery and equipment, $153 in inventory write-downs and $718 relating to
professional fees.
13
Table of Contents
METHODE ELECTRONICS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollar amounts in thousands, except share data)
The table below reflects
the activity for restructuring as of November 1, 2008:
|
|
One-Time
|
|
|
|
|
|
|
|
|
|
Employee
|
|
Asset
|
|
Other
|
|
|
|
|
|
Benefits
|
|
Write-Downs
|
|
Costs
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
FY
2008 restructuring charges
|
|
$
|
3,355
|
|
$
|
1,346
|
|
$
|
458
|
|
$
|
5,159
|
|
Payments
and asset write-downs
|
|
(203
|
)
|
(1,346
|
)
|
(434
|
)
|
(1,983
|
)
|
Accrued
balance at May 3, 2008
|
|
3,152
|
|
|
|
24
|
|
3,176
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter FY 2009 restructuring charges
|
|
2,821
|
|
1,703
|
|
393
|
|
4,917
|
|
Payments
and asset write-downs
|
|
(1,556
|
)
|
(1,703
|
)
|
(417
|
)
|
(3,676
|
)
|
Accrued
balance at August 2, 2008
|
|
4,417
|
|
|
|
|
|
4,417
|
|
|
|
|
|
|
|
|
|
|
|
Second
Quarter FY 2009 restructuring charges
|
|
1,609
|
|
4,350
|
|
325
|
|
6,284
|
|
Payments
and asset write-downs
|
|
(729
|
)
|
(4,350
|
)
|
(325
|
)
|
(5,404
|
)
|
Accrued
balance at November 1, 2008
|
|
5,297
|
|
|
|
|
|
5,297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.
COMPREHENSIVE
INCOME/(LOSS)
The components of
our comprehensive income/(loss) for the three months and six months ended November 1,
2008 and October 27, 2007 include net income and adjustments to
stockholders equity for foreign currency translations. The foreign currency translation adjustment
was due to exchange rate fluctuations in our foreign affiliates local currency
versus the U.S. dollar.
The following table presents details of our comprehensive
income/(loss):
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
Restated
|
|
|
|
Restated
|
|
|
|
|
|
(Note 2)
|
|
|
|
(Note 2)
|
|
|
|
|
|
November 1,
|
|
October 27,
|
|
November 1,
|
|
October 27,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
238
|
|
$
|
8,806
|
|
$
|
7,054
|
|
$
|
17,078
|
|
Translation
adjustment
|
|
(16,181
|
)
|
4,309
|
|
(14,446
|
)
|
4,061
|
|
Total
comprehensive income/(loss)
|
|
$
|
(15,943
|
)
|
$
|
13,115
|
|
$
|
(7,392
|
)
|
$
|
21,139
|
|
6.
GOODWILL AND
INTANGIBLE ASSETS
We review our goodwill and other intangible assets for impairment
whenever events or changes in circumstances indicate that the carrying amount
of these assets may not be recoverable, and we also review our goodwill
annually in accordance with SFAS No. 142, Goodwill and Other Intangibles. The values assigned to goodwill and
intangible assets are normally based on estimates and judgments regarding
expectations for the success and life cycle of products and technologies
acquired. A severe decline in
expectations could result in significant impairment charges, which could have a
material adverse effect on our business, financial condition and results of
operations.
14
Table of Contents
METHODE ELECTRONICS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollar amounts in thousands, except share
data)
6.
GOODWILL AND
INTANGIBLE ASSETS - Continued
One potential indicator of goodwill and other
intangible asset impairment is whether our fair value, as measured by our
market capitalization, has remained below our net book value for a significant
period of time. During the second quarter
of fiscal 2009, the lowest closing price of our common stock was $6.11, as
reported by the New York Stock Exchange, which corresponds to a market
capitalization of approximately $231,197, compared to our November 1, 2008
net book value of approximately $357,484.
Based on this event and general business declines, including the
Automotive segment, we performed step one of the goodwill impairment test in
accordance with paragraph 19 of SFAS No. 142, on the reporting units that
have goodwill as of November 1, 2008.
Based on this test, we determined that the fair value was less than the
carrying value of the net assets for certain reporting units. We have not yet completed step two of the
impairment test, and, as of the filing of this 10-Q, impairment is possible but
is not reasonably estimable. The amount
of goodwill associated to these reporting units is $29,237.
In accordance with FASB
Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, the Company records impairment losses on long-lived assets used in
operations when events and circumstances indicate that long-lived assets might
be impaired and the undiscounted cash flows estimated to be generated by those
assets are less than the carrying amounts of those assets. During the second
quarter of 2009, events and circumstances indicated that $15,192 million of
identifiable intangible assets of the TouchSensor business might be
impaired. However, the Companys
estimate of undiscounted cash flows indicated that such carrying amounts are
expected to be recovered. Nonetheless, it is reasonably possible that
the estimate of undiscounted cash flows may change in the near term resulting
in the need to write down those assets to fair value.
On September 30, 2008, we acquired certain assets of Hetronic LLC
(Hetronic) for $53,639 in cash. We also
incurred $2,367 in transaction costs related to the purchase. Hetronic is a global leader in industrial
safety radio remote controls with locations in the U.S., Malta, the Philippines
and Germany. Hetronic is represented in
45 countries by direct sales associates, licensed partners, distributors and
representatives. Hetronic provides
application specific and standard controls to many different industries, such
as material handling, transportation, mining, military, agriculture and
construction.
On a preliminary basis, based on a third-party valuation report, the
tangible net assets acquired had a fair value of $27,265. The fair values assigned to intangible assets
acquired were $11,430 for customer relationships, $2,700 for the trade name and
trademarks, $1,500 for technology valuation, and $260 for non-compete,
resulting in $12,851 of goodwill. The
customer relationships, technology valuation and non-compete will be amortized
over 5 to approximately 12 years. The
trade name and trademarks are not subject to amortization but will be subject
to periodic impairment testing. The
accounts and transactions of Hetronic have been included in the Interconnect
segment in the consolidated financial statements from the effective date of the
acquisition. Based on the nature of the
Hetronic business, a significant portion of their inventory is raw
material. This is the primary reason why
the total company consolidated raw material inventory increased as of November 1,
2008 as compared to April 28, 2008.
In connection with the Power Products segments acquisition of Cableco
Technologies in fiscal 2005, additional contingent consideration may be due if
certain operational and financial targets are met. Additional goodwill of up to $4,257 may
result from future contingent payments for this acquisition.
On August 31, 2007, we acquired 100% of the assets of Value
Engineered Products, Inc. (VEP) for $5,750 in cash, plus transaction costs
of $79. VEP is a thermal management
solutions provider, manufacturing heat sinks and related products for
high-powered applications. These
components complement our Power Products product offerings and, in some
instances, are joined with bus bars to aid thermal management of power
systems. The terms of the acquisition
provided for an additional payment of up to a maximum of $1,000 if sales
reached specified targets during the twelve-month period following the
close. The final payout was $758,
recorded in the second quarter of fiscal 2009.
15
Table of Contents
METHODE ELECTRONICS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollar amounts in thousands, except share
data)
6.
GOODWILL AND
INTANGIBLE ASSETS - Continued
Based on a third-party valuation report, the tangible
net assets acquired in the VEP transaction had a fair value of $915. The fair values assigned to intangible assets
acquired were $2,900 for customer relationships, $600 for trademarks, resulting
in $2,172 of goodwill. The customer
relationships acquired are being amortized over a period of approximately 16
years, which began in September 2007.
The trademark intangible assets are not subject to amortization but will
be subject to periodic impairment testing.
The accounts and transactions of the acquired business have been
included in the Power Products segment in the consolidated financial statements
from the effective date of the acquisition.
The following tables present details of
the Companys intangible assets:
|
|
As of November 1, 2008
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
Gross
|
|
Amortization
|
|
Net
|
|
Customer
relationships and agreements
|
|
$
|
52,517
|
|
$
|
21,324
|
|
$
|
31,193
|
|
Patents
and technology licenses
|
|
29,077
|
|
6,531
|
|
22,546
|
|
Covenants
not to compete
|
|
2,740
|
|
2,295
|
|
445
|
|
Total
|
|
$
|
84,334
|
|
$
|
30,150
|
|
$
|
54,184
|
|
|
|
As of May 3, 2008
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
Gross
|
|
Amortization
|
|
Net
|
|
Customer
relationships and agreements
|
|
$
|
41,324
|
|
$
|
19,168
|
|
$
|
22,156
|
|
Patents
and technology licenses
|
|
24,692
|
|
5,795
|
|
18,897
|
|
Covenants
not to compete
|
|
2,480
|
|
2,251
|
|
229
|
|
Total
|
|
$
|
68,496
|
|
$
|
27,214
|
|
$
|
41,282
|
|
The intangible assets for customer relationships
and agreements includes $1,840 and $2,278 as of November 1, 2008 and May 3,
2008, respectively, of net value assigned to a supply agreement with Delphi
Corporation. Delphi is currently
operating under a bankruptcy petition filed on October 8, 2005. We continue to supply product to Delphi
post-petition pursuant to this supply agreement and have determined that the
value of the supply agreement has not been impaired.
The estimated aggregate amortization expense for
fiscal 2009 and each of the four succeeding fiscal years is as follows:
2009
|
|
$
|
7,570
|
|
2010
|
|
8,496
|
|
2011
|
|
7,340
|
|
2012
|
|
5,671
|
|
2013
|
|
4,415
|
|
7.
INCOME TAXES
We recognize interest and penalties accrued related to the unrecognized
tax benefits in the provision for income taxes.
During the three months and six months ended November 1, 2008, we recognized
$75 and $42 in interest, respectively and zero in penalties. We had approximately $901 for the payment of
interest and zero for the payment of penalties accrued at November 1,
2008. The total unrecognized tax
benefits as of November 1, 2008 was $5,770.
We believe that it is reasonably possible that the total amount of
unrecognized tax benefits will change within the next twelve months. We have certain tax return years subject to
statutes of limitation, which will close
16
Table of Contents
METHODE ELECTRONICS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollar amounts in thousands, except share
data)
7.
INCOME TAXES - Continued
within
twelve months of the end of the quarter.
Unless challenged by tax authorities, the closure of those statutes of
limitation is expected to result in the recognition of uncertain tax positions
in the amount of $493.
The Company and all of its domestic subsidiaries file income tax
returns in the U.S. federal jurisdiction and various states. Our foreign subsidiaries file income tax
returns in certain foreign jurisdictions since they have operations outside the
U.S. The Company and its subsidiaries
are generally no longer subject to U.S. federal, state and local examinations
by tax authorities for years before fiscal year 2005.
8.
COMMON STOCK AND STOCK-BASED COMPENSATION
The
following table sets forth the changes in the number of issued shares of common
stock during the six month period presented:
|
|
Six Months Ended
|
|
|
|
November 1,
|
|
October 27,
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Balance at the
beginning of the period
|
|
38,225,379
|
|
37,950,829
|
|
Options exercised
|
|
19,089
|
|
100,730
|
|
Restricted stock
awards vested
|
|
38,607
|
|
46,967
|
|
Balance at the
end of the period
|
|
38,283,075
|
|
38,098,526
|
|
We
paid quarterly dividends of $2,633 and $1,895 on October 31, 2008 and August 1,
2008, respectively. We intend to retain the
remainder of our earnings not used for dividend payments to provide funds for
the operation and expansion of our business.
Our Board of Directors approved a stock repurchase plan on September 18,
2008 to repurchase up to 3,000,000 shares.
The plan expires at the end of fiscal 2010. There were 639,880 shares purchased during
the second quarter of fiscal 2009 at an average price of $8.03 per share.
The
following tables summarize the stock option activity and related information
for the six months ended November 1, 2008:
|
|
Summary of Option Activity
|
|
|
|
|
|
Wtd. Avg.
|
|
|
|
Shares
|
|
Exercise Price
|
|
Outstanding
at May 3, 2008
|
|
689,689
|
|
$
|
10.26
|
|
Exercised
|
|
(19,089
|
)
|
5.90
|
|
Forfeited
|
|
(15,921
|
)
|
11.68
|
|
Outstanding
at November 1, 2008
|
|
654,679
|
|
10.35
|
|
|
|
|
|
|
|
|
Options Outstanding and
|
|
Exercisable at November 1, 2008
|
|
|
|
|
|
Wtd. Avg.
|
|
Avg.
|
|
Range of
|
|
|
|
Exercise
|
|
Remaining
|
|
Exercise Prices
|
|
Shares
|
|
Price
|
|
Life (Years)
|
|
$5.12
- $7.69
|
|
161,025
|
|
$
|
6.71
|
|
2.5
|
|
$8.08
- $11.64
|
|
353,305
|
|
10.58
|
|
2.4
|
|
$12.11
- $17.66
|
|
140,349
|
|
13.94
|
|
1.5
|
|
|
|
654,679
|
|
10.35
|
|
|
|
|
|
|
|
|
|
|
|
|
The
aggregate intrinsic value of all options outstanding at November 1, 2008
was $142.
