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EX-31.1 - CERTIFICATION OF CEO PURSUANT TO SECTION 302 - METHODE ELECTRONICS INCmeiexhibit31111012014.htm
EX-32.1 - CERTIFICATION OF PERIODIC FINANCIAL REPORT - METHODE ELECTRONICS INCmeiexhibit3211012014.htm
EX-31.2 - CERTIFICATION OF CFO PURSUANT TO SECTION 302 - METHODE ELECTRONICS INCmeiexhibit31211012014.htm
EXCEL - IDEA: XBRL DOCUMENT - METHODE ELECTRONICS INCFinancial_Report.xls

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC  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 November 1, 2014
 
or
 
o         Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
for the transition period from ______ to ______
 __________________________________ 
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 and 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 “large accelerated filer” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x
 
Accelerated filer o
 
 
 
Non-accelerated filer o
 
Smaller reporting company o
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

At December 9, 2014, registrant had 38,331,912 shares of common stock outstanding.



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

TABLE OF CONTENTS
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




PART I - FINANCIAL INFORMATION
 
Item 1. Financial Statements
 
METHODE ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
($ in millions)
 
 
 
As of
 
As of
 
 
November 1,
2014
 
May 3,
2014
 
 
(Unaudited)
 
 
ASSETS
 
 

 
 

CURRENT ASSETS
 
 

 
 

Cash and cash equivalents
 
$
144.2

 
$
116.4

Accounts receivable, net
 
172.4

 
173.0

Inventories:
 
 
 
 

Finished products
 
18.0

 
14.2

Work in process
 
13.7

 
12.0

Materials
 
43.7

 
45.4

 
 
75.4

 
71.6

Deferred income taxes
 
6.0

 
8.7

Prepaid expenses and other current assets
 
14.8

 
12.0

TOTAL CURRENT ASSETS
 
412.8

 
381.7

PROPERTY, PLANT AND EQUIPMENT
 
320.0

 
323.6

Less allowances for depreciation
 
223.4

 
222.4

 
 
96.6

 
101.2

GOODWILL
 
12.9

 
13.0

INTANGIBLE ASSETS, net
 
12.2

 
13.0

PRE-PRODUCTION COSTS
 
8.0

 
10.5

DEFERRED INCOME TAXES
 
30.8

 
40.0

OTHER ASSETS
 
20.2

 
16.1

 
 
84.1

 
92.6

TOTAL ASSETS
 
$
593.5

 
$
575.5

LIABILITIES AND EQUITY
 
 

 
 

CURRENT LIABILITIES
 
 

 
 

Accounts payable
 
$
82.4

 
$
82.0

Other current liabilities
 
47.6

 
37.1

TOTAL CURRENT LIABILITIES
 
130.0

 
119.1

LONG-TERM DEBT
 
30.0

 
48.0

OTHER LIABILITIES
 
4.2

 
3.4

DEFERRED COMPENSATION
 
6.7

 
12.8

SHAREHOLDERS’ EQUITY
 
 

 
 

Common stock, $0.50 par value, 100,000,000 shares authorized, 39,678,536 and 39,262,168 shares issued as of November 1, 2014 and May 3, 2014, respectively
 
19.8

 
19.6

Additional paid-in capital
 
95.7

 
89.8

Accumulated other comprehensive income
 
8.6

 
24.7

Treasury stock, 1,346,624 shares and 1,342,188 as of November 1, 2014 and May 3, 2014, respectively
 
(11.5
)
 
(11.4
)
Retained earnings
 
309.7

 
269.2

TOTAL METHODE ELECTRONICS, INC. SHAREHOLDERS’ EQUITY
 
422.3

 
391.9

Noncontrolling interest
 
0.3

 
0.3

TOTAL EQUITY
 
422.6

 
392.2

TOTAL LIABILITIES AND EQUITY
 
$
593.5

 
$
575.5

 
See notes to condensed consolidated financial statements.

2


METHODE ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
($ in millions, except per share data)
 
 
 
Three Months Ended
 
Six Months Ended
 
 
November 1,
2014
 
October 26,
2013
 
November 1,
2014
 
October 26,
2013
 
 
 

 
 

 
 
 
 
Net sales
 
$
229.7

 
$
190.9

 
$
447.8

 
$
358.2

 
 
 
 
 
 
 
 
 
Cost of products sold
 
169.5

 
149.5

 
337.2

 
282.8

 
 
 
 
 
 
 
 
 
Gross profit
 
60.2

 
41.4

 
110.6

 
75.4

 
 
 
 
 
 
 
 
 
Selling and administrative expenses
 
25.4

 
19.7

 
47.6

 
38.5

 
 
 
 
 
 
 
 
 
Income from operations
 
34.8

 
21.7

 
63.0

 
36.9

 
 
 
 
 
 
 
 
 
Interest (income)/expense, net
 
(0.1
)
 
0.1

 
(0.2
)
 
0.2

Other expense, net
 
0.2

 
0.4

 
0.1

 
0.5

 
 
 
 
 
 
 
 
 
Income before income taxes
 
34.7

 
21.2

 
63.1

 
36.2

 
 
 
 
 
 
 
 
 
Income tax expense
 
8.7

 
1.4

 
15.7

 
2.7

 
 
 
 
 
 
 
 
 
Net income
 
26.0

 
19.8

 
47.4

 
33.5

 
 
 
 
 
 
 
 
 
Less: Net income attributable to noncontrolling interest
 

 

 

 

NET INCOME ATTRIBUTABLE TO METHODE ELECTRONICS, INC.
 
$
26.0

 
$
19.8

 
$
47.4

 
$
33.5

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

 
 

 
 
 
 
Basic
 
$
0.67

 
$
0.52

 
$
1.23

 
$
0.89

Diluted
 
$
0.66

 
$
0.51

 
$
1.21

 
$
0.87

Cash dividends:
 
 

 
 

 
 
 
 
Common stock
 
$
0.09

 
$
0.07

 
$
0.18

 
$
0.14

Weighted average number of Common Shares outstanding:
 
 

 
 

 
 
 
 
Basic
 
38,694,583

 
37,718,643

 
38,571,015

 
37,635,238

Diluted
 
39,516,436

 
38,486,370

 
39,038,647

 
38,348,040

 
See notes to condensed consolidated financial statements.



3


METHODE ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
($ in millions)

 
Three Months Ended
 
Six Months Ended
 
November 1, 2014
 
October 26, 2013
 
November 1, 2014
 
October 26, 2013
 
 

 
 

 
 
 
 
Net income
$
26.0

 
$
19.8

 
$
47.4

 
$
33.5

 
 
 
 
 
 
 
 
Foreign currency translation adjustment
(10.8
)
 
5.7

 
(16.1
)
 
8.1

Comprehensive income
15.2

 
25.5

 
31.3

 
41.6

Less: Comprehensive income attributable to non-controlling interest

 

 

 

Comprehensive income attributable to Methode Electronics, Inc.
$
15.2

 
$
25.5

 
$
31.3

 
$
41.6


See notes to consolidated financial statements.



