Item 1. Business
Methode Electronics, Inc. was incorporated in 1946 as an Illinois corporation and reincorporated in Delaware in 1966. As used herein, Methode Electronics, Inc. shall be referred to as the "Registrant" or the "Company."
The Company manufactures component devices worldwide for Original Equipment Manufacturers (OEMs) of information processing and networking equipment, voice and data communication systems, consumer electronics, automobiles, aerospace vehicles and industrial equipment. Products employ electrical, electronic and optical technologies as sensors, interconnections and controls. The business is managed on a technology product basis, with those technology segments being Electronic, Optical and Other. The business units whose results are identified in the Electronic segment principally employ electronic processes to control and convey signals. The business units whose results are identified in the Optical segment principally employ light to control and convey signals. The Other segment includes manufacturers of multi-layer printed circuit boards and bus systems as well as independent laboratories which provide services for qualification testing and certification of electronic and optical components. In April 1999 the Company announced its decision to exit the manufacture of printed circuitry as described in Note 2 to the consolidated financial statements.
The following tabulation reflects the percentage of net sales of the product segments of the Registrant for the last three fiscal years.
The sales activities of the Registrant are directed by sales managers who are supported by engineering personnel who provide technical services. The Registrant's products are sold through its sales staff and through independent manufacturers' representatives with offices throughout the world. Sales are made primarily to original equipment manufacturers and also independent distributors.
Sources and Availability of Raw Materials. Principal raw materials purchased by Registrant include ferrous and copper alloy strips, plastic molding materials, ferrules and fiber optic cable, semiconductor components, die castings and precious metals. All of these items are available from several suppliers and the Registrant generally relies on more than one for each item.
Patents; Licensing Agreements. The Registrant has various patents and licensing agreements, but does not consider its business to be materially dependent upon such patents and licensing agreements.
Seasonality. The business of the Registrant is not seasonal.
Working Capital Items. The Registrant is required to maintain adequate levels of inventory to meet scheduled delivery requirements of customers. It is not normal for the Registrant to carry significant amounts of finished goods, as the preponderance of orders received are for scheduled future deliveries.
Material Customers. During the year ended April 30, 1999, shipments to Daimler Chrysler AG and Ford Motor Corporation each were 10% or greater of consolidated net sales and, in the aggregate, amounted to approximately 41% of consolidated net sales. Such shipments included a wide variety of the Registrant's automotive component products.
Backlog. The Registrant's backlog of orders for its continuing operations was approximately $70,900,000 at May 31, 1998, and $65,235,000 at May 31, 1999. It is expected that most of the total backlog at May 31, 1999, will be shipped within the current fiscal year.
Competitive Conditions. The markets in which the Registrant operates are highly competitive and characterized by rapid changes due to technological improvements and developments. Registrant competes with a large number of other manufacturers in each of its product areas; many of these competitors have greater resources and total sales. Price, service and product performance are significant elements of competition in the sale of Registrant's products.
Research and Development. Registrant maintains a Research and Development program involving a number of professional employees who devote a majority of their time to the development of new products and processes and the advancement of existing ones. Senior management of the Registrant also participates directly in the program. Expenditures for the aforementioned activities amounted to $18,575,000, $21,120,000 and $22,750,000 for the fiscal years ended April 30, 1997, 1998 and 1999, respectively.
Environmental Quality. Compliance with federal, state and local provisions regulating the discharge of materials into the environment has not materially affected capital expenditures, earnings or the competitive position of the Registrant. Currently there are no environmental related lawsuits or material administrative proceedings pending against the Registrant. Further information as to environmental matters affecting the Registrant is presented in Note 8 to the consolidated financial statements included in Item 14 (a)(1).
Employees. At April 30, 1998 and 1999, Registrant had approximately 3,800 employees.
Foreign Sales. Information about the Registrant's operations in different geographic regions is summarized in Note 11 to the consolidated financial statements included in Item 14 (a)(1).
Item 2.
Item 2. Properties
The Registrant has 22 manufacturing and five service facilities containing approximately 1,135,000 square feet of space, of which approximately 322,000 square feet are leased. Eleven of the facilities are located in Illinois, four in California, two in New Jersey, one in Maryland, one in the Czech Republic, one in Ireland, two in Malta, one in Singapore and three in the United Kingdom. The acquisition of Optokon and Stratos, Ltd. added approximately 40,000 square feet of manufacturing space in fiscal 1999. A 26,000 square foot independent test laboratory and a 48,000 cable assembly facility, both located in Illinois, were added in fiscal 1998. The acquisition of Merit-Malta Ltd. in fiscal 1997 added approximately 175,000 square feet of manufacturing space. Registrant's manufacturing facilities have been modernized in the opinion of management to keep pace the developments in the industry.
