MEI 02.01.2014 10Q Q3
Table of Contents

UNITED STATES
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 Exchange Act of 1934 
for the quarterly period ended February 1, 2014
 
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)
 
(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 o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  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 March 11, 2014, registrant had 39,262,168 shares of common stock outstanding.

METHODE ELECTRONICS, INC.
FORM 10-Q
February 1, 2014

TABLE OF CONTENTS
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

PART I - FINANCIAL INFORMATION
 
Item 1 - Financial Statements
 
METHODE ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
($ in thousands)
 
 
 
As of
 
As of
 
 
February 1, 2014
 
April 27, 2013
 
 
(Unaudited)
 
 
ASSETS
 
 

 
 

CURRENT ASSETS
 
 

 
 

Cash and cash equivalents
 
$
96,779

 
$
65,811

Accounts receivable, net
 
134,881

 
119,816

Inventories:
 
 
 
 

Finished products
 
16,358

 
11,736

Work in process
 
10,443

 
10,220

Materials
 
52,405

 
37,973

 
 
79,206

 
59,929

Deferred income taxes
 
3,415

 
3,313

Prepaid and refundable income taxes
 
252

 
326

Prepaid expenses and other current assets
 
10,466

 
9,459

TOTAL CURRENT ASSETS
 
324,999

 
258,654

PROPERTY, PLANT AND EQUIPMENT
 
318,100

 
297,255

Less allowances for depreciation
 
215,445

 
198,897

 
 
102,655

 
98,358

GOODWILL
 
12,935

 
12,907

INTANGIBLE ASSETS, net
 
15,182

 
16,466

PRE-PRODUCTION COSTS
 
14,616

 
11,511

OTHER ASSETS
 
36,827

 
37,043

 
 
79,560

 
77,927

TOTAL ASSETS
 
$
507,214

 
$
434,939

LIABILITIES AND EQUITY
 
 

 
 

CURRENT LIABILITIES
 
 

 
 

Accounts payable
 
$
70,887

 
$
61,541

Other current liabilities
 
27,977

 
28,930

TOTAL CURRENT LIABILITIES
 
98,864

 
90,471

LONG-TERM DEBT
 
50,000

 
43,500

OTHER LIABILITIES
 
3,416

 
3,294

DEFERRED COMPENSATION
 
12,852

 
8,090

SHAREHOLDERS’ EQUITY
 
 

 
 

Common stock, $0.50 par value, 100,000,000 shares authorized, 39,262,168 and 38,455,853 shares issued as of February 1, 2014 and April 27, 2013, respectively
 
19,631

 
19,228

Additional paid-in capital
 
88,679

 
81,472

Accumulated other comprehensive income
 
20,389

 
15,680

Treasury stock, 1,342,188 shares as of February 1, 2014 and April 27, 2013
 
(11,377
)
 
(11,377
)
Retained earnings
 
224,502

 
184,368

TOTAL METHODE ELECTRONICS, INC. SHAREHOLDERS’ EQUITY
 
341,824

 
289,371

Noncontrolling interest
 
258

 
213

TOTAL EQUITY
 
342,082

 
289,584

TOTAL LIABILITIES AND EQUITY
 
$
507,214

 
$
434,939

 
See notes to condensed consolidated financial statements.
METHODE ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
($ in thousands, except per share data)
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
February 1,
2014
 
January 26,
2013
 
February 1, 2014
 
January 26, 2013
 
 
 

 
 

 
 
 
 
Net sales
 
$
189,753

 
$
122,982

 
$
547,933

 
$
371,478

 
 
 
 
 
 
 
 
 
Cost of products sold
 
151,269

 
102,949

 
434,085

 
307,686

 
 
 
 
 
 
 
 
 
Gross profit
 
38,484

 
20,033

 
113,848

 
63,792

 
 
 
 
 
 
 
 
 
Selling and administrative expenses
 
22,103

 
15,776

 
60,606

 
48,250

Income from settlement
 

 

 

 
(20,000
)
 
 
 
 
 
 
 
 
 
Income from operations
 
16,381

 
4,257

 
53,242

 
35,542

 
 
 
 
 
 
 
 
 
Interest expense, net
 
88

 
20

 
265

 
27

Other expense, net
 
270

 
114

 
763

 
609

 
 
 
 
 
 
 
 
 
Income before income taxes
 
16,023

 
4,123

 
52,214

 
34,906

 
 
 
 
 
 
 
 
 
Income tax expense
 
1,431

 
855

 
4,169

 
4,519

 
 
 
 
 
 
 
 
 
Net income
 
14,592

 
3,268

 
48,045

 
30,387

 
 
 
 
 
 
 
 
 
Less: Net income/(loss) attributable to noncontrolling interest
 
(6
)
 
(57
)
 
35

 
(189
)
NET INCOME ATTRIBUTABLE TO METHODE ELECTRONICS, INC.
 
$
14,598

 
$
3,325

 
$
48,010

 
$
30,576

 
 
 
 
 
 
 
 
 
Amounts per common share attributable to Methode Electronics, Inc.:
 
 

 
 

 
 
 
 
Basic
 
$
0.38

 
$
0.09

 
$
1.27

 
$
0.82

Diluted
 
$
0.38

 
$
0.09

 
$
1.26

 
$
0.81

Cash dividends:
 
 

 
 

 
 
 
 
Common stock
 
$
0.07

 
$
0.07

 
$
0.21

 
$
0.21

Weighted average number of Common Shares outstanding:
 
 

 
 

 
 
 
 
Basic
 
38,051,772

 
37,413,490

 
37,780,506

 
37,406,270

Diluted
 
38,474,129

 
37,995,292

 
38,123,192

 
37,937,894

 
See notes to condensed consolidated financial statements.




Table of Contents

METHODE ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS) (Unaudited)
($ in thousands)

 
Three Months Ended
 
Nine Months Ended
 
February 1, 2014
 
January 26, 2013
 
February 1, 2014
 
January 26, 2013
 
 

 
 

 
 
 
 
Net income
$
14,592

 
$
3,268

 
$
48,045

 
$
30,387

 
 
 
 
 
 
 
 
Foreign currency translation adjustment
(3,412
)
 
3,839

 
4,699

 
2,611

Comprehensive income
11,180

 
7,107

 
52,744

 
32,998

Less: Comprehensive income/(loss) attributable to non-controlling interest
(10
)
 
(58
)
 
45

 
(178
)
Comprehensive income attributable to Methode Electronics, Inc.
$
11,190

 
$
7,165

 
$
52,699

 
$
33,176


See notes to consolidated financial statements.



2

Table of Contents

METHODE ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
($ in thousands)
 
 
 
Nine Months Ended
 
 
February 1,
2014
 
January 26,
2013
OPERATING ACTIVITIES
 
 

 
 

Net income
 
$
48,045

 
$
30,387

Adjustments to reconcile net income to net cash provided by operating activities:
 
 

 
 

Provision for depreciation
 
15,946

 
11,622

Amortization of intangibles
 
1,332

 
1,278

Amortization of stock awards and stock options
 
2,596

 
2,472

Changes in operating assets and liabilities
 
(18,836
)
 
(12,828
)
Other
 
268

 
(30
)
NET CASH PROVIDED BY OPERATING ACTIVITIES
 
49,351

 
32,901

 
 
 
 
 
INVESTING ACTIVITIES
 
 

 
 

Purchases of property, plant and equipment
 
(23,516
)
 
(30,013
)
Acquisition of businesses
 

 
(1,434
)
NET CASH USED IN INVESTING ACTIVITIES
 
(23,516
)
 
(31,447
)
 
 
 
 
 
FINANCING ACTIVITIES
 
 

 
 

Proceeds from exercise of stock options
 
5,014

 

Cash dividends
 
(7,876
)
 
(7,781
)
Proceeds from borrowings
 
28,500

 
28,500

Repayment of borrowings
 
(22,000
)
 
(36,500
)
NET CASH PROVIDED BY/(USED IN) FINANCING ACTIVITIES
 
3,638

 
(15,781
)
 
 
 
 
 
Effect of foreign currency exchange rate changes on cash
 
1,495

 
905

 
 
 
 
 
INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS
 
30,968

 
(13,422
)
Cash and cash equivalents at beginning of period
 
65,811

 
86,797

CASH AND CASH EQUIVALENTS AT END OF PERIOD
 
$
96,779

 
$
73,375

 
See notes to condensed consolidated financial statements.