17
Table of Contents
METHODE ELECTRONICS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollar amounts in thousands, except share
data)
8.
COMMON
STOCK AND STOCK-BASED COMPENSATION - Continued
Prior
to June 21, 2007, we had three active stock plans, the Methode Electronics, Inc.
1997 Stock Plan, the Methode Electronics, Inc. 2000 Stock Plan, and the
Methode Electronics, Inc. 2004 Stock Plan.
No options were granted under the Plans since the first quarter of
fiscal 2005. As of November 1,
2008, we had 654,679 unexercised stock options, all of which are fully vested
and have a term of ten years. There is
no remaining unrecognized compensation expense relating to the stock options.
In April 2007, 225,000 shares of common
stock subject to performance-based Restricted Stock Awards (RSAs) granted to
our CEO in fiscal 2006 and 2007 were converted to Restricted Stock Units
(RSUs). The RSUs are subject to the same
vesting schedule and other major provisions of the RSAs they replaced, except
the RSUs are not payable until the earlier of: (1) thirty days after the
CEOs date of termination of employment with the Company and all of its
subsidiaries and affiliates; or (2) the last day of our fiscal year in
which the payment of common stock in satisfaction of the RSUs becomes
deductible to the Company under Section 162(m) of the Internal
Revenue Code. All further discussion of
RSAs in this report includes the RSUs described above.
At the beginning of fiscal year 2009, there were
582,298 performance-based and time-based RSAs outstanding. The time-based RSAs vest in three equal
annual installments from the grant date.
All RSAs awarded to senior management are performance-based and vest
after three years if the recipient remains employed by the Company until that
date and we have met certain revenue growth and return on invested capital
targets. All of the unvested RSAs are
entitled to voting rights and to payment of dividends. During the six months ended November 1,
2008, we awarded 340,665 restricted stock awards. Of the shares granted, 24,000 shares vest
immediately upon grant, 256,565 are performance-based RSAs and 60,100 are
time-based RSAs.
We
recognized pre-tax compensation expense for RSAs of $1,603 and $1,591 in the
six months ended November 1, 2008 and October 27, 2007,
respectively. We record the expense in
the selling and administrative section of our condensed consolidated statement
of income.
18
Table of Contents
METHODE ELECTRONICS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollar amounts in thousands, except share
data)
8
. COMMON STOCK AND STOCK-BASED
COMPENSATION - Continued
The following table
summarizes the RSA activity for the six months ended November 1, 2008:
|
|
Shares
|
|
Unvested
at May 3, 2008
|
|
582,298
|
|
Awarded
|
|
340,665
|
|
Vested
|
|
(24,332
|
)
|
Forfeited
|
|
|
|
Unvested
at November 1, 2008
|
|
898,631
|
|
The table below shows the
Companys unvested RSAs at November 1, 2008:
|
|
|
|
|
|
|
|
Probable
|
|
Target
|
|
|
|
|
|
|
|
|
|
Unearned
|
|
Unearned
|
|
Grant
|
|
|
|
|
|
Weighted
|
|
Compensation
|
|
Compensation
|
|
Fiscal
|
|
|
|
|
|
Average
|
|
Expense at
|
|
Expense at
|
|
Year
|
|
RSAs
|
|
Vesting Period
|
|
Value
|
|
November 1, 2008
|
|
November 1, 2008
|
|
2006
|
|
832
|
|
3-year equal annual
installments
|
|
10.84
|
|
|
|
|
|
2006
|
|
125,000
|
|
3-year cliff
|
|
12.42
|
|
|
|
|
|
2007
|
|
24,757
|
|
3-year equal annual
installments
|
|
7.87
|
|
27
|
|
27
|
|
2007
|
|
227,750
|
|
3-year cliff
|
|
7.79
|
|
307
|
|
307
|
|
2008
|
|
38,954
|
|
3-year equal annual
installments
|
|
14.97
|
|
218
|
|
218
|
|
2008
|
|
164,673
|
|
3-year cliff
|
|
15.14
|
|
1,388
|
|
1,388
|
|
2009
|
|
60,100
|
|
3-year equal annual
installments
|
|
11.35
|
|
509
|
|
509
|
|
2009
|
|
256,565
|
|
3-year cliff
|
|
11.35
|
|
2,509
|
|
2,509
|
|
At November 1, 2008,
the aggregate unvested RSAs had a weighted average fair value of $11.35 and a
weighted average vesting period of approximately 16 months.
19
Table of Contents
METHODE ELECTRONICS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollar amounts in thousands, except share
data)
9.
EARNINGS PER
SHARE
Basic earnings per
share (EPS) is calculated by dividing net earnings by the weighted average
number of common shares outstanding for the applicable period. Diluted EPS is calculated after adjusting the
numerator and the denominator of the basic EPS calculation for the effect of
all potential dilutive common shares outstanding during the period.
The
following table sets forth the computation of basic and diluted earnings per
share:
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
Restated
|
|
|
|
Restated
|
|
|
|
|
|
(Note 2)
|
|
|
|
(Note 2)
|
|
|
|
|
|
November 1,
|
|
October 27,
|
|
November 1,
|
|
October 27,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Numerator
- net income
|
|
$
|
238
|
|
$
|
8,806
|
|
$
|
7,054
|
|
$
|
17,078
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
Denominator
for basic earnings per share-weighted average shares
|
|
37,068
|
|
37,079
|
|
37,120
|
|
37,033
|
|
Dilutive
potential common shares-employee and director stock options
|
|
483
|
|
388
|
|
465
|
|
443
|
|
Denominator
for diluted earnings per share adjusted weighted average shares and assumed
conversions
|
|
37,551
|
|
37,467
|
|
37,584
|
|
37,476
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted net income per share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.01
|
|
$
|
0.24
|
|
$
|
0.20
|
|
$
|
0.46
|
|
Diluted
|
|
$
|
0.01
|
|
$
|
0.24
|
|
$
|
0.19
|
|
$
|
0.46
|
|
Options to purchase
304,522 shares of common stock at a weighted-average exercise price of $12.54 per
share were outstanding as of November 1, 2008, but were not included in
the computation of diluted earnings per share because the exercise prices were
greater than the average market price of the common stock and, therefore, the
effect would be antidilutive.
10.
SEGMENT INFORMATION
We are
a global manufacturer of component and subsystem devices. We design, manufacture and market devices
employing electrical, radio remote control, electronic, wireless, sensing and
optical technologies. Our components are
found in the primary end markets of the automotive, appliance, communications
(including information processing and storage, networking equipment, wireless
and terrestrial voice/data systems), aerospace, rail and other transportation
industries, consumer and industrial equipment markets.
We
report in four operating segments Automotive, Interconnect, Power Products
and Other. The Companys systems are not
designed to capture information by smaller product groups and it would be
impracticable to breakdown the Companys sales into smaller product groups.
On
January 24, 2008, we announced a restructuring of our U.S.-based automotive
operations and a decision to discontinue producing certain legacy products in
the Interconnect segment. During the
three months ended November 1, 2008, we recorded a restructuring charge of
$4,351 and $1,933 for the Automotive and Interconnect segments,
respectively. During the six months
ended November 1, 2008, we recorded a restructuring charge of $7,514 and $3,687
for the Automotive and Interconnect segments, respectively.
20
Table of Contents
METHODE ELECTRONICS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollar amounts in
thousands, except share data)
10.
SEGMENT
INFORMATION - Continued
The Automotive segment supplies
electronic and electromechanical devices and related products to automobile
OEMs, either directly or through their tiered suppliers, including control
switches for electrical power and signals, connectors for electrical devices,
integrated control components, switches and sensors that monitor the operation
or status of a component or system, and packaging of electrical components.
The Interconnect segment provides a
variety of copper and fiber-optic interconnect and interface solutions for the
aerospace, appliance, commercial, computer, construction, consumer, material
handling, medical, military, mining, networking, storage, and
telecommunications markets. Solutions
include solid-state field effect interface panels, PC and express card
packaging, industrial safety radio remote control, optical and copper
transceivers, terminators, connectors, custom cable assemblies and conductive
polymer and thick film inks. Services
include the design and installation of fiber optic and copper infrastructure
systems, and manufacturing of active and passive optical components.
The
Power Products segment manufactures current-carrying laminated bus devices,
custom power-product assemblies; powder coated bus bars, braided flexible
cables and high-current low voltage flexible power cabling systems that are
used in various markets and applications, including telecommunications,
computers, transportation, industrial and power conversion, insulated gate
bipolar transistor solutions, aerospace and military.
The
Other segment includes a designer and manufacturer of magnetic torque sensing
products, and independent laboratories that provide services for qualification
testing and certification, and analysis of electronic and optical components.
The accounting policies of the segments
are the same as those described in the summary of significant accounting
policies. We allocate resources to and
evaluate performance of segments based on operating income. Transfers between
segments are recorded using internal transfer prices set by us.
The identifiable
assets for the Automotive segment decreased $34,912 to $150,993 as of November 1,
2008, compared to $185,905 as of May 3, 2008. The decrease is primarily due to restructuring
charges for fixed assets and a general decrease in business. The identifiable assets for the Interconnect
segment increased $47,694 to 182,106 as of November 1, 2008, compared to
$134,412 as of May 3, 2008. The
increase is primarily due to the acquisition of Hetronic, which was funded by
Corporate.
Below is a table of identifiable assets for each segment
as of November 1, 2008 and May 3, 2008:
|
|
November 1, 2008
|
|
May 3, 2008
|
|
Net Change
|
|
Automotive
|
|
150,993
|
|
185,905
|
|
(34,912
|
)
|
Interconnect
|
|
182,106
|
|
134,412
|
|
47,694
|
|
Power
Products
|
|
36,977
|
|
37,063
|
|
(86
|
)
|
Other
|
|
7,926
|
|
7,332
|
|
594
|
|
Corporate
|
|
59,830
|
|
105,508
|
|
(45,678
|
)
|
Total
Identifiable Assets
|
|
437,832
|
|
470,220
|
|
(32,388
|
)
|
21
Table of Contents
METHODE ELECTRONICS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollar amounts in thousands, except share
data)
10
.
SEGMENT
INFORMATION - Continued
The table below presents information
about our reportable segments:
|
|
Three Months Ended November 1, 2008
|
|
|
|
Restated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Note 2)
|
|
|
|
Power
|
|
|
|
|
|
|
|
|
|
Automotive
|
|
Inter-Connect
|
|
Distribution
|
|
Other
|
|
Eliminations
|
|
Consolidated
|
|
Net sales
|
|
$
|
75,207
|
|
$
|
32,146
|
|
$
|
11,676
|
|
$
|
2,556
|
|
$
|
281
|
|
$
|
121,304
|
|
Transfers between segments
|
|
|
|
(143
|
)
|
(112
|
)
|
(26
|
)
|
(281
|
)
|
|
|
Net sales to unaffiliated customers
|
|
$
|
75,207
|
|
$
|
32,003
|
|
$
|
11,564
|
|
$
|
2,530
|
|
$
|
|
|
$
|
121,304
|
|
Segment income (loss) before restructuring charge
|
|
$
|
10,528
|
|
$
|
(638
|
)
|
$
|
482
|
|
$
|
(750
|
)
|
$
|
|
|
$
|
9,622
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring
|
|
(4,351
|
)
|
(1,933
|
)
|
|
|
|
|
|
|
(6,284
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment income (loss) including restructuring
charge
|
|
$
|
6,177
|
|
$
|
(2,571
|
)
|
$
|
482
|
|
$
|
(750
|
)
|
$
|
|
|
$
|
3,338
|
|
Corporate expenses, net
|
|
|
|
|
|
|
|
|
|
|
|
(3,965
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(627
|
)
|
|
|
Three Months Ended
October 27, 2007
|
|
|
|
|
|
|
|
Power
|
|
|
|
|
|
|
|
|
|
Automotive
|
|
Inter-Connect
|
|
Distribution
|
|
Other
|
|
Eliminations
|
|
Consolidated
|
|
Net sales
|
|
$
|
89,806
|
|
$
|
30,472
|
|
$
|
11,848
|
|
$
|
1,587
|
|
$
|
474
|
|
$
|
133,239
|
|
Transfers between segments
|
|
|
|
(213
|
)
|
(246
|
)
|
(15
|
)
|
(474
|
)
|
|
|
Net sales to unaffiliated customers
|
|
$
|
89,806
|
|
$
|
30,259
|
|
$
|
11,602
|
|
$
|
1,572
|
|
$
|
|
|
$
|
133,239
|
|
Segment income (loss) before restructuring charge
|
|
$
|
13,300
|
|
$
|
1,157
|
|
$
|
2,129
|
|
$
|
(407
|
)
|
$
|
|
|
$
|
16,179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment income (loss) including restructuring
charge
|
|
$
|
13,300
|
|
$
|
1,157
|
|
$
|
2,129
|
|
$
|
(407
|
)
|
$
|
|
|
$
|
16,179
|
|
Corporate expenses, net
|
|
|
|
|
|
|
|
|
|
|
|
(4,750
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
$
|
11,429
|
|
22
Table of Contents
METHODE ELECTRONICS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollar amounts in thousands, except share
data)
10
.
