SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------------------------- FORM 10-Q (Mark One) (X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934 for the quarterly period ended July 31, 1999 or ( ) 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.) 7444 West Wilson Avenue, Harwood Heights, Illinois 60656 - ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) <TABLE> <S> <C> (Registrant's telephone number, including area code) (708) 867-9600 ----------------------- </TABLE> None - ------------------------------------------------------------------------------- (Former name, former address, former fiscal year, if changed since last report) At August 27, 1999, Registrant had 34,308,490 shares of Class A Common Stock and 1,182,264 shares of Class B Common Stock outstanding. 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 report(s)), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------- -------
INDEX METHODE ELECTRONICS, INC. AND SUBSIDIARIES PART I. FINANCIAL INFORMATION - ---------------------------------- Item 1. Financial Statements (unaudited) Condensed consolidated balance sheets July 31, 1999 and April 30, 1999 Condensed consolidated statements of income -- Three months ended July 31, 1999 and 1998 Condensed consolidated statements of cash flows -- Three months ended July 31, 1999 and 1998 Notes to condensed consolidated financial statements -- July 31, 1999 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations PART II. OTHER INFORMATION - ------------------------------ Item 6. Exhibits and reports on Form 8-K SIGNATURES - ---------- 2
<TABLE> <CAPTION> PART I. FINANCIAL INFORMATION - -------------------------------------------------------------------------------------------- ITEM 1. FINANCIAL STATEMENTS CONDENSED CONSOLIDATED BALANCE SHEETS METHODE ELECTRONICS, INC. AND SUBSIDIARIES July 31, April 30, 1999 1999 ----- ------ <S> <C> <C> ASSETS (Unaudited) CURRENT ASSETS Cash and cash equivalents $ 39,827,675 $ 22,764,887 Accounts receivable - net 75,007,064 88,194,471 Inventories: Finished products 12,748,439 9,877,422 Work in process 21,920,429 25,180,203 Materials 17,211,655 14,157,216 ----------------------------------------- 51,880,523 49,214,841 Current deferred income taxes 5,239,000 5,239,000 Prepaid expenses 4,444,431 5,596,373 ----------------------------------------- TOTAL CURRENT ASSETS 176,398,693 171,009,572 PROPERTY, PLANT AND EQUIPMENT 223,690,609 217,183,692 Less allowance for depreciation 131,012,166 126,284,573 ----------------------------------------- 92,678,443 90,899,119 GOODWILL -- net 39,450,891 39,770,435 INTANGIBLE BENEFIT PLAN ASSET 1,431,664 1,598,597 OTHER ASSETS 14,282,918 13,344,897 ----------------------------------------- $324,242,609 $316,622,620 ========================================= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts and notes payable $ 29,790,552 $ 30,826,887 Other current liabilities 26,772,828 26,244,165 ----------------------------------------- TOTAL CURRENT LIABILITIES 56,563,380 57,071,052 OTHER LIABILITIES 2,771,978 2,918,650 DEFERRED COMPENSATION 7,463,516 7,320,313 ACCUMULATED BENEFIT PLAN OBLIGATION 856,268 837,939 SHAREHOLDERS' EQUITY Common Stock 17,981,077 17,909,545 Paid in capital 25,088,620 23,066,837 Retained earnings 221,796,131 215,116,544 Other shareholders' equity (8,278,361) (7,618,260) ----------------------------------------- 256,587,467 248,474,666 ----------------------------------------- $324,242,609 $316,622,620 ========================================= </TABLE> See notes to condensed consolidated financial statements. 3
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) METHODE ELECTRONICS, INC. AND SUBSIDIARIES <TABLE> <CAPTION> Three Months Ended July 31, --------------------------- 1999 1998 ----- ---- <S> <C> <C> INCOME: Net sales $ 98,607,614 $ 87,961,397 Other 2,013,133 1,133,451 ------------------------------------- Total 100,620,747 89,094,848 COSTS AND EXPENSES: Cost of products sold 74,111,900 65,441,410 Selling and administrative expenses 13,404,949 11,876,048 ------------------------------------- Total 87,516,849 77,317,458 ------------------------------------- Income before income taxes 13,103,898 11,777,390 Provision for income taxes 4,650,000 4,100,000 ------------------------------------- NET INCOME $ 8,453,898 $ 7,677,390 ===================================== Basic and diluted earnings per Common Share $0.24 $0.22 Cash dividends per Common Share $0.05 $0.05 Weighted average number of Common Shares outstanding: Basic 35,262,000 35,350,000 Diluted 35,443,000 35,404,000 </TABLE> See notes to condensed consolidated financial statements. 