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.  Our business is managed and our financial results are reported on a segment basis, with those segments being Automotive, Interconnect, Power Products and Other.  The condensed consolidated financial statements and related disclosures as of February 1, 2014 and results of operations for the three months and nine months ended February 1, 2014 and January 26, 2013 are unaudited, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).  The April 27, 2013 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 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 Form 10-K for the year ended April 27, 2013, filed with the SEC on June 20, 2013.  Results may vary from quarter to quarter for reasons other than seasonality. Due to the timing of our fiscal calendar, the three months ended February 1, 2014 represent 14 weeks of results and the three months ended January 26, 2013 represent 13 weeks of results. In addition, the nine months ended February 1, 2014 and January 26, 2013, represent 40 and 39 weeks of results, respectively. 

2.             RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
 
In February 2013, the Financial Accounting Standards Board, ("FASB"), issued Accounting Standards Updates, ("ASU") 2013-02, "Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income". The update requires disclosure of amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present either on the face of the consolidated statements of income or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required to be reclassified to net income in its entirety in the same reporting period. For amounts not reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures that provide additional detail about those amounts. ASU 2013-02 was effective prospectively for the Company for the first quarter of fiscal 2014, which began April 28, 2013. The adoption of ASU 2013-02 did not have a material impact on our financial statements.

3.             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 at least annually in accordance with Accounting Standard Codification ("ASC") No. 350, “Intangibles — Goodwill and Other”.  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 financial condition and results of operations.

The following table shows the roll-forward of goodwill in the financial statements for the nine months ended February 1, 2014:

 
 
 
 
 
 
 
 
 
 
 
Power
 
 
 
 
Interconnect
 
Products
 
Total
Balance as of April 27, 2013
 
$
11,957

 
$
950

 
$
12,907

Foreign currency translation
 
28

 

 
28

Balance as of February 1, 2014
 
$
11,985

 
$
950

 
$
12,935



The following tables present details of the Company’s intangible assets:
 
 
As of February 1, 2014
 
 
 
 
 
 
 
 
Wtd. Avg.
 
 
 
 
 
 
 
 
Remaining
 
 
 
 
Accumulated
 
 
 
Amortization
 
 
Gross
 
Amortization
 
Net
 
Periods (Years)
Customer relationships and agreements
 
$
16,579

 
$
14,574

 
$
2,005

 
10.1
Trade names, patents and technology licenses
 
25,774

 
12,686

 
13,088

 
9.7
Covenants not to compete
 
119

 
30

 
89

 
3.7
Total
 
$
42,472

 
$
27,290

 
$
15,182

 
 
 
 
 
As of April 27, 2013
 
 
 
 
 
 
 
 
Wtd. Avg.
 
 
 
 
 
 
 
 
Remaining
 
 
 
 
Accumulated
 
 
 
Amortization
 
 
Gross
 
Amortization
 
Net
 
Periods (Years)
Customer relationships and agreements
 
$
16,579

 
$
14,213

 
$
2,366

 
10.9
Trade names, patents and technology licenses
 
25,774

 
11,779

 
13,995

 
10.4
Covenants not to compete
 
119

 
14

 
105

 
4.4
Total
 
$
42,472

 
$
26,006

 
$
16,466

 
 
 
The estimated aggregate amortization expense for the current fiscal year and each of the four succeeding fiscal years is as follows:
 
2014

$1,722
2015

1,725

2016

1,541

2017

1,476

2018

1,379

 
As of February 1, 2014 and April 27, 2013, the trade names, patents and technology licenses include $1,800 of trade names that are not subject to amortization.
 
4.             INCOME TAXES
 
At February 1, 2014 and April 27, 2013, we had a total valuation allowance against our deferred tax assets of $40,895 and $42,436, respectively.  In the U.S., as of February 1, 2014 and April 27, 2013, the company had a full valuation allowance against its domestic federal and state net deferred tax assets of $33,670 and $35,200, respectively.

In accordance with ASC No. 740, “Income Taxes,” a valuation allowance is required to be recorded when it is more likely than not that deferred tax assets will not be realized.  Future realization depends on the existence of sufficient taxable income within the carry-forward period available under the tax laws.  Sources of future taxable income include future reversals of taxable temporary differences, future taxable income exclusive of reversing taxable differences, taxable income in carry-back years and tax planning strategies.  These sources of positive evidence of realizability must be weighed against negative evidence, such as cumulative losses in recent years.
 
In forming a judgment about the future realization of our deferred tax assets, we considered both the positive and negative evidence of realizability and gave significant weight to the negative evidence from our recent cumulative loss in the U.S. Each reporting period, the Company considers all available evidence, both positive and negative, to determine whether based on the weight of that evidence, a valuation allowance for deferred tax assets is needed. The Company has experienced cumulative domestic losses in recent years, which represents significant negative evidence. However, the Company has recently launched major automotive and appliance programs in the U.S. which have generated, and are expected to continue to generate, pre-tax income. In evaluating this positive evidence, the Company considered its ability to accurately assess future demand for its products, general economic climate and eventual product acceptance, given the limited experience with the launches.
The Company has concluded based on the weight of the available evidence that a full valuation allowance continues to be appropriate at February 1, 2014. However, continued sustained improvement in the Company’s domestic operating results could result in the reversal of some or all of the Company’s domestic valuation allowance in subsequent quarters.
 
The Company recognized an income tax provision of $1,431 and $855 for the three months ended February 1, 2014 and January 26, 2013, respectively. The Company's effective tax rate was 8.9% and 20.4% for the three months ended February 1, 2014 and January 26, 2013, respectively. The Company recognized an income tax provision of $4,169 and $4,519 for the nine months ended February 1, 2014 and January 26, 2013, respectively. The Company's effective tax rate was 8.0% and 12.9% for the nine months ended February 1, 2014 and January 26, 2013, respectively. The income tax provision for both the three and nine months ended February 1, 2014 and January 26, 2013 is lower than the U.S. statutory rate primarily due to foreign investment tax credits, foreign operations with lower statutory rates and adjustments in valuation allowances.

We recognize interest and penalties accrued related to the unrecognized tax benefits in the provision for income taxes.  We had approximately $78 accrued at February 1, 2014 for the payment of interest and penalties.  The total unrecognized tax benefit as of February 1, 2014 was $532. The accrued amount increased $139 in the current fiscal year.
  
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 all years except fiscal 2013, 2012 and 2011.
 
5.             NET INCOME PER SHARE
 
Basic net income per share is calculated by dividing net income by the weighted average number of common shares outstanding for the applicable period.  Diluted net income per share is calculated after adjusting the denominator of the basic net income per share calculation for the effect of all potentially dilutive stock compensation awards outstanding during the period.
 
The following table sets forth the computation of basic and diluted net income per share:
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
February 1,
2014
 
January 26,
2013
 
February 1, 2014
 
January 26, 2013
Numerator - net income attributable to Methode Electronics, Inc.
 