Item 3.
Item 3. Legal Proceedings
As of July 9, 1999, the Registrant was not involved in any material litigation or any litigation or material administrative proceedings with governmental authorities pertaining to the discharge of materials into the environment.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to security holders during the fourth quarter of fiscal 1999.
Executive Officers of the Registrant
All executive officers serve a term of one year which, for the current year, expires on September 14, 1999, or until their successors are duly elected and qualified.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Registrant's Class A and Class B Common Stock are traded on the Nasdaq National Market System under the symbols METHA and METHB. The following is a tabulation of high and low sales prices for the periods indicated as reported by Nasdaq.
The Registrant pays dividends quarterly and for fiscal years 1998 and 1999, quarterly dividends were paid at an annual rate of $.20 on both the Class A and Class B Common Stock. On June 25, 1999, the Board declared a dividend of $.05 per Class A share and Class B share, payable on July 30, 1999, to holders of record on July 15, 1999.
The Registrant expects to continue its policy of paying regular cash dividends, although there is no assurance as to future dividends because they are dependent on future earnings, capital requirements and financial conditions.
As of July 9, 1999, the approximate number of record holders of the Company's Class A and Class B Common Stock was 1,260 and 450.
Item 6.
Item 6. Selected Financial Data
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Results Of Operations. Consolidated net sales increased 6% in fiscal 1999 following an increase of 11% in 1998. Domestic sales increased 5% in 1999 and 6% in 1998 while foreign sales gained 11% in 1999 and 32% in 1998. The foreign sales gains in 1999 and 1998 were primarily the result of the acquisitions described below.
Sales of the Electronic segment represented 78% of consolidated sales in 1999, 83% in 1998 and 81% in 1997. Electronic sales were flat in 1999 compared with 1998 sales. Sales in 1998 were up 14% over 1997 sales. Sales to the automotive industry which represented 65%, 59% and 63% of Electronic segment sales in 1999, 1998 and 1997 increased 9% in 1999 and 7% in 1998. Fiscal 1998 Electronic sales benefited from acquisitions made in the fourth quarter of 1997 and the first quarter of fiscal 1998.
Sales of the Optical segment represented 15% of consolidated sales in 1999 and 9% in both 1998 and 1997. Optical sales grew 76% in 1999 and 13% in 1998 led by the explosive growth in sales of the Company's Optoelectronics products which increased 285% in 1999 and 240% in 1998. Optical sales in 1999 were also helped by the acquisition of two European based optical connector companies during the year.
Sales of other products (chiefly current carrying bus devices and printed circuit boards) increased 2% in 1999 following a decline of 15% in 1998.
Income from the settlement of litigation in fiscal 1999 represented the settlement of a claim relative to one of the Company's patents.
Other income consisted primarily of earnings from the Company's automotive joint venture, interest income from short-term investments, royalties and, in 1998, an approximate $1,000,000 gain from the sale of a building.
Cost of goods sold as a percentage of sales for 1999, 1998 and 1997 were 74.5%, 73.9% and 71.8%. The gross margin declines in 1999 and 1998 were largely due to margin erosion on sales to the automotive industry caused by product mix changes, additional infrastructure and engineering costs incurred for new programs not yet producing revenue and customer requested piece part sales price reductions. Selling and administrative expenses as a percentage of sales were 13.6%, 13.2% and 12.8%. The increase in 1999 is partly due to an additional provision for bad debts of $1,000,000.
The $3,100,000 provision for exiting printed circuit business in 1999 represents the estimated loss on disposal of assets, employee severance pay and additional costs associated with environmental matters specifically related to the decision to exit the business. Operating losses that will be incurred in the first half of fiscal 2000 to wind down these businesses are not expected to be material and will be recorded as incurred.
Effective income tax rates were 35.2%, 34.2% and 36.3% for fiscal 1999, 1998, and 1997. The effective income tax rates for this three-year period reflect the effects of lower tax rates from foreign operations offset, in part, by state income taxes. The balance between these effects was altered by the acquisition of substantial business operations in lower tax locations in late 1997. The effective rate for 1998 was lower than 1997 and 1999 due to the effects of the substantially tax-free gain on the sale of a building.