SEGMENT
INFORMATION - Continued
|
|
Six
Months Ended November 1, 2008
|
|
|
|
Restated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Note 2)
|
|
|
|
Power
|
|
|
|
|
|
|
|
|
|
Automotive
|
|
Inter-Connect
|
|
Distribution
|
|
Other
|
|
Eliminations
|
|
Consolidated
|
|
Net sales
|
|
$
|
159,940
|
|
$
|
67,865
|
|
$
|
23,810
|
|
$
|
4,778
|
|
$
|
575
|
|
$
|
255,818
|
|
Transfers between segments
|
|
|
|
(275
|
)
|
(245
|
)
|
(55
|
)
|
(575
|
)
|
|
|
Net sales to unaffiliated customers
|
|
$
|
159,940
|
|
$
|
67,590
|
|
$
|
23,565
|
|
$
|
4,723
|
|
$
|
|
|
$
|
255,818
|
|
Segment income (loss) before restructuring charge
|
|
$
|
24,126
|
|
$
|
1,536
|
|
$
|
1,284
|
|
$
|
(1,332
|
)
|
$
|
|
|
$
|
25,614
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring
|
|
(7,514
|
)
|
(3,687
|
)
|
|
|
|
|
|
|
(11,201
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment income (loss) including restructuring
charge
|
|
$
|
16,612
|
|
$
|
(2,151
|
)
|
$
|
1,284
|
|
$
|
(1,332
|
)
|
$
|
|
|
$
|
14,413
|
|
Corporate expenses, net
|
|
|
|
|
|
|
|
|
|
|
|
(6,327
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,086
|
|
|
|
Six
Months Ended October 27, 2007
|
|
|
|
|
|
|
|
Power
|
|
|
|
|
|
|
|
|
|
Automotive
|
|
Inter-Connect
|
|
Distribution
|
|
Other
|
|
Eliminations
|
|
Consolidated
|
|
Net sales
|
|
$
|
172,668
|
|
$
|
62,058
|
|
$
|
21,183
|
|
$
|
3,261
|
|
$
|
922
|
|
$
|
258,248
|
|
Transfers between segments
|
|
|
|
(391
|
)
|
(501
|
)
|
(30
|
)
|
(922
|
)
|
|
|
Net sales to unaffiliated customers
|
|
$
|
172,668
|
|
$
|
61,667
|
|
$
|
20,682
|
|
$
|
3,231
|
|
$
|
|
|
$
|
258,248
|
|
Segment income (loss) before restructuring charge
|
|
$
|
25,042
|
|
$
|
3,558
|
|
$
|
3,978
|
|
$
|
(682
|
)
|
$
|
|
|
$
|
31,896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment income (loss) including restructuring
charge
|
|
$
|
25,042
|
|
$
|
3,558
|
|
$
|
3,978
|
|
$
|
(682
|
)
|
$
|
|
|
$
|
31,896
|
|
Corporate expenses, net
|
|
|
|
|
|
|
|
|
|
|
|
(9,395
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
$
|
22,501
|
|
11.
CONTINGENCIES
Certain litigation arising in the normal course of business is pending
against us. We are from time to time
subject to various legal actions and claims incidental to our business,
including those arising out of alleged defects, breach of contracts,
employment-related matters and environmental matters. We consider insurance coverage and
third-party indemnification when determining required accruals for pending
litigation and claims. Although the
outcome of potential legal actions and claims cannot be determined, it is our
opinion, based on the information
available, that we have adequate reserves for these
liabilities and that the ultimate resolution of these matters will not have a
material effect on our consolidated financial statements.
23
Table of Contents
METHODE ELECTRONICS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollar amounts in thousands, except share
data)
12.
PRE-PRODUCTION
COSTS RELATED TO LONG-TERM SUPPLY ARRANGEMENTS
We incur pre-production tooling costs related
to certain products produced for our customers under long-term supply
agreements. We had $8,039 and $8,211 as
of fiscal periods ended November 1, 2008 and May 3, 2008,
respectively, of pre-production tooling costs related to customer-owned tools
for which reimbursement is contractually guaranteed by the customer or for
which the customer has provided a non-cancelable right to use the tooling. These amounts are included in our
work-in-process inventory in the condensed consolidated balance sheets. Net revenues and costs on projects are
deferred and recognized over the life of the related long-term supply
agreement.
13.
FAIR
VALUE MEASUREMENTS
We adopted SFAS No. 157,
Fair Value Measurements as of May 4, 2008. SFAS No. 157 defines fair value as the
exchange price that would be received for an asset or paid to transfer a
liability (an exit price) in the principal or most advantageous market for the
asset or liability in an orderly transaction between market participants.
In February 2008,
the FASB issued FASB Staff Position No. 157-2, which delays the effective
date of SFAS No. 157 for non-financial assets and liabilities, which
are not measured at fair value on a recurring basis (at least annually) until
fiscal years beginning after November 15, 2008, which is our fiscal year
2010 that begins May 3, 2009. We
are currently assessing the impact of adopting SFAS No. 157 for
non-financial assets and liabilities on our condensed consolidated financial
statements.
SFAS No. 157
also specifies a fair value hierarchy based upon the observation of inputs in
valuation techniques. Observable inputs
(highest level) reflect market data obtained from independent sources, while
unobservable inputs (lowest level) reflect internally developed market
assumptions. In accordance with SFAS No. 157,
fair value measurements are classified under the following hierarchy:
·
Level 1 Quoted prices in active markets for identical assets and
liabilities.
·
Level 2 Quoted prices in active markets for similar assets and
liabilities, or other inputs that are observable for the asset or liability,
either directly or indirectly, for substantially the full term of the financial
instrument.
·
Level 3 Unobservable inputs that are supported by little or no market
activity and that are significant to the fair value of the assets and
liabilities. This includes certain
pricing models, discounted cash flow methodologies and similar techniques that
use significant unobservable inputs.
The adoption of
SFAS No. 157 had no effect on our condensed consolidated financial
position or results of operations.
Assets and liabilities recorded at fair value are valued using quoted
market prices or under a market approach using other relevant information
generated by market transactions involving identical or comparable instruments
and included:
24
Table of Contents
METHODE ELECTRONICS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollar amounts in thousands, except share
data)
13.
FAIR
VALUE MEASUREMENTS - Continued
Below is a table that summarizes the fair
value of assets and liabilities as of November 1, 2008:
|
|
Fair value measurement used
|
|
|
|
|
|
Quoted prices
|
|
Quoted prices
|
|
|
|
|
|
|
|
in active
|
|
in active
|
|
|
|
|
|
|
|
markets for
|
|
markets for
|
|
Other
|
|
|
|
|
|
identical
|
|
similar
|
|
unobservable
|
|
|
|
Recorded
|
|
instruments
|
|
instruments
|
|
inputs
|
|
|
|
Value
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents (1)
|
|
$
|
52,806
|
|
$
|
47,612
|
|
$
|
5,194
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets Related to Deferred Compensation Plan
|
|
$
|
2,467
|
|
$
|
|
|
$
|
2,467
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets at Fair Value
|
|
$
|
55,273
|
|
$
|
47,612
|
|
$
|
7,661
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Compensation Plan
|
|
$
|
2,241
|
|
$
|
2,241
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities at Fair Value
|
|
$
|
2,241
|
|
$
|
2,241
|
|
$
|
|
|
$
|
|
|
(1) Includes
cash, money-market investments and certificates of deposit.
25
Table of Contents
Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations
Cautionary
Statement
Certain statements in this report are
forward-looking statements that are subject to certain risks and
uncertainties. We undertake no duty to
update any such forward-looking statements to conform to actual results or
changes in our expectations. Our
business is highly dependent upon two large automotive customers and specific
makes and models of automobiles. Our
results will be subject to many of the same risks that apply to the automotive,
appliance, computer and telecommunications industries, such as general economic
conditions, interest rates, credit availability, consumer spending patterns and
technological changes. Other factors,
which may result in materially different results for future periods, include
the following risk factors. These risk
factors should be considered in connection with evaluating the forward-looking
statements contained in this report because these factors could cause our
actual results and condition to differ materially from those projected in
forward-looking statements. The
forward-looking statements in this report are subject to the safe harbor
protection provided under the securities laws.
·
Our business may be materially adversely affected by the current economic environment. The recent disruptions in global financial and credit markets have significantly impacted global economic activity and lead to an economic recession. As a result of these disruptions, our customers and markets have been adversely affected. We have recently experienced a significant drop in sales in our Automotive segment. If we experience reduced demand because of these disruptions in the macroeconomic environment, our business, results of operation and financial condition could be materially adversely affected. If we are unable to successfully anticipate changing economic and financial conditions, we may be unable to effectively plan for and respond to these changes and our business could be adversely affected.
·
We may record impairment
charges which would adversely impact our results of operations. We review our goodwill and other intangible
assets for impairment whenever events or changes in circumstances indicate that
the carrying amount of these assets may not be recoverable, and we also review
our goodwill annually in accordance with SFAS No. 142, Goodwill and Other
Intangibles. The values assigned to
goodwill and intangible assets are normally based on estimates and judgments
regarding expectations for the success and life cycle of products and
technologies acquired. A severe decline
in expectations, future cash flows, a change in strategic direction or our
market capitalization remaining below our net book value for a significant
period of time could result in significant impairment charges, which could have
a material adverse effect on our business, financial condition and results of
operations. Based on events and general
business declines, especially in the Automotive segment, we performed step one
of the goodwill impairment test in accordance with paragraph 19 of SFAS No. 142,
on the reporting units that have goodwill as of November 1, 2008. Based on this test, we determined that the
fair value was less than the carrying value of the net assets for certain
reporting units. We have not yet
completed step two of the impairment test, and, as of the filing of this
10-Q, impairment is possible but is not reasonably estimable. The amount of goodwill associated to these
reporting units is $29,237.
In accordance with FASB
Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, the Company records impairment losses on long-lived assets used in
operations when events and circumstances indicate that long-lived assets might
be impaired and the undiscounted cash flows estimated to be generated by those
assets are less than the carrying amounts of those assets. During the second
quarter of 2009, events and circumstances indicated that $27,769 million of
identifiable intangible assets of the TouchSensor business might be
impaired. However, the Companys
estimate of undiscounted cash flows indicated that such carrying amounts are
expected to be recovered. Nonetheless,
it is reasonably possible that the estimate of undiscounted cash flows may
change in the near term resulting in the need to write down those assets to
fair value.
·
We may incur additional
significant restructuring charges that will adversely affect our results of
operations.
·
Our automotive customers have recently experienced severe declines in demand for their products. Such factors as consumer preference, restricted liquidity and the availability of financing and increased cost of
26
Table of Contents
capital has negatively impacted their businesses. This could cause them to decrease purchases of our products, further restructure their businesses or even reorganize under bankruptcy laws.
·
We depend on a small number of large customers. If we were to lose any of these customers or any of these customers decreased the number of orders it placed, our future results could be adversely affected.
·
Our
business is cyclical and seasonal in nature and further downturns in the
automotive industry could reduce the sales and profitability of our business.
·
Because we derive approximately 63% of our revenues from the automotive industry, the downturn and challenges faced by this industry may have a material adverse effect on our business, financial condition and operating results.
·
Because we derive a substantial portion of our revenues from customers in the automotive, appliance, computer and communications industries, construction, industrial safety radio remote control market, we are susceptible to trends and factors affecting those industries.
·
Because
we derive approximately 63% of our revenues from the automotive segment, oil
prices could adversely affect future results.
·
We are
subject to intense pricing pressures in the automotive industry.
·
We are dependent on the availability and price of raw materials.
·
We face
risks relating to our international operations, including fluctuations in the
U.S. dollar.
·
Our
technology-based business and the markets in which we operate are highly
competitive. If we are unable to compete
effectively, our sales will decline.
·
If we
are unable to protect our intellectual property or we infringe, or are alleged
to infringe, on another persons intellectual property, our business, financial
condition and operating results could be materially adversely affected.