$
14,598

 
$
3,325

 
$
48,010

 
$
30,576

Denominator:
 

 

 
 
 
 
Denominator for basic net income per share-weighted average shares
 
38,051,772

 
37,413,490

 
37,780,506

 
37,406,270

Dilutive potential common shares
 
422,357

 
581,802

 
342,686

 
531,624

Denominator for diluted net income per share-adjusted weighted average shares and assumed conversions
 
38,474,129

 
37,995,292

 
38,123,192

 
37,937,894

 
 
 
 
 
 
 
 
 
Net income per share:
 
 

 
 

 
 
 
 
Basic
 
$
0.38

 
$
0.09

 
$
1.27

 
$
0.82

Diluted
 
$
0.38

 
$
0.09

 
$
1.26

 
$
0.81

 
For the three and nine months ended January 26, 2013, options to purchase 383,185 and 511,185 shares, respectively, have been excluded in the computation of net income per share because the exercise price was greater than the average market price for that period, and therefore, would have been anti-dilutive. In addition, restricted stock awards for 700,000 shares have been excluded in the computation of diluted net income per share for all periods presented, as these awards are contingent on the Company's performance in fiscal 2015.

6.             SEGMENT INFORMATION
 
We are a global manufacturer of component and subsystem devices.  We design, manufacture and market devices employing electrical, 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; and the consumer and industrial equipment markets.
 
ASC No. 280, “Segment Reporting”, establishes annual and interim reporting standards for an enterprise’s operating segments and related disclosures about its products, services, geographic areas and major customers. An operating segment is defined as a component of an enterprise that engages in business activities from which it may earn revenues and incur expenses, and about which separate financial information is regularly evaluated by the Chief Operating Decision Maker (“CODM”) in deciding how to allocate resources.  The CODM, as defined by ASC No. 280, is the Company’s President and Chief Executive Officer (“CEO”).

We have multiple operating segments that are aggregated in four reportable segments. Those segments are Automotive, Interconnect, Power Products and Other.
 
The Automotive segment supplies electronic and electromechanical devices and related products to automobile Original Equipment Manufacturers ("OEMs"), either directly or through their tiered suppliers. Our products include 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 conductive polymers, connectors, custom cable assemblies, industrial safety radio remote controls, optical and copper transceivers, personal computer and express card packaging and terminators, solid-state field effect interface panels, and thick film inks.  Services include the design and installation of fiber optic and copper infrastructure systems, and manufacturing active and passive optical components.
 
The Power Products segment manufactures braided flexible cables, current-carrying laminated bus devices, custom power-product assemblies, high-current low voltage flexible power cabling systems and powder coated bus bars that are used in various markets and applications, including aerospace, computers, industrial and power conversion, inverters and battery systems, insulated gate bipolar transistor solutions, military, telecommunications, and transportation.
 
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 in our Form 10-K for the fiscal year ended April 27, 2013.  We allocate resources to segments based on operating income. Transfers between segments are recorded using internal transfer prices set by us. 
The following tables present information regarding our segments. The Automotive segment income from operations for the nine months ended January 26, 2013 includes $20,000 of income from settlement.
 
 
Three Months Ended February 1, 2014
 
 
Automotive
 
Interconnect
 
Power
Products
 
Other
 
Eliminations/Corporate
 
Consolidated
Net sales
 
$
129,666

 
$
41,364

 
$
18,029

 
$
2,481

 
$
(1,787
)
 
$
189,753

Transfers between segments
 
(724
)
 
(777
)
 
(32
)
 
(81
)
 
1,614

 

Net sales to unaffiliated customers
 
$
128,942

 
$
40,587

 
$
17,997

 
$
2,400

 
$
(173
)
 
$
189,753

 
 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) from operations
 
$
17,906

 
$
5,073

 
$
2,125

 
$
(659
)
 
$
(8,064
)
 
$
16,381

Interest expense, net
 
 
 
 
 
 
 
 
 
 
 
88

Other expense, net
 
 
 
 
 
 
 
 
 
 
 
270

Income before income taxes
 
 
 
 
 
 
 
 
 
 
 
$
16,023

 
 
 
Three Months Ended January 26, 2013
 
 
Automotive
 
Interconnect
 
Power
Products
 
Other
 
Eliminations/Corporate
 
Consolidated
Net sales
 
$
74,349

 
$
32,218

 
$
12,816

 
$
4,276

 
$
(677
)
 
$
122,982

Transfers between segments
 
(93
)
 
(591
)
 
(30
)
 
(33
)
 
747

 

Net sales to unaffiliated customers
 
$
74,256

 
$
31,627

 
$
12,786

 
$
4,243

 
$
70

 
$
122,982

 
 
 
 
 
 
 
 
 
 
 
 
 
Income/(loss) from operations
 
$
3,258

 
$
3,651

 
$
517

 
$
1,124

 
$
(4,293
)
 
$
4,257

Interest income, net
 
 
 
 
 
 
 
 
 
 
 
20

Other income, net
 
 
 
 
 
 
 
 
 
 
 
114

Income before income taxes
 
 
 
 
 
 
 
 
 
 
 
$
4,123

 
 
 
Nine Months Ended February 1, 2014
 
 
Automotive
 
Interconnect
 
Power
Products
 
Other
 
Eliminations/Corporate
 
Consolidated
Net sales
 
$
360,061

 
$
129,973

 
$
54,002

 
$
7,522

 
$
(3,625
)
 
$
547,933

Transfers between segments
 
(1,568
)
 
(2,048
)
 
(149
)
 
(152
)
 
3,917

 

Net sales to unaffiliated customers
 
$
358,493

 
$
127,925

 
$
53,853

 
$
7,370

 
$
292

 
$
547,933

 
 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) from operations
 
$
48,325

 
$
19,397

 
$
7,931

 
$
(808
)
 
$
(21,603
)
 
$
53,242

Interest expense, net
 
 
 
 
 
 
 
 
 
 
 
265

Other expense, net
 
 
 
 
 
 
 
 
 
 
 
763

Income before income taxes
 
 
 
 
 
 
 
 
 
 
 
$
52,214


 
 
Nine Months Ended January 26, 2013
 
 
Automotive
 
Interconnect
 
Power
Products
 
Other
 
Eliminations/Corporate
 
Consolidated
Net sales
 
$
225,954

 
$
98,488

 
$
37,557

 
$
12,022

 
$
(2,543
)
 
$
371,478

Transfers between segments
 
(500
)
 
(1,895
)
 
(136
)
 
(72
)
 
2,603

 

Net sales to unaffiliated customers
 
$
225,454

 
$
96,593

 
$
37,421

 
$
11,950

 
$
60

 
$
371,478

 
 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) from operations
 
$
32,406

 
$
12,655

 
$
568

 
$
2,672

 
$
(12,759
)
 
$
35,542

Interest expense, net
 
 
 
 
 
 
 
 
 
 
 
27

Other expense, net
 
 
 
 
 
 
 
 
 
 
 
609

Income before income taxes
 
 
 
 
 
 
 
 
 
 
 
$
34,906


3

METHODE ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollar amounts in thousands, except per share data)


7.          CONTINGENCIES

In September 2012, the Company and various Delphi parties settled all Delphi related litigation matters. In addition to resolving all claims between the parties, the Company assigned certain patents to Delphi and entered into a non-compete with respect to the related technology. In exchange, the Company received a payment of $20,000, half of which was paid in October 2012 and half of which was paid in January 2013. The Company recorded the entire gain in the second quarter of fiscal 2013, in the income from settlement section of our consolidated statement of operations.

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.

8.          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 $14,616 and $11,511 as of February 1, 2014 and April 27, 2013, 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.  Engineering, testing and other costs incurred in the design and development of production parts are expensed as incurred, unless the costs are reimbursable, as specified in a customer contract.
 