Financial Condition, Liquidity And Capital Resources. Net cash provided by operations was $32,317,000, $38,288,000 and $44,854,000 in 1999, 1998 and 1997. The decrease in cash provided from operations in 1999 and 1998 was primarily the result of lower net income and increased working capital requirements to support increased sales. The Company used $2,766,000 of cash in fiscal 1999 to acquire Polycore Technologies, a developer of highly integrated data communication modules for Local Area Network equipment, Stratos, Ltd., a developer and manufacturer of expanded beam fiber optic connectivity products for harsh environments and an additional 25% of Optokon, a fiber optic connector company, from a former joint venture partner. In connection with the 1998 acquisition of Adam Technologies, a designer and marketer of electrical and electronic connectors, the Company made cash payments of $3,580,000 in 1998, $1,217,000 in 1999 and $837,000 in fiscal 2000 using available cash.
During fiscal 1999 the Company used $3,084,000 of its available cash to acquire 275,000 shares of its Common Stock for treasury. The purchases of these shares were made pursuant to a three-year Common Stock Repurchase Program authorized by the Board of Directors in February, 1999 and based upon the belief that Methode stock represents an excellent investment for the Company.
Depreciation and amortization expense was $17,735,000, $17,627,000 and $14,668,000 in 1999, 1998 and 1997. Capital expenditures were $21,996,000, $23,211,000 and $20,376,000 in 1999, 1998 and 1997. Principal capital investments involved the expansion of the automotive manufacturing and test laboratory facilities and purchases of machinery and equipment to support the increasing sales volume of optoelectronic devices and products for the automotive industry in 1999, purchases of new facilities for an independent test laboratory and our cable assembly operations in 1998 and completion of a new Research and Test Center in 1997. Capital expenditures in 1999, 1998 and 1997 were funded from operating cash flows. It is anticipated that capital acquisitions for 2000 will also be funded from operating cash flows.
Year 2000 Conversion. The Year 2000 issue exists because many computer systems, applications and assets use two-digit date fields to designate a year. As the century date change occurs, date sensitive systems may recognize the Year 2000 as 1900, or not at all. This inability to recognize or properly treat the Year 2000 may cause systems to process financial and operations information incorrectly.
Status Of Readiness:
The Company's Year 2000 Strategy to make systems "Y2K ready" includes a common company-wide focus on all internal systems potentially impacted by the Y2K issue, including Information Technology ("IT") Systems and Non-IT equipment and systems (Operating Equipment) that contain embedded computer technology. Each of the foregoing IT and Non-IT programs is being conducted in phases; described as follows:
Inventory Phase--Identify hardware or software that use or process date information.
Assessment Phase--Identify Year 2000 Date processing deficiencies and related implications.
Planning Phase--Determining for each deficiency an appropriate solution and budget as well as scheduling personnel and other resources.
Implementation Phase--Implement designated solutions and test systems.
The Company is upgrading hardware and software for certain major computer systems which will concurrently address the Year 2000 issues for those systems. The Company has fully completed its assessment of all systems that could be significantly affected by the Year 2000. The completed assessment indicates that most of the Company's significant information technology systems could be affected, particularly the general ledger and billing systems. The assessment also indicates, that in some instances, software and hardware (embedded chips) used in operating equipment also are at risk. However, based on a review of its product line, the Company has determined that the products it has sold and will continue to sell do not require remediation to be Year 2000 ready.
For IT Systems, the Company is 75% complete on the implementation phase and expects to complete upgrade and replacement of the remaining systems by September 1999. For its Non-IT Systems, the Company is in the process of bringing such systems into Year 2000 readiness. This remediation is 80% complete. The Company expects to substantially complete this remediation effort by September 1999.
The Company has worked with third party suppliers to determine the Year 2000 readiness of the Company's systems that interface directly with third parties. The company completed its remediation efforts on these systems with testing completed in March 1999.
The Company has queried its significant Non-IT suppliers that do not share information systems with the Company (external agents). To date, the Company is not aware of any external agent with a Year 2000 issue that would materially impact the Company's results of operations, liquidity, or capital resources. However, the
Company has no means of ensuring that external agents will be Year 2000 ready. The inability of external agents to complete their Year 2000 resolution process in a timely fashion would indirectly impact the Company, and the impact may be material. The Company also is making inquiries as to the Year 2000 readiness of selected customers and service vendors. The Company will have a contingency plan in place no later than October 1999 to compensate for those external agents that fail to complete their Year 2000 Resolution by the end of 1999.