4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) METHODE ELECTRONICS, INC. AND SUBSIDIARIES <TABLE> <CAPTION> Three Months Ended July 31, -------------------------- 1999 1998 ----- ----- <S> <C> <C> OPERATING ACTIVITIES Net income $ 8,453,898 $ 7,677,390 Provision for depreciation and amortization 4,601,076 4,664,562 Changes in operating assets and liabilities 11,605,503 (2,249,970) Other 964,263 793,054 --------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 25,624,740 10,885,036 INVESTING ACTIVITIES Purchases of property, plant and equipment (5,763,700) (4,072,490) Acquisitions (1,444,442) Other 326,509 380,718 --------------------------------------- NET CASH USED IN INVESTING ACTIVITIES (5,437,191) (5,136,214) FINANCING ACTIVITIES Dividends (1,774,311) (1,777,561) Other (1,350,450) (563,927) --------------------------------------- NET CASH USED IN FINANCING ACTIVITIES (3,124,761) (2,341,488) --------------------------------------- INCREASE IN CASH AND CASH EQUIVALENTS 17,062,788 3,407,334 Cash and cash equivalents at beginning of period 22,764,887 24,178,868 --------------------------------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $39,827,675 $27,586,202 ======================================= </TABLE> See notes to condensed consolidated financial statements. 5
METHODE ELECTRONICS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) July 31, 1999 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, 1999 are not necessarily indicative of the results that may be expected for the year ending April 30, 2000. 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, 1999. Comprehensive income consists of net income and foreign currency translation adjustments and totaled $8,787,000 and $6,605,000 for the first quarters of 2000 and 1999. 2. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share: <TABLE> <CAPTION> Three Months Ended July 31, --------------------------- 1999 1998 ---- ---- <S> <C> <C> Numerator - net income $ 8,453,898 $ 7,677,390 =========== =========== Denominator: Denominator for basic earnings per share - Weighted-average shares outstanding 35,262,000 35,350,000 Dilutive potential Common Shares - Employee stock options and stock awards 181,000 54,000 ----------- ----------- Denominator for diluted earnings per share - Adjusted weighted-average shares and assumed conversions 35,443,000 35,404,000 =========== =========== Basic and diluted earnings per share $ 0.24 $ 0.22 =========== ============ </TABLE> Options to purchase 217,350 shares of Common Stock at a weighted-average option price of $23.78 per share were not included in the computation of diluted earnings per share because the option exercise price was greater than the average market price of the Common Shares and, therefore, the effect would be antidilutive. 3. SEGMENT INFORMATION The Company 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 Company's businesses that manufacture multi-layer printed circuit board and bus systems as well as its independent test laboratories are included in the Other segment. The Company is in the process of exiting the printed circuit board businesses and expects to be finished by the end of the second quarter. 6
3. SEGMENT INFORMATION (Continued) The table below presents information about the Company's reportable segments: <TABLE> <CAPTION> Three Months Ended July 31, 1999 -------------------------------------------------------------------- Electronic Optical Other Eliminations Consolidated ----------- ----------- ----------- ------------- ------------- <S> <C> <C> <C> <C> <C> Net sales to unaffiliated customers $73,810,000 $17,345,000 $7,453,000 $98,608,000 Transfers between technology segments 8,000 473,000 219,000 ($700,000) - -------------------------------------------------------------------- Total net sales $73,818,000 $17,818,000 $7,672,000 ($700,000) $98,608,000 ==================================================================== Income (loss) before income taxes $12,498,000 $ 4,153,000 $ (245,000) $16,406,000 =========== =========== ========== Corporate expenses (3,302,000) --------------- Total income before income taxes $13,104,000 =============== </TABLE> <TABLE> <CAPTION> Three Months Ended July 31, 1998 -------------------------------------------------------------------- Electronic Optical Other Eliminations Consolidated ----------- ----------- ----------- ------------- ------------- <S> <C> <C> <C> <C> <C> Net sales to unaffiliated customers $68,626,000 $11,687,000 $7,648,000 $87,961,000 Transfers between technology segments - 321,000 163,000 ($484,000) - -------------------------------------------------------------------- Total net sales $68,626,000 $12,008,000 $7,811,000 ($484,000) $87,961,000 ==================================================================== Income (loss) before income taxes $12,012,000 $ 2,004,000 $ (158,000) $13,858,000 =========== =========== ========== Corporate expenses (2,081,000) --------------- Total income before income taxes $11,777,000 =============== </TABLE> 4. RECLASSIFICATIONS Certain prior year amounts have been reclassified to conform to the current year presentation. 