9.          DEBT AND CREDIT AGREEMENT
 
We are party to an Amended and Restated Credit Agreement with Bank of America, N.A., as administrative agent, and certain other financial institutions, which has a maturity of September 21, 2017. The credit facility is in the aggregate principal amount of $100,000, with an option to increase the principal amount by an additional $50,000, subject to customary conditions and approval of the lender(s) providing new commitment(s). The credit facility provides for variable rates of interest based on the type of borrowing and the Company's debt to EBITDA financial ratio. The Amended and Restated Credit Agreement is guaranteed by certain of our U.S. subsidiaries. At February 1, 2014, the interest rate on the credit facility was 1.5% plus LIBOR. At February 1, 2014, we were in compliance with the covenants of the agreement. During the first nine months of fiscal 2014, we had borrowings of $28,500 and payments of $22,820, which includes interest of $820 under this credit facility. As of February 1, 2014, there were outstanding balances against the credit facility of $50,000.  There was $50,000 available to borrow under the credit facility as of February 1, 2014, which does not include the option to increase the principal amount. We believe the fair value approximates the carrying amount as of February 1, 2014.

10.    SUBSEQUENT EVENT

On February 10, 2014, one of the Company's investments, an interest in Lumidigm, with a cost basis of $4,056, was sold. The Company's portion of the proceeds from the sale is $7,241, which will result in a pre-tax gain of $3,185. The Company will record the transaction in the fourth quarter of fiscal 2014. The Company continues to hold an exclusive license in Lumidigm for certain transportation markets.


    
Item 2.  Management’s 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 communications industries, such as general economic conditions, interest rate fluctuations, consumer spending patterns and technological changes.   Other factors which may result in materially different results for future periods include the following risk factors. Additional risks and uncertainties not presently known or that our management currently believe to be insignificant may also adversely affect our financial condition or results of operations.  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 and are made as of the date of this report.

Our business is highly dependent on two large automotive customers. If we were to lose either of these customers or experienced a significant decline in the volume or price of products purchased by these customers, or if either of the customers declare bankruptcy, our future results could be adversely affected.

Because we derive a substantial portion of our revenues from customers in the automotive, appliance, computer and communications industries, we are susceptible to trends and factors affecting those industries.

We face risks relating to our international operations, including political and economic instability, expropriation, or the imposition of government controls.

Our inability to effectively manage the timing, quality and cost of new program launches could adversely affect our financial performance.

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.
  
Our technology-based business and the markets in which we operate are highly competitive. If we are unable to compete effectively, our sales could decline.

We are dependent on the availability and price of materials.

Disruption of our supply chain could have an adverse effect on our business, financial condition and results of operations.

We may be required to recognize impairment charges for our goodwill and indefinite-lived intangible assets.

We may be unable to keep pace with rapid technological changes, which could adversely affect our business.

If we are unable to protect our intellectual property or we infringe, or are alleged to infringe, on another person’s intellectual property, our business, financial condition and operating results could be materially adversely affected.

We are subject to continuing pressure to lower our prices.

We currently have a significant amount of our cash located outside the U.S.

Downturns in the automotive industry or the bankruptcy of certain automotive customers could reduce the sales and profitability of our business.

A significant fluctuation between the U.S. dollar and other currencies could adversely impact our operating results.

We may acquire businesses or divest business operations. These transactions may pose significant risks and may materially adversely affect our business, financial condition and operating results.

We could suffer significant business interruptions.

Unfavorable tax law changes may adversely affect our financial results.

Our information technology (“IT”) systems could be breached.
 
The SEC's annual disclosure and reporting requirements for those companies who use conflict minerals mined from the Democratic Republic of Congo (DRC) and adjoining countries may be difficult and costly to implement.

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 statements, all of which are expressly qualified by the foregoing.  See Part I — Item 1A, Risk Factors of our Form 10-K for the fiscal year ended April 27, 2013, for a further discussion regarding some of the reasons that actual results may be materially different from those we anticipate.
 
Overview
 
We are a global manufacturer of component and subsystem devices with manufacturing, design and testing facilities in China, Egypt, Germany, India, Italy, Lebanon, Malta, Mexico, the Philippines, Singapore, Switzerland, the United Kingdom and the United States. We are a global designer and manufacturer of electronic and electro-mechanical devices. We design, manufacture and market devices employing electrical, radio remote control, electronic, wireless, sensing and optical technologies. 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 April 27, 2013.
 
Our components are found in the primary end markets of the aerospace, appliance, automotive, construction, consumer and industrial equipment markets, communications (including information processing and storage, networking equipment, wireless and terrestrial voice/data systems), rail and other transportation industries.

Due to the timing of our fiscal calendar, the three months ended February 1, 2014 represent 14 weeks of results and the three months ended January 26, 2013 represent 13 weeks of results. In addition, the nine months ended February 1, 2014 and January 26, 2013, represent 40 and 39 weeks of results, respectively.
 
Delphi Settlement

In September 2012, the Company and various Delphi parties settled all Delphi related litigation matters. In addition to resolving all claims between the parties, the Company assigned certain patents to Delphi and entered into a non-compete with respect to the related technology. In exchange, the Company received a payment of $20.0 million, half of which was paid in October 2012 and half of which was paid in January 2013. The Company recorded the entire gain in the second quarter of fiscal 2013, in the income from settlement section of our consolidated statement of operations.

Hetronic Italy Transaction

In September 2012, we acquired certain assets of Hetronic South Europe S.R.L. for $1.4 million in cash, as well as the forgiveness of debt owed to the Company of $1.3 million, for total consideration of $2.7 million. We operate this business under the name Hetronic Italy. The business, located in Milan, Italy, is a market leader in industrial safety radio remote controls, primarily serving the Italian market. The accounts and transactions of Hetronic Italy have been included in the Hetronic Group in the Interconnect segment in the consolidated financial statements from the effective date of the acquisition.


Results of Operations for the Three Months Ended February 1, 2014 as Compared to the Three Months Ended January 26, 2013
 
Consolidated Results
 
Below is a table summarizing results for the three months ended:
($ in millions)
(“N/M” equals not meaningful) 
 
 
February 1,
2014
 
January 26,
2013
 
Net Change
 
Net Change
Net sales
 
$
189.8

 
$
123.0

 
$
66.8

 
54.3
%
 
 
 
 
 
 
 
 
 
Cost of products sold
 
151.3

 
102.9

 
48.4

 
47.0
%
 
 
 
 
 
 
 
 
 
Gross profit
 
38.5

 
20.1

 
18.4

 
91.5
%
 
 
 
 
 
 
 
 
 
Selling and administrative expenses
 
22.1

 
15.9

 
6.2

 
39.0
%
Interest expense, net
 
0.1

 

 
0.1

 
N/M
Other expense, net
 
0.3

 
0.1

 
0.2

 
200.0
%
Income tax expense
 
1.4

 
0.9

 
0.5

 
55.6
%
Net loss attributable to noncontrolling interest
 

 
(0.1
)
 
0.1

 
N/M
Net income attributable to Methode Electronics, Inc.
 
$
14.6

 
$
3.3

 
$
11.3

 
342.4
%
 
 
 
 
 
 
 
 
 
Percent of sales:
 
February 1,
2014
 
January 26,
2013
 
 
 
 
Net sales
 
100.0
%
 
100.0
 %
 
 
 
 
Cost of products sold
 
79.7
%
 
83.7
 %
 
 
 
 
Gross margins
 
20.3
%
 
16.3
 %
 
 
 
 
Selling and administrative expenses
 
11.6
%
 
12.9
 %
 
 
 
 
Interest expense, net
 
0.1
%
 
 %
 
 
 
 
Other expense, net
 
0.2
%
 
0.1
 %
 
 
 
 
Income tax expense
 
0.7
%
 
0.7
 %
 
 
 
 
Net loss attributable to noncontrolling interest
 
%
 
(0.1
)%
 
 
 
 
Net income attributable to Methode Electronics, Inc.
 
