UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
Commission file number 0-2816
METHODE ELECTRONICS, INC. (Exact name of registrant as specified in its charter.)
(Registrant's 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 [ ]
At September 7, 2001, Registrant had 34,735,508 shares of Class A Common Stock and 1,093,017 shares of Class B Common Stock outstanding.
INDEX METHODE ELECTRONICS, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS METHODE ELECTRONICS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands)
See note to condensed consolidated financial statements.
METHODE ELECTRONICS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (in thousands, except per share data)
See notes to condensed consolidated financial statements.
METHODE ELECTRONICS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands)
METHODE ELECTRONICS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) July 31, 2001
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month period ended July 31, 2001 are not necessarily indicative of the results that may be expected for the year ending April 30, 2002. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended April 30, 2001.
Comprehensive income consists of net income and foreign currency translation adjustments and totaled $3.5 million and $8.2 million for the first quarters of fiscal 2002 and 2001.
2. DISCONTINUED OPERATIONS
As of May 28, 2000 the Company contributed and transferred to its then wholly-owned subsidiary, Stratos Lightwave, Inc. (Stratos), all of the assets and liabilities of its optoelectronics and fiber optic divisions and all of the capital stock and equity interest held by the Company in certain other subsidiaries that conducted the majority of its optical products business, pursuant to a master separation agreement.
In the first quarter of fiscal 2001 Stratos issued 10,062,500 shares of common stock in an initial public offering at a price of $21 per share. After the initial public offering, the Company owned 84.3% of Stratos' common stock outstanding. Proceeds from the offering totaled $195.5 million net of underwriting discount and expenses and were retained by Stratos
Effective as of the close of business on April 28, 2001 ("the distribution date"), Methode distributed all of its remaining interest in Stratos through a stock dividend to Methode stockholders of record as of the close of business on April 5, 2001. This distribution was made in the amount of 1.5113 shares of Stratos common stock for each outstanding share of Methode Class A and Class B common stock. Methode's consolidated financial statements for all periods present Stratos as discontinued operations through the distribution date in accordance with APB Opinion No. 30.
Net sales for Stratos in the first quarter of fiscal 2001 were $25.9 million.
3. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, Business Combinations, and No.142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives.
The Company will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of fiscal 2003. Application of the nonamortization provisions of the Statement is expected to result in an increase in net income of $0.9 million ($.03 per share) per year. During fiscal 2003, the Company will perform the first of the required impairment test of goodwill and indefinite lived intangible assets as of May 1, 2002 and has not yet determined what the effect of these tests will be on the earnings and financial position of the Company.
4. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share:
Options to purchase 1,718,307 shares of common stock at a weighted average option price of $12.12 per share were outstanding at July 31, 2001 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 shares and, therefore, the effect would be antidilutive.
5. SEGMENT INFORMATION
Methode Electronics, Inc. is a global manufacturer of component and subsystem devices. The Company designs, manufactures and markets devices employing electrical, electronic, wireless, sensing and optical technologies. Methode's components are found in the primary end markets of the automotive, communications (including information processing and storage, networking equipment, wireless and terrestrial voice/data systems), aerospace, rail and other transportation industries; and the consumer and industrial equipment markets. The Company has two reportable business segments: Electronic and Optical.
The business units whose results are identified in the Electronic segment principally employ electronic processes to control and convey signals.
The business units whose results are identified in the Optical segment principally employ light to control and convey signals. As described in Note 2, the Company transferred the majority of this business to Stratos. The following information has been restated to reflect the operations of Stratos as a discontinued operation.
The Company's business that manufactures bus systems as well as its independent laboratories that provide services for qualification testing and certification of electronic and optical components are included in the Other segment.
The Company allocates resources to and evaluates performance of its technology segments based on operating income. Transfers between technology segments are recorded using internal transfer prices set by the Company.
The table below presents information about the Company's reportable segments (in thousands):
6. RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current year presentation.
The Company's business is managed on a technology product basis, with those technology segments being Electronic, Optical and Other. The business units whose results are identified in the Electronic segment principally employ electronic processes to control and convey signals. The business units whose results are identified in the Optical segment principally employ light to control and convey signals. The Other segment includes a manufacturer of bus systems and independent laboratories that provide services for qualification testing and certification of electronic and optical components.