Costs:
As of April 30, 1999, the Company's total incremental costs (historical plus estimated future costs) of system upgrades and addressing Year 2000 issues are estimated to be $2,635,000 of which $1,540,000 has been incurred ($340,000 expensed and $1,200,000 capitalized for new systems and equipment). These costs are being funded through operating cash flow. Of the total remaining project costs ($1,095,000), approximately $795,000 is attributable to the purchase of new software and equipment which will be capitalized. The remaining $300,000 will be expensed as incurred. The Company estimates that a substantial portion of these costs are attributable to system upgrades that would have been incurred regardless of the Year 2000 issue. Implementation of the Company's Year 2000 Plan is an ongoing process. Consequently, the above- described estimates of costs and completion dates for the various components of the plan are subject to change.
Risks:
The Company's Year 2000 readiness program is directed primarily toward ensuring that the Company will be able to continue to perform five critical functions: (A) order and receive raw material and supplies, (B) make and sell its products, (C) invoice customers and collect payments, (D) pay its employees and suppliers and (E) maintain accurate accounting records. While the Company currently believes that it will be able to modify or replace its effected systems in time to minimize any significant detrimental effects on its operations, failure to do so, or the failure of key third parties to modify or replace their effected systems, could have materially adverse impacts on the Company's business operations or financial condition. In particular, because of the interdependent nature of business systems, the Company could be materially adversely affected if private businesses, utilities and governmental entities with which it does business or that provide essential products or services are not Year 2000 ready. Reasonably likely consequences of failure by the Company or third parties to resolve the Year 2000 Problem include, among other things, temporary slowdowns of manufacturing operations at one or more Company facilities, billing and collection errors, delays in the distribution of products and delays in the receipt of supplies.
The Company's expectations about future costs necessary to achieve Year 2000 readiness, the impact on its operations and its ability to bring each of its systems into Year 2000 readiness are subject to a number of uncertainties that could cause actual results to differ materially. Such factors include the following: (i) The Company may not be successful in properly identifying all systems and programs that contain two-digit year codes; (ii) The nature and number of systems which require reprogramming, upgrading or replacement may exceed the Company's expectations in terms of complexity and scope; (iii) The Company may not be able to complete all remediation and testing necessary in a timely manner; (iv) The Company's key suppliers and other third parties may not be able to supply the Company with components or materials which are necessary to manufacture its products, with sufficient electrical power and other utilities to sustain its manufacturing process, or with adequate, reliable means of transporting its products to its customers.
Contingency Plans:
Contingency plans for suppliers and mission critical systems impacted by Year 2000 Issues are currently under development. It is anticipated that Year 2000 contingency plans will be completed by September 1999. Contingency plans may include stockpiling raw materials, increasing inventory levels, securing alternate sources of supply and other appropriate measures. Once developed, Year 2000 contingency plans and related cost estimates will be continually refined as additional information becomes available.
Euro Conversion. On January 1, 1999, eleven member countries of the European Union established fixed conversion rates between their existing currencies ("legal currencies") and one common currency, the Euro. The
Euro is now trading on currency exchanges and may be used in certain transactions such as electronic payments. Beginning in January 2002, new Euro- denominated notes and coins will be used, and legacy currencies will be withdrawn from circulation. The conversion to the Euro has eliminated currency exchange rate risk for transactions between the member countries, which for the Company primarily consists of sales to certain customers and payments to certain suppliers. The Company is currently addressing the issues involved with the new currency, which include converting information technology systems, recalculating currency risk, and revising processes for preparing accounting and taxation records. Based on the work completed so far, the Company does not believe the Euro conversion will have a significant impact on the results of its operations or cash flows.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
Although certain of the Company's subsidiaries enter into transactions in currencies other than their functional currency, foreign currency exposures arising from these transactions are not material to the Company. The primary foreign currency exposure arises from the translation of the Company's net equity investment in its foreign subsidiaries to U.S. dollars. The Company generally views as long-term its investments in foreign subsidiaries with functional currencies other than the U.S. dollar. The primary currencies to which the Company is exposed are the Singapore dollar, Maltese lira and other European currencies. The fair value of the Company's net foreign investments would not be materially affected by a 10% adverse change in foreign currency exchange rates from April 30, 1999 levels.