7.7
%
 
2.7
 %
 
 
 
 
 
Net Sales.  Consolidated net sales increased $66.8 million, or 54.3%, to $189.8 million for the three months ended February 1, 2014, from $123.0 million for the three months ended January 26, 2013.  The Automotive segment net sales increased $54.6 million, or 73.5%, to $128.9 million for the third quarter of fiscal 2014, from $74.3 million for the third quarter of fiscal 2013 primarily related to the GM Center Console program, which launched in the first quarter of fiscal 2014, and increased sales volumes for steering-angle sensors, and visible and hidden switch product lines.  The Interconnect segment net sales increased $9.0 million, or 28.5%, to $40.6 million for the third quarter of fiscal 2014, compared to $31.6 million for the third quarter of fiscal 2013, primarily due to higher sales volumes in appliance and data products.  The Power Products segment net sales increased $5.2 million, or 40.6%, to $18.0 million for the third quarter of fiscal 2014, compared to $12.8 million for the third quarter of fiscal 2013, primarily due to higher sales volumes for cabling and busbar products.  The Other segment net sales decreased $1.8 million, or 42.9%, to $2.4 million for the third quarter of fiscal 2014, as compared to $4.2 million for the third quarter of fiscal 2013, primarily due to lower sales volumes for our torque-sensing products.  Translation of foreign operations net sales for the three months ended February 1, 2014 increased reported net sales by $1.6 million or 0.9% due to average currency rate fluctuations in the third quarter of fiscal 2014, compared to the third quarter of fiscal 2013, primarily due to the strengthening of the Euro compared to the U.S. dollar.
 
Cost of Products Sold.  Consolidated cost of products sold increased $48.4 million, or 47.0%, to $151.3 million for the three months ended February 1, 2014, compared to $102.9 million for the three months ended January 26, 2013.  Consolidated cost of products sold as a percentage of sales was 79.7% for the third quarter of fiscal 2014, compared to 83.7% for the third quarter of fiscal 2013.  The Automotive segment experienced a decrease in cost of goods sold as a percentage of sales due to increased manufacturing efficiencies related to the increased sales volumes and the vertical integration of our paint and decorative molding operation into our manufacturing processes. The Interconnect segment experienced an increase in cost of products sold as a percentage of sales primarily due to manufacturing inefficiencies related to lower sales volumes for our European sensor products. The Power Products segment experienced a decrease in cost of products sold as a percentage of sales primarily due to lower development costs, favorable commodity pricing for raw materials and favorable product sales mix. The Other segment experienced an increase in cost of products sold as a percentage of sales primarily due to manufacturing inefficiencies as a result of lower sales volumes in our torque-sensing business.
 
Gross Profit.  Consolidated gross profit increased $18.4 million, or 91.5%, to $38.5 million for the three months ended February 1, 2014, as compared to $20.1 million for the three months ended January 26, 2013.  Gross margins as a percentage of net sales increased to 20.3% for the three months ended February 1, 2014, compared to 16.3% for the three months ended January 26, 2013.  The increase is primarily due to increased manufacturing efficiencies related to the increased sales volumes and the vertical integration of our paint and decorative molding facility in our manufacturing process in the Automotive segment. The Interconnect segment experienced a decrease in gross margins as a percentage of sales primarily due to inefficiencies related to lower sales volumes for our European sensor products. The Power Products segment experienced an increase in gross margins as a percentage of sales primarily due to favorable commodity pricing for raw materials and favorable product sales mix. The Other segment experienced a decrease in gross margins as a percentage of sales primarily due to inefficiencies caused by lower sales volumes in our torque-sensing business.
 
Selling and Administrative Expenses.  Selling and administrative expenses increased by $6.2 million, or 39.0%, to $22.1 million for the three months ended February 1, 2014, compared to $15.9 million for the three months ended January 26, 2013.  Selling and administrative expenses as a percentage of net sales decreased to 11.6% for the three months ended February 1, 2014 from 12.9% for the three months ended January 26, 2013. The decrease is primarily due to higher sales volumes. In the third quarter of fiscal 2014, $1.6 million of performance-based compensation expense was recorded related to the tandem-cash component of Company's long-term incentive plan. There was no expense recorded in the third quarter of fiscal 2013. In addition, expenses for short term bonuses and fringe benefit expense increased $2.1 million, legal expenses and other professional services increased $1.3 million, travel expenses and other general expenses increased $0.9 million and development costs increased $0.3 million in the third quarter of fiscal 2014.
 
Interest Expense, Net.  Interest expense, net was $0.1 million for the three months ended February 1, 2014, compared to no interest expense, net for the three months ended January 26, 2013.

Other Expense, Net. Other expense, net increased $0.2 million, to $0.3 million for the three months ended February 1, 2014, compared to $0.1 million for the three months ended January 26, 2013. All amounts for both the third quarter of fiscal 2014 and fiscal 2013, relate to currency rate fluctuations. The functional currencies of these operations are the British pound, Chinese yuan, Euro, Indian Rupee, Mexican peso, Singapore dollar and Swiss Franc. 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.

Income Tax Expense.  Income tax expense increased $0.5 million, or 55.6%, to $1.4 million for the three months ended February 1, 2014, compared to $0.9 million for the three months ended January 26, 2013.  The income tax expense for both the third quarter of fiscal 2014 and fiscal 2013 relates to income taxes on foreign profits.
 
Net Income Attributable to Methode Electronics, Inc.  Net income attributable to Methode Electronics, Inc. increased $11.3 million, or 342.4%, to $14.6 million for the three months ended February 1, 2014, compared to $3.3 million for the three months ended January 26, 2013. The fiscal 2014 third quarter benefitted from the launch of the GM Center Console Program, higher sales volumes for other products and manufacturing efficiencies, partially offset with higher selling and administrative expenses.

Operating Segments
 
Automotive Segment Results
 
Below is a table summarizing results for the three months ended:
($ in millions)
(“N/M” equals not meaningful) 
 
 
February 1,
2014
 
January 26,
2013
 
Net Change
 
Net Change
Net sales
 
$
128.9

 
$
74.3

 
$
54.6

 
73.5
%
 
 
 
 
 
 
 
 
 
Cost of products sold
 
104.0

 
65.0

 
39.0

 
60.0
%
 
 
 
 
 
 
 
 
 
Gross profit
 
24.9

 
9.3

 
15.6

 
167.7
%
 
 
 
 
 
 
 
 
 
Selling and administrative expenses
 
7.0

 
6.0

 
1.0

 
16.7
%
 
 
 
 
 
 
 
 
 
Income from operations
 
$
17.9

 
$
3.3

 
$
14.6

 
442.4
%
 
 
 
 
 
 
 
 
 
Percent of sales:
 
February 1,
2014
 
January 26,
2013
 
 
 
 
Net sales
 
100.0
%
 
100.0
%
 
 
 
 
Cost of products sold
 
80.7
%
 
87.5
%
 
 
 
 
Gross margins
 
19.3
%
 
12.5
%
 
 
 
 
Selling and administrative expenses
 
5.4
%
 
8.1
%
 
 
 
 
Income from operations
 
13.9
%
 
4.4
%
 
 
 
 
 
Net Sales.  Automotive segment net sales increased $54.6 million, or 73.5%, to $128.9 million for the three months ended February 1, 2014, from $74.3 million for the three months ended January 26, 2013.  Net sales increased in North America $42.7 million, or 200.5%, to $64.0 million in the third quarter of fiscal 2014, compared to $21.3 million in the third quarter of fiscal 2013 primarily due to the GM Center Console Program, which launched in the first quarter of fiscal 2014 and increased sales volumes for our Ford Center Console Program and our transmission lead-frame assemblies. Net sales increased in Europe by $8.6 million, or 25.2%, to $42.7 million in the third quarter of fiscal 2014, compared to $34.1 million in the third quarter of fiscal 2013, primarily due to new product launches, increased sales volumes for hidden switch products as well as currency rate fluctuations. Net sales in Asia increased $3.3 million, or 17.5%, to $22.2 million in the third quarter of fiscal 2014, compared to $18.9 million in the third quarter of fiscal 2013, primarily due to increased sales volumes for our steering-angle sensor products and our transmission lead-frame assemblies. Translation of foreign operations net sales for the three months ended February 1, 2014 increased reported net sales by $1.6 million, or 1.3%, due to average currency rates in the third quarter of fiscal 2014, compared to the average currency rates in the third quarter of fiscal 2013, primarily due to the strengthening of the Euro as compared to the U.S. dollar.

