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METHODE ELECTRONICS INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations
(Edgar Glimpses Via Acquire Media NewsEdge) 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 believes 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.
• We depend on a small number of large customers, specifically two large
automotive customers. If we were to lose either of these customers or experienced a significant decline in the volume of products purchased by
these customers, or if either of these 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.
• Downturns in the automotive industry or the bankruptcy of certain
automotive customers could reduce the sales and profitability of our
business.
• We have a significant amount of new product launches in fiscal 2013 and
fiscal 2014. We can not assure the new product launches will be successful
or profitable.
• Our technology-based business and the markets in which we operate are highly competitive. If we are unable to compete effectively, our sales
will decline.
• We face risks relating to our international operations, including
political and economic instability, expropriation, or the imposition of
government controls.
• 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 unable to keep pace with rapid technological changes, which
could adversely affect our business.
• We have not, and may not experience comparable increases in our gross
margins as our sales increase due to a variety of factors, including,
without limitation the following: 1.) changes in product mix; 2.) new
program and product launch costs; 3.) increases in operating expenses; 4.)
competitive pricing pressures; and 5.) decreases in volume.
• 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.
• 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 were awarded new North American automotive business in fiscal 2011 for
programs that will not begin production until late fiscal 2013. We
anticipate that it will take a significant amount of our cash and
resources to launch these programs.
• We currently have a significant amount of our cash located outside the
U.S. and we may suffer adverse tax consequences if we repatriate this
cash.
• A significant fluctuation between the U.S. dollar and other currencies
could adversely impact our operating results.
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• 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, which could adversely
affect our sales and operating results.
• The following factors may impact our income tax rate or impose additional
liabilities: 1.) changes in the mix of earnings among countries with
different tax rates; 2.) changes in our assessment of tax exposures; 3.)
changes in the valuation of deferred tax assets and liabilities; 4.)
changes in tax laws; and 5.) expiration of uncertain tax positions.
• We cannot ensure that the newly acquired businesses will be successful or
that we can implement and profit from any new applications of the acquired
technology.
•The future trading price of our common stock could be subject to wide
fluctuations in response to a variety of factors.
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 28, 2012, 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 28, 2012.
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.
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
will receive a payment of $20.0 million, half of which was paid in October 2012
and half of which will be 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.
Amended and Restated Credit Agreement
On September 21, 2012, we entered into an amendment to our Amended and Restated
Credit Agreement which increased the maximum principal amount of the credit
facility from $75.0 million to $100.0 million, with an option to increase the
principal amount by up to an additional $50.0 million, subject to customary
conditions and approval of the lender(s) providing new commitment(s). The
amendment also extended the maturity date from February 25, 2016 to September
21, 2017. The credit facility provides for variable rates of interest based on
the type of borrowing and the Company's debt to EBITDA financial ratio.
Currently, the interest rate on the credit facility is 1.5% plus LIBOR. The
Amended and Restated Credit Agreement is guaranteed by certain of our U.S.
subsidiaries.
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Recent Transactions
In September 2011, we acquired certain assets and liabilities of Nypro
Monterrey, S. de R.L. (Nypro Monterrey) from Nypro Inc. for $6.4 million. We
operate this injection molding and painting business under the name Advanced
Molding and Decoration, S.A. de C.V. (AMD), and it has become a part of our
existing Monterrey manufacturing campus and the Automotive segment. AMD operates
a state-of-the-art facility, which provides us with high-quality injection
molding, painting and decorating capabilities. The AMD assets include 52
injection mold machines, three paint lines and several pad print machines.
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 October 27, 2012 as Compared to
the Three Months Ended October 29, 2011
Consolidated Results
Below is a table summarizing results for the three months ended:
(in millions)
("N/M" equals not meaningful)
October 27, October 29,
2012 2011 Net Change Net Change
Net sales $ 129.8 $ 115.9 $ 13.9 12.0 %
Cost of products sold 107.5 95.0 12.5 13.2 %
Gross margins 22.3 20.9 1.4 6.7 %
Selling and administrative expenses 15.2 18.3 (3.1 ) (16.9 )%
Income from settlement (20.0 ) - (20.0 ) N/M
Interest expense 0.1 - 0.1 N/M
Other expense, net 0.5 0.2 0.3 150.0%
Income tax expense 3.2 2.2 1.0 45.5%
Net loss attributable to noncontrolling
interest (0.1 ) (0.1 ) - - %
Net income attributable to Methode
Electronics, Inc. $ 23.4 $ 0.3 $ 23.1 N/M
October 27, October 29,
Percent of sales: 2012 2011
Net sales 100.0 % 100.0 %
Cost of products sold 82.8 % 82.0 %
Gross margins 17.2 % 18.0 %
Selling and administrative expenses 11.7 % 15.8 %
Income from settlement (15.4 )% - %
Interest expense 0.1 % - %
Other expense, net 0.4 % 0.2 %
Income tax expense 2.5 % 1.9 %
Net loss attributable to noncontrolling
interest (0.1 )% (0.1 )%
Net income attributable to Methode
Electronics, Inc. 18.0 % 0.3 %
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Net Sales. Consolidated net sales increased $13.9 million, or 12.0%, to $129.8
million for the three months ended October 27, 2012, from $115.9 million for the
three months ended October 29, 2011. The Automotive segment net sales increased
$12.7 million, or 18.8%, to $80.2 million for the second quarter of fiscal 2013,
from $67.5 million for the second quarter of fiscal 2012. The Interconnect
segment net sales increased $1.8 million, or 5.7%, to $33.3 million for the
second quarter of fiscal 2013, compared to $31.5 million for the second quarter
of fiscal 2012. The Power Products segment net sales decreased $1.2 million, or
8.8%, to $12.5 million for the second quarter of fiscal 2013, compared to $13.7
million for the second quarter of fiscal 2012. The Other segment net sales
increased $0.6 million, or 18.8%, to $3.8 million for the second quarter of
fiscal 2013, as compared to $3.2 million for the second quarter of fiscal 2012.
Translation of foreign operations net sales for the three months ended
October 27, 2012 decreased reported net sales by $2.0 million or 1.5% compared
to the second quarter of fiscal 2012, primarily due to the weakening of the euro
compared to the U.S. dollar.
Cost of Products Sold. Consolidated cost of products sold increased $12.5
million, or 13.2%, to $107.5 million for the three months ended October 27,
2012, compared to $95.0 million for the three months ended October 29, 2011.
Consolidated cost of products sold as a percentage of sales was 82.8% for the
second quarter of fiscal 2013, compared to 82.0% for the second quarter of
fiscal 2012. In the second quarter of fiscal 2013, the Automotive segment
experienced costs in North America for design, development, and engineering of
$2.0 million related to a new program scheduled to launch in late fiscal 2013.