Item 8.
Item 8. Financial Statements and Supplementary Data
See Item 14 for an Index to Financial Statements and Financial Statement Schedules. Such Financial Statements and Schedules are incorporated herein by reference.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
None.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
Information regarding the directors of the Registrant is included under the caption "Election of Directors" in the Registrant's proxy statement to be dated on or about August 10, 1999, and is incorporated herein by reference. Information regarding the executive officers of the Registrant is included under a separate caption in Part I hereof, and is incorporated herein by reference, in accordance with General Instruction G(3) to Form 10-K and Instruction 3 to Item 401(b) of Regulation S-K. Information regarding Section 16(a) of the Exchange Act is included under the caption "16(a) Beneficial Ownership Reporting Compliance."
Item 11.
Item 11. Executive Compensation
Information regarding the above is included under the caption "Executive Compensation" in the Registrant's proxy statement to be dated on or about August 10, 1999, and is incorporated herein by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information regarding the above is included under the caption "Security Ownership" in the Registrant's proxy statement to be dated on or about August 10, 1999, and is incorporated herein by reference.
Item 13.
Item 13. Certain Relationships and Related Transactions
Information regarding the above is included under the caption "Election of Directors" in the Registrant's proxy statement to be dated on or about August 10, 1999, and is incorporated herein by reference.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) (1) (2) List of Financial Statements and Financial Statement Schedules
The response to this portion of Item 14 is included in this report under the caption "List of Financial Statements and Financial Statement Schedules" which is incorporation herein by reference.
(a) (3) List of Exhibits Required by Item 601 of Regulation S-K
See "Exhibit Index" immediately following the financial statement schedules.
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the last quarter of the period covered by this report.
(c) Exhibits Required by Item 601 of Regulation S-K
See "Exhibit Index" immediately following the financial statement schedules.
(d) Financial Statement Schedules
The response to this portion of Item 14 is included in this report under the caption "List of Financial Statements and Financial Statement Schedules" which is incorporated herein by reference.
Schedules and exhibits other than those listed are omitted for the reasons that they are not required, are not applicable or that equivalent information has been included in the financial statements, and notes thereto, or elsewhere herein.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
METHODE ELECTRONICS, INC. (Registrant)
/s/ Kevin J. Hayes By:__________________________________ Kevin J. Hayes Executive Vice President, Chief Financial Officer & Director
Dated: July 28, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
George C. Wright
METHODE ELECTRONICS, INC. AND SUBSIDIARIES
FORM 10-K
ITEM 14 (a) (1) and (2)
List of Financial Statements and Financial Statement Schedules
The following consolidated financial statements of Methode Electronics, Inc. and subsidiaries are included in Item 8:
Consolidated Balance Sheets--April 30, 1999 and 1998.
Consolidated Statements of Income--Years Ended April 30, 1999, 1998 and 1997.
Consolidated Statements of Shareholders' Equity--Years Ended April 30, 1999, 1998 and 1997
Consolidated Statements of Cash Flows--Years Ended April 30, 1999, 1998 and
Notes to Consolidated Financial Statements
The schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inappropriate and, therefore, have been omitted.
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders Methode Electronics, Inc.
We have audited the accompanying consolidated balance sheets of Methode Electronics, Inc. and subsidiaries as of April 30, 1999 and 1998, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended April 30, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Methode Electronics, Inc. and subsidiaries at April 30, 1999 and 1998, and the consolidated results of their operations and their cash flows for each of the three years in the period ended April 30, 1999, in conformity with generally accepted accounting principles.
Ernst & Young LLP
Chicago, Illinois June 21, 1999
METHODE ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
See notes to consolidated financial statements.
METHODE ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
See notes to consolidated financial statements.
METHODE ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended April 30, 1999, 1998, and 1997
See notes to consolidated financial statements.
METHODE ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
See notes to consolidated financial statements.
METHODE ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 1999
1. Significant Accounting Policies
Principles of Consolidation: The consolidated financial statements include the accounts and operations of the Company and its subsidiaries.
Cash Equivalents: All highly liquid investments with a maturity of three months or less when purchased are carried at their approximate fair value and classified in the balance sheet as cash equivalents.
Inventories: Inventories are stated at the lower of cost (first-in, first- out method) or market.