Cost of Products Sold.  Automotive segment cost of products sold increased $39.0 million, or 60.0%, to $104.0 million for the three months ended February 1, 2014, from $65.0 million for the three months ended January 26, 2013.  The Automotive segment cost of products sold as a percentage of sales decreased to 80.7% in the third quarter of fiscal 2014, compared to 87.5% in the third quarter of fiscal 2013.  The decrease is primarily due to increased manufacturing efficiencies related to the increased sales volumes and the vertical integration of our paint and decorative molding operation into our manufacturing processes.
 
Gross Profit.  Automotive segment gross profit increased $15.6 million, or 167.7%, to $24.9 million for the three months ended February 1, 2014, as compared to $9.3 million for the three months ended January 26, 2013.  The Automotive segment gross margins as a percentage of net sales were 19.3% for the three months ended February 1, 2014, as compared to 12.5% for the three months ended January 26, 2013.  The increase is primarily due to increased manufacturing efficiencies related to the increased sales volumes and the vertical integration of our paint and decorative molding facility into our manufacturing processes.
Selling and Administrative Expenses.  Selling and administrative expenses increased $1.0 million, or 16.7%, to $7.0 million for the three months ended February 1, 2014, compared to $6.0 million for the three months ended January 26, 2013.  Selling and administrative expenses as a percentage of net sales were 5.4% for the three months ended February 1, 2014 and 8.1% for the three months ended January 26, 2013. The increase in expenses in the third quarter of fiscal 2014 is primarily due to higher bonus and travel expenses as a result of increased business levels as compared to the third quarter of fiscal 2013.
    
Income from Operations.  Automotive segment income from operations increased $14.6 million, or 442.4%, to $17.9 million for the three months ended February 1, 2014, compared to $3.3 million for the three months ended January 26, 2013. The fiscal 2014 third quarter benefitted from higher sales volumes and manufacturing efficiencies, due to the launch of the GM Center Console Program and increased sales volumes from other products, partially offset by higher selling and administrative expenses.

Interconnect Segment Results
 
Below is a table summarizing results for the three months ended:
($ in millions)
 
 
 
February 1,
2014
 
January 26,
2013
 
Net Change
 
Net Change
Net sales
 
$
40.6

 
$
31.6

 
$
9.0

 
28.5
%
 
 
 
 
 
 
 
 
 
Cost of products sold
 
30.8

 
23.7

 
7.1

 
30.0
%
 
 
 
 
 
 
 
 
 
Gross profit
 
9.8

 
7.9

 
1.9

 
24.1
%
 
 
 
 
 
 
 
 
 
Selling and administrative expenses
 
4.7

 
4.2

 
0.5

 
11.9
%
 
 
 
 
 
 
 
 
 
Income from operations
 
$
5.1

 
$
3.7

 
$
1.4

 
37.8
%
 
 
 
 
 
 
 
 
 
Percent of sales:
 
February 1,
2014
 
January 26,
2013
 
 
 
 
Net sales
 
100.0
%
 
100.0
%
 
 
 
 
Cost of products sold
 
75.9
%
 
75.0
%
 
 
 
 
Gross margins
 
24.1
%
 
25.0
%
 
 
 
 
Selling and administrative expenses
 
11.6
%
 
13.3
%
 
 
 
 
Income from operations
 
12.6
%
 
11.7
%
 
 
 
 
 
Net Sales.  Interconnect segment net sales increased $9.0 million, or 28.5%, to $40.6 million for the three months ended February 1, 2014, from $31.6 million for the three months ended January 26, 2013.  Net sales increased in North America by $9.0 million, or 38.0%, to $32.7 million in the third quarter of fiscal 2014, compared to $23.7 million in the third quarter of fiscal 2013, primarily due to stronger sales volumes for our appliance, data solutions and radio remote control products. Net sales in Europe increased $0.8 million, or 18.2%, to $5.2 million in the third quarter of fiscal 2014, compared to $4.4 million in the third quarter of fiscal 2013, primarily due to higher radio remote control sales volumes. Net sales in Asia decreased $0.8 million, or 22.9%, to $2.7 million in the third quarter of fiscal 2014, compared to $3.5 million in the third quarter of fiscal 2013, primarily due to lower sales volumes from certain legacy products resulting from the planned exit of a product line.
 
Cost of Products Sold.  Interconnect segment cost of products sold increased $7.1 million, or 30.0%, to $30.8 million for the three months ended February 1, 2014, compared to $23.7 million for the three months ended January 26, 2013.  Interconnect segment cost of products sold as a percentage of net sales increased to 75.9% for the three months ended February 1, 2014, compared to 75.0% for the three months ended January 26, 2013.  The increase in cost of products sold as a percentage of sales is primarily due to manufacturing inefficiencies related to lower sales volumes for our European sensor products.

Gross Profit.  Interconnect segment gross profit increased $1.9 million, or 24.1%, to $9.8 million for the three months ended February 1, 2014, compared to $7.9 million for the three months ended January 26, 2013.  Gross margins as a percentage of net sales decreased to 24.1% for the three months ended February 1, 2014, from 25.0% for the three months ended January 26, 2013.  The decrease in gross margins as a percentage of sales is primarily due to manufacturing inefficiencies related to lower sales volumes for our European sensor products and sales mix within the segment.
 
Selling and Administrative Expenses.  Selling and administrative expenses increased $0.5 million, or 11.9%, to $4.7 million for the three months ended February 1, 2014, compared to $4.2 million for the three months ended January 26, 2013.  Selling and administrative expenses as a percentage of net sales decreased to 11.6% for the three months ended February 1, 2014, from 13.3% for the three months ended January 26, 2013. The increase in selling and administrative expenses is primarily due to increased development costs in our North American sensor business and severance costs in our radio remote control business. 
 
Income from Operations.  Interconnect segment income from operations increased $1.4 million, or 37.8%, to $5.1 million for the three months ended February 1, 2014, compared to $3.7 million for the three months ended January 26, 2013, primarily due to higher sales volumes, partially offset with increased expenses related to development costs and severance.

Power Products Segment Results
 
Below is a table summarizing results for the three months ended:
($ in millions)
(“N/M” equals not meaningful)
 
 
February 1,
2014
 
January 26,
2013
 
Net Change
 
Net Change
Net sales
 
$
18.0

 
$
12.8

 
$
5.2

 
40.6
 %
 
 
 
 
 
 
 
 
 
Cost of products sold
 
14.6

 
10.7

 
3.9

 
36.4
 %
 
 
 
 
 
 
 
 
 
Gross profit
 
3.4

 
2.1

 
1.3

 
61.9
 %
 
 
 
 
 
 
 
 
 
Selling and administrative expenses
 
1.3

 
1.6

 
(0.3
)
 
(18.8
)%
 
 
 
 
 
 
 
 
 
Income from operations
 
$
2.1

 
$
0.5

 
$
1.6

 
320.0
 %
 
 
 
 
 
 
 
 
 
Percent of sales:
 
February 1,
2014
 
January 26,
2013
 
 
 
 
Net sales
 
100.0
%
 
100.0
%
 
 
 
 
Cost of products sold
 
81.1
%
 
83.6
%
 
 
 
 
Gross margins
 
18.9
%
 
16.4
%
 
 
 
 
Selling and administrative expenses
 
7.2
%
 
12.5
%
 
 
 
 
Income from operations
 
11.7
%
 
3.9
%
 
 
 
 
 
Net Sales.  Power Products segment net sales increased $5.2 million, or 40.6%, to $18.0 million for the three months ended February 1, 2014, compared to $12.8 million for the three months ended January 26, 2013.  Net sales increased in North America by $1.6 million, or 18.8%, to $10.1 million in the third quarter of fiscal 2014, compared to $8.5 million in the third quarter of fiscal 2013, primarily due to higher sales volumes for our PowerRail and associated products, partially offset by lower sales volumes for our thermal heat sink products. Net sales in Europe increased $2.3 million, or 328.6%, to $3.0 million in the third quarter of fiscal 2014, compared to $0.7 million in the third quarter of fiscal 2012, due to increased sales volumes for a by-pass switch and busbars for electric vehicles. Net sales in Asia increased $1.3 million, or 36.1%, to $4.9 million in the third quarter of fiscal 2014, compared to $3.6 million in the third quarter of fiscal 2013, primarily due to increased sales volumes of busbar and cabling assemblies.
 