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS Results of Operations - --------------------- Consolidated net sales for the first quarter of fiscal 2000 increased 12% to $98,608,000 from $87,961,000 a year ago. Sales of the Company's domestic operations increased 14% and sales of the foreign operations increased 7%. The increase in foreign sales was the result of the acquisition of two fiber optic connector companies in fiscal 1999. Sales of the Electronic segment represented 75% of the consolidated sales in the first quarter of fiscal 2000 and 78% in fiscal 1999. Electronic segment sales increased 8% over the prior year first quarter. Sales to the automotive industry in the first quarter increased 21% and represented 69% of Electronic segment sales compared with 62% in the first quarter of 1999. This sales gain was reduced by double digit sales declines at the Company's Far East connector operation, double digit declines in sales of dataMate terminators and the consolidation and reorganization of two domestic harness facilities during the current quarter. Sales of the Optical segment represented 18% of consolidated sales in the first quarter of fiscal 2000 and 13% in fiscal 1999. Optical segment sales in the first quarter increased 48% over the prior year first quarter led by sales of Optical transceivers which increased by more than 60% compared to last year's first quarter. Optical segment sales also benefited from the acquisitions described above. Sales of Other products (chiefly current carrying devices and printed circuit boards) increased 2% in the current quarter compared with the first quarter last year. This segment includes $2,655,000 in fiscal 2000 and $3,680,000 in 1999 of sales of the Company's printed circuit and related businesses from which it expects to exit by the end of the second quarter. Other income consisted primarily of earnings from the Company's automotive joint venture, interest income from short-term investments, royalties and license fees. The increase in fiscal 2000 was largely due to $675,000 of income related to the licensing program of the Company's optoelectronic patent portfolio. Cost of goods sold as a percentage of sales for the first quarter increased to 75.2% compared with the year-ago period of 74.4%. Gross margins were adversely affected by the winding-down of the printed circuit businesses and the consolidation and reorganization of two cable assembly operations during the current quarter. Selling and administration expenses as a percentage of sales were relatively constant at 13.6% in fiscal 2000 and 13.5% in fiscal 1999. The effective tax rate was 35.5% in the first quarter of fiscal 2000 compared with 34.8% in the first quarter and 35.2% in the full year of fiscal 1999. Lower tax rates on results from foreign operations reduce the Company's effective tax rate below the combined statutory federal and state income tax rate. Income from ongoing operations was up 15% to $9,100,000 or $0.26 per diluted share as compared to $7,920,000 and $0.22 per share. Net income was $8,454,000, or $0.24 per share as compared to $7,677,000 and $0.22 per share in the year ago quarter. As previously announced, the Company is exiting the printed circuit board business. Included in results is an operating loss of $650,000 from the two printed circuit board businesses. The Company 8
expects to incur approximately the same operating loss in the second quarter as the wind-down of these two businesses is completed. Financial Conditions, Liquidity and Capital Resources - ----------------------------------------------------- Net cash provided by operating activities was $25,625,000 in the first quarter of fiscal 2000, up substantially from the $10,885,000 provided during the year-ago period. The increase in cash provided was chiefly due to collection of accounts receivable that included substantial amounts related to automotive tooling programs. Depreciation and amortization expense was $4,601,000 in the first quarter of fiscal 2000 compared with $4,665,000 in fiscal 1999, with capital additions of $5,764,000 and $4,072,000, respectively. It is presently expected that fixed asset additions for fiscal 2000 will approach $30,000,000 and will be financed with internally generated funds. Year 2000 Conversion - -------------------- The Year 2000 issue exists because many computer systems, applications and assets use two-digit date fields to designate a year. As the century date change occurs, date sensitive systems may recognize the Year 2000 as 1900, or not at all. This inability to recognize or properly treat the Year 2000 may cause systems to process financial and operations information incorrectly. Status Of Readiness: The Company's Year 2000 Strategy to make systems "Y2K ready" includes a common company-wide focus on all internal systems potentially impacted by the Y2K