Property, Plant and Equipment: Properties are stated on the basis of cost. The Company amortizes such costs by annual charges to income, computed on the straight-line method using estimated useful lives of 5 to 50 years for buildings and improvements and 3 to 15 years for machinery and equipment for financial reporting purposes. Accelerated methods are generally used for income tax purposes.
Income Taxes: Income taxes are accounted for using the liability method as required by Statement of Financial Accounting Standards, "SFAS" No. 109, Accounting for Income Taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.
Research and Development Costs: Costs associated with the development of new products are charged to expense when incurred. Research and development costs for the years ended April 30, 1999, 1998 and 1997 amounted to $22,750,000, $21,120,000 and $18,575,000, respectively.
Fair Value of Financial Instruments: The carrying amounts of the Company's borrowings under its short-term revolving credit agreements approximate their fair value. The weighted average interest rates on such borrowings for the years ended April 30, 1999, 1998 and 1997 were 7.23%, 7.10% and 6.57%, respectively.
Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Segment Disclosures: In 1999, the Company adopted SFAS No. 131 Disclosures about Segments of an Enterprise and Related Information. SFAS 131 established standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. It also established standards for related disclosures about products and services, geographic areas, and major customers. The adoption of Statement No. 131 did not affect the results of operations or financial position of the Company, but did affect the disclosure of segment information (see Note 11).
Comprehensive Income: In 1999, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 130, Reporting Comprehensive Income, which requires companies to report all changes in equity during a period, except those resulting from investment by owners and distribution to owners, in a financial statement for the period in which they were recognized. The Company has chosen to disclose Comprehensive Income, which encompasses net income and foreign currency translation adjustments, in the Consolidated Statement of Shareholders' Equity. Prior years have been restated to conform with the SFAS No. 130 requirements.
METHODE ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. Acquisitions And Divestitures
On April 15, 1999, the Company purchased for cash all of the outstanding shares of Polycore Technologies, a developer of highly integrated data communication modules for Local Area Network equipment.
Effective December 1, 1998, the Company purchased for cash, all of the outstanding shares of Stratos, Ltd. (formerly AB Stratos, Ltd.) of Haverhill, England. Stratos is a developer and manufacturer of fiber optic connectivity products for harsh environments.
Effective May 5, 1997, the Company purchased for cash all of the outstanding shares of Adam Technologies, a designer and marketer of electronic connectors. Additional contingent cash consideration is due if certain performance targets are attained for fiscal 1999 and 2000. For 1999, the targets were substantially met and an additional cash payment was made subsequent to year end.
On February 26, 1997, the Company acquired all of the outstanding shares of German-based Merit-Eletrik GmbH and Malta-based Merit Malta Ltd. (collectively, Merit Eletrik). The aggregate purchase price of approximately $30,400,000 including costs of acquisition, was financed with available cash balances. Merit Eletrik is a manufacturer of automotive switches, transmission controls, and other devices. The estimated fair values of tangible assets acquired and liabilities assumed were $17,916,000 and $7,199,000, respectively. This allocation resulted in an excess of purchase price over assets acquired of $19,680,000, which is being amortized on a straight-line basis over 40 years.
On February 16, 1997, the Company acquired for cash 75% of the outstanding shares of Sentorque, Inc. Sentorque, Inc.'s wholly-owned subsidiary Magna- lastic Devices, Inc., owns a portfolio of intellectual property covering innovative advances in circulary magnetized noncontact torque sensors.
The above-described acquisitions were accounted for using the purchase method of accounting, and the results of operations of the acquired companies have been included in the Company's consolidated financial statements from their respective dates of acquisition. The excess of purchase price over net assets acquired in these acquisitions, if any, is being amortized on a straight-line basis over periods ranging from 25 to 40 years. Had these acquisitions been made as of the beginning of fiscal 1997, sales and operating results would not be materially different than reported.
In April 1999, the Company made the decision to exit the printed circuit industry and is seeking to divest its two board manufacturing facilities. It is anticipated that the two operations will either be sold or closed during the second quarter of fiscal 2000. The Company recorded a non-recurring charge of $3,100,000 or $1,860,000 net of tax benefits for the costs associated with the exit of the business. The charge is comprised of $1,540,000 for the write- down of the plant and equipment with a carrying value of $4,700,000 to their fair value, $600,000 for additional environmental costs directly associated with the decision to close the operations, and approximately $960,000 for other exit costs. The write-down for the plant and equipment reflects impairment in their carrying value. The fair value of the plant and equipment was based upon the estimated current value less costs to sell. The results of operations to wind down the businesses will be recorded as they are incurred. Net sales of the Company's printed circuit board businesses were $12,755,000, $14,610,000 and $14,120,000 for fiscal 1999, 1998 and 1997, respectively. Net losses of the businesses were $1,061,000, $119,000 and $225,000 for fiscal 1999, 1998 and 1997, respectively.