Cost of Products Sold.  Power Products segment cost of products sold increased $3.9 million, or 36.4%, to $14.6 million for the three months ended February 1, 2014, compared to $10.7 million for the three months ended January 26, 2013.  The Power Products segment cost of products sold as a percentage of sales decreased to 81.1% for the three months ended February 1, 2014, from 83.6% for the three months ended January 26, 2013.  The decrease in cost of products sold as a percentage of sales is primarily due to higher sales volumes, lower product development costs, favorable commodity pricing for raw materials and favorable product sales mix.

Gross Profit.  Power Products segment gross profit increased $1.3 million, or 61.9%, to $3.4 million in the third quarter of fiscal 2014, compared to $2.1 million in the third quarter of fiscal 2013.  Gross margins as a percentage of net sales increased to 18.9% for the three months ended February 1, 2014 from 16.4% for the three months ended January 26, 2013. The increase in gross margins is primarily due to higher sales volumes, lower product development costs, favorable commodity pricing for raw materials and favorable product sales mix.

Selling and Administrative Expenses.  Selling and administrative expenses decreased $0.3 million, or 18.8%, to $1.3 million for the three months ended February 1, 2014, compared to $1.6 million for the three months ended January 26, 2013.  Selling and administrative expenses as a percentage of net sales decreased to 7.2% for the three months ended February 1, 2014 from 12.5% for the three months ended January 26, 2013. Selling and administrative expenses decreased due to lower commission expense in North America.
 
Income From Operations.  Power Products segment income from operations increased $1.6 million, to $2.1 million for the three months ended February 1, 2014, compared to $0.5 million for the three months ended January 26, 2013, due to higher sales, favorable commodity pricing for raw materials, favorable product mix and lower selling and administrative expenses. 

Other Segment Results
 
Below is a table summarizing results for the three months ended:
($ in millions)
 
 
February 1,
2014
 
January 26,
2013
 
Net Change
 
Net Change
Net sales
 
$
2.4

 
$
4.2

 
$
(1.8
)
 
(42.9
)%
 
 
 
 
 
 
 
 
 
Cost of products sold
 
1.5

 
2.6

 
(1.1
)
 
(42.3
)%
 
 
 
 
 
 
 
 
 
Gross profit
 
0.9

 
1.6

 
(0.7
)
 
(43.8
)%
 
 
 
 
 
 
 
 
 
Selling and administrative expenses
 
1.6

 
0.5

 
1.1

 
220.0
 %
 
 
 
 
 
 
 
 
 
Income/(loss) from operations
 
$
(0.7
)
 
$
1.1

 
$
(1.8
)
 
N/M

 
 
 
 
 
 
 
 
 
Percent of sales:
 
February 1,
2014
 
January 26,
2013
 
 
 
 
Net sales
 
100.0
 %
 
100.0
%
 
 
 
 
Cost of products sold
 
62.5
 %
 
61.9
%
 
 
 
 
Gross margins
 
37.5
 %
 
38.1
%
 
 
 
 
Selling and administrative expenses
 
66.7
 %
 
11.9
%
 
 
 
 
Income/(loss) from operations
 
(29.2
)%
 
26.2
%
 
 
 
 
 
Net Sales.  The Other segment net sales decreased $1.8 million, or 42.9%, to $2.4 million for the three months ended February 1, 2014, compared to $4.2 million for the three months ended January 26, 2013.  Net sales from our torque-sensing business decreased 76.3% in the third quarter of fiscal 2014, compared to the third quarter of fiscal 2013, primarily due to the planned exit of certain product lines and lower demand in the e-bike and motorcycle markets.  Net sales from our testing facilities increased 22.8%, primarily due to increased vibration shock and environmental testing sales in the third quarter of fiscal 2014, compared to the third quarter of fiscal 2013.
 
Cost of Products Sold.  Other segment cost of products sold decreased $1.1 million, or 42.3%, to $1.5 million for the three months ended February 1, 2014, compared to $2.6 million for the three months ended January 26, 2013. Cost of products sold as a percentage of sales increased to 62.5% in the third quarter of fiscal 2014, compared to 61.9% in the third quarter of fiscal 2013. The increase in cost of products sold as a percentage of sales is primarily due to manufacturing inefficiencies as a result of lower sales volumes in our torque-sensing business.

Gross Profit.  The Other segment gross profit decreased $0.7 million, or 43.8%, to $0.9 million for the three months ended February 1, 2014, compared to $1.6 million for the three months ended January 26, 2013.  Gross margins as a percentage of sales decreased to 37.5% for the three months ended February 1, 2014, compared to 38.1% for the three months ended January 26, 2013. The decrease in gross margins as a percentage of sales is primarily due to inefficiencies caused by lower sales volumes.
 
Selling and Administrative Expenses.  Selling and administrative expenses increased $1.1 million, or 220.0%, to $1.6 million for the three months ended February 1, 2014, compared to $0.5 million for the three months ended January 26, 2013.  Selling and administrative expenses as a percentage of net sales increased to 66.7% for the three months ended February 1, 2014, from 11.9% for the three months ended January 26, 2013. The increase in selling and administrative expenses is primarily due to increased legal expenses for pursuing a patent lawsuit from our torque-sensing business.
 
Income/(Loss) From Operations  The Other segment income/(loss) from operations decreased $1.8 million, to a loss of $0.7 million for the three months ended February 1, 2014, compared to income of $1.1 million for the three months ended January 26, 2013.  The decrease was primarily due to lower sales volumes and production inefficiencies and increased legal expenses.


4

Table of Contents

Results of Operations for the Nine Months Ended February 1, 2014 as Compared to the Nine Months Ended January 26, 2013
 
Consolidated Results
 
Below is a table summarizing results for the nine months ended:
($ in millions)
(“N/M” equals not meaningful) 
 
 
February 1,
2014
 
January 26,
2013
 
Net Change
 
Net Change
Net sales
 
$
547.9

 
$
371.5

 
$
176.4

 
47.5
 %
 
 
 
 
 
 
 
 
 
Cost of products sold
 
434.1

 
307.7

 
126.4

 
41.1
 %
 
 
 
 
 
 
 
 
 
Gross profit
 
113.8

 
63.8

 
50.0

 
78.4
 %
 
 
 
 
 
 
 
 
 
Selling and administrative expenses
 
60.6

 
48.3

 
12.3

 
25.5
 %
Income from settlement
 

 
(20.0
)
 
20.0

 
N/M

Interest expense, net
 
0.3

 

 
0.3

 
N/M

Other expense, net
 
0.8

 
0.6

 
0.2

 
33.3
 %
Income tax expense
 
4.2

 
4.5

 
(0.3
)
 
(6.7
)%
Net loss attributable to noncontrolling interest
 

 
(0.2
)
 
0.2

 
N/M

Net income attributable to Methode Electronics, Inc.
 