·
We may
be unable to keep pace with rapid technological changes, which would adversely
affect our business.
·
Products
we manufacture may contain design or manufacturing defects that could result in
reduced demand for our products or services and liability claims against us.
·
We may
acquire businesses or divest of various business operations. These transactions
may pose significant risks and may materially adversely affect our business,
financial condition and operating results.
·
We cannot assure you that the newly-acquired Hetronic business will be
successful or that we can implement and profit from new applications of the
acquired technology.
Any such forward-looking statements are not
guarantees of future performance and actual results, developments and business
decisions may differ materially from those foreseen in such forward-looking
statements. These forward-looking
statements speak only as of the date of the report, press release, statement,
document, webcast or oral discussion in which they are made. We do not intend to update any
forward-looking statement, all of which are expressly qualified by the
foregoing. See Part I Item A,
Risk Factors of our latest Form 10-K for the fiscal year ended May 3,
2008, for a further discussion regarding some of the reasons that actual
results may be materially different from those we anticipate.
27
Table of Contents
Overview
We
are a global manufacturer of component and subsystem devices with
manufacturing, design and testing facilities in the United States, Malta, Mexico,
United Kingdom, Germany, Czech Republic, China, India, the Philippines and
Singapore. We design, manufacture and
market devices employing electrical, electronic, wireless, sensing and optical
technologies and wireless remote controls.
Our business is managed on a segment basis, with those segments being
Automotive, Interconnect, Power Products and Other. For more information regarding the business
and products of these segments, see Item 1. Business of our Form 10-K
for the fiscal year ended May 3, 2008.
Our components are
found in the primary end markets of the automotive, information processing and
networking equipment, construction, voice and data communication systems,
consumer electronics, appliance, aerospace vehicles and industrial equipment
industries. Our products employ
electronic and optical technologies to control and convey signals through
sensors, interconnections and controls.
Recent trends in the industries that we serve include:
·
continued customer migration to
lower-cost Eastern European and Asian suppliers;
·
growth of North American subsidiaries
of foreign-based automobile manufacturers;
·
rising raw material costs;
·
the deteriorating financial condition
of certain of our customers and the uncertainty as they undergo restructuring
initiatives, including in some cases, reorganization under bankruptcy laws;
·
increasing pressure by automobile
manufacturers on automotive suppliers to reduce selling prices;
·
more supplier-funded design,
engineering and tooling costs previously funded by the automobile
manufacturers;
·
reduced production schedules for
domestic automobile manufacturers;
rising interest rates and availability of credit; and
·
decline in demand for less
fuel-efficient trucks and SUVs.
On September 30,
2008, we acquired certain assets of Hetronic LLC (Hetronic) for $53,639 in
cash. We also incurred $2,367 in
transaction costs related to the purchase.
Hetronic is a global leader in industrial safety radio remote controls
with locations in the U.S., Malta, the Philippines and Germany. Hetronic is represented in 45 countries by
direct sales associates, licensed partners, distributors and representatives. Hetronic provides application specific and
standard controls to many different industries, such as material handling,
transportation, mining, military, agriculture and construction.
On March 30,
2008, we acquired 100% of the assets of Tribotek, Inc for $1.8 million in
cash. Tribotek designs, develops and
manufactures high current power connectors and power product systems for
products such as power supplies, servers, rectifiers, inverters, robotics and
automated test equipment, in addition to various military and telecommunication
applications.
On August 31,
2007, we acquired 100% of the assets of Value Engineered Products, Inc.
(VEP) for $5.8 million in cash. VEP is a
thermal management solutions provider, manufacturing heat sinks and related
products for high-powered applications.
These components complement our Power Product offerings and, in some
instances, are joined with bus bars to aid thermal management of power systems.
On
January 24, 2008, we announced a restructuring of our U.S.-based
automotive operations and a decision to discontinue producing certain legacy
electronic Interconnect products. The
Automotive and Interconnect restructuring is expected to be completed during
fiscal 2010. During the three months
ended November 1, 2008, we recorded a restructuring charge of $6,284,
which consisted of $1,609 for employee severance, $4,350 in impairment and
accelerated depreciation for buildings and improvements and machinery and
equipment, and $325 relating to professional fees. During the six months ended November 1,
2008, we recorded a restructuring charge of $11,201, which consisted of $4,430
for employee severance, $5,900 in impairment and accelerated depreciation for
buildings and improvements and machinery and equipment, $153 in inventory
write-downs and $718 relating to professional fees. We record the expense in the restructuring
section of our consolidated statement of income. We estimate that we will
record additional pre-tax charges through fiscal 2010 of between $5,000 and
$10,000, of which $2,000 to $3,000 will relate to the termination of approximately
550 employees and the cost of one-time employee benefits,
28
Table of Contents
retention,
COBRA and outplacement services. We will continue to perform periodic
impairment testing and will record any charges incurred as per SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets in the period
when impairment is incurred.
Business
Outlook
Recent
market events, including an unfavorable global economic environment and a
widening international credit crisis, are adversely impacting demand for our
customers products and will impact our operating results in the foreseeable
future. Our financial results will be
subject to certain factors outside of our control. We will continue to monitor industry and
market conditions and intend to respond accordingly. However, no assurance can be given regarding
the length or severity of the economic downturn and its impact on our future
financial results.
Results of Operations for the Three Months Ended November 1,
2008 as Compared to the Three Months Ended October 27, 2007
Consolidated
Results
Below is a table
summarizing results for the three months ended:
(in millions)
|
|
Restated
|
|
|
|
|
|
|
|
|
|
(Note 2)
|
|
|
|
|
|
|
|
|
|
November 1,
|
|
October 27,
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
Net Change
|
|
Net Change
|
|
Net
sales
|
|
$
|
121.3
|
|
$
|
133.2
|
|
$
|
(11.9
|
)
|
-8.9
|
%
|
Other
income
|
|
1.0
|
|
0.5
|
|
0.5
|
|
100.0
|
%
|
|
|
122.3
|
|
133.7
|
|
(11.4
|
)
|
-8.5
|
%
|
|
|
|
|
|
|
|
|
|
|
Cost
of products sold
|
|
97.8
|
|
105.9
|
|
(8.1
|
)
|
-7.6
|
%
|
|
|
|
|
|
|
|
|
|
|
Gross
margins (including other income)
|
|
24.5
|
|
27.8
|
|
(3.3
|
)
|
-11.9
|
%
|
|
|
|
|
|
|
|
|
|
|
Restructuring
|
|
6.3
|
|
|
|
6.3
|
|
0.0
|
%
|
Selling
and administrative expenses
|
|
18.7
|
|
16.1
|
|
2.6
|
|
16.1
|
%
|
Interest
income, net - income/(expense)
|
|
0.4
|
|
0.6
|
|
(0.2
|
)
|
-33.3
|
%
|
Other,
net - income/(expense)
|
|
(0.6
|
)
|
(0.9
|
)
|
0.3
|
|
-33.3
|
%
|
Income
taxes - (benefit)/expense
|
|
(0.9
|
)
|
2.6
|
|
(3.5
|
)
|
-134.6
|
%
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
0.2
|
|
$
|
8.8
|
|
$
|
(8.6
|
)
|
-97.7
|
%
|
|
|
Restated
|
|
|
|
|
|
(Note 2)
|
|
|
|
|
|
November 1,
|
|
October 27,
|
|
Percent
of sales:
|
|
2008
|
|
2007
|
|
Net
sales
|
|
100.0
|
%
|
100.0
|
%
|
Other
income
|
|
0.8
|
%
|
0.4
|
%
|
Cost
of products sold
|
|
80.6
|
%
|
79.5
|
%
|
Gross
margins (including other income)
|
|
20.2
|
%
|
20.9
|
%
|
Restructuring
|
|
5.2
|
%
|
0.0
|
%
|
Selling
and administrative expenses
|
|
15.4
|
%
|
12.1
|
%
|
Interest
income, net
|
|
0.3
|
%
|
0.5
|
%
|
Other,
net
|
|
-0.5
|
%
|
-0.7
|
%
|
Income
taxes
|
|
-0.7
|
%
|
2.0
|
%
|
Net
income
|
|
0.2
|
%
|
6.6
|
%
|
29
Table of Contents
Net Sales
. Consolidated net sales decreased $11.9
million, or 8.9%, to $121.3 million for the three months ended November 1,
2008 from $133.2 million for three months ended October 27, 2007. The automotive segment net sales declined
$14.6 million or 16.3% to $75.2 million in the second quarter of fiscal 2009
from $89.8 million in the second quarter of fiscal 2008. The decline is attributable to the softening
of the global economic environment, especially the direct effect on the North
American automotive industry. Recently,
the Detroit 3 automakers reported sales volume declines of between 30 to 40
percent. The Automotive segment net
sales were negatively impacted by anticipated lower Chrysler sales, but, were
also negatively impacted by price increases of $2.2 million in the second
quarter of fiscal 2009, compared to $3.7 million in the second quarter of
fiscal 2008. In July 2007, we
decided to exit production for certain Chrysler products at the expiration of
our manufacturing commitment, but, at
the request of the customer, agreed to produce until production was transferred
to other suppliers. The transfer of the
Chrysler product is expected to be completed by the end of the third quarter of
fiscal 2009. The Interconnect
segment net sales increased $1.7 million, or 5.6% to $32.0 million in the
second quarter of fiscal 2009 as compared to $30.3 million in the second
quarter of fiscal 2008. The increase is
primarily due to the acquisition of Hetronic, purchased on September 30,
2008. Translation of foreign operations
net sales in the three months ended November 1, 2008 increased reported
net sales by $0.8 million or 0.6% due to currency rate fluctuations.
Other Income
. Other income increased $0.5 million, or
100.0%, to $1.0 million for the three months ended November 1, 2008 from
$0.5 million for three months ended October 27, 2007. Other income consisted primarily of earnings
from engineering design fees and royalties.
Cost of
Products Sold
.
Consolidated cost of products sold decreased $8.1 million, or 7.6%, to
$97.8 million for the three months ended November 1, 2008 from $105.9
million for the three months ended October 27, 2007. The decrease is due to the lower Automotive
segment net sales volumes, partially offset by higher Interconnect sales from
Hetronic. Consolidated cost of products
sold as a percentage of sales was 80.6% for the three months ended November 1,
2008 and 79.5% for the three months ended October 27, 2007. The increase in cost of products sold as a
percentage of net sales is due to lower sales volumes in the Automotive segment
and production costs for the Power Products segment, which is partially offset
by favorable cost for Hetronic, which has a lower cost of goods sold as a
percentage of sales compared to other businesses. The Automotive segment cost of products sold
as a percentage of sales was favorably impacted by Chrysler price increases
during the second quarter of fiscal 2008.
Gross
Margins (including other income).
Consolidated
gross margins (including other income) decreased $3.3 million, or 11.9%, to
$24.5 million for the three months ended November 1, 2008 as compared to
$27.8 million for the three months ended October 27, 2007. Gross margins as a percentage of net sales
was 20.2% for the three months ended November 1, 2008 as compared to 20.9%
for the three months ended October 27, 2007. The decline in gross margins as a percentage
of sales is due to the lower Automotive segment net sales, unfavorable product
mix for the Power Products segment and the impact of the Chrysler price
increases in the second quarter of fiscal 2008.
Selling
and Administrative Expenses
.
Selling and administrative expenses increased $2.6 million, or 16.1%, to
$18.7 million for the three months ended November 1, 2008 compared to
$16.1 million for the three months ended October 27, 2007. The increase relates to the Hetronic
acquisition, as well as higher amortization expense for the TouchSensor and VEP
acquisitions, purchased on February 28, 2007 and August 31, 2007,
respectively. Selling and administrative
expenses as a percentage of net sales increased to 15.4% in the three months
ended November 1, 2008 from 12.1% for the three months ended October 27,
2007.
Restructuring
. On January 24, 2008, we announced a
restructuring of our U.S.-based automotive operations and the decision to
discontinue producing certain legacy products in the Interconnect segment. During the fiscal quarter ended November 1,
2008, we recorded a restructuring charge of $6.3 million, which consisted of
$1.6 million for employee severance, $4.4 million for impairment and
accelerated depreciation for buildings and improvements and machinery and
equipment and $0.3 million relating to professional fees.
Interest
Income, Net
. Net
interest income decreased 33.3% in the three months ended November 1, 2008
to $0.4 million as compared to $0.6 million in the three months ended October 27,
2007. The average cash balance was $94.6
million during the three months ended November 1, 2008 as compared to
$79.3 million during the three months ended October 27, 2007. The average interest rate earned in the three
months ended November 1, 2008 was
30
Table
of Contents
2.38% compared to 3.35%
in the three months ended October 27, 2007. The portfolio was weighted more heavily to
tax-exempt investments in the second quarter of fiscal 2009 as compared to the
second quarter of fiscal 2008. The
average interest rate earned includes both taxable interest and tax-exempt
municipal interest. Interest expense was
$0.1 million for both periods.