4


METHODE ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
($ in millions)
 
 
 
Six Months Ended
 
 
November 1,
2014
 
October 26,
2013
OPERATING ACTIVITIES
 
 

 
 

Net income
 
$
47.4

 
$
33.5

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

 
 

Provision for depreciation
 
11.2

 
10.5

Amortization of intangibles
 
0.8

 
0.9

Amortization of stock awards and stock options
 
2.2

 
1.9

Changes in operating assets and liabilities
 
1.6

 
(16.2
)
Other
 

 
0.2

NET CASH PROVIDED BY OPERATING ACTIVITIES
 
63.2

 
30.8

 
 
 
 
 
INVESTING ACTIVITIES
 
 

 
 

Purchases of property, plant and equipment
 
(10.8
)
 
(16.5
)
NET CASH USED IN INVESTING ACTIVITIES
 
(10.8
)
 
(16.5
)
 
 
 
 
 
FINANCING ACTIVITIES
 
 

 
 

Proceeds from exercise of stock options
 
6.3

 
2.3

Cash dividends
 
(6.9
)
 
(5.2
)
Proceeds from borrowings
 

 
21.5

Repayment of borrowings
 
(18.0
)
 
(13.5
)
NET CASH PROVIDED BY/(USED IN) FINANCING ACTIVITIES
 
(18.6
)
 
5.1

 
 
 
 
 
Effect of foreign currency exchange rate changes on cash
 
(6.0
)
 
2.6

 
 
 
 
 
INCREASE IN CASH AND CASH EQUIVALENTS
 
27.8

 
22.0

Cash and cash equivalents at beginning of period
 
116.4

 
65.8

CASH AND CASH EQUIVALENTS AT END OF PERIOD
 
$
144.2

 
$
87.8

 
See notes to condensed consolidated financial statements.



5

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




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, Interface (formerly known as Interconnect), Power Products and Other.  The condensed consolidated financial statements and related disclosures as of November 1, 2014 and results of operations for the three months and six months ended November 1, 2014 and October 26, 2013 are unaudited, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).  The May 3, 2014 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 May 3, 2014, filed with the SEC on June 26, 2014.  Results may vary from quarter to quarter for reasons other than seasonality.
 
2.             RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
 
In April 2014, the Financial Accounting Standards Board ("FASB") issued guidance that changes the criteria for reporting discontinued operations. To qualify as a discontinued operation under the guidance, a component or group of components of an entity that has been disposed of or is classified as held for sale must represent a strategic shift that has or will have a major effect on the entity's operations and financial results. This guidance also expands related disclosure requirements. The guidance is effective for the reporting periods beginning after December 15, 2014, which will be our fourth quarter of fiscal 2015, which begins on February 1, 2015. We do not expect the adoption of this guidance to have a material impact on our financial statements.

In May 2014, the FASB and the International Accounting Standards Board jointly issued a comprehensive new revenue recognition standard, Accounting Standards Update 2014-09 (Topic 606) that will supersede nearly all existing revenue recognition guidance under U.S. GAAP and International Financial Reporting Standards. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services.

The standard is effective for public entities for annual and interim periods beginning after December 15, 2016. We will adopt this standard in the quarter beginning January 31, 2017. The Company is evaluating the impact of the adoption of this standard on the 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 Standards Codification 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.

    

6

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


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

 
 
As of November 1, 2014
 
 
 
 
 
 
 
 
 
 
 
Power
 
 
 
 
Interface
 
Products
 
Total
Balance as of May 3, 2014
 
$
12.0

 
$
1.0

 
$
13.0

Foreign currency translation
 
(0.1
)
 

 
(0.1
)
Balance as of November 1, 2014
 
$
11.9

 
$
1.0

 
$
12.9


The following tables present details of the Company’s intangible assets:
 
 
As of November 1, 2014
 
 
 
 
 
 
 
 
Wtd. Avg.
 
 
 
 
 
 
 
 
Remaining
 
 
 
 
Accumulated
 
 
 
Amortization
 
 
Gross
 
Amortization
 
Net
 
Periods (Years)
Customer relationships and agreements
 
$
16.5

 
$
14.9

 
$
1.6

 
9.3
Trade names, patents and technology licenses
 
25.8

 
15.3

 
10.5

 
9.4
Covenants not to compete
 
0.1

 

 
0.1

 
2.9
Total
 
$
42.4

 
$
30.2

 
$
12.2

 
 
 
 
 
As of May 3, 2014
 
 
 
 
 
 
 
 
Wtd. Avg.
 
 
 
 
 
 
 
 
Remaining
 
 
 
 
Accumulated
 
 
 
Amortization
 
 
Gross
 
Amortization
 
Net
 
Periods (Years)
Customer relationships and agreements
 
$
16.6

 
$
14.7

 
$
1.9

 
9.9
Trade names, patents and technology licenses
 
25.8

 
14.8

 
11.0

 
9.8
Covenants not to compete
 
0.1

 

 
0.1

 
3.4
Total
 
$
42.5

 
$
29.5

 
$
13.0

 
 
 
The estimated aggregate amortization expense for the current fiscal year and each of the four succeeding fiscal years is as follows:
 
2015

$1.5
2016

1.2

2017

1.1

2018

1.1

2019

1.0

 
As of November 1, 2014 and May 3, 2014, the trade names, patents and technology licenses include $1.8 million of trade names that are not subject to amortization.
 
4.             INCOME TAXES
 
In the fourth quarter of fiscal 2014, we recorded a deferred tax benefit of $31.7 million related to the release of substantially all of our domestic valuation allowance. The Company evaluated all available positive and negative evidence, including past operating results and projection of future taxable income and determined it is more likely than not that expected future taxable income will be sufficient to utilize substantially all of our U.S. federal and state net deferred tax assets. The Company maintained a valuation allowance of $2.6 million at November 1, 2014 and May 3, 2014 related to certain state and federal net operating loss carryovers and expects to continue to maintain this allowance until we determine that these deferred tax assets are more likely than not realizable.


7

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


At November 1, 2014, we had available $25.0 million of federal and $93.0 million of state net operating loss carryforwards (having a tax benefit of $8.1 million and $2.7 million, respectively), $11.0 million of foreign tax credit carryforwards, and $0.6 million of research tax credit carryforwards that may be used to reduce regular federal and state income taxes. If unused, the U.S. federal net operating loss carryforwards will expire in the years 2018 through 2032. Any unused state net operating loss carryforwards will expire in the fiscal years 2015 through 2034. The foreign tax credits will expire in the fiscal years 2019 through 2024. The unused research tax credits will expire in the fiscal years 2032 through 2034.

The tax laws of Malta provide for investment tax credits of 30% of certain qualified expenditures. Unused credits of $20.7 million as of November 1, 2014 can be carried forward indefinitely. We have accumulated investment tax credits in excess of amounts more likely than not to be realized based upon projections of taxable income to be generated by our Maltese operations within a reasonable time period. Valuation allowances of $8.4 million as of November 1, 2014 have been provided for this excess. We record investment tax credits using the "flow through" method.