issue, including Information Technology ("IT") Systems and Non-IT equipment and systems (Operating Equipment) that contain embedded computer technology. Each of the foregoing IT and Non-IT programs is being conducted in phases; described as follows: Inventory Phase -- Identify hardware or software that use or process date information. Assessment Phase -- Identify Year 2000 date processing deficiencies and related implications. Planning Phase -- Determine for each deficiency an appropriate solution and budget as well as scheduling personnel and other resources. Implementation Phase -- Implement designated solutions and test systems. The Company is upgrading hardware and software for certain major computer systems which will concurrently address the Year 2000 issues for those systems. The Company has fully completed its assessment of all systems that could be significantly affected by the Year 2000. The completed assessment indicates that most of the Company's significant information technology systems could be affected, particularly the general ledger and billing systems. The assessment also indicates, that in some instances, software and hardware (embedded chips) used in operating equipment also are at risk. However, based on a review of its product line, the Company has determined that the 9
products it has sold and will continue to sell do not require remediation to be Year 2000 ready. For IT Systems, the Company is 90% complete on the implementation phase and expects to complete upgrade and replacement of the remaining systems by October 1999. For its' critical Non-IT Systems, the Company is substantially Year 2000 ready. The Company has worked with third party suppliers to determine the Year 2000 readiness of the Company's systems that interface directly with third parties. The Company completed its remediation efforts on these systems with testing completed in March 1999. The Company has queried its significant Non-IT suppliers that do not share information systems with the Company (external agents). To date, the Company is not aware of any external agent with a Year 2000 issue that would materially impact the Company's results of operations, liquidity, or capital resources. However, the Company has no means of ensuring that external agents will be Year 2000 ready. The inability of external agents to complete their Year 2000 resolution process in a timely fashion would indirectly impact the Company, and the impact may be material. The Company also is making inquiries as to the Year 2000 readiness of selected customers and service vendors. The Company will have a contingency plan in place no later than October 1999 to compensate for those external agents that fail to complete their Year 2000 Resolution by the end of 1999. Costs: As of July 31, 1999, the Company's total incremental costs (historical plus estimated future costs) of system upgrades and addressing Year 2000 issues are estimated to be $2,635,000 of which $1,735,000 has been incurred ($370,000 expensed and $1,365,000 capitalized for new systems and equipment). These costs are being funded through operating cash flow. Of the total remaining project costs ($900,000), approximately $655,000 is attributable to the purchase of new software and equipment that will be capitalized. The remaining $245,000 will be expensed as incurred. The Company estimates that a substantial portion of these costs is attributable to system upgrades that would have been incurred regardless of the Year 2000 issue. Implementation of the Company's Year 2000 Plan is an ongoing process. Consequently, the above-described estimates of costs and completion dates for the various components of the plan are subject to change. Risks: The Company's Year 2000 readiness program is directed primarily toward ensuring that the Company will be able to continue to perform five critical functions: (A) order and receive raw material and supplies, (B) make and sell its products, (C) invoice customers and collect payments, (D) pay its employees and suppliers and (E) maintain accurate accounting records. While the Company currently believes that it will be able to modify or replace its affected systems in time to minimize any significant detrimental effects on its operations, failure to do so, or the failure of key third parties to modify or replace their affected systems, could have materially adverse impacts on the Company's business operations or 10