3. Shareholders' Equity
Preferred Stock: The Company has 50,000 authorized shares of Series A, 4% cumulative convertible Preferred Stock, par value $100 per share, of which none were outstanding at April 30, 1999.
METHODE ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Common Stock: Common Stock, Class A, is entitled to dividends at least equivalent to those paid on the shares of Common Stock, Class B. The Common Stock, Class A, has more limited voting rights than the Common Stock, Class B. Generally the holders of Common Stock, Class A, are entitled to elect 25% of the Company's Board of Directors and are entitled to one-tenth of one vote per share respecting other matters. Holders of Common Stock, Class B, are entitled to one vote per share. Each share of Common Stock, Class B, is convertible into one share of Common Stock, Class A, at the option of the holder. At April 30, 1999, 3,735,878 shares of Common Stock, Class A, are reserved for future issuance in connection with the conversion of shares of Common Stock, Class B, and the Company's stock award and stock option plans.
Common Stock, par value $.50 per share, authorized, issued and in treasury, was as follows:
Stock Awards: The Company has an Incentive Stock Award Plan (Incentive Plan) which permits the issuance of up to 3,000,000 shares of Common Stock, Class A, to certain officers and key employees of the Company, of which 2,511,601 shares have been awarded through April 30, 1999. Pursuant to the terms of the Incentive Plan, the granted stock does not vest until two years after the award date. If for any reason other than retirement, disability or death an employee terminates his service before the two-year period, the stock will not vest and will be made available for future grants.
The Company also has an Incentive Stock Award Plan for Non-employee Directors which permits the issuance of up to 120,000 shares of Common Stock, Class A, to non-employee directors, of which 99,000 shares have been awarded at April 30, 1999. Shares awarded pursuant to this plan have no vesting restrictions.
Stock Options: In fiscal 1998 the Company adopted the Methode Electronics, Inc. 1997 Stock Plan ("Plan"). The Plan awards stock options to key employees. As of April 30, 1999, the maximum number of shares that may be granted under the Plan is 2,000,000. Stock options granted to date vest over a period of six to twenty-seven months after the date of the grant and have a term of ten years.
The following table summarizes the transactions pursuant to the 1997 Stock Plan:
METHODE ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company has adopted the disclosure-only provisions of SFAS No. 123 and has not recorded any compensation expense associated with these stock options. Consistent with prior years, stock-based compensation continues to be recorded using the intrinsic value method prescribed in APB No. 25 and related Interpretations. If the Company had determined compensation cost based on the fair value at the grant date consistent with SFAS No. 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
The weighted average estimated fair value of options granted during fiscal 1999 and 1998 was $6.27 and $5.37. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:
4. Employee Stock Ownership Plan
The Company has an Employee Stock Ownership Plan for the benefit of its eligible full-time employees. Eligible employees are generally U.S. employees who have completed one year of service. The purpose of the Plan is to assist employees to accumulate capital ownership in the Company and through that ownership to promote in them a strong interest in the successful operation of the Company. The Company made annual contributions of $1,200,000 to the Plan during fiscal 1999, 1998 and 1997.
5. Supplemental Executive Benefit Plan
In fiscal 1992, the Company adopted an unfunded defined benefit plan covering certain key executives. Benefits under the plan are in recognition of significant contributions to the success of the Company made by the executives during their many years of service with the Company. Annual payments of $900,000 pursuant to the plan are being made through fiscal year 2001.
METHODE ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The net periodic cost recognized as expense for this plan was as follows:
The weighted-average assumed discount rate used to measure the projected benefit obligation in all years was 6 2/3%.
6. Income Taxes
Significant components of the Company's deferred tax assets and liabilities at April 30 were as follows:
Income taxes consisted of the following:
METHODE ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A reconciliation of the consolidated provisions for income taxes to amounts determined by applying the prevailing statutory federal income tax rate of 35% to pre-tax earnings is as follows:
The Company paid income taxes of approximately $17,469,000 in 1999, $18,415,000 in 1998 and $21,035,000 in 1997. No provision has been made for income taxes of approximately $13,031,000 at April 30, 1999 which would be payable should undistributed net income of $32,947,000 of foreign operations be distributed as dividends, as the Company plans to continue these foreign operations and does not contemplate such distributions in the foreseeable future.
7. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share:
Options to purchase 378,131 shares of common stock at a weighted average option price of $15.29 per share were outstanding during 1999 but were not included in the computation of diluted earnings per share because the options exercise price was greater than the average market price of the common shares and, therefore, the effect would be antidilutive.
8. Environmental Matters
The Company is involved in environmental investigation and/or remediation at certain of its present plant sites. The Company is not yet able to determine when such remediation activity will be complete.
At April 30, 1999 and 1998, the Company had accruals, primarily based upon independent engineering studies, for environmental matters of approximately $3,075,000 and $1,785,000, respectively. The Company believes the provisions it has made for environmental matters are adequate to satisfy its liabilities relating to such matters.
METHODE ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In 1999, the Company spent $624,000 on remediation cleanups and related studies compared with $290,000 in 1998 and $1,350,000 in 1997. The Company also recorded $600,000 in the fourth quarter of 1999 to provide for additional environmental costs associated with the exit of its printed circuit businesses, as well as a $1,000,000 provision for general printed circuit environmental costs not associated with the decision to exit the businesses. In 1999, the costs associated with environmental matters as they relate to day-to-day activities were not material.
9. Pending Litigation
Certain litigation arising in the normal course of business is pending against the Company. The Company is of the opinion that the resolution of such litigation will not have a significant effect on the consolidated financial statements of the Company.
10. Material Customers
Sales to two automotive customers approximated 41%, 38% and 43% of net sales in the years ended April 30, 1999, 1998 and 1997. At April 30, 1999 and 1998, accounts receivable from customers in the automotive industry were approximately $43,707,000 and $33,683,000.
Accounts receivable are generally due within 30 to 45 days. Credit losses relating to all customers consistently have been within management's expectation.
11. Segment Information
As described in Note 1, the Company adopted SFAS No. 131 in fiscal year 1999. The Company has two reportable business segments: Electronic Products and Optical Products.
The Company manufactures component devices world-wide for Original Equipment Manufacturers (OEMs) of information processing and networking equipment, voice and data communication systems, consumer electronics, automobiles, aerospace vehicles and industrial equipment. Products employ electrical, electronic and optical technologies as sensors, interconnections and controls. The Company is managed on a technology product basis, with those technology segments being Electronic and Optical.
The business units whose results are identified in the Electronic segment principally employ electronic processes to control and convey signals.
The business units whose results are identified in the Optical segment principally employ light to control and convey signals.
The Company's businesses which manufacture multi-layer printed circuit boards and bus systems as well as its independent laboratories which provide services for qualification testing and certification of electronic and optical components are included in Other. In April 1999 the Company announced its decision to exit the manufacture of printed circuitry as described in Note 2.
The accounting policies of the technology segments are the same as those described in the summary of significant accounting policies. The Company allocates resources to and evaluates performance of its technology segments based on operating income. Transfers between technology segments are recorded using internal transfer prices set by the Company.
METHODE ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The table below presents information about the Company's reportable segments:
METHODE ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Information about the Company's operations in different geographic regions is as follows:
METHODE ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
12. Summary Of Quarterly Results Of Operations (Unaudited)
The following is a summary of unaudited quarterly results of operations for the two years ended April 30, 1999.
INDEX TO EXHIBITS
- ------- (1) Previously filed with Registrant's Form S-3 Registration Statement No. 33- 61940 filed April 30, 1993, and incorporated herein by reference. (2) Previously filed with Registrant's Form S-8 Registration Statement No. 2- 60613 and incorporated herein by reference. (3) Previously filed with Registrant's Registration Statement No. 2-92902 filed August 23, 1984, and incorporated herein by reference. (4) Previously filed with Registrant's Form 10-Q for three months ended January 31, 1994, and incorporated herein by reference. (5) Previously filed with Registrant's Form 10-K for the year ended April 30, 1994, and incorporated herein by reference. (6) Previously filed with Registrant's S-8 Registration Statement No. 33-88036 and incorporated herein by reference. (7) Previously filed with Registrant's Statement No. 333-49671 and incorporated herein by reference. * Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Annual Report on Form 10-K pursuant to Item 14(c) of Form 10-K.