The Company recognized an income tax provision of $8.7 million and $1.4 million for the three months ended November 1, 2014 and October 26, 2013, respectively. The Company recognized an income tax provision of $15.7 million and $2.7 million for the six months ended November 1, 2014 and October 26, 2013, respectively. The Company's effective tax rate was 25.1% and 6.6% for the three months ended November 1, 2014 and October 26, 2013, respectively. The Company's effective tax rate was 24.9% and 7.5% for the six months ended November 1, 2014 and October 26, 2013, respectively. The income tax provision for both the three months and six months ended November 1, 2014 and October 26, 2013 is lower than the U.S. statutory rate primarily due to foreign investment tax credits, foreign operations with lower statutory rates, and in fiscal 2014, full valuation allowances in the U.S.

We recognize interest and penalties accrued related to the unrecognized tax benefits in the provision for income taxes.  We had approximately $0.1 million accrued at November 1, 2014 for the payment of interest and penalties.  The total unrecognized tax benefit as of November 1, 2014 was $0.7 million. There have been no changes to the accrued amounts 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.             COMMON STOCK AND STOCK-BASED COMPENSATION
 
Stock Options Granted Under the 2010 Stock Plan
 
In July 2014, the Compensation Committee approved the grant of options to purchase 108,000 shares of our common stock to our executive officers.  The stock options have a ten-year term and will vest one-third per year on each anniversary of the date of grant.  The exercise price is the closing price on the date granted.
 
Stock Options Granted Under the 2007 Stock Plan
 
In July 2014, our Compensation Committee awarded options to purchase 50,500 shares of our common stock to some non-executive members of the management team that vest one-third per year on each anniversary of the date of grant. The stock options awarded under the 2007 Stock Plan have a ten-year term. The exercise price is the closing price on the date granted.

We estimated the fair value of the shares granted under both the 2010 Stock Plan and the 2007 Stock Plan on the date of grant using the Black-Scholes option-pricing model with the following assumptions:
 
Fiscal 2015
 
Awards
Average expected volatility
51.00
%
Average risk-free interest rate
1.00
%
Dividend yield
1.66
%
Expected life of options (in years)
4.12

Weighted-average grant-date fair value
$
14.99



8

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


Restricted Stock Awards Granted Under the 2007 Stock Plan
 
During the first half of fiscal 2015, we awarded 13,500 shares to our independent directors, all of which vested immediately upon grant.

6.             NET INCOME PER SHARE
 
Basic net income per share is calculated by dividing net income attributable to Methode shareholders 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
 
Six Months Ended
 
 
November 1,
2014
 
October 26,
2013
 
November 1,
2014
 
October 26,
2013
Numerator - net income attributable to Methode Electronics, Inc.
 
$
26.0

 
$
19.8

 
$
47.4

 
$
33.5

Denominator:
 

 

 
 
 
 
Denominator for basic net income per share-weighted average shares outstanding and vested/unissued restricted stock awards
 
38,694,583

 
37,718,643

 
38,571,015

 
37,635,238

Dilutive potential common shares-employee and director stock options, restricted stock awards and restricted stock units
 
821,853

 
767,727

 
467,632

 
712,802

Denominator for diluted net income per share
 
39,516,436

 
38,486,370

 
39,038,647

 
38,348,040

 
 
 
 
 
 
 
 
 
Net income per share:
 
 

 
 

 
 
 
 
Basic
 
$
0.67

 
$
0.52

 
$
1.23

 
$
0.89

Diluted
 
$
0.66

 
$
0.51

 
$
1.21

 
$
0.87

 
For both the three months ended and six months ended November 1, 2014, options to purchase 158,500 shares 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. Restricted stock awards for 350,000 shares have been excluded in the computation of diluted net income per share for the six months ended November 1, 2014. Restricted stock awards for 700,000 shares have been excluded in the computation of diluted net income per share for both the three months ended and six months ended October 26, 2013 as these awards are contingent on the Company's performance in fiscal 2015.

7.             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”).


9

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


We have multiple operating segments that are aggregated in four reportable segments. Those segments are Automotive, Interface (formerly known as 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 as well as design and manufacturer of magnetic torque sensing products.
 
The Interface segment was previously known as the Interconnect segment. It 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, military, telecommunications, and transportation.
 
The Other segment includes medical devices, inverters and battery systems, insulated gate bipolar transistor solutions, 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 May 3, 2014.  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 reporting segment results for the three months and six months ended October 26, 2013 have been reclassified to conform with the new reporting segment presentation for the three months and six months ended November 1, 2014.
 
 
Three Months Ended November 1, 2014
 
 
Automotive
 
Interface
 
Power
Products
 
Other
 
Eliminations/Corporate
 
Consolidated
Net sales
 
$
167.1

 
$
41.1

 
$
21.7

 
$
1.7

 
$
(1.9
)
 
$
229.7

Transfers between segments
 
(1.2
)
 
(0.5
)
 
(0.1
)
 
(0.1
)
 
1.9

 

Net sales to unaffiliated customers
 
$
165.9

 
$
40.6

 
$
21.6

 
$
1.6

 
$

 
$
229.7

 
 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) from operations
 
$
35.0

 
$
4.8

 
$
5.6

 
$
(1.0
)
 
$
(9.6
)
 
$
34.8

Interest income, net
 
 
 
 
 
 
 
 
 
 
 
(0.1
)
Other expense, net
 
 
 
 
 
 
 
 
 
 
 
0.2

Income before income taxes
 
 
 
 
 
 
 
 
 
 
 
$
34.7

 

10

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


 
 
Three Months Ended October 26, 2013
 
 
Automotive
 
Interface
 
Power
Products
 
Other
 
Eliminations/Corporate
 
Consolidated
Net sales
 
$
126.7

 
$
45.0

 
$
18.8

 
$
1.5

 
$
(1.1
)
 
$
190.9

Transfers between segments
 
(0.5
)
 
(0.7
)
 
(0.1
)
 

 
1.3

 

Net sales to unaffiliated customers
 
$
126.2

 
$
44.3

 
$
18.7

 
$
1.5

 
$
0.2

 
$
190.9

 
 
 
 
 
 
 
 
 
 
 
 
 
Income/(loss) from operations
 
$
17.3

 
$
7.4

 
$
4.1

 
$
(0.7
)
 
$
(6.4
)
 
$
21.7

Interest expense, net
 
 
 
 
 
 
 
 
 
 
 
0.1

Other expense, net
 
 
 
 
 
 
 
 
 
 
 
0.4

Income before income taxes
 
 
 
 
 
 
 
 
 
 
 
$
21.2


 
 
Six Months Ended November 1, 2014
 
 
Automotive
 
Interface
 
Power
Products
 
Other
 
Eliminations/Corporate
 
Consolidated
Net sales
 
$
323.9

 
$
85.6

 
$
38.0

 
$
3.4

 
$
(3.1
)
 
$
447.8

Transfers between segments
 
(1.6
)
 
(1.1
)
 
(0.2
)
 
(0.1
)
 
3.0

 

Net sales to unaffiliated customers
 
$
322.3

 
$
84.5

 
$
37.8

 
$
3.3

 
$
(0.1
)
 
$
447.8

 
 
 
 
 
 
 
 
 
 
 
 
 
Income/(loss) from operations
 
$
62.7

 
$
11.9

 
$
8.6

 
$
(3.1
)
 
$
(17.1
)
 
$
63.0

Interest income, net
 
 
 