Other,
Net
. As restated,
Other, net was expense of $0.6 million
for the three months ended November 1, 2008 as compared to expense of $0.9
million for the three months ended October 27, 2007. During the second quarter of fiscal 2009, we recorded $2.5
million of unrealized currency exchange losses arising from an intercompany
loan between our corporate headquarters and one of our foreign subsidiaries in
conjunction with a recent acquisition of Hetronic, L.L.C., purchased on September 30,
2008. In addition, the U.S.
dollar strengthened versus the Euro and Czech koruna during the second quarter
of fiscal 2009 as compared to the second quarter of fiscal 2008. The functional currencies of these operations
are the British pound, Chinese yuan, Czech koruna, Euro, Mexican peso and
Singapore dollar. Some foreign
operations have transactions denominated in currencies other than their
functional currencies, primarily sales in U.S. dollars and Euros, creating
exchange rate sensitivities.
At November 1,
2008, approximately $5.9 million was invested in an enhanced cash fund
sold as an alternative to traditional money-market funds. We have historically
invested a portion of our on hand cash balances in this fund. These investments
are subject to credit, liquidity, market and interest rate risk. Based on the information
available to us, we have estimated the fair value of this fund at $0.882 per
unit as of November 1, 2008. During the quarter ended November 1,
2008 we recorded a loss of $0.5 million, of which $0.2 million was realized on
partial redemptions of $3.8 million, and $0.3 million was unrealized
.
Income
Taxes.
The effective
income tax rate was a benefit of 47.1% in the second quarter of fiscal 2009
compared with an income tax expense of 23.0% in the second quarter of fiscal
2008. The income tax rate was a benefit
in the second quarter of fiscal 2009 in our U.S.-based businesses due to
restructuring charges and slowing of business, causing a loss before income
taxes. In addition, the effective tax
rates for both fiscal 2009 and 2008 reflect utilization of foreign investment
tax credits and the effect of lower tax rates on income of the Companys
foreign earnings and a higher percentage of earnings at those foreign
operations.
Net
Income.
As restated,
net income decreased $8.6 million, or 97.7%, to $0.2 million for the three
months ended November 1, 2008 as compared to $8.8 million for the three
months ended October 27, 2007 due to the restructuring charges, the softening of the global economic
environment resulting in decreased sales and higher selling and administrative
expenses and the unrealized currency exchange loss relating to the intercompany
loan. Net income as a percentage of
sales decreased to 0.2% for the three months ended November 1, 2008 as
compared to 6.6% for the three months ended October 27, 2007.
31
Table of Contents
Operating
Segments
Automotive
Segment Results
Below is a table
summarizing results for the three months ended:
(in millions)
|
|
Restated
|
|
|
|
|
|
|
|
|
|
(Note 2)
|
|
|
|
|
|
|
|
|
|
November 1,
|
|
October 27,
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
Net Change
|
|
Net Change
|
|
Net
sales
|
|
$
|
75.2
|
|
$
|
89.8
|
|
$
|
(14.6
|
)
|
-16.3
|
%
|
Cost
of products sold
|
|
60.2
|
|
71.3
|
|
(11.1
|
)
|
-15.6
|
%
|
Gross
margins
|
|
15.0
|
|
18.5
|
|
(3.5
|
)
|
-18.9
|
%
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes and restructuring
|
|
$
|
10.5
|
|
$
|
13.3
|
|
$
|
(2.8
|
)
|
-21.1
|
%
|
|
|
|
|
|
|
|
|
|
|
Restructuring
|
|
(4.4
|
)
|
|
|
(4.4
|
)
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
$
|
6.1
|
|
$
|
13.3
|
|
$
|
(7.2
|
)
|
-54.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Restated
|
|
|
|
|
|
|
|
|
|
(Note 2)
|
|
|
|
|
|
|
|
|
|
November 1,
|
|
October 27,
|
|
|
|
|
|
Percent of sales:
|
|
2008
|
|
2007
|
|
|
|
|
|
Net
sales
|
|
100.0
|
%
|
100.0
|
%
|
|
|
|
|
Cost
of products sold
|
|
80.1
|
%
|
79.4
|
%
|
|
|
|
|
Gross
margins
|
|
19.9
|
%
|
20.6
|
%
|
|
|
|
|
Income
before income taxes and restructuring
|
|
14.0
|
%
|
14.8
|
%
|
|
|
|
|
Restructuring
|
|
-5.9
|
%
|
0.0
|
%
|
|
|
|
|
Income
before income taxes
|
|
8.1
|
%
|
14.8
|
%
|
|
|
|
|
Net Sales
. Automotive segment net sales decreased $14.6
million, or 16.3%, to $75.2 million for the three months ended November 1,
2008 from $89.8 million for the three months ended October 27, 2007. The decline is attributable to the softening
of the global economic environment, especially the effect on the North American
automotive industry. Recently, the
Detroit 3 automakers reported volume declines of between 30 to 40 percent. Net sales have declined in the second quarter
of fiscal 2009 as compared to fiscal 2008 by 21.6% in North America, 10.1% in
Europe and 11.1% in Asia. The Automotive
segment net sales were negatively impacted by anticipated lower Chrysler sales,
but, were also negatively impacted by price increases of $2.2 million in the
second quarter of fiscal 2009, compared to $3.7 million in the second quarter
of fiscal 2008. In July 2007, we
decided to exit production for certain Chrysler products at the expiration of
our manufacturing commitment, but, at
the request of the customer, agreed to produce until production was transferred
to other suppliers. The transfer of the
Chrysler product is expected to be completed by the end of the third quarter of
fiscal 2009. Translation of
foreign operations net sales in the three months ended November 1, 2008
increased reported net sales by $0.5 million, or 0.6%, due to currency rate
fluctuations.
Cost of
Products Sold
.
Automotive segment cost of products sold decreased $11.1 million to
$60.2 million for the three months ended November 1, 2008 from $71.3 for
the three months ended October 27, 2007.
The decrease relates to lower sales volumes. Automotive segment costs of products sold as
a percentage of sales increased to 80.1% for the three months ended November 1,
2008 from 79.4% for the three months ended October 27, 2007. Automotive segment cost of products sold as a
percentage of sales was negatively impacted by the year-over-year sales volume
declines in the Chrysler business in the second quarter of fiscal 2009 as
compared to the second quarter of fiscal 2008, as well as increased costs due
to overall lower production volumes.
Gross
Margins.
Automotive
segment gross margins decreased $3.5 million, or 18.9%, to $15.0 million for
the three months ended November 1, 2008 as compared to $18.5 million for the
three months ended October 27,
32
Table of Contents
2007. Gross margins as a percentage of net sales
decreased to 19.9% for the three months ended November 1, 2008 from 20.6%
for the three months ended October 27, 2007. The decrease in gross profit as a percentage
of sales is primarily due to higher costs related to lower production volumes
and the decline in sales volumes in the second quarter of fiscal 2009 as
compared to the second quarter of fiscal 2008.
Restructuring
. On January 24, 2008, we announced a restructuring
of our U.S.-based automotive operations.
During the fiscal quarter ended November 1, 2008, we recorded a
restructuring charge of $4.4 million, which consisted of $1.1 million for
employee severance, $3.0 million for impairment and accelerated depreciation
for buildings, building improvements and machinery and equipment and $0.3 million for professional fees. We expect the restructuring to be completed
during fiscal 2010.
Income
Before Income Taxes.
As
restated, Automotive segment income before income taxes decreased $7.2 million,
or 54.1%, to $6.1 million for the three months ended November 1, 2008
compared to $13.3 million for the three months ended October 27, 2007 due
to restructuring expenses, lower sales volumes and the unrealized currency
exchange loss relating to the intercompany loan in the second quarter of fiscal
2009 as compared to the second quarter of fiscal 2008.
Interconnect
Segment Results
Below is a table summarizing results for the three months ended:
(in millions)
|
|
November 1,
|
|
October 27,
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
Net Change
|
|
Net Change
|
|
Net sales
|
|
$
|
32.0
|
|
$
|
30.3
|
|
$
|
1.7
|
|
5.6
|
%
|
Cost of products
sold
|
|
23.2
|
|
23.6
|
|
(0.4
|
)
|
-1.7
|
%
|
Gross margins
|
|
8.8
|
|
6.7
|
|
2.1
|
|
31.3
|
%
|
|
|
|
|
|
|
|
|
|
|
Income before
income taxes and restructuring
|
|
$
|
(0.6
|
)
|
$
|
1.2
|
|
$
|
(1.8
|
)
|
-150.0
|
%
|
|
|
|
|
|
|
|
|
|
|
Restructuring
|
|
(1.9
|
)
|
|
|
(1.9
|
)
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
Income/(loss)
before income taxes
|
|
$
|
(2.5
|
)
|
$
|
1.2
|
|
$
|
(3.7
|
)
|
-308.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
November 1,
|
|
October 27,
|
|
|
|
|
|
Percent of sales:
|
|
2008
|
|
2007
|
|
|
|
|
|
Net sales
|
|
100.0
|
%
|
100.0
|
%
|
|
|
|
|
Cost of products
sold
|
|
72.5
|
%
|
77.9
|
%
|
|
|
|
|
Gross margins
|
|
27.5
|
%
|
22.1
|
%
|
|
|
|
|
Income before
income taxes and restructuring
|
|
-1.9
|
%
|
4.0
|
%
|
|
|
|
|
Restructuring
|
|
-5.9
|
%
|
0.0
|
%
|
|
|
|
|
Income/(loss)
before income taxes
|
|
-7.8
|
%
|
4.0
|
%
|
|
|
|
|
Net Sales
.
Interconnect segment net sales increased
$1.7 million, or 5.6%, to $32.0 million for the three months ended November 1,
2008 from $30.3 million for the three months ended October 27, 2007. Net sales were favorably impacted by the
acquisition of Hetronic on September 30, 2008. Excluding Hetronic, North American net sales
declined 7.4% and Europe and Asia declined 1.2% in the second quarter of fiscal
2009 as compared to the second quarter of fiscal 2008. The North American net sales decline was
primarily due to the restructuring of our Connector and Duel businesses during
the fourth quarter of fiscal 2008 and the first quarter of fiscal 2009. Translation of foreign operations net sales
in the three months ended November 1, 2008 increased reported net sales by
$0.3 million, or 1.0%, due to currency rate fluctuations.
33
Table of Contents
Cost of
Products Sold
.
Interconnect segment cost of products sold decreased $0.4 million to
$23.2 million for the three months ended November 1, 2008 compared to
$23.6 million for the three months ended October 27, 2007. Interconnect segment cost of products sold as
a percentage of net sales decreased to 72.5% for the three months ended November 1,
2008 compared to 77.9% for the three months ended October 27, 2007. The decrease in cost of products sold as a
percentage of net sales is primarily due to Hetronic, which has a lower cost of
goods sold as a percentage of sales compared to the other Interconnect
businesses.
Gross
Margins.
Interconnect
segment gross margins increased $2.1 million, or 31.3%, to $8.8 million for the
three months ended November 1, 2008 as compared to $6.7 million for the
three months ended October 27, 2007.
Gross margins as a percentage of net sales increased to 27.5% for the
three months ended November 1, 2008 from 22.1% for the three months ended October 27,
2007. The increase in gross margins as a
percentage of net sales is primarily due to Hetronic, which has higher gross
margins compared to the other Interconnect businesses.
Restructuring
. On January 24, 2008, we announced our
decision to discontinue producing certain legacy products in the Interconnect
segment. During the fiscal quarter ended
November 1, 2008, we recorded a restructuring charge of $1.9 million,
which consisted of $0.6 million for employee severance and $1.3 million for
impairment and accelerated depreciation for buildings, building improvements
and machinery and equipment. We expect
the restructuring will be completed by the fourth quarter of fiscal 2009.
Income/(Loss)
Before Income Taxes.
Interconnect
income before income taxes decreased $3.7 million to a loss of $2.5 million for
the three months ended November 1, 2008 compared to income of $1.2 million
for the three months ended October 27, 2007 due to restructuring charges
and $0.9 million of increased amortization expense.