During the second quarter of fiscal 2012, our North American operations
experienced costs for design, development and engineering of $1.0 million for a
program that launched in the third quarter of fiscal 2012, as well as the
program scheduled to launch in late fiscal 2013. In the second quarter of fiscal
2013 and 2012, our North American Automotive operations incurred third-party
inspection costs, premium freight and over-time expenses related to the Ford
Center Console Program of $0.6 million and $0.7 million, respectively. The
Interconnect segment cost of goods sold as a percentage of sales increased
primarily due to costs of $0.3 million related to launch delays for white goods
products that were scheduled to launch in the second quarter of fiscal 2013,
partially offset by higher sales volumes for data solution products, which have
better gross margins as a percentage to sales than other product lines in the
segment. The Power Products segment cost of products sold as a percentage of
sales increased, primarily due to manufacturing inefficiencies due to lower
sales volumes at our North American and Asian operations as well as unfavorable
sales mix within the segment. The Other segment cost of products sold as a
percentage of sales decreased primarily related to lower material costs due to a
lower percentage of purchased content as well as increased manufacturing
efficiencies from our torque-sensing business.
Gross Margins. Consolidated gross margins increased $1.4 million, or 6.7%, to
$22.3 million for the three months ended October 27, 2012, as compared to $20.9
million for the three months ended October 29, 2011. Gross margins as a
percentage of net sales decreased to 17.2% for the three months ended
October 27, 2012, compared to 18.0% for the three months ended October 29,
2011. Gross margins as a percentage of sales decreased primarily due to
increased program and product launch costs in the Automotive segment. Gross
margins were also negatively impacted by increased sales of automotive product
that have higher material cost due to the high percentage of purchased content.
Gross margins were positively impacted in the second quarter of fiscal 2013, due
to favorable adjustments for commodity pricing in the Automotive segment. Gross
margins were negatively impacted due to launch delays for white goods in the
Interconnect segment, which were partially offset due to higher sales volumes
for data solution products. Gross margins were also negatively impacted due to
manufacturing inefficiencies related to lower sales volumes in the Power
Products segment as well as unfavorable sales mix within the segment. Gross
margins were favorably impacted in the Other segment related to increased sales
and lower material costs in our torque-sensing business.
Selling and Administrative Expenses. Selling and administrative expenses
decreased by $3.1 million, or 16.9%, to $15.2 million for the three months ended
October 27, 2012, compared to $18.3 million for the three months ended
October 29, 2011. Selling and administrative expenses as a percentage of net
sales decreased to 11.7% for the three months ended October 27, 2012 from 15.8%
for the three months ended October 29, 2011. In the second quarter of fiscal
2013, the Company reversed $1.1 million of various accruals related to a
customer bankruptcy. Legal expenses decreased $0.4 million, to $1.5 million for
the second quarter of fiscal 2013, compared to $1.9 million for the second
quarter of fiscal 2012. Selling and administrative expenses also decreased in
the second quarter of fiscal 2013 due to lower compensation, travel, advertising
and marketing, and professional fees of $1.5 million.
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 with respect to the related technology. In
exchange, the Company will receive a payment of $20.0 million, half of which was
paid in October 2012 and half of which will be 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.
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Interest Expense, Net. Interest expense, net was $0.1 million for the three
months ended October 27, 2012, compared to no interest expense for the three
months ended October 29, 2011.
Other Expense, Net. Other expense, net increased $0.3 million, to $0.5 million
for the three months ended October 27, 2012, compared to $0.2 million for the
three months ended October 29, 2011. The second quarter of fiscal 2012 includes
a gain of $0.3 million related to the acquisition of Advanced Molding and
Decoration, purchased in September 2011. All other amounts for both the second
quarter of fiscal 2013 and fiscal 2012, 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 $1.0 million, or 45.5%, to
$3.2 million for the three months ended October 27, 2012, compared to $2.2
million for the three months ended October 29, 2011. The income tax expense for
the second quarter of fiscal 2013 relates to income taxes on foreign profits.
The income tax expense for the second quarter of fiscal 2012 relates to income
taxes on foreign profits of $1.1 million, $0.9 million for foreign taxes on a
foreign dividend, and other other taxes of $0.2 million.
Net Income Attributable to Methode Electronics, Inc. Net income attributable to
Methode Electronics, Inc. increased $23.1 million, to $23.4 million for the
three months ended October 27, 2012, compared to $0.3 million for the three
months ended October 29, 2011. The increase is primarily due to income from the
litigation settlement, higher sales volumes, a one-time reversal of various
accruals related to a customer bankruptcy, lower legal, compensation, travel,
advertising and marketing, and professional fees, partially offset with higher
costs for design, development and engineering, manufacturing inefficiencies,
costs related to launch delays and higher income tax expense.
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Operating Segments
Automotive Segment Results
Below is a table summarizing results for the three months ended:
(in millions)
("N/M" equals not meaningful)
October 27, October 29,
2012 2011 Net Change Net Change
Net sales $ 80.2 $ 67.5 $ 12.7 18.8 %
Cost of products sold 68.3 57.2 11.1 19.4 %
Gross margins 11.9 10.3 1.6 15.5 %
Selling and administrative expenses 5.4 7.1 (1.7 ) (23.9 )%
Income from settlement (20.0 ) - (20.0 ) N/M
Income from operations $ 26.5 $ 3.2 $ 23.3 N/M
October 27, October 29,
Percent of sales: 2012 2011
Net sales 100.0 % 100.0 %
Cost of products sold 85.2 % 84.7 %
Gross margins 14.8 % 15.3 %
Selling and administrative expenses 6.7 % 10.5 %
Income from settlement (24.9 )% - %
Income from operations 33.0 % 4.7 %
Net Sales. Automotive segment net sales increased $12.7 million, or 18.8%, to
$80.2 million for the three months ended October 27, 2012, from $67.5 million
for the three months ended October 29, 2011. Net sales increased $11.2 million,
or 75.7%, in North America, to $26.1 million in the second quarter of fiscal
2013, compared to $14.9 million in the second quarter of fiscal 2012, primarily
due to increased sales for our Ford Center Console Program and our transmission
lead-frame assembly. Net sales increased in Europe by $5.3 million, or 17.3%, to
$35.8 million in the second quarter of fiscal 2013, compared to $30.5 million in
the second quarter of fiscal 2012, primarily due to new launches for our hidden
switch product lines. In the second quarter of fiscal 2013, the Automotive
segment recorded $0.5 million of favorable commodity pricing adjustments for
precious metals supplied to one customer in Europe. Net sales in Asia decreased
$3.7 million, or 17.3%, to $17.7 million in the second quarter of fiscal 2013,
compared to $21.4 million in the second quarter of fiscal 2012, primarily due to
the planned partial transfer of some of the transmission lead-frame assembly
product from our China facility to our Mexico facility. The transmission
lead-frame assembly is now being manufactured at both facilities. Translation of
foreign operations net sales for the three months ended October 27, 2012
decreased reported net sales by $2.0 million, or 2.4%, compared to the second
quarter of fiscal 2012, primarily due to the weakening of the euro as compared
to the U.S. dollar.