 
 
 
 
 
 
 
 
(0.2
)
Other expense, net
 
 
 
 
 
 
 
 
 
 
 
0.1

Income before income taxes
 
 
 
 
 
 
 
 
 
 
 
$
63.1


 
 
Six Months Ended October 26, 2013
 
 
Automotive
 
Interface
 
Power
Products
 
Other
 
Eliminations/Corporate
 
Consolidated
Net sales
 
$
230.8

 
$
90.0

 
$
36.2

 
$
3.4

 
$
(2.2
)
 
$
358.2

Transfers between segments
 
(0.8
)
 
(1.3
)
 
(0.1
)
 
(0.1
)
 
2.3

 

Net sales to unaffiliated customers
 
$
230.0

 
$
88.7

 
$
36.1

 
$
3.3

 
$
0.1

 
$
358.2

 
 
 
 
 
 
 
 
 
 
 
 
 
Income/(loss) from operations
 
$
29.4

 
$
15.4

 
$
7.2

 
$
(1.3
)
 
$
(13.8
)
 
$
36.9

Interest expense, net
 
 
 
 
 
 
 
 
 
 
 
0.2

Other expense, net
 
 
 
 
 
 
 
 
 
 
 
0.5

Income before income taxes
 
 
 
 
 
 
 
 
 
 
 
$
36.2


 
8.          CONTINGENCIES

Certain litigation arising in the normal course of business is pending against us.  We are from time to time subject to various legal actions and claims incidental to our business, including those arising out of alleged defects, breach of contracts, employment-related matters and environmental matters.  We consider insurance coverage and third-party indemnification when determining required accruals for pending litigation and claims.  Although the outcome of potential legal actions and claims cannot be determined, it is our opinion, based on the information available, that we have adequate reserves for these liabilities.

Hetronic Germany-GmbH Matters    

For several years, Hetronic Germany-GmbH and Hydronic-Steuersysteme-GmbH (the “Fuchs companies”) served as our distributors for Germany, Austria and other central and eastern European countries pursuant to their respective intellectual property licenses and distribution and assembly agreements. We became aware that the Fuchs companies and their managing director, Albert Fuchs, had materially violated those agreements. As a result, we terminated all of our agreements with the Fuchs companies. On June 6, 2014, we filed a proceeding in Germany against the Fuchs companies and Mr. Fuchs seeking a

11

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


preliminary injunction to prevent them from using the Hetronic name or trademark due to their material breaches of the intellectual property licenses.  On August 5, 2014, we withdrew the proceeding for a preliminary injunction without prejudice.  On June 20, 2014, we filed a separate lawsuit against the Fuchs companies in the Federal District Court for the Western District of Oklahoma alleging material breaches of the distribution and assembly agreements. We are seeking damages from the defendants, as well as various forms of injunctive relief.  On August 13, 2014, the Fuchs companies filed an answer and counterclaim.  The answer denies our allegations, and the counterclaim alleges breach of contract, interference with business relations and business slander.  Discovery in the Oklahoma case has commenced.

9.          PRE-PRODUCTION COSTS RELATED TO LONG-TERM SUPPLY ARRANGEMENTS
 
We incur pre-production tooling costs related to certain products produced for our customers under long-term supply agreements.  We had $8.0 million and $10.5 million as of November 1, 2014 and May 3, 2014, 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.
 
10.          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 $100.0 million, with an option to increase the principal amount by an additional $50.0 million, 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 November 1, 2014, the interest rate on the credit facility was 1.5% plus LIBOR. At November 1, 2014, we were in compliance with the covenants of the agreement. During the first six months of fiscal 2015, we had no borrowings and payments of $18.4 million, which includes interest of $0.4 million under this credit facility. As of November 1, 2014, there were outstanding balances against the credit facility of $30.0 million.  There was $70.0 million available to borrow under the credit facility as of November 1, 2014, which does not include the option to increase the principal amount. We believe the fair value approximates the carrying amount as of November 1, 2014.

12


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.

Our ability to market our automotive products is subject to a lengthy sales cycle, which requires significant investment prior to significant sales revenues, and there is no assurance that our products will be implemented in any particular vehicle.

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

We are subject to continuing pressure to lower our prices.

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

We are dependent on the availability and price of materials.

A significant portion of our business activities are conducted in foreign countries, exposing us to additional risks that may not exist in the United States.

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

Changes in our effective tax rate may harm our results of operations.

Our gross margins are subject to fluctuations due to many factors such as geographical and vertical market pricing mix, changes in the mix of our prototyping and production-based business and various manufacturing cost variables including product yields, package and assembly costs and provisions for obsolete inventory.

We may be required to recognize additional impairment charges.

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

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

Any decision to strategically divest one or more current businesses or our inability to capitalize on prior or future acquisitions may adversely affect our business.

Products we manufacture may contain design or manufacturing defects that could result in reduced demand for our products or services, costs associated with recalls, or liability claims against us.

13


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.

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.

Should a catastrophic event or other significant business interruption occur at any of our facilities, we could face significant reconstruction or remediation costs, penalties, third party liability and loss of production capacity, which could adversely affect our business.

Our information technology (“IT”) systems could be breached.

Regulations related to the use of conflict-free minerals may increase our costs and expenses, and an inability to certify that our products are conflict-free may adversely affect customer relationships.

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 May 3, 2014, 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, Interface (formerly known as Interconnect), Power Products and Other.  For more information regarding the business and products of these segments, see “Item 1. Business.” of our Form 10-K for the fiscal year ended May 3, 2014.
 
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.
 
Hetronic Germany-GmbH Matters    

For several years, Hetronic Germany-GmbH and Hydronic-Steuersysteme-GmbH (the “Fuchs companies”) served as our distributors for Germany, Austria and other central and eastern European countries pursuant to their respective intellectual property licenses and distribution and assembly agreements. We became aware that the Fuchs companies and their managing director, Albert Fuchs, had materially violated those agreements. As a result, we terminated all of our agreements with the Fuchs companies. On June 6, 2014, we filed a proceeding in Germany against the Fuchs companies and Mr. Fuchs seeking a preliminary injunction to prevent them from using the Hetronic name or trademark due to their material breaches of the intellectual property licenses.  On August 5, 2014, we withdrew the proceeding for a preliminary injunction without prejudice.  On June 20, 2014, we filed a separate lawsuit against the Fuchs companies in the Federal District Court for the Western District of Oklahoma alleging material breaches of the distribution and assembly agreements. We are seeking damages from the defendants, as well as various forms of injunctive relief.  On August 13, 2014, the Fuchs companies filed an answer and counterclaim.  The answer denies our allegations, and the counterclaim alleges breach of contract, interference with business relations and business slander.  Discovery in the Oklahoma case has commenced.