As described in Note 2 to the condensed consolidated financial statements, a majority of the Optical segment was transferred to the Company's newly formed subsidiary, Stratos Lightwave, Inc. (Stratos), effective May 28, 2000. On June 27, 2000, Stratos issued shares of common stock in an initial public offering after which the Company owned 84.3% of Stratos' common stock outstanding. Effective as of the close of business on April 28, 2001, the Company distributed all of its remaining interest in Stratos through a stock dividend to its stockholders of record as of the close of business on April 5, 2001. This distribution was made in the amount of 1.5113 shares of Stratos common stock for each share of Methode Class A and Class B common stock. The Company's consolidated financial statements for all periods present Stratos as a discontinued operation through the distribution date in accordance with Accounting Principles Board Opinion No. 30.
Results of Operations
The following table sets forth certain income statement data as a percentage of net sales for the periods indicated:
Net sales. First quarter consolidated net sales decreased 11% to $79.6 million in fiscal 2002 from $89.9 million in fiscal 2001. Net sales of the Electronic segment, which represented 84% and 88% of consolidated net sales in fiscal 2002 and fiscal 2001, decreased to $66.5 million in fiscal 2002 from $79.1 million in fiscal 2001. Product sales to the automotive industry, which represented 78% and 63% of Electronic segment net sales in 2002 and 2001 increased by 4% in fiscal 2002. The increase was the result of continued customer demand and new product launches, which were partially offset by price concessions made in January 2001. Sales for the balance of the Electronic segment decreased 48% reflecting the continued weakness in the overall economy and a further downturn in the computer and telecommunication markets.
First quarter net sales of the Optical segment represented 11% of consolidated net sales in fiscal 2002 and 7% of consolidated net sales in fiscal 2001. Optical segment net sales increased 38% to $9.2 million in the first quarter of fiscal 2002 from $6.6 million in fiscal 2001. Net sales at the Company's domestic subsidiary that provides custom installation of fiber optic cable assemblies primarily to data centers more than doubled to $3.8 million in the first quarter of fiscal 2002 compared with the first quarter of fiscal 2001.
First quarter net sales of the Other segment declined 5% to $4.0 million in fiscal 2002 from $4.2 million in fiscal 2001. Net sales of current-carrying bus devices decreased 7% in fiscal 2002, and net sales of the test laboratories declined 1%.
Other income. Other income consisted primarily of earnings from the Company's automotive joint venture, license fees and royalties. The decrease in the first quarter of fiscal 2002 from the first quarter of 2001 was due to a reduction in license fees and royalties earned in the quarter.
Cost of products sold. Cost of products sold as a percentage of net sales was 81% in the first quarter of fiscal 2002 compared with 78% in the first quarter of fiscal 2001.
Gross margins of the Electronic segment decreased to 19% in the first quarter of fiscal 2002 from 23% in the first quarter of fiscal 2001. While gross margins on sales to the automotive industry were down slightly from the year-ago first quarter, margins showed marked improvement over the third and fourth quarters of fiscal 2001 as a result of productivity gains and aggressive cost control programs. Gross margins for the balance of the Electronic segment declined significantly due to the significant sales decline experienced in the first quarter of fiscal 2002.
Gross margins of the Optical segment increased to 22% in the fiscal 2002 first quarter from 10% in the fiscal 2001 first quarter. The significant increase in domestic sales and the return to profitability at the Company's fiber optic operation in the United Kingdom were the primary contributors to the margin increase in fiscal 2002.
Gross margins of the Other segment were flat in the first quarter of fiscal 2002 compared with the first quarter of fiscal 2001 at 24%.
Selling and administrative expenses. Selling and administrative expenses as a percentage of net sales were 12% in the first quarter of both fiscal 2002 and fiscal 2001.
Interest, net. Interest income, net of interest expense declined 27% in the first quarter of fiscal 2002 compared with fiscal 2001, primarily due to lower interest rates.
Other, net. Other, net was primarily currency exchange gains at the Company's foreign locations in the first quarter of both fiscal 2002 and 2001.