Cost of Products Sold. Automotive segment cost of products sold increased $11.1
million, or 19.4%, to $68.3 million for the three months ended October 27, 2012,
from $57.2 million for the three months ended October 29, 2011. The Automotive
segment cost of products sold as a percentage of sales was 85.2% in the second
quarter of fiscal 2013, compared to 84.7% in the second quarter of fiscal 2012.
In the second quarter of fiscal 2013, the Automotive segment experienced costs
for design, development, and engineering of $2.0 million at our North American
facility, related to a program scheduled to launch in late fiscal 2013. During
the second quarter of fiscal 2012, our North American operations experienced
costs for design, development and engineering of $1.0 million for a program that
launched in the third quarter of fiscal 2012, as well as the program scheduled
to launch in late fiscal 2013. In both the second quarter of fiscal 2013 and
2012, our North American operations experienced third-party inspection costs,
premium freight and over-time expenses related to the Ford Center Console
Program of $0.6 million and $0.7 million, respectively. The increase in costs of
products sold as a percentage of sales was also
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affected by increased sales of products that have a higher material cost due to
the high percentage of purchased content during the second quarter of fiscal
2013.
Gross Margins. Automotive segment gross margins increased $1.6 million, or
15.5%, to $11.9 million for the three months ended October 27, 2012, as compared
to $10.3 million for the three months ended October 29, 2011. The Automotive
segment gross margins as a percentage of net sales were 14.8% for the three
months ended October 27, 2012, as compared to 15.3% for the three months ended
October 29, 2011. Gross margins were negatively impacted in the second quarter
of fiscal 2013 due to increased sales of product that has higher material cost
due to the high percentage of purchased content. Gross margins as a percentage
of sales also decreased due to increased design, development, engineering and
launch costs related to new programs and new product launches. Gross margins
were favorably impacted by the favorable commodity pricing adjustments in the
second quarter of fiscal 2013.
Selling and Administrative Expenses. Selling and administrative expenses
decreased $1.7 million, or 23.9%, to $5.4 million for the three months ended
October 27, 2012, compared to $7.1 million for the three months ended
October 29, 2011. Selling and administrative expenses as a percentage of net
sales were 6.7% for the three months ended October 27, 2012 and 10.5% for the
three months ended October 29, 2011. In the second quarter of fiscal 2013, the
Company reversed $1.1 million of various accruals related to a customer
bankruptcy. Selling and administrative expenses were also lower in the second
quarter of fiscal 2013, compared to the second quarter of fiscal 2012, primarily
due to lower legal expenses.
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 with respect to the related technology. In
exchange, the Company will receive a payment of $20.0 million, half of which was
paid in October 2012 and half of which will be 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.
Income from Operations. Automotive segment income from operations increased
$23.3 million to $26.5 million for the three months ended October 27, 2012,
compared to $3.2 million for the three months ended October 29, 2011 due to
income from the litigation settlement, increased sales, the favorable commodity
pricing adjustments and lower lower legal expenses, partially offset by
increased design, development and engineering costs.
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Interconnect Segment Results
Below is a table summarizing results for the three months ended:
(in millions)
October 27, October 29,
2012 2011 Net Change Net Change
Net sales $ 33.3 $ 31.5 $ 1.8 5.7 %
Cost of products sold 24.8 23.4 1.4 6.0 %
Gross margins 8.5 8.1 0.4 4.9 %
Selling and administrative expenses 4.4 4.4 - - %
Income from operations $ 4.1 $ 3.7 $ 0.4 10.8 %
October 27, October 29,
Percent of sales: 2012 2011
Net sales 100.0 % 100.0 %
Cost of products sold 74.5 % 74.3 %
Gross margins 25.5 % 25.7 %
Selling and administrative expenses 13.2 % 14.0 %
Income from operations 12.3 % 11.7 %
Net Sales. Interconnect segment net sales increased $1.8 million, or 5.7%, to
$33.3 million for the three months ended October 27, 2012, from $31.5 million
for the three months ended October 29, 2011. Net sales increased in North
America by $3.3 million, or 15.6%, to $24.1 million in the second quarter of
fiscal 2013, compared to $20.9 million in the second quarter of fiscal 2012,
primarily due to stronger sales for data solution products and white goods,
partially offset by lower radio remote control sales. Net sales in Europe
decreased $0.4 million, or 6.4%, to $5.9 million in the second quarter of fiscal
2013, compared to $6.3 million in the second quarter of fiscal 2012, primarily
due to weaker radio remote control sales and lower sensor sales in the second
quarter of fiscal 2013. Net sales in Asia decreased $1.2 million, or 26.1%, to
$3.2 million in the second quarter of fiscal 2013, compared to $4.3 million in
the second quarter of fiscal 2012, primarily due to weaker radio remote control
sales as well as certain legacy products resulting from the planned exit of a
product line.
Cost of Products Sold. Interconnect segment cost of products sold increased
$1.4 million, or 6.0%, to $24.8 million for the three months ended October 27,
2012, compared to $23.4 million for the three months ended October 29, 2011.
Interconnect segment cost of products sold as a percentage of net sales
increased slightly to 74.5% for the three months ended October 27, 2012,
compared to 74.3% for the three months ended October 29, 2011. The increase in
cost of goods sold as a percentage of sales is primarily due to $0.3 million of
costs related to launch delays for white goods products that were scheduled to
launch in the second quarter of fiscal 2013, partially offset by higher sales
volumes for data solution products.
Gross Margins. Interconnect segment gross margins increased $0.4 million, or
4.9%, to $8.5 million for the three months ended October 27, 2012, compared to
$8.1 million for the three months ended October 29, 2011. Gross margins as a
percentage of net sales decreased slightly to 25.5% for the three months ended
October 27, 2012, from 25.7% for the three months ended October 29, 2011. The
decrease in gross margins as a percentage of sales is primarily due to costs
related to launch delays for white goods products that were scheduled to launch
in the second quarter of fiscal 2013, partially offset by higher sales volumes
for data solution products, which have better gross margins as a percentage of
sales than other product lines in the segment.
Selling and Administrative Expenses. Selling and administrative expenses were
flat at $4.4 million for both the three months ended October 27, 2012 and the
three months ended October 29, 2011. Selling and administrative expenses as a
percentage of net sales decreased to 13.2% for the three months ended
October 27, 2012, from 14.0% for the three months ended October 29, 2011 due to
higher sales volumes.
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Income from Operations. Interconnect segment income from operations increased
$0.4 million, or 10.8%, to $4.1 million for the three months ended October 27,
2012, compared to $3.7 million for the three months ended October 29, 2011,
primarily due to increased sales partially offset by costs related to launch
delays for white good products.