14


Results of Operations for the Three Months Ended November 1, 2014 as Compared to the Three Months Ended October 26, 2013
 
Consolidated Results
 
Below is a table summarizing results for the three months ended:
($ in millions)
(“N/M” equals not meaningful) 
 
 
November 1,
2014
 
October 26,
2013
 
Net Change
 
Net Change
Net sales
 
$
229.7

 
$
190.9

 
$
38.8

 
20.3
 %
 
 
 
 
 
 
 
 
 
Cost of products sold
 
169.5

 
149.5

 
20.0

 
13.4
 %
 
 
 
 
 
 
 
 
 
Gross profit
 
60.2

 
41.4

 
18.8

 
45.4
 %
 
 
 
 
 
 
 
 
 
Selling and administrative expenses
 
25.4

 
19.7

 
5.7

 
28.9
 %
Interest (income)/expense, net
 
(0.1
)
 
0.1

 
(0.2
)
 
N/M
Other expense, net
 
0.2

 
0.4

 
(0.2
)
 
(50.0
)%
Income tax expense
 
8.7

 
1.4

 
7.3

 
521.4
 %
Net income attributable to Methode Electronics, Inc.
 
$
26.0

 
$
19.8

 
$
6.2

 
31.3
 %
 
 
 
 
 
 
 
 
 
Percent of sales:
 
November 1,
2014
 
October 26,
2013
 
 
 
 
Net sales
 
100.0
 %
 
100.0
%
 
 
 
 
Cost of products sold
 
73.8
 %
 
78.3
%
 
 
 
 
Gross margins
 
26.2
 %
 
21.7
%
 
 
 
 
Selling and administrative expenses
 
11.1
 %
 
10.3
%
 
 
 
 
Interest (income)/expense, net
 
 %
 
0.1
%
 
 
 
 
Other expense, net
 
0.1
 %
 
0.2
%
 
 
 
 
Income tax expense
 
3.8
 %
 
0.7
%
 
 
 
 
Net income attributable to Methode Electronics, Inc.
 
11.3
 %
 
10.4
%
 
 
 
 
 
Net Sales.  Consolidated net sales increased $38.8 million, or 20.3%, to $229.7 million for the three months ended November 1, 2014, from $190.9 million for the three months ended October 26, 2013.  The Automotive segment net sales increased $39.7 million, or 31.5%, to $165.9 million for the second quarter of fiscal 2015, from $126.2 million for the second quarter of fiscal 2014, due to higher sales volumes for the GM Center Console Program. In addition, sales volumes also increased for the Ford Center Console Program and transmission lead-frame assemblies, partially offset by currency rate fluctuations and lower sales volumes for hidden switch products.  The Interface segment net sales decreased $3.7 million, or 8.4%, to $40.6 million for the second quarter of fiscal 2015, compared to $44.3 million for the second quarter of fiscal 2014, primarily due to lower sales volumes of appliance and radio remote control products, partially offset with stronger sales volumes for data solutions products.  The Power Products segment net sales increased $2.9 million, or 15.5%, to $21.6 million for the second quarter of fiscal 2015, compared to $18.7 million for the second quarter of fiscal 2014, primarily due to higher sales volumes for our datacom, cabling and busbar products.  Translation of foreign operations net sales for the three months ended November 1, 2014 decreased reported net sales by $1.2 million, or 0.5%, due to average currency rate fluctuations in the second quarter of fiscal 2015, compared to the second quarter of fiscal 2014, primarily due to the strengthening of the U.S. dollar compared to the Euro.
 
Cost of Products Sold.  Consolidated cost of products sold increased $20.0 million, or 13.4%, to $169.5 million for the three months ended November 1, 2014, compared to $149.5 million for the three months ended October 26, 2013.  Consolidated cost of products sold as a percentage of sales was 73.8% for the second quarter of fiscal 2015, compared to 78.3% for the second quarter of fiscal 2014.  The Automotive and Power Products segments both experienced a decrease in cost of goods sold as a percentage of sales due to manufacturing efficiencies related to the increased sales volumes, primarily in North

15


America and Asia. The Interface segment experienced an increase in cost of products sold as a percentage of sales primarily due to lower appliance sales volumes and unfavorable sales mix of our data solutions products.
 
Gross Profit.  Consolidated gross profit increased $18.8 million, or 45.4%, to $60.2 million for the three months ended November 1, 2014, as compared to $41.4 million for the three months ended October 26, 2013.  Gross margins as a percentage of net sales increased to 26.2% for the three months ended November 1, 2014, compared to 21.7% for the three months ended October 26, 2013.  The increase is primarily due to the Automotive and Power Products segments which both experienced an increase in gross margins as a percentage of sales due to manufacturing efficiencies related to the increased sales volumes, primarily in North America and Asia, and other manufacturing improvements at the Company's captive molding business. The Interface segment experienced a decrease in gross margins as a percentage of sales primarily due to lower appliance sales volumes and unfavorable sales mix of our data solutions products.
 
Selling and Administrative Expenses.  Selling and administrative expenses increased by $5.7 million, or 28.9%, to $25.4 million for the three months ended November 1, 2014, compared to $19.7 million for the three months ended October 26, 2013.  Selling and administrative expenses as a percentage of net sales increased to 11.1% for the three months ended November 1, 2014 from 10.3% for the three months ended October 26, 2013. In the second quarter of fiscal 2015, total compensation expense increased $3.6 million, legal expense increased $0.8 million, travel and other general expenses increased $0.8 million and stock-based compensation increased $0.5 million.
 
Interest (Income)/Expense, Net.  Interest (income)/expense was income of $0.1 million for the three months ended November 1, 2014, compared to an expense of $0.1 million for the three months ended October 26, 2013.

Other Expense, Net. Other expense, net decreased $0.2 million, or 50.0%, to $0.2 million for the three months ended November 1, 2014, compared to $0.4 million for the three months ended October 26, 2013. All amounts for both the second quarter of fiscal 2015 and the second quarter of fiscal 2014, 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 $7.3 million, or 521.4%, to $8.7 million for the three months ended November 1, 2014, compared to $1.4 million for the three months ended October 26, 2013.  The Company's effective tax rate increased to 25.1% in the second quarter of fiscal 2015, compared to 6.6% in the second quarter of fiscal 2014. In the fourth quarter of fiscal 2014, the Company recorded a reversal of a valuation allowance against the deferred tax assets in the U.S. Due to the reversal, the Company recorded income tax expense in the U.S. during the second quarter of fiscal 2015, compared to no income tax expense recorded in the second quarter of fiscal 2014.
 
Net Income Attributable to Methode Electronics, Inc.  Net income attributable to Methode Electronics, Inc. increased $6.2 million, or 31.3%, to $26.0 million for the three months ended November 1, 2014, compared to $19.8 million for the three months ended October 26, 2013, primarily due to increased sales volumes and manufacturing efficiencies, partially offset by increased income tax expense and increased selling and administrative expenses.