Power
Products Segment Results
Below is a table summarizing results for the three
months ended:
(in millions)
|
|
November 1,
|
|
October 27,
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
Net Change
|
|
Net Change
|
|
Net sales
|
|
$
|
11.6
|
|
$
|
11.6
|
|
$
|
|
|
0.0
|
%
|
Cost of products
sold
|
|
9.5
|
|
8.5
|
|
1.0
|
|
11.8
|
%
|
Gross margins
|
|
2.1
|
|
3.1
|
|
(1.0
|
)
|
-32.3
|
%
|
|
|
|
|
|
|
|
|
|
|
Income before
income taxes
|
|
$
|
0.5
|
|
$
|
2.1
|
|
$
|
(1.6
|
)
|
-76.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
November 1,
|
|
October 27,
|
|
|
|
|
|
Percent of sales:
|
|
2008
|
|
2007
|
|
|
|
|
|
Net sales
|
|
100.0
|
%
|
100.0
|
%
|
|
|
|
|
Cost of products
sold
|
|
81.9
|
%
|
73.3
|
%
|
|
|
|
|
Gross margins
|
|
18.1
|
%
|
26.7
|
%
|
|
|
|
|
Income before
income taxes
|
|
4.3
|
%
|
18.1
|
%
|
|
|
|
|
Net Sales
. Power Products segment net sales were $11.6
million for both the three months ended November 1, 2008 and the three
months ended October 27, 2007. Net
sales from VEP, acquired on August 31, 2007 were offset by declines in the
other Power Products businesses.
Excluding VEP, Power Products net sales declined 2.6% in the second
quarter of fiscal 2009 as compared to the second quarter of fiscal 2008.
Cost of
Products Sold
. Power
Products segment cost of products sold increased $1.0 million, or 11.8%, to
$9.5 million for the three months ended November 1, 2008 compared to $8.5
million for the three months ended October 27, 2007. The Power Products segment cost of products
sold as a percentage of sales increased to 81.9% for the three months ended November 1,
2008 from 73.3% for the three months ended October 27, 2007. The increase is partially due to a product
which reached end-of-life at the end of fiscal 2008 and had a lower cost as a
34
Table of Contents
percentage of
sales than the remaining sales during the second quarter of fiscal 2009. In addition, we experienced unfavorable
product mix in our busbar businesses, as well as, increased shipping and
distribution costs.
Gross
Margins.
Power
Products segment gross margins decreased $1.0 million, or 32.3%, to $2.1
million for the three months ended November 1, 2008 as compared to $3.1
million for the three months ended October 27, 2007. Gross margins as a
percentage of net sales decreased to 18.1% for the three months ended November 1,
2008 from 26.7% for the three months ended October 27, 2007. The decrease is due to a product which
reached end-of- life at the end of fiscal 2008 and had higher gross margins
than the remaining sales and gross margins during the second quarter of fiscal
2009. In addition, we also experienced
unfavorable product mix and labor costs, as well as, shipping and distribution
costs.
Income
Before Income Taxes.
Power
Products segment income before income taxes decreased by $1.6 million or 76.2%
to $0.5 million for the three months ended November 1, 2008 from $2.1
million for the three months ended October 27, 2007 due to decreased sales
of products which became end-of-life at the end of fiscal year 2008, higher
material, labor and shipping costs, higher commission expense and expenses
related to Tribotek, which was acquired on March 30, 2008.
Other
Segment Results
Below is a table summarizing results for the three months ended:
(in millions)
|
|
November 1,
|
|
October 27,
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
Net Change
|
|
Net Change
|
|
Net sales
|
|
$
|
2.5
|
|
$
|
1.6
|
|
$
|
0.9
|
|
56.3
|
%
|
Cost of products
sold
|
|
2.6
|
|
1.6
|
|
1.0
|
|
62.5
|
%
|
Gross margins
|
|
(0.1
|
)
|
|
|
(0.1
|
)
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
Loss before
income taxes
|
|
$
|
(0.8
|
)
|
$
|
(0.4
|
)
|
$
|
(0.4
|
)
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
November 1,
|
|
October 27,
|
|
|
|
|
|
Percent of sales:
|
|
2008
|
|
2007
|
|
|
|
|
|
Net sales
|
|
100.0
|
%
|
100.0
|
%
|
|
|
|
|
Cost of products
sold
|
|
104.0
|
%
|
100.0
|
%
|
|
|
|
|
Gross margins
|
|
-4.0
|
%
|
0.0
|
%
|
|
|
|
|
Loss before
income taxes
|
|
-32.0
|
%
|
-25.0
|
%
|
|
|
|
|
Net Sales
. The Other segment net sales increased $0.9
million to $2.5 million for the three months ended November 1, 2008 as
compared to $1.6 million for the three months ended October 27, 2007. Net sales from our torque-sensing business
increased 204.9% and net sales from our testing facilities increased 33.7% in
the second quarter of fiscal 2009 as compared to the second quarter of fiscal
2008.
Cost of
Products Sold
. Other
segment cost of products sold increased $1.0 million to $2.6 million for the
three months ended November 1, 2008 compared to $1.6 million for the three
months ended October 27, 2007. The
majority of the increase is due to continued investment initiatives in our
torque-sensing business.
Gross
Margins.
The Other
segment gross margins decreased to a loss of $0.1 million for the three months
ended November 1, 2008, compared to break-even gross margins for the three
months ended October 27, 2007.
Gross margins slightly declined in the second quarter of fiscal 2009 due
to the increased investments in our torque-sensing business.
Loss
Before Income Taxes.
The
Other segment loss before income taxes was $0.8 million for the three months
ended November 1, 2008 compared to $0.4 million for the three months ended
October 27, 2007. The
35
Table of Contents
increase in the
loss before income taxes is due to additional support staff for our North
American testing facilities, as well as, a new testing facility that was opened
in Shanghai, China in the second quarter of fiscal 2009.
Results
of Operations for the Six Months Ended November 1, 2008 as Compared to the
Six Months Ended October 27, 2007
Consolidated
Results
Below is a table summarizing results for the six
months ended:
(in millions)
|
|
Restated
|
|
|
|
|
|
|
|
|
|
(Note 2)
|
|
|
|
|
|
|
|
|
|
November 1,
|
|
October 27,
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
Net Change
|
|
Net Change
|
|
Net sales
|
|
$
|
255.8
|
|
$
|
258.3
|
|
$
|
(2.5
|
)
|
-1.0
|
%
|
Other income
|
|
1.7
|
|
0.7
|
|
1.0
|
|
142.9
|
%
|
|
|
257.5
|
|
259.0
|
|
(1.5
|
)
|
-0.6
|
%
|
|
|
|
|
|
|
|
|
|
|
Cost of products
sold
|
|
203.2
|
|
204.2
|
|
(1.0
|
)
|
-0.5
|
%
|
|
|
|
|
|
|
|
|
|
|
Gross margins
(including other income)
|
|
54.3
|
|
54.8
|
|
(0.5
|
)
|
-0.9
|
%
|
|
|
|
|
|
|
|
|
|
|
Restructuring
|
|
11.2
|
|
|
|
11.2
|
|
0.0
|
%
|
Selling and
administrative expenses
|
|
35.2
|
|
32.1
|
|
3.1
|
|
9.7
|
%
|
Interest income,
net - income/(expense)
|
|
1.0
|
|
1.0
|
|
|
|
0.0
|
%
|
Other, net -
income/(expense)
|
|
(0.9
|
)
|
(1.2
|
)
|
0.3
|
|
-25.0
|
%
|
Income taxes -
(benefit)/expense
|
|
1.0
|
|
5.4
|
|
(4.4
|
)
|
-81.5
|
%
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
7.0
|
|
$
|
17.1
|
|
$
|
(10.1
|
)
|
-59.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Restated
|
|
|
|
|
|
|
|
|
|
(Note 2)
|
|
|
|
|
|
|
|
|
|
November 1,
|
|
October 27,
|
|
|
|
|
|
Percent of sales:
|
|
2008
|
|
2007
|
|
|
|
|
|
Net sales
|
|
100.0
|
%
|
100.0
|
%
|
|
|
|
|
Other income
|
|
0.7
|
%
|
0.3
|
%
|
|
|
|
|
Cost of products
sold
|
|
79.4
|
%
|
79.1
|
%
|
|
|
|
|
Gross margins
(including other income)
|
|
21.2
|
%
|
21.2
|
%
|
|
|
|
|
Restructuring
|
|
4.4
|
%
|
0.0
|
%
|
|
|
|
|
Selling and
administrative expenses
|
|
13.8
|
%
|
12.4
|
%
|
|
|
|
|
Interest income,
net
|
|
0.4
|
%
|
0.4
|
%
|
|
|
|
|
Other, net
|
|
-0.4
|
%
|
-0.5
|
%
|
|
|
|
|
Income taxes
|
|
0.4
|
%
|
2.1
|
%
|
|
|
|
|
Net income
|
|
2.7
|
%
|
6.6
|
%
|
|
|
|
|
Net Sales
. Consolidated net sales decreased $2.5
million, or 1.0%, to $255.8 million for the six months ended November 1,
2008 from $258.3 million for six months ended October 27, 2007. The automotive segment net sales declined
$12.8 million or 7.4% to $159.9 million in the first half of fiscal 2009 from
$172.7 million in the first half of fiscal 2008. The decline is attributable to the softening
of the global economic environment, especially the effect on the North American
automotive industry. The Automotive
segment net sales were negatively impacted by anticipated lower Chrysler sales,
but, were also favorably impacted by price increases of $7.3 million in the
first half of fiscal 2009, compared to $5.0 million in the first half of fiscal
2008. In July 2007, we decided to
exit production for certain Chrysler products at the expiration of our
manufacturing commitment, but, at the
request of the customer, agreed to produce until production was transferred to
other suppliers. Therefore, the first
half of fiscal 2009 had 6
36
Table of
Contents
months
of price increases and the first half of fiscal 2008 only had four months of
price increases. The transfer of the
Chrysler product is expected to be completed by the end of the third quarter of
fiscal 2009.
The Interconnect segment net sales increased $5.9 million,
or 9.6% to $67.6 million in the first half of fiscal 2009 as compared to $61.7
million in the first half of fiscal 2008.
The increase is primarily due to the acquisition of Hetronic, which was
purchased on September 30, 2008 and increased net sales in our TouchSensor
business, which launched a new product line for an existing customer in the
first half of fiscal 2009. The Power
Products segment was favorably impacted by the VEP business that was acquired
on August 31, 2007. Translation of
foreign operations net sales in the six months ended November 1, 2008
increased reported net sales by $4.7 million or 1.8% due to currency rate
fluctuations.
Other
Income
. Other income
increased $1.0 million, or 142.9%, to $1.7 million for the six months ended November 1,
2008 from $0.7 million for six months ended October 27, 2007. Other income consisted primarily of earnings
from engineering design fees and royalties.
Cost of
Products Sold
.
Consolidated cost of products sold decreased $1.0 million, or 0.5%, to
$203.2 million for the six months ended November 1, 2008 from $204.2
million for the six months ended October 27, 2007. The decrease is due to the lower sales
volumes. Consolidated cost of products
sold as a percentage of sales was 79.4% for the six months ended November 1,
2008 and 79.1% for the six months ended October 27, 2007. The Automotive segment cost of products sold
as a percentage of sales was impacted by favorable pricing from the Chrysler
business during the first half of fiscal 2009.
Cost of products sold as a percentage of net sales is higher to due to
lower sales volumes in the Automotive segment, unfavorable product mix and
production costs for the Power Products segment, which is partially offset by
favorable costs for Hetronic, which has a lower cost of goods sold as a
percentage of sales compared to other businesses.
Gross
Margins (including other income).
Consolidated
gross margins (including other income) decreased $0.5 million, or 0.9%, to
$54.3 million for the six months ended November 1, 2008 as compared to
$54.8 million for the six months ended October 27, 2007. Gross margins as a percentage of net sales
were 21.2% for both the six months ended November 1, 2008 and the six
months ended October 27, 2007.
Gross margins were impacted by
favorable pricing and sales volumes related to the Chrysler business in the
first half of fiscal 2009 compared to the first half of fiscal 2008, offset by
lower automotive segment sales and unfavorable product mix and production costs
for the Power Products segment.
Selling
and Administrative Expenses
.
Selling and administrative expenses increased $3.1 million, or 9.7%, to
$35.2 million for the six months ended November 1, 2008 compared to $32.1
million for the six months ended October 27, 2007. The increase relates to the Hetronic
acquisition, as well as higher amortization expense for the TouchSensor and VEP
acquisitions, purchased on February 28, 2007 and August 31, 2007,
respectively. In addition, management
positions were filled for our testing facilities in the first half of fiscal
2009, which were vacant in the first half of fiscal 2008. Selling and administrative expenses as a
percentage of net sales increased to 13.8% in the six months ended November 1,
2008 from 12.4% for the six months ended October 27, 2007.