$
47.9

 
$
30.6

 
$
17.3

 
56.5
 %
 
 
 
 
 
 
 
 
 
Percent of sales:
 
February 1,
2014
 
January 26,
2013
 
 
 
 
Net sales
 
100.0
%
 
100.0
 %
 
 
 
 
Cost of products sold
 
79.2
%
 
82.8
 %
 
 
 
 
Gross margins
 
20.8
%
 
17.2
 %
 
 
 
 
Selling and administrative expenses
 
11.1
%
 
13.0
 %
 
 
 
 
Income from settlement
 
%
 
(5.4
)%
 
 
 
 
Interest expense, net
 
0.1
%
 
 %
 
 
 
 
Other expense, net
 
0.1
%
 
0.2
 %
 
 
 
 
Income tax expense
 
0.8
%
 
1.2
 %
 
 
 
 
Net loss attributable to noncontrolling interest
 
%
 
(0.1
)%
 
 
 
 
Net income attributable to Methode Electronics, Inc.
 
8.7
%
 
8.2
 %
 
 
 
 
 
Net Sales.  Consolidated net sales increased $176.4 million, or 47.5%, to $547.9 million for the nine months ended February 1, 2014, from $371.5 million for the nine months ended January 26, 2013.  The Automotive segment net sales increased $133.0 million, or 59.0%, to $358.5 million for the first nine months of fiscal 2014, from $225.5 million for the first nine months of fiscal 2013, primarily related to the GM Center Console Program, which launched in the first quarter of fiscal 2014, new product launches in Europe and higher sales volumes for steering-angle sensor, and hidden switch product lines. The Interconnect segment net sales increased $31.3 million, or 32.4%, to $127.9 million for the first nine months of fiscal 2014, compared to $96.6 million for the first nine months of fiscal 2013, primarily due to higher sales volumes in appliance and data products.  The Power Products segment net sales increased $16.5 million, or 44.1%, to $53.9 million for the first nine months of fiscal 2014, compared to $37.4 million for the first nine months of fiscal 2013, primarily due to higher sales volumes for cabling and busbar products.  The Other segment net sales decreased $4.6 million, or 38.3%, to $7.4 million for the first nine months of fiscal 2014, as compared to $12.0 million for the first nine months of fiscal 2013, primarily due to lower sales volumes for our torque-sensing products.  Translation of foreign operations net sales for the nine months ended February 1, 2014 increased reported net sales by $3.0 million or 0.8% due to average currency rate fluctuations in the first nine months of fiscal 2014, compared to the first nine months of fiscal 2013, primarily due to the strengthening of the Euro compared to the U.S. dollar.
 

5

Table of Contents

Cost of Products Sold.  Consolidated cost of products sold increased $126.4 million, or 41.1%, to $434.1 million for the nine months ended February 1, 2014, compared to $307.7 million for the nine months ended January 26, 2013.  Consolidated cost of products sold as a percentage of sales was 79.2% for the first nine months of fiscal 2014, compared to 82.8% for the first nine months of fiscal 2013.  The Automotive segment experienced a decrease in cost of goods sold as a percentage of sales due to increased manufacturing efficiencies related to the increased sales volumes and the vertical integration of our paint and decorative molding operation into our manufacturing processes. The Interconnect segment experienced an increase in cost of products sold as a percentage of sales primarily due to manufacturing inefficiencies related to lower sales volumes for our European sensor products. The Power Products segment experienced a decrease in cost of products sold as a percentage of sales primarily due to lower development costs, favorable commodity pricing for raw materials and favorable product sales mix.
 
Gross Profit.  Consolidated gross profit increased $50.0 million, or 78.4%, to $113.8 million for the nine months ended February 1, 2014, as compared to $63.8 million for the nine months ended January 26, 2013.  Gross margins as a percentage of net sales increased to 20.8% for the nine months ended February 1, 2014, compared to 17.2% for the nine months ended January 26, 2013.  The increase is primarily due to increased manufacturing efficiencies related to the increased sales volumes and the vertical integration of our paint and decorative molding facility in our manufacturing process in the Automotive segment. The Interconnect segment experienced a decrease in gross margins as a percentage of sales primarily due to manufacturing inefficiencies related to lower sales volumes for our European sensor products. The Power Products segment experienced an increase in gross margins as a percentage of sales primarily due to favorable commodity pricing for raw materials and favorable product sales mix.
 
Selling and Administrative Expenses.  Selling and administrative expenses increased by $12.3 million, or 25.5%, to $60.6 million for the nine months ended February 1, 2014, compared to $48.3 million for the nine months ended January 26, 2013.  Selling and administrative expenses as a percentage of net sales decreased to 11.1% for the nine months ended February 1, 2014 from 13.0% for the nine months ended January 26, 2013. The decrease is primarily due to higher sales volumes. The selling and administrative expenses in the first half of fiscal 2013 benefitted from a $1.1 million reversal of various accruals related to a customer bankruptcy. In the first nine months of fiscal 2014, $4.6 million of performance-based compensation expense was recorded related to the tandem-cash component of Company's long-term incentive plan. There was no expense recorded in the first nine months of fiscal 2013. In addition, expenses for short term bonuses, salary and fringe benefit expense increased $4.0 million, travel expenses and other general expenses increased $1.5 million, professional services increased $0.7 million, and development costs increased $0.4 million in the first nine months of fiscal 2014.
 
Income From Settlement. In September 2012, the Company and various Delphi parties settled all Delphi related litigation matters. In addition to resolving all claims between the parties, the Company assigned certain patents to Delphi and entered into a non-compete agreement with respect to the related technology. In exchange, the Company received a payment of $20.0 million, half of which was paid in October 2012 and the other half was paid in January 2013. The Company recorded the entire gain in the second quarter of fiscal 2013, in the income from settlement section of our consolidated statement of operations.

Interest Expense, Net.  Interest expense, net increased to $0.3 million for the nine months ended February 1, 2014, compared to break-even for the nine months ended January 26, 2013.

Other Expense, Net. Other expense, net increased $0.2 million, to $0.8 million, or 33.3%, for the nine months ended February 1, 2014, compared to $0.6 million for the nine months ended January 26, 2013. All amounts for both the nine months ended February 1, 2014 and January 26, 2013 relate to currency rate fluctuations. The functional currencies of these operations are the British pound, Chinese yuan, Euro, Indian Rupee, Mexican peso, Singapore dollar and Swiss Franc. 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.

Income Tax Expense.  Income tax expense decreased $0.3 million, or 6.7%, to $4.2 million for the nine months ended February 1, 2014, compared to $4.5 million for the nine months ended January 26, 2013.  The income tax expense for both the first half of fiscal 2014 and the first half of fiscal 2013 relates to income taxes on foreign profits.
 

6

Table of Contents

Net Income Attributable to Methode Electronics, Inc.  Net income attributable to Methode Electronics, Inc. increased $17.3 million, or 56.5%, to $47.9 million for the nine months ended February 1, 2014, compared to $30.6 million for the nine months ended January 26, 2013. The nine months ended February 1, 2014 benefitted from the GM Center Console Program launch, higher sales volumes, realized manufacturing efficiencies related to the increased sales volumes and the vertical integration of our paint and decorative molding facility in our manufacturing process, partially offset with higher selling and administrative expenses. The nine months ended January 26, 2013 benefitted from the $20.0 million settlement and the $1.1 million reversal of various accruals related to a customer bankruptcy.

Operating Segments
 
Automotive Segment Results
 
Below is a table summarizing results for the nine months ended:
($ in millions)
 
 
February 1,
2014
 
January 26,
2013
 
Net Change
 
Net Change
Net sales
 
$
358.5

 
$
225.5

 
$
133.0

 
59.0
%
 
 
 
 
 
 
 
 
 
Cost of products sold
 
290.3

 
194.8

 
95.5

 
49.0
%
 
 
 
 
 
 
 
 
 
Gross profit
 
68.2

 
30.7

 
37.5

 
122.1
%
 
 
 
 
 
 
 
 
 
Selling and administrative expenses
 
19.9

 
18.3

 
1.6

 
8.7
%
Income from settlement
 

 
(20.0