16


Operating Segments
 
Automotive Segment Results
 
Below is a table summarizing results for the three months ended:
($ in millions)
 
 
November 1,
2014
 
October 26,
2013
 
Net Change
 
Net Change
Net sales
 
$
165.9

 
$
126.2

 
$
39.7

 
31.5
%
 
 
 
 
 
 
 
 
 
Cost of products sold
 
122.9

 
102.1

 
20.8

 
20.4
%
 
 
 
 
 
 
 
 
 
Gross profit
 
43.0

 
24.1

 
18.9

 
78.4
%
 
 
 
 
 
 
 
 
 
Selling and administrative expenses
 
8.0

 
6.8

 
1.2

 
17.6
%
 
 
 
 
 
 
 
 
 
Income from operations
 
$
35.0

 
$
17.3

 
$
17.7

 
102.3
%
 
 
 
 
 
 
 
 
 
Percent of sales:
 
November 1,
2014
 
October 26,
2013
 
 
 
 
Net sales
 
100.0
%
 
100.0
%
 
 
 
 
Cost of products sold
 
74.1
%
 
80.9
%
 
 
 
 
Gross margins
 
25.9
%
 
19.1
%
 
 
 
 
Selling and administrative expenses
 
4.8
%
 
5.4
%
 
 
 
 
Income from operations
 
21.1
%
 
13.7
%
 
 
 
 
 
Net Sales.  Automotive segment net sales increased $39.7 million, or 31.5%, to $165.9 million for the three months ended November 1, 2014, from $126.2 million for the three months ended October 26, 2013.  Net sales increased in North America by $38.4 million, or 59.5%, to $102.9 million in the second quarter of fiscal 2015, compared to $64.5 million in the second quarter of fiscal 2014, due to higher sales volumes for the GM Center Console Program. In addition, sales volumes also increased for the Ford Center Console Program and transmission lead-frame assemblies. North America was favorably impacted by $0.6 million for nonrecurring price adjustments for certain legacy products and other manufacturing improvements at the Company's captive molding business. Net sales decreased in Europe by $2.7 million, or 6.3%, to $40.0 million in the second quarter of fiscal 2015, compared to $42.7 million in the second quarter of fiscal 2014, primarily due to currency rate fluctuations, lower tooling sales volumes and lower sales volumes for hidden switch products. Net sales in Asia increased $4.0 million, or 21.1%, to $23.0 million in the second quarter of fiscal 2015, compared to $19.0 million in the second quarter of fiscal 2014, primarily due to higher sales volumes for our transmission lead-frame assemblies. Translation of foreign operations net sales for the three months ended November 1, 2014 decreased reported net sales by $1.2 million, or 0.7%, due to average currency rates in the second quarter of fiscal 2015, compared to the average currency rates in the second quarter of fiscal 2014, primarily due to the strengthening of the U.S. dollar as compared to the Euro.

Cost of Products Sold.  Automotive segment cost of products sold increased $20.8 million, or 20.4%, to $122.9 million for the three months ended November 1, 2014, from $102.1 million for the three months ended October 26, 2013.  The Automotive segment cost of products sold as a percentage of sales decreased to 74.1% in the second quarter of fiscal 2015, compared to 80.9% in the second quarter of fiscal 2014.  The decrease is substantially due to manufacturing efficiencies related to the increased sales volumes, primarily in North America and Asia. North America was favorably impacted by a $1.3 million reimbursement from a customer for prior period cost related to the cancellation of a program. The cost of products sold was also favorably impacted in the second quarter of fiscal 2015 due to the ramp up of production in our lower cost manufacturing operation in Egypt.
 
Gross Profit.  Automotive segment gross profit increased $18.9 million, or 78.4%, to $43.0 million for the three months ended November 1, 2014, as compared to $24.1 million for the three months ended October 26, 2013.  The Automotive segment gross margins as a percentage of net sales increased to 25.9% for the three months ended November 1, 2014, as compared to 19.1% for the three months ended October 26, 2013.  The increase is substantially due to manufacturing

17


efficiencies related to the increased sales volumes, primarily in North America and Asia, and other manufacturing improvements at the Company's captive molding business. The gross profit in North America was also favorably impacted due to non-recurring price adjustments and the reimbursement of cost for the cancellation of a program. In addition, gross margins were favorably impacted in the second quarter of fiscal 2015 due to the ramp up of production in our lower cost manufacturing operation in Egypt.
     
Selling and Administrative Expenses.  Selling and administrative expenses increased $1.2 million, or 17.6%, to $8.0 million for the three months ended November 1, 2014, compared to $6.8 million for the three months ended October 26, 2013.  Selling and administrative expenses as a percentage of net sales decreased to 4.8% for the three months ended November 1, 2014 from 5.4% for the three months ended October 26, 2013. The increase in expenses in the second quarter of fiscal 2015 is primarily due to higher compensation expense, employee recruitment fees and travel expenses as a result of increased business levels as compared to the second quarter of fiscal 2014, partially offset with lower legal and development costs.
    
Income from Operations.  Automotive segment income from operations increased $17.7 million, or 102.3%, to $35.0 million for the three months ended November 1, 2014, compared to $17.3 million for the three months ended October 26, 2013. The second quarter of fiscal 2015 benefitted from higher sales volumes, manufacturing efficiencies and lower legal expenses, partially offset with higher compensation, employee recruitment fees and travel expenses.

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

 
$
44.3

 
$
(3.7
)
 
(8.4
)%
 
 
 
 
 
 
 
 
 
Cost of products sold
 
30.1

 
32.5

 
(2.4
)
 
(7.4
)%
 
 
 
 
 
 
 
 
 
Gross profit
 
10.5

 
11.8

 
(1.3
)
 
(11.0
)%
 
 
 
 
 
 
 
 
 
Selling and administrative expenses
 
5.7

 
4.4

 
1.3

 
29.5
 %
 
 
 
 
 
 
 
 
 
Income from operations
 
$
4.8

 
$
7.4

 
$
(2.6
)
 
(35.1
)%
 
 
 
 
 
 
 
 
 
Percent of sales:
 
November 1,
2014
 
October 26,
2013
 
 
 
 
Net sales
 
100.0
%
 
100.0
%
 
 
 
 
Cost of products sold
 
74.1
%
 
73.4
%
 
 
 
 
Gross margins
 
25.9
%
 
26.6
%
 
 
 
 
Selling and administrative expenses
 
14.0
%
 
9.9
%
 
 
 
 
Income from operations
 
11.8
%
 
16.7
%
 
 
 
 
 
Net Sales.  Interface segment net sales decreased $3.7 million, or 8.4%, to $40.6 million for the three months ended November 1, 2014, from $44.3 million for the three months ended October 26, 2013.  Net sales decreased in North America by $2.7 million, or 7.7%, to $32.5 million in the second quarter of fiscal 2015, compared to $35.2 million in the second quarter of fiscal 2014, primarily due to lower sales volumes of appliance and radio remote control products, partially offset with higher sales volumes of data solutions products. Net sales in Europe increased $0.1 million, or 1.8%, to $5.8 million in the second quarter of fiscal 2015, compared to $5.7 million in the second quarter of fiscal 2014, primarily due to higher radio remote control sales volumes, partially offset with lower data solution products sales volumes. Net sales in Asia decreased $1.1 million, or 32.4%, to $2.3 million in the second quarter of fiscal 2015, compared to $3.4 million in the second quarter of fiscal 2014, primarily due to lower sales volumes of radio remote controls and certain legacy products resulting from the planned exit of a product line.
 

18


Cost of Products Sold.  Interface segment cost of products sold decreased $2.4 million, or 7.4%, to $30.1 million for the three months ended November 1, 2014, compared to $32.5 million for the three months ended October 26, 2013.  Interface segment cost of products sold as a percentage of net sales increased to 74.1% for the three months ended November 1, 2014, compared to 73.4% for the three months ended October 26, 2013.  The increase in cost of products sold as a percentage of sales is primarily due to lower appliance sales volumes and unfavorable sales mix of data solutions products.