Income taxes. The effective income tax rate in the first quarter was 33% in fiscal 2002 and 35% in fiscal 2001. The effective rate for both fiscal 2002 and fiscal 2001 reflect the effect of lower tax rates on income from foreign operations, however income from foreign operations was a larger component of total consolidated income in fiscal 2002 accounting for the reduction in the effective tax rate. The effective rate for the full year fiscal 2001 was 34%.
Financial Condition, Liquidity and Capital Resources
Net cash provided by operations was $11.7 million and $12.2 million in the first quarter of fiscal 2002 and 2001, respectively. The decrease in cash provided from net income was largely offset by decreased working capital requirements due to the overall business slowdown.
Net cash used in investing activities was $5.2 million for fiscal 2002 and $3.5 million for fiscal 2001. Net cash used in investing activities in fiscal 2002 included a $2.0 million advance deposit on the Company's August 2001 acquisition of the automotive safety business of American Components, Inc. An additional $10.5 million of cash consideration for this acquisition was paid upon closing and additional contingent consideration will be due beginning in fiscal 2003 based on the attainment of certain sales targets. Included in this asset purchase are the manufacturing operations and patented intellectual property for a sensor pad used in occupant detector systems.
Net cash used in financing activities was $0.2 million in fiscal 2002 and $0.6 million in fiscal 2001. The Company paid cash dividends of $1.8 million in the first quarter of both fiscal 2002 and 2001 and received proceeds from the exercise of stock options of $0.5 million in fiscal 2002 and $0.9 million in fiscal 2001. In the first quarter of fiscal 2002, $1.1 million was provided by a short-term borrowing arrangement at a foreign subsidiary.
Euro Conversion
On January 1, 1999, eleven member countries of the European Union established fixed conversion rates between their existing currencies ("legal currencies") and one common currency, the Euro. The Euro is now trading on currency exchanges and may be used in certain transactions such as electronic payments. Beginning in January 2002, new Euro-denominated notes and coins will be used, and legacy currencies will be withdrawn from circulation. The conversion to the Euro has eliminated currency exchange rate risk for transactions between the member countries, which for the Company primarily consists of sales to certain customers and payments to certain suppliers. The Company is currently addressing the issues involved with the new currency, which include converting information technology systems, recalculating currency risk, and revising processes for preparing accounting and taxation records. Based on the work completed so far, the Company does not believe the Euro conversion will have a significant impact on the results of its operations or cash flows.
Cautionary Statement
Certain statements in this report are forward-looking statements that are subject to certain risks and uncertainties. The Company's business is highly dependent upon specific makes and models of automobiles. Therefore, the Company's financial results will be subject to many of the same risks that apply to the automotive industry, such as general economic conditions, interest rates and consumer spending patterns. A significant portion of the balance of the Company's business relates to the computer and telecommunication industries which are subject to many of the same risks facing the automotive industry as well as fast-moving technological change. Other factors which may result in materially different results for future periods include actual growth in the Company's various markets; operating costs; currency exchange rates and devaluations; delays in development, production and marketing of new products; and other factors set forth from time to time in the Company's reports filed with the Securities and Exchange Commission. Any of these factors could cause the Company's actual results to differ materially from those described in the forward-looking statements. The forward-looking statements in this report are intended to be subject to the safe harbor protection provided under the securities law.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Although certain of the Company's subsidiaries enter into transactions in currencies other than their functional currency, foreign currency exposures arising from these transactions are not material to the Company. The primary foreign currency exposure arises from the translation of the Company's net equity investment in its foreign subsidiaries to U.S. dollars. The Company generally views as long-term its investments in foreign subsidiaries with functional currencies other than the U.S. dollar. The primary currencies to which the Company is exposed are the Singapore dollar, Maltese lira and other European currencies. The fair value of the Company's net foreign investments would not be materially affected by a 10% adverse change in foreign currency exchange rates from July 31, 2001 levels.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits- See Index to Exhibits immediately following the signature page.
b) Reports on Form 8-K
The Company did not file a report on Form 8-K during the three months ended July 31, 2001.
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.
Dated: September 14, 2001
INDEX TO EXHIBITS