Power Products Segment Results
Below is a table summarizing results for the three months ended:
(in millions)
("N/M" equals not meaningful)
October 27, October 29,
2012 2011 Net Change Net Change
Net sales $ 12.5 $ 13.7 $ (1.2 ) (8.8 )%
Cost of products sold 11.0 11.0 - - %
Gross margins 1.5 2.7 (1.2 ) (44.4 )%
Selling and administrative expenses 1.8 1.9 (0.1 ) (5.3 )%
Income/(loss) from operations $ (0.3 ) $ 0.8 $ (1.1 ) N/M
October 27, October 29,
Percent of sales: 2012 2011
Net sales 100.0 % 100.0 %
Cost of products sold 88.0 % 80.3 %
Gross margins 12.0 % 19.7 %
Selling and administrative expenses 14.4 % 13.9 %
Income/(loss) from operations (2.4 )% 5.8 %
Net Sales. Power Products segment net sales decreased $1.2 million, or 8.8%, to
$12.5 million for the three months ended October 27, 2012, compared to $13.7
million for the three months ended October 29, 2011. Net sales decreased in
North America $0.6 million, or 6.8%, to $8.4 million in the second quarter of
fiscal 2013, compared to $9.0 million in the second quarter of fiscal 2012,
primarily due to lower demand for our busbar and heat sink products, partially
offset by higher demand for our cabling products. Net sales in Europe were flat
at $0.5 million for both the second quarter of fiscal 2013 and fiscal 2012. Net
sales in Asia decreased $0.6 million, or 15.2%, to $3.5 million for the second
quarter of fiscal 2013, compared to $4.1 million for the second quarter of 2012,
due to lower demand for busbar products.
Cost of Products Sold. Power Products segment cost of products sold were flat
at $11.0 million for both the three months ended October 27, 2012 and the three
months ended October 29, 2011. The Power Products segment cost of products sold
as a percentage of sales increased to 88.0% for the three months ended
October 27, 2012, from 80.3% for the three months ended October 29, 2011. The
increase in cost of products sold as a percentage of sales is primarily due to
manufacturing inefficiencies due to lower sales volumes at our North American
and Asian operations as well as unfavorable sales mix within the segment.
Gross Margins. Power Products segment gross margins decreased $1.2 million, or
44.4%, to $1.5 million for the three months ended October 27, 2012, compared to
$2.7 million for the three months ended October 29, 2011. Gross margins as a
percentage of net sales decreased to 12.0% for the three months ended
October 27, 2012 from 19.7% for the three months ended October 29, 2011. The
decrease in gross margins as a percentage of sales is primarily due to
manufacturing inefficiencies due to lower sales volumes at our North American
and Asian operations as well as unfavorable sales mix within the segment.
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Selling and Administrative Expenses. Selling and administrative expenses
decreased $0.1 million, or 5.3%, to $1.8 million for the three months ended
October 27, 2012, compared to $1.9 million for the three months ended
October 29, 2011. Selling and administrative expenses as a percentage of net
sales increased to 14.4% for the three months ended October 27, 2012 from 13.9%
for the three months ended October 29, 2011. Selling and administrative expenses
decreased due to lower compensation, development and travel expenses in North
America.
Income/(Loss) From Operations. Power Products segment income/(loss) from
operations decreased $1.1 million to a loss of $0.3 million for the three months
ended October 27, 2012, compared to income of $0.8 million for the three months
ended October 29, 2011, due to lower sales volumes, manufacturing
inefficiencies, unfavorable sales mix, partially offset with lower compensation,
development and travel expenses.
Other Segment Results
Below is a table summarizing results for the three months ended:
(in millions)
("N/M" equals not meaningful)
October 27, October 29,
2012 2011 Net Change Net Change
Net sales $ 3.8 $ 3.2 $ 0.6 18.8 %
Cost of products sold 2.6 2.5 0.1 4.0 %
Gross margins 1.2 0.7 0.5 71.4 %
Selling and administrative expenses 0.6 0.9 (0.3 ) (33.3 )%
Income/(loss) from operations $ 0.6 $ (0.2 ) $ 0.8 N/M
October 27, October 29,
Percent of sales: 2012 2011
Net sales 100.0 % 100.0 %
Cost of products sold 68.4 % 78.1 %
Gross margins 31.6 % 21.9 %
Selling and administrative expenses 15.8 % 28.1 %
Income/(loss) from operations 15.8 % (6.3 )%
Net Sales. The Other segment net sales increased $0.6 million, or 18.8%, to
$3.8 million for the three months ended October 27, 2012, compared to $3.2
million for the three months ended October 29, 2011. Net sales from our
torque-sensing business increased 42.4% in the second quarter of fiscal 2013,
compared to the second quarter of fiscal 2012, primarily due to penetration in
the e-bike and motorcycle markets. Net sales from our testing facilities were
flat in the second quarter of fiscal 2013, compared to the second quarter of
fiscal 2012.
Cost of Products Sold. Other segment cost of products sold increased $0.1
million to $2.6 million for the three months ended October 27, 2012, compared to
$2.5 million for the three months ended October 29, 2011. Cost of products sold
as a percentage of sales decreased to 68.4% in the second quarter of fiscal
2013, compared to 78.1% in the second quarter of fiscal 2012. The decrease in
cost of products sold as a percentage of sales is primarily due to lower
material costs due to a lower percentage of purchased content as well as
increased manufacturing efficiencies from our torque-sensing business.
Gross Margins. The Other segment gross margins increased $0.5 million, or
71.4%, to $1.2 million for the three months ended October 27, 2012, compared to
$0.7 million for the three months ended October 29, 2011. The increase in gross
margins as a percentage of sales is primarily due to decreased material
purchased content as well as increased manufacturing efficiencies from our
torque-sensing business.
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Selling and Administrative Expenses. Selling and administrative expenses
decreased $0.3 million, or 33.3%, to $0.6 million for the three months ended
October 27, 2012, compared to $0.9 million for the three months ended
October 29, 2011. Selling and administrative expenses as a percentage of net
sales decreased to 15.8% for the three months ended October 27, 2012, from 28.1%
for the three months ended October 29, 2011. Selling and administrative expenses
decreased in the second quarter of fiscal 2013, compared to the second quarter
of fiscal 2012, due to lower compensation, severance and legal expenses.
Income/(Loss) From Operations The Other segment income/(loss) from operations
improved $0.8 million to income of $0.6 million for the three months ended
October 27, 2012, compared to a loss of $0.2 million for the three months ended
October 29, 2011. The increase was primarily due to increased sales, lower
material purchased content and increased manufacturing efficiencies from our
torque-sensing business as well as lower selling and administrative expenses.