Gross Profit.  Interface segment gross profit decreased $1.3 million, or 11.0%, to $10.5 million for the three months ended November 1, 2014, compared to $11.8 million for the three months ended October 26, 2013.  Gross margins as a percentage of net sales decreased to 25.9% for the three months ended November 1, 2014, from 26.6% for the three months ended October 26, 2013.  The decrease in gross margins as a percentage of sales is primarily due to lower appliance sales volumes and unfavorable sales mix of data solutions products.
 
Selling and Administrative Expenses.  Selling and administrative expenses increased $1.3 million, or 29.5%, to $5.7 million for the three months ended November 1, 2014, compared to $4.4 million for the three months ended October 26, 2013.  Selling and administrative expenses as a percentage of net sales increased to 14.0% for the three months ended November 1, 2014, from 9.9% for the three months ended October 26, 2013. A substantial portion of the increase in selling and administrative expenses is due to increased legal expenses related to the Hetronic Germany GmbH lawsuit (see "Overview" section for more information). In addition, expenses increased for compensation, travel and professional fees.
 
Income from Operations.  Interface segment income from operations decreased $2.6 million, or 35.1%, to $4.8 million for the three months ended November 1, 2014, compared to $7.4 million for the three months ended October 26, 2013, primarily due to lower sales volumes, unfavorable sales mix and increased legal, compensation, travel and professional fees.

Power Products Segment Results
 
Below is a table summarizing results for the three months ended:
($ in millions)
 
 
November 1,
2014
 
October 26,
2013
 
Net Change
 
Net Change
Net sales
 
$
21.6

 
$
18.7

 
$
2.9

 
15.5
%
 
 
 
 
 
 
 
 
 
Cost of products sold
 
14.7

 
13.4

 
1.3

 
9.7
%
 
 
 
 
 
 
 
 
 
Gross profit
 
6.9

 
5.3

 
1.6

 
30.2
%
 
 
 
 
 
 
 
 
 
Selling and administrative expenses
 
1.3

 
1.2

 
0.1

 
8.3
%
 
 
 
 
 
 
 
 
 
Income from operations
 
$
5.6

 
$
4.1

 
$
1.5

 
36.6
%
 
 
 
 
 
 
 
 
 
Percent of sales:
 
November 1,
2014
 
October 26,
2013
 
 
 
 
Net sales
 
100.0
%
 
100.0
%
 
 
 
 
Cost of products sold
 
68.1
%
 
71.7
%
 
 
 
 
Gross margins
 
31.9
%
 
28.3
%
 
 
 
 
Selling and administrative expenses
 
6.0
%
 
6.4
%
 
 
 
 
Income from operations
 
25.9
%
 
21.9
%
 
 
 
 
 
Net Sales.  Power Products segment net sales increased $2.9 million, or 15.5%, to $21.6 million for the three months ended November 1, 2014, compared to $18.7 million for the three months ended October 26, 2013.  Net sales increased in North America by $2.6 million, or 24.1%, to $13.4 million in the second quarter of fiscal 2015, compared to $10.8 million in the second quarter of fiscal 2014, primarily due to higher sales volumes of datacom products. Net sales in Europe decreased $0.8 million, or 24.2%, to $2.5 million in the second quarter of fiscal 2015, compared to $3.3 million in the second quarter of fiscal 2014, primarily due to lower sales volumes of a by-pass switch. Net sales in Asia increased $1.1 million, or 23.9%, to

19


$5.7 million in the second quarter of fiscal 2015, compared to $4.6 million in the second quarter of fiscal 2014, primarily due to increased sales volumes of datacom products, busbar and cabling assemblies.
 
Cost of Products Sold.  Power Products segment cost of products sold increased $1.3 million, or 9.7%, to $14.7 million for the three months ended November 1, 2014, compared to $13.4 million for the three months ended October 26, 2013.  The Power Products segment cost of products sold as a percentage of sales decreased to 68.1% for the three months ended November 1, 2014, from 71.7% for the three months ended October 26, 2013.  The decrease in cost of products sold as a percentage of sales is primarily due to manufacturing efficiencies related to increased sales volumes in North America and Asia and favorable sales mix.
 
Gross Profit.  Power Products segment gross profit increased $1.6 million, or 30.2%, to $6.9 million in the second quarter of fiscal 2015, compared to $5.3 million in the second quarter of fiscal 2014.  Gross margins as a percentage of net sales increased to 31.9% for the three months ended November 1, 2014 from 28.3% for the three months ended October 26, 2013. The increase in gross margins as a percentage of sales is primarily due to manufacturing efficiencies related to increased sales volumes and favorable sales mix.

Selling and Administrative Expenses.  Selling and administrative expenses increased $0.1 million, or 8.3%, to $1.3 million for the three months ended November 1, 2014, compared to $1.2 million for the three months ended October 26, 2013.  Selling and administrative expenses as a percentage of net sales decreased to 6.0% for the three months ended November 1, 2014 from 6.4% for the three months ended October 26, 2013. Selling and administrative expenses increased due to higher compensation expense in North America, partially offset by lower development costs.
 
Income From Operations.  Power Products segment income from operations increased $1.5 million, or 36.6%, to $5.6 million for the three months ended November 1, 2014, compared to $4.1 million for the three months ended October 26, 2013, due to increased sales volumes, manufacturing efficiencies, favorable sales mix, and lower development costs, partially offset with higher compensation expense. 

Other Segment Results
 
Below is a table summarizing results for the three months ended:
($ in millions)
(“N/M” equals not meaningful) 

 
 
November 1,
2014
 
October 26,
2013
 
Net Change
 
Net Change
Net sales
 
$
1.6

 
$
1.5

 
$
0.1

 
6.7
%
 
 
 
 
 
 
 
 
 
Cost of products sold
 
1.7

 
1.6

 
0.1

 
6.3
%
 
 
 
 
 
 
 
 
 
Gross profit
 
(0.1
)
 
(0.1
)
 

 
%
 
 
 
 
 
 
 
 
 
Selling and administrative expenses
 
0.9

 
0.6

 
0.3

 
50.0
%
 
 
 
 
 
 
 
 
 
Loss from operations
 
$
(1.0
)
 
$
(0.7
)
 
$
(0.3
)
 
N/M

 
 
 
 
 
 
 
 
 
Percent of sales:
 
November 1,
2014
 
October 26,
2013
 
 
 
 
Net sales
 
100.0
 %
 
100.0
 %
 
 
 
 
Cost of products sold
 
106.3
 %
 
106.7
 %
 
 
 
 
Gross margins
 
(6.3
)%
 
(6.7
)%
 
 
 
 
Selling and administrative expenses
 
56.3
 %
 
40.0
 %
 
 
 
 
Loss from operations
 
(62.5
)%
 
(46.7
)%
 
 
 
 
 

20


Net Sales.  The Other segment net sales increased $0.1 million, or 6.7%, to $1.6 million for the three months ended November 1, 2014, compared to $1.5 million for the three months ended October 26, 2013, due to slightly higher environmental testing sales in the second quarter of fiscal 2015, compared to the second quarter of fiscal 2014.
 