financial condition. In particular, because of the interdependent nature of business systems, the Company could be materially adversely affected if private businesses, utilities and governmental entities with which it does business or that provide essential products or services are not Year 2000 ready. Reasonably likely consequences of failure by the Company or third parties to resolve the Year 2000 Problem include, among other things, temporary slowdowns of manufacturing operations at one or more Company facilities, billing and collection errors, delays in the distribution of products and delays in the receipt of supplies. The Company's expectations about future costs necessary to achieve Year 2000 readiness, the impact on its operations and its ability to bring each of its systems into Year 2000 readiness are subject to a number of uncertainties that could cause actual results to differ materially. Such factors include the following: (i) The Company may not be successful in properly identifying all systems and programs that contain two-digit year codes; (ii) The nature and number of systems which require reprogramming, upgrading or replacement may exceed the Company's expectations in terms of complexity and scope; (iii) The Company may not be able to complete all remediation and testing necessary in a timely manner; (iv) The Company's key suppliers and other third parties may not be able to supply the Company with components or materials which are necessary to manufacture its products, with sufficient electrical power and other utilities to sustain its manufacturing process, or with adequate, reliable means of transporting its products to its customers. Contingency Plans: Contingency plans for suppliers and mission critical systems impacted by Year 2000 Issues are currently under development. Contingency plans are completed for 90% of the Company's critical suppliers with expected completion by October 1999. Contingency plans may include stockpiling raw materials, increasing inventory levels, securing alternate sources of supply and other appropriate measures. Once developed, Year 2000 contingency plans and related cost estimates will be continually refined as additional information becomes available. 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 Statements - --------------------- 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 Form 10-K and other 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. 11
PART II. OTHER INFORMATION - -------- ----------------- Item 6. Exhibits and Reports on Form 8-K a) Exhibits INDEX TO EXHIBITS <TABLE> <CAPTION> Sequential Exhibit Page Number Description Number - ------- ----------- ------- <S> <C> <C> 3.1 Certificate of Incorporation of Registrant, as amended and currently in effect(1) 3.2 By-Laws of Registrant, as amended and currently in effect(1) 4.1 Article Fourth of Certificate of Incorporation of Registrant, as amended and currently in effect (included in Exhibit 3.1) 10.1 Methode Electronics, Inc. Employee Stock Ownership Plan dated February 24,1977(2)* 10.2 Methode Electronics, Inc. Employee Stock Ownership Plan and Trust Amendment No. 1(2)* 10.3 Methode Electronics, Inc. Employee Stock Ownership Trust(2)* 10.4 Methode Electronics, Inc. Employee Stock Ownership Trust- Amendment No. 1(2)* 10.5 Methode Electronics, Inc. Incentive Stock Award Plan(3)* 10.6 Methode Electronics Inc. Supplemental Executive Benefit Plan(4)* 10.7 Methode Electronics. Inc. Managerial Bonus and Matching Bonus Plan (also referred to as the Longevity Contingent Bonus Program) (4)* 10.8 Methode Electronics, Inc. Capital Accumulation Plan(4)* 10.9 Incentive Stock Award Plan for Non-Employee Directors(5)* 10.10 Methode Electronics, Inc. 401(k) Savings Plan(5)* 10.11 Methode Electronics, Inc. 401(k) Savings Trust(5)* 10.12 Methode Electronics, Inc. Electronic Controls Division Cash and Class A Common Stock Bonus Plan(6)* 10.13 Methode Electronics, Inc. 1997 Stock Plan (7)* 27 Financial Data Schedules 14 - ------- (1) Previously filed with Registrant's Form S-3 Registration Statement No. 33-61940 filed April 30, 1993 and incorporated herein by reference. </TABLE> 12
<TABLE> <CAPTION> <S> <C> (2) Previously filed with Registrant's S-8 Registration Statement No. 2-60613 and incorporated herein by reference. (3) Previously filed with Registrant's Registration Statement No. 2-92902 filed August 23, 1984, and incorporated herein by reference. (4) Previously filed with Registrant's Form 10-Q for three months ended January 31, 1994, and incorporated herein by reference. (5) Previously filed with Registrant's Form 10-K for the year ended April 30, 1994, and incorporated herein by reference. (6) Previously filed with Registrant's S-8 Registration Statement No. 333-49559 and incorporated herein by reference. (7) Previously filed with Registrant's Registration Statement No. 333-49671 and incorporated herein by reference. *Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Report on Form 10-Q pursuant to Item 6 of Form 10-Q. b) Reports on Form 8-K ----------------------- The Company did not file a report on Form 8-K during the three months ended July 31, 1999. </TABLE> 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: ----------------------------------- Kevin J. Hayes Chief Financial Officer Dated: September 7, 1999 ----------------- 13