Restructuring
. On January 24, 2008, we announced a
restructuring of our U.S.-based automotive operations and the decision to
discontinue producing certain legacy products in the Interconnect segment. During the six months ended November 1,
2008, we recorded a restructuring charge of $11.2 million, which consisted of
$4.4 million for employee severance, $5.9 million for impairment and
accelerated depreciation for buildings and improvements and machinery and
equipment, $0.2 million for inventory write-downs and $0.7 million relating to
professional fees.
Interest
Income, Net
. Net
interest income was $1.0 million for both the six months ended November 1,
2008 and six months ended October 27, 2007. The average cash balance was $105.3 million
during the six months ended November 1, 2008 as compared to $73.4 million
during the six months ended October 27, 2007. The average interest rate earned in the six
months ended November 1, 2008 was 2.14% compared to 3.32% in the six months
ended October 27, 2007. The
portfolio was weighted more heavily to tax-exempt investments in the first half
of fiscal 2009 as compared to the first half of fiscal 2008. The average interest rate earned includes
both taxable interest and tax-exempt municipal interest. Interest expense was $0.1 million for both
periods.
37
Table
of Contents
Other,
Net
. As restated,
Other, net was an expense of $0.9 million for the six months ended November 1,
2008, compared to an expense of $1.2 million for the six months ended October 27,
2007. During the second quarter of
fiscal 2009, we
recorded $2.5 million of unrealized currency exchange losses arising from an
intercompany loan between our corporate headquarters and one of our foreign
subsidiaries in conjunction with a recent acquisition of Hetronic, L.L.C.,
purchased on September 30, 2008.
In addition. the U.S. dollar strengthened versus the Euro and Czech
koruna during the second quarter of fiscal 2009 as compared to the second
quarter of fiscal 2008. The functional
currencies of these operations are the British pound, Chinese yuan, Czech
koruna, Euro, Mexican peso and Singapore dollar. Some foreign operations have transactions
denominated in currencies other than their functional currencies, primarily
sales in U.S. dollars and Euros, creating exchange rate sensitivities.
At November 1,
2008, approximately $5.9 million was invested in an enhanced cash fund
sold as an alternative to traditional money-market funds. We have historically
invested a portion of our on hand cash balances in this fund. These investments
are subject to credit, liquidity, market and interest rate risk. Based on the
information available to us, we have estimated the fair value of this fund at
$0.8820 per unit as of November 1, 2008. During the first six months of
the fiscal year, we recorded a loss of $0.5 million, of which $0.2 million was
realized on partial redemptions of $6.4
million, and $0.3 was unrealized
.
Income
Taxes.
The effective
income tax rate was 9.8% in the first half of fiscal 2009 compared with 24.1%
in the first half of fiscal 2008. The
income tax rate in the first half of fiscal 2009 benefited due to restructuring
charges and slowing business in our U.S. based businesses, causing a smaller
income before income taxes. The
effective tax rates for both fiscal 2009 and 2008 reflect utilization of
foreign investment tax credits and the effect of lower tax rates on income of
the Companys foreign earnings and a higher percentage of earnings at those
foreign operations.
Net
Income.
As restated,
net income decreased $10.1 million, or 59.1%, to $7.0 million for the six
months ended November 1, 2008 as compared to $17.1 million for the six
months ended October 27, 2007 due to the restructuring charges and higher
selling and administrative expenses, the unrealized currency exchange loss
relating to the intercompany loan, partially offset by automotive segment price
increases. Net income as a percentage of
sales decreased to 2.7% for the six months ended November 1, 2008 as
compared to 6.6% for the six months ended October 27, 2007.
38
Table of Contents
Operating
Segments
Automotive
Segment Results
Below is a table summarizing results for the six months ended:
(in millions)
|
|
Restated
|
|
|
|
|
|
|
|
|
|
(Note 2)
|
|
|
|
|
|
|
|
|
|
November 1,
|
|
October 27,
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
Net Change
|
|
Net Change
|
|
Net sales
|
|
$
|
159.9
|
|
$
|
172.7
|
|
$
|
(12.8
|
)
|
-7.4
|
%
|
Cost of products
sold
|
|
127.8
|
|
137.8
|
|
(10.0
|
)
|
-7.3
|
%
|
Gross margins
|
|
32.1
|
|
34.9
|
|
(2.8
|
)
|
-8.0
|
%
|
|
|
|
|
|
|
|
|
|
|
Income before
income taxes and restructuring
|
|
$
|
24.1
|
|
$
|
25.0
|
|
$
|
(0.9
|
)
|
-3.6
|
%
|
|
|
|
|
|
|
|
|
|
|
Restructuring
|
|
(7.5
|
)
|
|
|
(7.5
|
)
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
Income before
income taxes
|
|
$
|
16.6
|
|
$
|
25.0
|
|
$
|
(8.4
|
)
|
-33.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Restated
|
|
|
|
|
|
|
|
|
|
(Note 2)
|
|
|
|
|
|
|
|
|
|
November 1,
|
|
October 27,
|
|
|
|
|
|
Percent of sales:
|
|
2008
|
|
2007
|
|
|
|
|
|
Net sales
|
|
100.0
|
%
|
100.0
|
%
|
|
|
|
|
Cost of products
sold
|
|
79.9
|
%
|
79.8
|
%
|
|
|
|
|
Gross margins
|
|
20.1
|
%
|
20.2
|
%
|
|
|
|
|
Income before
income taxes and restructuring
|
|
15.1
|
%
|
14.5
|
%
|
|
|
|
|
Restructuring
|
|
-4.7
|
%
|
0.0
|
%
|
|
|
|
|
Income before
income taxes
|
|
10.4
|
%
|
14.5
|
%
|
|
|
|
|
Net Sales
. Automotive segment net sales decreased $12.8
million, or 7.4%, to $159.9 million for the six months ended November 1,
2008 from $172.7 million for the six months ended October 27, 2007. The decline is attributable to the softening
of the global economic environment, especially the effect on the North American
automotive industry. Recently, the
Detroit 3 automakers reported volume declines of between 30 to 40 percent. North American net sales have declined in the
first half of fiscal 2009 as compared to fiscal 2008 by 11.5%. The Automotive segment net sales were
negatively impacted by anticipated lower Chrysler sales, but, were also
favorably impacted by price increases of $7.3 million in the first half of
fiscal 2009, compared to $5.0 million in the first half of fiscal 2008. In July 2007, we decided to exit
production for certain Chrysler products at the expiration of our manufacturing
commitment, but, at the request of the
customer, agreed to produce until production was transferred to other
suppliers. Therefore, the first half of
fiscal 2009 had 6 months of price increases and the first half of fiscal 2008
only had four months of price increases.
The transfer of the Chrysler product is expected to be completed by the
end of the third quarter of fiscal 2009.
Excluding the Chrysler sales volume increases, North American net
sales declined 18.3% in the first half of fiscal 2009 compared to the first
half of fiscal 2008. Net sales declined
in Europe and Asia by 1.4% and 13.1%, respectively in the first half of fiscal
2009 compared to the first half of fiscal 2008.
Translation of foreign operations net sales in the six months ended November 1,
2008 increased reported net sales by $3.9 million, or 2.2%, due to currency
rate fluctuations.
Cost of
Products Sold
.
Automotive segment cost of products sold decreased $10.0 million to
$127.8 million for the six months ended November 1, 2008 from $137.8 for
the six months ended October 27, 2007.
The decrease relates to lower sales volumes. Automotive segment costs of products sold as
a percentage of sales decreased to 79.9% for the six months ended November 1,
2008 from 79.8% for the six months ended October 27, 2007. Automotive segment cost of products sold as a
percentage of sales was impacted by favorable Chrysler sales price increases in
the first half of fiscal 2009 as compared to the first half of fiscal
2008. The favorable sales price offset
higher production cost due to lower volumes in the first half of fiscal 2009 as
compared to the same period last year.
39
Table of Contents
Gross
Margins.
Automotive
segment gross margins decreased $2.8 million, or 8.0%, to $32.1 million for the
six months ended November 1, 2008 as compared to $34.9 million for the six
months ended October 27, 2007.
Gross margins as a percentage of net sales decreased to 20.1% for the
six months ended November 1, 2008 from 20.2% for the six months ended October 27,
2007. Automotive segment gross margins
as a percentage of sales was impacted by favorable Chrysler sales price
increases in the first half of fiscal 2009 as compared to the first half of
fiscal 2008. The favorable sales price
increases offset higher production cost due to lower volumes in the first half
of fiscal 2009 as compared to the same period last year.
Restructuring
. On January 24, 2008, we announced a
restructuring of our U.S.-based automotive operations. During the fiscal half year ended November 1,
2008, we recorded a restructuring charge of $7.5 million, which consisted of
$3.2 million for employee severance, $3.7 million for impairment and
accelerated depreciation for buildings, building improvements and machinery and
equipment and $0.6 million for professional
fees. We expect the restructuring to be
completed during fiscal 2010.
Income
Before Income Taxes.
As
restated, Automotive segment income before income taxes decreased $8.4 million,
or 33.6%, to $16.6 million for the six months ended November 1, 2008
compared to $25.0 million for the six months ended October 27, 2007 due to
restructuring expenses, decreased net sales, higher production costs, the
unrealized currency exchange loss relating to the intercompany loan, partially
offset by the price increases.
Interconnect
Segment Results
Below is a table summarizing results for the six months ended:
(in millions)
|
|
November 1,
|
|
October 27,
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
Net Change
|
|
Net Change
|
|
Net sales
|
|
$
|
67.6
|
|
$
|
61.7
|
|
$
|
5.9
|
|
9.6
|
%
|
Cost of products
sold
|
|
49.8
|
|
47.3
|
|
2.5
|
|
5.3
|
%
|
Gross margins
|
|
17.8
|
|
14.4
|
|
3.4
|
|
23.6
|
%
|
|
|
|
|
|
|
|
|
|
|
Income before
income taxes and restructuring
|
|
$
|
1.5
|
|
$
|
3.6
|
|
$
|
(2.1
|
)
|
-58.3
|
%
|
|
|
|
|
|
|
|
|
|
|
Restructuring
|
|
(3.7
|
)
|
|
|
(3.7
|
)
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
Income/(loss)
before income taxes
|
|
$
|
(2.2
|
)
|
$
|
3.6
|
|
$
|
(5.8
|
)
|
-161.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
November 1,
|
|
October 27,
|
|
|
|
|
|
Percent of sales:
|
|
2008
|
|
2007
|
|
|
|
|
|
Net sales
|
|
100.0
|
%
|
100.0
|
%
|
|
|
|
|
Cost of products
sold
|
|
73.7
|
%
|
76.7
|
%
|
|
|
|
|
Gross margins
|
|
26.3
|
%
|
23.3
|
%
|
|
|
|
|
Income before
income taxes and restructuring
|
|
2.2
|
%
|
5.8
|
%
|
|
|
|
|
Restructuring
|
|
-5.5
|
%
|
0.0
|
%
|
|
|
|
|
Income before
income taxes
|
|
-3.3
|
%
|
5.8
|
%
|
|
|
|
|
Net Sales
. Interconnect segment net sales increased $5.9
million, or 9.6%, to $67.6 million for the six months ended November 1,
2008 from $61.7 million for the six months ended October 27, 2007. Net sales were favorably impacted by the
acquisition of Hetronic on September 30, 2008. Excluding Hetronic, North American net sales
increased 2.8%, Asia increased 15.0% and Europe declined 4.8% in the first half
of fiscal 2009 as compared to the first half of fiscal 2008. The European net sales decline was primarily
due to our Optical businesses.
40
Table of Contents
Translation of
foreign operations net sales in the six months ended November 1, 2008
increased reported net sales by $0.8 million, or 1.3%, due to currency rate
fluctuations.
Cost of
Products Sold
.
Interconnect segment cost of products sold increased $2.5 million to
$49.8 million for the six months ended November 1, 2008 compared to $47.3
million for the six months ended October 27, 2007. The majority of the increase is due to higher
net sales. Interconnect segment cost of
products sold as a percentage of net sales decreased to 73.7% for the six
months ended November 1, 2008 compared to 76.7% for the six months ended October 27,
2007. The decrease in cost of products
sold as a percentage of net sales is due primarily to Hetronic, which has a
lower cost of goods sold as a percentage of sales compared to the other
Interconnect businesses.
Gross
Margins.
Interconnect
segment gross margins increased $3.4 million, or 23.6%, to $17.8 million for
the six months ended November 1, 2008 as compared to $14.4 million for the
six months ended October 27, 2007.
Gross margins as a percentage of net sales increased to 26.3% for the
six months ended November 1, 2008 from 23.3% for the six months ended October 27,
2007. The increase in gross margins as a
percentage of net sales is due primarily to Hetronic, which has higher gross
margins compared to the other Interconnect businesses.