Results of Operations for the Six Months Ended October 27, 2012 as Compared to
the Six Months Ended October 29, 2011
Consolidated Results
Below is a table summarizing results for the six months ended:
(in millions)
("N/M" equals not meaningful)
October 27, October 29,
2012 2011 Net Change Net Change
Net sales $ 248.5 $ 226.7 $ 21.8 9.6 %
Cost of products sold 204.7 185.8 18.9 10.2 %
Gross margins 43.8 40.9 2.9 7.1 %
Selling and administrative expenses 32.5 36.8 (4.3 ) (11.7 )%
Income from settlement (20.0 ) - (20.0 ) N/M
Other expense, net 0.5 0.2 0.3 150.0%
Income tax expense 3.7 2.2 1.5 68.2 %
Net loss attributable to noncontrolling
interest (0.1 ) (0.1 ) - - %
Net income attributable to Methode
Electronics, Inc. $ 27.2 $ 1.8 $ 25.4 N/M
October 27, October 29,
Percent of sales: 2012 2011
Net sales 100.0 % 100.0 %
Cost of products sold 82.4 % 82.0 %
Gross margins 17.6 % 18.0 %
Selling and administrative expenses 13.1 % 16.2 %
Delphi settlement (8.0 )% - %
Other expense, net 0.2 % 0.1 %
Income tax expense 1.5 % 1.0 %
Net loss attributable to noncontrolling
interest - % - %
Net income attributable to Methode
Electronics, Inc. 10.9 % 0.8 %
Net Sales. Consolidated net sales increased $21.8 million, or 9.6%, to $248.5
million for the six months ended October 27, 2012, from $226.7 million for the
six months ended October 29, 2011. The Automotive segment net sales increased
$21.0 million, or 16.1%, to $151.2 million for the first half of fiscal 2013,
from $130.2 million for the first half of fiscal 2012. The Interconnect segment
net sales increased $1.1 million, or 1.7%, to $65.0 million for the first half
of fiscal 2013, compared to $63.9 million for the half of fiscal 2012. The
Power Products segment net sales decreased $1.9 million, or 7.2%, to $24.6
million for the first half of fiscal 2013, compared to $26.5 million for the
first half of fiscal 2012. The Other segment net sales increased $1.6 million,
or 26.2%, to $7.7 million for the first half of fiscal 2013, as compared to $6.1
million
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for the first half of fiscal 2012. Translation of foreign operations net sales
for the six months ended October 27, 2012 decreased reported net sales by $2.4
million or 2.0% compared to the first half of fiscal 2012, primarily due to the
weakening of the euro compared to the U.S. dollar.
Cost of Products Sold. Consolidated cost of products sold increased $18.9
million, or 10.2%, to $204.7 million for the six months ended October 27, 2012,
compared to $185.8 million for the six months ended October 29, 2011.
Consolidated cost of products sold as a percentage of sales was 82.4% for the
first half of fiscal 2013, compared to 82.0% for the first half of fiscal 2012.
In the first half of fiscal 2013, the Automotive segment experienced costs in
North America for design, development, and engineering of $3.4 million related
to a new program scheduled to launch in late fiscal 2013. During the first half
of fiscal 2012, our North American Automotive operations experienced additional
costs for design, development and engineering of $1.9 million for a program that
launched in the third quarter of fiscal 2012, as well as the program scheduled
to launch in late fiscal 2013. In the first half of fiscal 2013 and 2012, our
North American operations incurred third-party inspection costs, premium freight
and over-time expenses related to the Ford Center Console Program of $1.3
million for both periods. The Interconnect segment cost of products sold as a
percentage of net sales decreased primarily due to higher sales volumes for data
solution products, which have better gross margins as a percentage of sales than
other product lines in the segment, partially offset by additional development
costs of $0.3 million for white goods products that were scheduled to launch in
the second quarter of fiscal 2013. The Power Products segment cost of products
sold as a percentage of sales decreased primarily due to manufacturing
inefficiencies due to lower sales volumes at our North American and Asian
operations as well as unfavorable sales mix within the segment. The Other
segment cost of products sold as a percentage of sales decreased primarily
related to lower material costs due to a lower percentage of purchased content
as well as increased manufacturing efficiencies from our torque-sensing
business.
Gross Margins. Consolidated gross margins increased $2.9 million, or 7.1%, to
$43.8 million for the six months ended October 27, 2012, as compared to $40.9
million for the six months ended October 29, 2011. Gross margins as a
percentage of net sales decreased to 17.6% for the six months ended October 27,
2012, compared to 18.0% for the six months ended October 29, 2011. Gross
margins as a percentage of sales decreased primarily due to increased program
and product launch costs in the Automotive segment. Gross margins were also
negatively impacted by increased sales of automotive product that have higher
material cost due to the high percentage of purchased content. Gross margins
were positively impacted in the first half of fiscal 2013 due to favorable
adjustments for commodity pricing in the Automotive segment as well as sales mix
in the Interconnect segment. Gross margins were negatively impacted by
manufacturing inefficiencies due to lower sales volumes in the Power Products
segment. Gross margins were favorably impacted in the Other segment due to
increased sales and lower material costs in our torque-sensing business.
Selling and Administrative Expenses. Selling and administrative expenses
decreased by $4.3 million, or 11.7%, to $32.5 million for the six months ended
October 27, 2012, compared to $36.8 million for the six months ended October 29,
2011. Selling and administrative expenses as a percentage of net sales
decreased to 13.1% for the six months ended October 27, 2012 from 16.2% for the
six months ended October 29, 2011. In the second quarter of fiscal 2013, the
Company reversed $1.1 million of various accruals related to a customer
bankruptcy. Legal expenses decreased $1.0 million, to $2.6 million for the first
half of fiscal 2013, compared to $3.6 million for the first half of fiscal 2012.
Selling and administrative expenses also decreased in the first half of fiscal
2013 due to lower compensation, travel, advertising and marketing, and
professional fees of $2.2 million.
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 with respect to the related technology. In
exchange, the Company will receive a payment of $20.0 million, half of which was
paid in October 2012 and half of which will be 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.
Other Expense, Net. Other expense, net increased $0.3 million, to $0.5 million
for the six months ended October 27, 2012, compared to $0.2 million for the six
months ended October 29, 2011. Other expense, net included income of
$0.1 million for first half of fiscal 2012, related to life insurance policies
in connection with an employee deferred compensation plan. The first half of
fiscal 2012 also includes a gain of $0.3 million related to the acquisition of
Advanced Molding and Decoration, purchased in September 2011. All other amounts
for both the first half of fiscal 2013 and fiscal 2012, 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.
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Income Tax Expense. Income tax expense increased to $1.5 million, or 68.2%, to
$3.7 million for the six months ended October 27, 2012, compared to $2.2 million
for the six months ended October 29, 2011. The income tax expense for the first
half of fiscal 2013 relates to income taxes on foreign profits. The income tax
expense for the first six months of fiscal 2012 relates to income taxes on
foreign profits of $2.2 million and $0.9 million for foreign taxes on a foreign
dividend. In addition, the first six months of fiscal 2012 includes a benefit of
$1.1 million was recorded relating to tax credits from our Malta facility.