Cost of Products Sold.  Other segment cost of products sold increased $0.1 million, or 6.3%, to $1.7 million for the three months ended November 1, 2014, compared to $1.6 million for the three months ended October 26, 2013. Cost of products sold as a percentage of sales decreased slightly to 106.3% in the second quarter of fiscal 2015, compared to 106.7% in the second quarter of fiscal 2014. The decrease in cost of products sold as a percentage of sales is primarily due to slightly higher sales volumes for environmental testing.

Gross Profit.  The Other segment gross profit was a loss of $0.1 million for both the three months ended November 1, 2014 and the three months ended October 26, 2013.  Gross margins as a percentage of sales were (6.3)% for the three months ended October 26, 2013, compared to (6.7)% for three months ended October 26, 2013. The loss for both the second quarter of fiscal 2015 and the second quarter of fiscal 2014 primarily relate to development costs in our medical products business, which does not have any corresponding sales.
 
Selling and Administrative Expenses.  Selling and administrative expenses increased $0.3 million, or 50.0%, to $0.9 million for the three months ended November 1, 2014, compared to $0.6 million for the three months ended October 26, 2013.  Selling and administrative expenses as a percentage of net sales increased to 56.3% for the three months ended November 1, 2014, from 40.0% for the three months ended October 26, 2013. The increase in selling and administrative expenses is primarily due to increased headcount and professional fees in our medical products business.
 
Loss From Operations  The Other segment loss from operations increased $0.3 million, to $1.0 million for the three months ended November 1, 2014, compared to $0.7 million for the three months ended October 26, 2013.  The increase was primarily due to increased development expenses, professional fees and headcount in our medical products business.


21


Results of Operations for the Six Months Ended November 1, 2014 as Compared to the Six Months Ended October 26, 2013
 
Consolidated Results
 
Below is a table summarizing results for the six months ended:
($ in millions)
(“N/M” equals not meaningful) 
 
 
November 1,
2014
 
October 26,
2013
 
Net Change
 
Net Change
Net sales
 
$
447.8

 
$
358.2

 
$
89.6

 
25.0
 %
 
 
 
 
 
 
 
 
 
Cost of products sold
 
337.2

 
282.8

 
54.4

 
19.2
 %
 
 
 
 
 
 
 
 
 
Gross profit
 
110.6

 
75.4

 
35.2

 
46.7
 %
 
 
 
 
 
 
 
 
 
Selling and administrative expenses
 
47.6

 
38.5

 
9.1

 
23.6
 %
Interest (income)/expense, net
 
(0.2
)
 
0.2

 
(0.4
)
 
N/M

Other expense, net
 
0.1

 
0.5

 
(0.4
)
 
(80.0
)%
Income tax expense
 
15.7

 
2.7

 
13.0

 
481.5
 %
Net income attributable to Methode Electronics, Inc.
 
$
47.4

 
$
33.5

 
$
13.9

 
41.5
 %
 
 
 
 
 
 
 
 
 
Percent of sales:
 
November 1,
2014
 
October 26,
2013
 
 
 
 
Net sales
 
100.0
 %
 
100.0
%
 
 
 
 
Cost of products sold
 
75.3
 %
 
79.0
%
 
 
 
 
Gross margins
 
24.7
 %
 
21.0
%
 
 
 
 
Selling and administrative expenses
 
10.6
 %
 
10.7
%
 
 
 
 
Interest (income)/expense, net
 
 %
 
0.1
%
 
 
 
 
Other expense, net
 
 %
 
0.1
%
 
 
 
 
Income tax expense
 
3.5
 %
 
0.8
%
 
 
 
 
Net income attributable to Methode Electronics, Inc.
 
10.6
 %
 
9.4
%
 
 
 
 
 
Net Sales.  Consolidated net sales increased $89.6 million, or 25.0%, to $447.8 million for the six months ended November 1, 2014, from $358.2 million for the six months ended October 26, 2013.  The Automotive segment net sales increased $92.3 million, or 40.1%, to $322.3 million for the first half of fiscal 2015, from $230.0 million for the first half of fiscal 2014, due to higher sales volumes for the GM Center Console Program. In addition, sales volumes also increased for transmission lead-frame assemblies, and hidden switch products, partially offset by lower sales volumes for the Ford Center Console Program.  The Interface segment net sales decreased $4.2 million, or 4.7%, to $84.5 million for the first half of fiscal 2015, compared to $88.7 million for the first half of fiscal 2014, primarily due to lower appliance and radio remote control sales volumes, partially offset with increased sales volumes of data solutions products.  The Power Products segment net sales increased $1.7 million, or 4.7%, to $37.8 million for the first half of fiscal 2015, compared to $36.1 million for the first half of fiscal 2014, primarily due to higher sales volumes of datacom, cabling and busbar products, partially offset with lower sales volumes of a by-pass switch.  Translation of foreign operations net sales for the six months ended November 1, 2014 had no impact on reported net sales in the first half of fiscal 2015, compared to the average currency rates in the first half of fiscal 2014.
 
Cost of Products Sold.  Consolidated cost of products sold increased $54.4 million, or 19.2%, to $337.2 million for the six months ended November 1, 2014, compared to $282.8 million for the six months ended October 26, 2013.  Consolidated cost of products sold as a percentage of sales decreased to 75.3% for the first half of fiscal 2015, compared to 79.0% for the first half of fiscal 2014.  The Automotive and Power Products segments both experienced a decrease in cost of goods sold as a percentage of sales due to manufacturing efficiencies related to the increased sales volumes, primarily in North America and Asia. In addition, cost of products sold was favorably impacted in the Automotive segment in the first half of fiscal 2015 by the ramp up of production in our lower cost manufacturing operation in Egypt. The Interface segment experienced a slightly higher cost of goods sold as a percentage of sales primarily due to lower appliance sales volumes and unfavorable sales mix of

22


data solutions products. The Other segment experienced an increase in cost of products sold as a percentage of sales primarily due to increased development costs in our medical products business.
 
Gross Profit.  Consolidated gross profit increased $35.2 million, or 46.7%, to $110.6 million for the six months ended November 1, 2014, as compared to $75.4 million for the six months ended October 26, 2013.  Gross margins as a percentage of net sales increased to 24.7% for the six months ended November 1, 2014, compared to 21.0% for the six months ended October 26, 2013.  The increase is primarily due to the Automotive and Power Products segments manufacturing efficiencies related to the higher sales volumes, other manufacturing improvements at the Company's captive molding business and the ramp up of production in our lower cost manufacturing facility in Egypt. The Interface segment experienced a decrease in gross margins as a percentage of sales primarily due to lower appliance sales volumes and sales mix of data solutions products. The Other segment experienced a decrease in gross margins as a percentage of sales primarily due to increased development costs in our medical products business.
 
Selling and Administrative Expenses.  Selling and administrative expenses increased by $9.1 million, or 23.6%, to $47.6 million for the six months ended November 1, 2014, compared to $38.5 million for the six months ended October 26, 2013.  Selling and administrative expen