Restructuring
. On January 24, 2008, we announced our
decision to discontinue producing certain legacy products in the Interconnect
segment. During the fiscal first half
ended November 1, 2008, we recorded a restructuring charge of $3.7
million, which consisted of $1.2 million for employee severance, $2.2 million
for impairment and accelerated depreciation for buildings, building
improvements and machinery and equipment, $0.2 million for inventory
write-downs and $0.1 relating to professional fees. We expect the restructuring to be completed
by the fourth quarter of fiscal 2009.
Income/(Loss)
Before Income Taxes.
Interconnect
income before income taxes decreased $5.8 million, or 161.1%, to a loss of $2.2
million for the six months ended November 1, 2008 compared to income of
$3.6 million for the six months ended October 27, 2007 due to
restructuring, $1.5 million of increased amortization expense, partially offset
by higher gross margins.
Power
Products Segment Results
Below is a table summarizing results for the six months ended:
(in millions)
|
|
November 1,
|
|
October 27,
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
Net Change
|
|
Net Change
|
|
Net sales
|
|
$
|
23.6
|
|
$
|
20.7
|
|
$
|
2.9
|
|
14.0
|
%
|
Cost of products
sold
|
|
19.2
|
|
15.0
|
|
4.2
|
|
28.0
|
%
|
Gross margins
|
|
4.4
|
|
5.7
|
|
(1.3
|
)
|
-22.8
|
%
|
|
|
|
|
|
|
|
|
|
|
Income before
income taxes
|
|
$
|
1.3
|
|
$
|
4.0
|
|
$
|
(2.7
|
)
|
-67.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
November 1,
|
|
October 27,
|
|
|
|
|
|
Percent
of sales:
|
|
2008
|
|
2007
|
|
|
|
|
|
Net sales
|
|
100.0
|
%
|
100.0
|
%
|
|
|
|
|
Cost of products
sold
|
|
81.4
|
%
|
72.5
|
%
|
|
|
|
|
Gross margins
|
|
18.6
|
%
|
27.5
|
%
|
|
|
|
|
Income before
income taxes
|
|
5.5
|
%
|
19.3
|
%
|
|
|
|
|
Net Sales
. Power Products segment net sales increased
$2.9 million to $23.6 million for the six months ended November 1, 2008
from $20.7 million for the six months ended October 27, 2007. Net sales were favorably impacted by the VEP
acquisition on August 31, 2007.
Excluding VEP, Power Products net sales increased 8.2% in the second
quarter of fiscal 2009 as compared to the second quarter of fiscal 2008 due to
strong net sales from our Asian operation.
41
Table of Contents
Cost of Products
Sold
. Power Products
segment cost of products sold increased $4.2 million, or 28.0%, to $19.2
million for the six months ended November 1, 2008 compared to $15.0
million for the six months ended October 27, 2007. The Power Products segment cost of products
sold as a percentage of sales increased to 81.4% for the six months ended November 1,
2008 from 72.5% for the six months ended October 27, 2007. The increase is partially due to a product
which reached end-of-life at the end of fiscal 2008 and had a lower cost as a
percentage of sales than the remaining sales during the first half of fiscal
2009. In addition, we experienced an
unfavorable product mix in our busbar businesses, as well as, increased shipping
and distribution costs.
Gross
Margins.
Power
Products segment gross margins decreased $1.3 million, or 22.8%, to $4.4
million for the six months ended November 1, 2008 as compared to $5.7
million for the six months ended October 27, 2007. Gross margins as a
percentage of net sales decreased to 18.6% for the six months ended November 1,
2008 from 27.5% for the six months ended October 27, 2007. The decrease is due to a product which
reached end-of-life at the end of fiscal 2008 and had higher gross margins than
the remaining sales and gross margins during the first half of fiscal
2009. We also experienced an unfavorable
product mix, labor costs, as well as, shipping and distribution costs.
Income
Before Income Taxes.
Power
Products segment income before income taxes decreased by $2.7 million or 67.5%
to $1.3 million for the six months ended November 1, 2008 from $4.0
million for the six months ended October 27, 2007 due to decreased sales
of products which became end-of-life at the end of fiscal year 2008, higher
material, labor and shipping costs, higher commission expense and expenses
related to Tribotek, which was acquired on March 30, 2008.
Other
Segment Results
Below is a table summarizing results for the six months ended:
(in millions)
|
|
November 1,
|
|
October 27,
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
Net Change
|
|
Net Change
|
|
Net sales
|
|
$
|
4.7
|
|
$
|
3.2
|
|
$
|
1.5
|
|
46.9
|
%
|
Cost of products
sold
|
|
4.6
|
|
3.1
|
|
1.5
|
|
48.4
|
%
|
Gross margins
|
|
0.1
|
|
0.1
|
|
0.0
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
Loss before
income taxes
|
|
$
|
(1.3
|
)
|
$
|
(0.7
|
)
|
$
|
(0.6
|
)
|
85.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
November 1,
|
|
October 27,
|
|
|
|
|
|
Percent of sales:
|
|
2008
|
|
2007
|
|
|
|
|
|
Net sales
|
|
100.0
|
%
|
100.0
|
%
|
|
|
|
|
Cost of products
sold
|
|
97.9
|
%
|
96.9
|
%
|
|
|
|
|
Gross margins
|
|
2.1
|
%
|
3.1
|
%
|
|
|
|
|
Loss before
income taxes
|
|
-27.7
|
%
|
-21.9
|
%
|
|
|
|
|
Net Sales
. The Other segment net sales increased $1.5 million
to $4.7 million for the six months ended November 1, 2008 as compared to
$3.2 million for the six months ended October 27, 2007. Net sales from our torque-sensing business
increased 214.3% and net sales from our testing facilities increased 21.7% in
the first half of fiscal 2009 as compared to the first half of fiscal 2008.
Cost of
Products Sold
. Other
segment cost of products sold increased $1.5 million to $4.6 million for the
six months ended November 1, 2008 compared to $3.1 million for the six
months ended October 27, 2007. The
majority of the increase is due to continued investment initiatives in our
torque-sensing business.
Gross
Margins.
The Other
segment gross margins were $0.1 million for both the six months ended November 1,
2008 and October 27, 2007. Gross
margins were flat in the first half of fiscal 2009 due to the
42
Table of Contents
increased sales
for both the torque-sensing business and the testing facilities, offset by
increased investments in our torque-sensing business.
Loss
Before Income Taxes.
The
Other segment loss before income taxes was $1.3 million for the six months
ended November 1, 2008 compared to $0.7 million for the six months ended October 27,
2007. The increase in the loss before
income taxes is due to additional support staff for our North American testing
facilities as well as a new testing facility that was opened in Shanghai, China
in the second quarter of fiscal 2009.
Liquidity
and Capital Resources
We
have historically financed our cash requirements through cash flows from
operations. We are currently pursuing
opportunities to expand our business through acquisitions. If we are successful, our cash position will
be reduced. Our future capital
requirements will depend on a number of factors, including our future net sales
and the timing and the severity of the current global economic crisis and the
financial and business problems of major customers. We believe our current cash balances together
with the cash flow expected to be generated from future domestic and foreign
operations will be sufficient to support current operations. We have an agreement with our primary bank
for a committed $75.0 million revolving credit facility to provide ready
financing for general corporate purposes, including acquisition opportunities
that may become available. The bank
credit agreement, which expires on January 31, 2011, requires maintenance
of certain financial ratios and a minimum net worth level. At November 1, 2008, the Company was in
compliance with these covenants and there were no borrowings against this
credit facility.
At November 1, 2008,
approximately $5.9 million was invested in an enhanced cash fund sold as
an alternative to traditional money-market funds. We have historically invested
a portion of our on hand cash balances in this fund. These investments are
subject to credit, liquidity, market and interest rate risk. In December 2007,
the
fund was overwhelmed
with withdrawal requests from investors and was closed with a restriction
placed upon the cash redemption ability of its holders.
Based on the information available to
us, we have estimated the fair value of this fund at $0.8820 per unit as of November 1,
2008. During the second quarter, we recorded a loss of $0.5 million, of which
$0.2 million was realized on partial redemptions of $3.8 million, and $0.3
million was unrealized. For the first six months of the fiscal year, we
recorded a loss of $0.5 million, of which $0.2 million was realized on partial
redemptions of $6.4 million, and $0.3
million was unrealized.
The
latest information from fund management states that its goal is to have 83% of
the portfolio liquidated by December 2008 and 90% by June 2009.
Information and the markets relating to these investments remain dynamic, and
there may be further declines in the value of these investments, the value of
the collateral held by these entities, and the liquidity of our investments. To
the extent we determine that there is a further decline in fair value, we may
recognize additional losses in future periods.
As
restated, net cash provided by operating activities decreased $12.7 million, or
30.2%, to $29.4 million for the first six months of fiscal 2009 compared to
$42.1 million in the first six months of fiscal 2008. As restated, our net income decreased $10.1
million, or 59.1%, to $7.0 million in the first six months of fiscal 2009
compared to $17.1 million for the first six months of fiscal 2008. In the first quarter of fiscal 2008, we
received a significant prepayment from a customer for products that were
delivered during the fiscal year. The
primary factor in the Companys ability to generate cash from operations is our
net income. Additionally, cash flows from operations exceed net income
because non-cash charges (depreciation, amortization of intangibles, restricted
stock awards, and stock options) negatively impact net income but do not result
in the use of cash. Similarly, non-cash
credits such as deferred income tax benefits increase net income but do not
provide cash. Additional contributors or
offsets to cash flows from operations are working capital requirements.
Net cash used in investing activities during the first six months of
fiscal 2009 was $66.8 million compared to $18.2 million for the first six
months of fiscal 2008. Purchases of
plant and equipment was $9.6 million and $10.1 million for the first six months
of fiscal 2009 and 2008, respectively.
On September 30, 2008, we acquired certain assets of Hetronic LLC
(Hetronic) for $53.6 million in cash. We
also incurred $2.4 million in transaction costs related to the purchase. In the first six months of fiscal 2009, we
made a contingent payment of $0.8 million related to the VEP acquisition. In the first six months of fiscal 2008, we
made a contingent payment of $0.3 million
43
Table of Contents
related
to the acquisition of Cableco Technologies.
In the first six months of fiscal 2008, a dividend payment of $1.0
million was paid relating to our automotive joint venture.
Net cash used in financing activities during the first six months in
fiscal 2009 was $9.5 million compared with $2.4 million in the first six months
of fiscal 2008. Our Board of Directors
approved a stock repurchase plan on September 18, 2008 to repurchase up to
3,000,000 shares. There were 639,880
shares purchased for $5.1 million during the second quarter of fiscal 2009 at
an average price of $8.03 per share.
Proceeds from the exercise of stock options decreased $1.0 million to
$0.1 million for the first six months of fiscal 2009 as compared to $1.0 million
in the first six months of fiscal 2008.
In addition, cash dividends increased $0.8 million in the first six
months of fiscal 2009 to $4.5 million, compared to $3.8 million in the first
six months of fiscal 2008. In September 2008,
the Board of Directors announced that the dividend increased from $0.05 per
share to $0.07 per share for the second quarter fiscal 2009 payout.
Off-Balance Sheet Arrangements
We
do not have any off-balance sheet arrangements, other than operating leases and
purchase obligations entered into in the normal course of business.
44
Table
of Contents
PART II. OTHER INFORMATION
Item
6. Exhibits
Exhibit
Number
|
|
Description
|
31.1
|
|
Rule 13a-14(a)/15d-14(a) Certification of
Principal Executive Officer
|
31.2
|
|
Rule 13a-14(a)/15d-14(a) Certification of
Principal Financial Officer
|
32
|
|
Certification of Periodic Financial Report Pursuant to
18 U.S.C. Section 1350
|
45
Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
|
METHODE ELECTRONICS, INC.
|
|
|
|
|
|
|
By:
|
/s/ Douglas A. Koman
|
|
|
Douglas A. Koman
|
|
|
Chief Financial Officer
|
|
|
(principal financial officer)
|
|
|
|
Dated:
|
June 29, 2009
|
|
|
|
|
|
|
|
|
46
Table of
Contents
INDEX TO EXHIBITS
Exhibit
Number
|
|
Description
|
31.1
|
|
Rule 13a-14(a)/15d-14(a) Certification of
Principal Executive Officer
|
31.2
|
|
Rule 13a-14(a)/15d-14(a) Certification of
Principal Financial Officer
|
32
|
|
Certification of Periodic Financial Report Pursuant to
18 U.S.C. Section 1350
|
47
Methode Electronics (NYSE:MEI)
Historical Stock Chart
From May 2024 to Jun 2024
Methode Electronics (NYSE:MEI)
Historical Stock Chart
From Jun 2023 to Jun 2024