Net Income Attributable to Methode Electronics, Inc. Net income attributable to
Methode Electronics, Inc. increased $25.4 million, to $27.2 million for the six
months ended October 27, 2012, compared to $1.8 million for the six months ended
October 29, 2011. The increase is primarily due income from the litigation
settlement, higher sales volumes, one-time reversal of various accruals related
to a customer bankruptcy, lower legal, compensation, travel, advertising and
marketing, and professional fees, partially offset with higher costs for design,
development and engineering, manufacturing inefficiencies, costs related to
launch delays and higher income tax expense.
Operating Segments
Automotive Segment Results
Below is a table summarizing results for the six months ended:
(in millions)
("N/M" equals not meaningful)
October 27, October 29,
2012 2011 Net Change Net Change
Net sales $ 151.2 $ 130.2 $ 21.0 16.1 %
Cost of products sold 129.9 110.6 19.3 17.5 %
Gross margins 21.3 19.6 1.7 8.7 %
Selling and administrative expenses 12.2 14.1 (1.9 ) (13.5 )%
Income from settlement (20.0 ) - (20.0 ) N/M
Income from operations $ 29.1 $ 5.5 $ 23.6 N/M
October 27, October 29,
Percent of sales: 2012 2011
Net sales 100.0 % 100.0 %
Cost of products sold 85.9 % 84.9 %
Gross margins 14.1 % 15.1 %
Selling and administrative expenses 8.1 % 10.8 %
Delphi settlement (13.2 )% - %
Income from operations 19.2 % 4.2 %
Net Sales. Automotive segment net sales increased $21.0 million, or 16.1%, to
$151.2 million for the six months ended October 27, 2012, from $130.2 million
for the six months ended October 29, 2011. Net sales increased $24.3 million,
or 92.6%, in North America, to $50.5 million in the first half of fiscal 2013,
compared to $26.2 million in the first half of fiscal 2012, primarily due to
increased sales for our Ford Center Console Program and our transmission
lead-frame assembly. Net sales increased in Europe by $3.7 million, or 6.2%, to
$64.2 million in the first half of fiscal 2013, compared to $60.5 million in the
first half of fiscal 2012, primarily due to new launches for our hidden switch
product lines. In the first half of fiscal 2013, the Automotive segment recorded
$1.4 million of favorable commodity pricing adjustments for precious metals
supplied to one customer in Europe. Net sales in Asia decreased $6.6 million, or
15.8%, to $35.2 million in the first half of fiscal 2013, compared to $41.8
million in the first half of fiscal 2012, primarily due to the planned partial
transfer of some of the transmission lead-frame assembly product from our China
facility to our Mexico facility. The transmission lead-frame assembly is now
being manufactured at both facilities. Translation of foreign operations net
sales for the six months ended
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October 27, 2012 decreased reported net sales by $2.4 million, or 3.3%, compared
to the first half of fiscal 2012, primarily due to the weakening of the euro as
compared to the U.S. dollar.
Cost of Products Sold. Automotive segment cost of products sold increased $19.3
million, or 17.5%, to $129.9 million for the six months ended October 27, 2012,
from $110.6 million for the six months ended October 29, 2011. The Automotive
segment cost of products sold as a percentage of sales was 85.9% in the first
half of fiscal 2013, compared to 84.9% in the first half of fiscal 2012. In the
first half of fiscal 2013, the Automotive segment experienced costs for design,
development, and engineering of $3.4 million at our North American facility,
related to a program scheduled to launch in late fiscal 2013. During the first
half of fiscal 2012, our North American operations experienced costs for design,
development and engineering of $1.9 million for a program that launched in the
third quarter of fiscal 2012, as well as the program scheduled to launch in late
fiscal 2013. In both the first half of fiscal 2013 and 2012, our North American
operations experienced third-party inspection costs, premium freight and
over-time expenses related to the Ford Center Console Program of $1.3 million
for both periods. The increase in costs of products sold as a percentage of
sales was also affected by increased sales of products that have a higher
material cost due to the high percentage of purchased content during the first
half of fiscal 2013.
Gross Margins. Automotive segment gross margins increased $1.7 million, or
8.7%, to $21.3 million for the six months ended October 27, 2012, as compared to
$19.6 million for the six months ended October 29, 2011. The Automotive segment
gross margins as a percentage of net sales were 14.1% for the six months ended
October 27, 2012, as compared to 15.1% for the six months ended October 29,
2011. Gross margins were negatively impacted in the first half of fiscal 2013
due to increased sales of product that has higher material cost due to the
current high percentage of purchased content. Gross margins as a percentage of
sales also decreased due to increased design, development, engineering and
launch costs related to new programs and new product launches. Gross margins
were favorably impacted by the favorable commodity pricing adjustments in the
first half of fiscal 2013.
Selling and Administrative Expenses. Selling and administrative expenses
decreased $1.9 million, or 13.5%, to $12.2 million for the six months ended
October 27, 2012, compared to $14.1 million for the six months ended October 29,
2011. Selling and administrative expenses as a percentage of net sales were
8.1% for the six months ended October 27, 2012 and 10.8% for the six months
ended October 29, 2011. In the second quarter of fiscal 2013, the Company
reversed $1.1 million of various accruals related to a customer bankruptcy.
Selling and administrative expenses were also lower in the first half of fiscal
2013, compared to the first half of fiscal 2012, primarily due to lower legal
expenses.
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 with respect to the related technology. In
exchange, the Company will receive a payment of $20.0 million, half of which was
paid in October 2012 and half of which will be 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.
Income from Operations. Automotive segment income from operations increased
$23.6 million to $29.1 million for the six months ended October 27, 2012,
compared to $5.5 million for the six months ended October 29, 2011 due to income
from the litigation settlement, increased sales, the favorable commodity pricing
adjustments and lower lower legal expenses, partially offset with higher design,
development and engineering expenses.
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Interconnect Segment Results
Below is a table summarizing results for the six months ended:
(in millions)
October 27, October 29,
2012 2011 Net Change Net Change
Net sales $ 65.0 $ 63.9 $ 1.1 1.7 %
Cost of products sold 47.1 46.5 0.6 1.3 %
Gross margins 17.9 17.4 0.5 2.9 %
Selling and administrative expenses 8.8 9.4 (0.6 ) (6.4 )%
Income from operations $ 9.1 $ 8.0 $ 1.1 13.8 %
October 27, October 29,
Percent of sales: 2012 2011
Net sales 100.0 % 100.0 %
Cost of products sold 72.5 % 72.8 %
Gross margins 27.5 % 27.2 %
Selling and administrative expenses 13.5 % 14.7 %
Income from operations 14.0 % 12.5 %
Net Sales. Interconnect segment net sales increased $1.1 million, or 1.7%, to
$65.0 million for the six months ended October 27, 2012, from $63.9 million for
the six months ended October 29, 2011. Net sales increased in North America by
$4.9 million, or 11.9%, to $46.1 million in the first half of fiscal 2013,
compared to $41.2 million in the first half of fiscal 2012, primarily due to
stronger sales for data solution products and white goods, partially offset by
lower radio remote control sales. Net sales in Europe decreased $1.8 million, or
13.6%, to $11.7 million in the first half of fiscal 2013, compared to $13.5
million in the first half of fiscal 2012, primarily due to weaker radio remote
control sales and lower sensor sales in the first half of fiscal 2013. Net sales
in Asia decreased $0.6 million, or 7.5%, to $7.4 million in the first half of
fiscal 2013, compared to $8.0 million in the first half of fiscal 2012,
primarily due to weaker radio remote control sales as well as certain legacy
products resulting from the planned exit of a product line.
Cost of Products Sold. Interconnect segment cost of products sold increased
$0.6 million, or 1.3%, to $47.1 million for the six months ended October 27,
2012, compared to $46.5 million for the six months ended October 29, 2011.
Interconnect segment cost of products sold as a percentage of net sales
decreased to 72.5% for the six months ended October 27, 2012, compared to 72.8%
for the six months ended October 29, 2011. The decrease in cost of products
sold as a percentage of sales is primarily due to higher sales volumes for data
solution products, which have better gross margins as a percentage of net sales
than other product lines in the segment, partially offset by additional
development costs of $0.3 million for white goods products that were scheduled
to launch in the second quarter of fiscal 2013.
Gross Margins. Interconnect segment gross margins increased $0.5 million, or
2.9%, to $17.9 million for the six months ended October 27, 2012, compared to
$17.4 million for the six months ended October 29, 2011. Gross margins as a
percentage of net sales increased to 27.5% for the six months ended October 27,
2012, from 27.2% for the six months ended October 29, 2011. The increase in
gross margins as a percentage of sales is primarily due to higher sales volumes
for data solution products, which have a higher gross margin as a percentage of
net sales than other product lines in this segment, partially offset by
additional development costs for white goods products that were scheduled to
launch in the second quarter of fiscal 2013.
Selling and Administrative Expenses. Selling and administrative expenses
decreased $0.6 million, or 6.4%, to $8.8 million for the six months ended
October 27, 2012, compared to $9.4 million for the six months ended October 29,
2011. Selling and administrative expenses as a percentage of net sales
decreased to 13.5% for the six months ended October 27, 2012, from 14.7% for the
six months ended October 29, 2011. The decrease is primarily due to lower
compensation, travel and bad debt expense in the first half of fiscal 2013,
compared to the first half of fiscal 2012.
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Income from Operations. Interconnect segment income from operations increased
$1.1 million, or 13.8%, to $9.1 million for the six months ended October 27,
2012, compared to $8.0 million for the six months ended October 29, 2011,
primarily due to favorable sales mix and lower selling and administrative
expenses.
Power Products Segment Results
Below is a table summarizing results for the six months ended:
(in millions)
("N/M" equals not meaningful)
October 27, October 29,
2012 2011 Net Change Net Change
Net sales $ 24.6 $ 26.5 $ (1.9 ) (7.2 )%
Cost of products sold 21.1 21.8 (0.7 ) (3.2 )%
Gross margins 3.5 4.7 (1.2 ) (25.5 )%
Selling and administrative expenses 3.5 3.6 (0.1 ) (2.8 )%
Income from operations $ - $ 1.1 $ (1.1 ) N/M
October 27, October 29,
Percent of sales: 2012 2011
Net sales 100.0 % 100.0 %
Cost of products sold 85.8 % 82.3 %
Gross margins 14.2 % 17.7 %
Selling and administrative expenses 14.2 % 13.6 %
Income from operations - % 4.2 %
Net Sales. Power Products segment net sales decreased $1.9 million, or 7.2%, to
$24.6 million for the six months ended October 27, 2012, compared to $26.5
million for the six months ended October 29, 2011. Net sales decreased in North
America $1.2 million, or 6.9%, to $16.3 million in the first half of fiscal
2013, compared to $17.5 million in the first half of fiscal 2012, primarily due
to lower demand for our busbar and heat sink products, partially offset by
higher demand for our cabling products. Net sales in Europe decreased by $0.1
million, or 9.7%, to $0.9 million in the first half of fiscal 2013, compared to
$1.0 million in the first half of fiscal 2012, due to lower demand for busbar
products. Net sales in Asia decreased $0.6 million, or 7.5%, to $7.4 million for
the first half of fiscal 2013, compared to $8.0 million for the first half of
fiscal 2012, due to lower demand for busbar products.
Cost of Products Sold. Power Products segment cost of products sold decreased
$0.7 million, or 3.2%, to $21.1 million for the six months ended October 27,
2012, compared to $21.8 million for the six months ended October 29, 2011. The
Power Products segment cost of products sold as a percentage of sales increased
to 85.8% for the six months ended October 27, 2012, from 82.3% for the six
months ended October 29, 2011. The increase in cost of products sold as a
percentage of sales is primarily related to manufacturing inefficiencies due to
lower sales volumes at our North American and Asian operations as well as
unfavorable sales mix within the segment.
Gross Margins. Power Products segment gross margins decreased $1.2 million, or
25.5%, to $3.5 million for the six months ended October 27, 2012, compared to
$4.7 million for the six months ended October 29, 2011. Gross margins as a
percentage of net sales decreased to 14.2% for the six months ended October 27,
2012 from 17.7% for the six months ended October 29, 2011. The decrease in gross
margins as a percentage of sales is primarily due to manufacturing
inefficiencies due to lower sales volumes at our North American and Asian
operations as well as unfavorable sales mix within the segment.
Selling and Administrative Expenses. Selling and administrative expenses
decreased $0.1 million, or 2.8%, to $3.5 million for the six months ended
October 27, 2012, compared to $3.6 million for the six months ended October 29,
2011.
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Selling and administrative expenses as a percentage of net sales increased to
14.2% for the six months ended October 27, 2012 from 13.6% for the six months
ended October 29, 2011. Selling and administrative expenses decreased due to
lower compensation, development and travel expenses in North America.
Income From Operations. Power Products segment income from operations decreased
$1.1 million, to break-even for the six months ended October 27, 2012, compared
to $1.1 million for the six months ended October 29, 2011, due to lower sales
volumes, manufacturing inefficiencies, unfavorable sales mix, partially offset
with lower compensation, development and travel expenses.
Other Segment Results
Below is a table summarizing results for the six months ended:
(in millions)
("N/M" equals not meaningful)
October 27, October 29,
2012 2011 Net Change Net Change
Net sales $ 7.7 $ 6.1 $ 1.6 26.2 %
Cost of products sold 5.0 5.2 (0.2 ) (3.8 )%
Gross margins 2.7 0.9 1.8 200.0 %
Selling and administrative expenses 1.2 2.1 (0.9 ) (42.9 )%
Income/(loss) from operations $ 1.5 $ (1.2 ) $ 2.7 N/M
October 27, October 29,
Percent of sales: 2012 2011
Net sales 100.0 % 100.0 %
Cost of products sold 64.9 % 85.2 %
Gross margins 35.1 % 14.8 %
Selling and administrative expenses 15.6 % 34.4 %
Income/(loss) from operations 19.5 % (19.7 )%
Net Sales. The Other segment net sales increased $1.6 million, or 26.2%, to
$7.7 million for the six months ended October 27, 2012, compared to $6.1 million
for the six months ended October 29, 2011. Net sales from our torque-sensing
business increased 48.9% in the first half of fiscal 2013, compared to the first
half of fiscal 2012, primarily due to penetration in the e-bike and motorcycle
markets. Net sales from our testing facilities increased 3.4% in the first half
of fiscal 2013, compared to the first half quarter of fiscal 2012.
Cost of Products Sold. Other segment cost of products sold decreased $0.2
million, or 3.8%, to $5.0 million for the six months ended October 27, 2012,
compared to $5.2 million for the six months ended October 29, 2011. Cost of
products sold as a percentage of sales decreased to 64.9% in the first half of
fiscal 2013, compared to 85.2% in the first half of fiscal 2012. The decrease in
cost of products sold as a percentage of sales is primarily due to lower
material costs due to a lower percentage of purchased content as well as
increased manufacturing efficiencies from our torque-sensing business.
Gross Margins. The Other segment gross margins increased $1.8 million, or
200.0%, to $2.7 million for the six months ended October 27, 2012, compared to
$0.9 million for the six months ended October 29, 2011. The increase in gross
margins as a percentage of sales is primarily due to decreased material costs as
well as increased manufacturing efficiencies from our torque-sensing business.
Selling and Administrative Expenses. Selling and administrative expenses
decreased $0.9 million, or 42.9%, to $1.2 million for the six months ended
October 27, 2012, compared to $2.1 million for the six months ended October 29,
2011. Selling and administrative expenses as a percentage of net sales
decreased to 15.6% for the six months ended October 27, 2012, from 34.4% for the
six months ended October 29, 2011. Selling and administrative expenses decreased
in the first half of fiscal 2013, compared to the first half of fiscal 2012, due
to lower compensation, severance and legal expenses.
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Income/(Loss) From Operations The Other segment income/(loss) from operations
improved $2.7 million to income of $1.5 million for the six months ended
October 27, 2012, compared to a loss of $1.2 million for the six months ended
October 29, 2011. The increase was primarily due to increased sales, lower
material costs content and increased manufacturing efficiencies from our
torque-sensing business as well as lower selling and administrative expenses.
Liquidity and Capital Resources
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
will receive a payment of $20.0 million, half of which was paid in October 2012
and half of which will be 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.
We believe our current world-wide cash balances together with expected future
cash flows to be generated from operations will be sufficient to support our
operations. However, due to the shifting of operations from the U.S. to foreign
locations, a significant amount of cash and expected future cash flows are
located outside of the U.S. Of the total cash and cash equivalents as of
October 27, 2012, $55.3 million, which represents 72.6% of our total cash and
cash equivalents, was held in subsidiaries outside the U.S. and is deemed to be
permanently reinvested and therefore not available to fund our domestic
operations. We currently have $50.0 million of net operating loss carry-forwards
in the U.S. which would reduce the cash tax obligation upon any future
repatriation of funds.
During fiscal 2011, we were awarded a next generation center stack program for
multiple GM vehicle platforms. The program will be manufactured in our plants in
Monterrey, Mexico. This program requires a significant amount of cash for the
purchase of equipment, tooling and initial inventory as well as additional
staffing for the development and launching of the programs. We expect to begin
production and generate sales on this program in late fiscal 2013. Therefore, we
anticipate our cash balances may decline (not including the Delphi settlement
mentioned above) further due to the launch of this program without a
corresponding increase in sales.
We are party to an Amended and Restated Credit Agreement with Bank of America,
N.A., as administrative agent, and certain other financial institutions. On
September 21, 2012, we entered into an amendment to the Amended and Restated
Credit Agreement which increased the maximum principal amount of the credit
facility from $75.0 million to $100.0 million, with an option to increase the
principal amount by up to an additional $50.0 million, subject to customary
conditions and approval of the lender(s) providing new commitment(s). The
amendment also extended the maturity date from February 25, 2016 to September
21, 2017. The credit facility provides for variable rates of interest based on
the type of borrowing and the Company's debt to EBITDA financial ratio.
Currently, the interest rate on the credit facility is 1.5% plus LIBOR. The
Amended and Restated Credit Agreement is guaranteed by certain of our U.S.
subsidiaries. At October 27, 2012, we were in compliance with the covenants of
the agreement. During the first half of fiscal 2013, we had borrowings of $24.5
million and payments of $27.1 million, which includes interest of $0.6 million
under this credit facility. As of October 27, 2012, there were outstanding
balances against the credit facility of $46.0 million. There was $54.0 million
available to borrow under the credit facility as of October 27, 2012, which does
not include the option to increase the principal amount. We believe the fair
value approximates the carrying amount as of October 27, 2012.
Cash Flow Operating Activities
Net cash provided by operating activities increased $21.0 million to $22.7
million for the six months ended October 27, 2012, compared to $1.7 million for
the six months ended October 29, 2011. The operating activities increase is
primarily driven by the first cash payment of $10.0 million received in October
2012 related to the legal settlement. The net changes in assets and liabilities
used cash of $14.9 million, primarily due to the receivable recorded related to
the second $10.0 million payment related to the legal settlement, expected to be
received in late January 2013. In addition, accounts receivable balances
increased due to timing of sales, as well as increases in inventory due to the
timing of our product launches.
Cash Flow Investing Activities
Net cash used in investing activities increased by $9.5 million, to $25.0
million for the six months ended October 27, 2012, compared to $15.5 million for
the six months ended October 29, 2011. Purchases of property, plant and
equipment increased $14.5 million, to $23.6 million for the six months ended
October 27, 2012, compared to $9.1 million for the six months ended October 29,
2011. The increase primarily relates to plant expansion and equipment purchases
in Europe and North America for products scheduled to be launched in late fiscal
2013. In the first six months of fiscal 2013, we acquired
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the Hetronic Italy business for $1.4 million. In the first six months of fiscal
2012, we acquired the Advanced Molding and Decoration business for $6.4 million.
Cash Flow Financing Activities
Net cash provided by financing activities decreased $38.7 million to cash used
of $7.2 million in the first six months of fiscal 2013, compared to cash
provided of $31.5 million for the first six months of fiscal 2012. During the
first six months of fiscal 2013, the Company had borrowings against the credit
facility of $24.5 million, compared to $36.5 million in the first six months of
fiscal 2012. During the first six months of fiscal 2013, the Company had
payments against the credit facility of $26.5 million. We paid dividends of $5.2
million for both the first six months of fiscal 2013 and 2012. The first six
months of fiscal 2012 included $0.2 million of proceeds for the exercise of
stock options.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, other than operating leases
and purchase obligations entered into in the normal course of business.
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