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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q/A-1
(Mark One) (X) Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities and Exchange Act of 1934
for the quarterly period ended January 31, 1999
or
( ) Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934.
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Commission file number 0-2816
METHODE ELECTRONICS, INC.
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(Exact name of registrant as specified in its charter.)
Delaware 36-2090085
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7444 West Wilson Avenue, Harwood Heights, Illinois 60656
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(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (708) 867-9600
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None
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(Former name, former address, former fiscal year, if changed since last report)
At March 1, 1999, Registrant had 34,356,805 shares of Class A Common Stock
and 1,189,191 shares of Class B Common Stock outstanding.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such report(s)), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
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Item 2. Management's Discussion and Analysis
Results of Operations
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Net sales for the third quarter of fiscal 1999 increased 6% to $96,387,000,
compared with $90,740,000 for the third quarter last year. Sales for the nine
months ended January 31, 1999 increased 3% to $292,224,000 compared with
$282,573,000 for the same period last year. Sales of our high frequency gigabit
optical transceiver products more than doubled in the current quarter and more
than tripled for the nine-month period compared with the same periods last year.
Domestic automotive interconnect devices and controls, which represented
approximately 40% of Methode's business during all periods, experienced a 7%
increase in sales in the current quarter and a 2% increase for the current nine-
month period. Our worldwide automotive interconnect sales increased 12% for the
current quarter and 6% for the nine-month period. Sales of our dataMate "smart
interconnects" fell off approximately 25% in the current quarter and 28% in the
nine-month period following sales gains of approximately 11% in the prior year
quarter and 35% in the prior year nine-month period. Sales of other connector
products were up 2% for the current quarter but down 7% for the nine-month
period compared with the prior year.
Other income consisted primarily of earnings from an automotive joint
venture, royalty and license fees, and interest on short-term investments.
Cost of products sold as a percentage of sales for the third quarter was
75.5% compare with 75.7% for the year-ago period. For the nine-month period
ended January 31, 1999 this percentage increased to 74.8% from 74.0% for the
same period last year. Margin declines in the nine-month period resulted, to
some extent, from the incremental cost of providing our automotive customers
with full-service engineering support previously provided by the customers'
engineering staff. Margin improvement resulting from volume gains by optical
transceiver products were offset by margin declines due to reduced sales volumes
of dataMate products.
Selling and administrative expenses as a percentage of sales were 14.1% and
13.7% in the current quarter and nine-month periods of fiscal 1999, up from
13.4% and 13.3% for the year-ago periods.
The effective income tax rate was 34.5% in the current quarter and nine-
month period compared with 35.3% and 35.1% for the quarter and nine-month period
ended January 31, 1998. The effective income tax rate in fiscal 1998
approximated the statutory federal rate of 35% with lower statutory rates on
foreign operations offsetting the effect of state income taxes. In fiscal 1999,
the foreign operations were a larger component of total income resulting in a
lower effective rate.
Financial Conditions, Liquidity and Capital Resources
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Net cash provided by operating activities was $22,890,000 in fiscal 1999,
down from $27,387,000 provided during the year-ago period. The decrease was the
result of lower net income and increased working capital requirements primarily
due to large automotive tooling requirements.
Depreciation and amortization expense was $14,028,000 in fiscal 1999
compared with $13,655,000 in fiscal 1998. Capital expenditures were $15,510,000
in fiscal 1999 compared with $14,932,000 last year. It is presently expected
that fixed asset additions for fiscal 1999 will approximate $23,000,000 and will
be financed with internally generated funds.
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The Board of Directors adopted a Common Stock Repurchase Program that
authorizes the Company to repurchase up to $20,000,000 of Common Stock of the
Company over the next three years. Depending on the timing of such purchases,
the Company may utilize bank borrowings to fund this program.
Year 2000 (Y2K) Conversion
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The Year 2000 issue exists because many computer system, applications and
assets use two-digit date fields to designate a year. As the century date change
occurs, date sensitive systems may recognize the Year 2000 as 1900, or not at
all. This inability to recognize or properly treat the Year 2000 may cause
systems to process financial and operations information incorrectly.
Status of Readiness:
The Company's Year 2000 Strategy to make systems "Y2K ready" includes a
common Company-wide focus on all internal systems potentially impacted by the
Y2K issue, including Information Technology ("IT") Systems and Non-IT
equipment and systems (Operating Equipment) that contain embedded computer
technology. Each of the foregoing IT and Non-IT programs is being conducted in
phases; described as follows:
Inventory Phase--Identify hardware or software that use or process date
information.
Assessment Phase--Identify Year 2000 Date processing deficiencies and
related implications.
Planning Phase--Determine for each deficiency an appropriate solution and
budget as well as schedule personnel and other resources.
Implementation Phase--Implement designated solutions and test systems. The
Company is upgrading hardware and software for certain major computer systems
that will concurrently address the Year 2000 issues for those systems. To date,
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 Compliant.
For IT Systems, to date the Company is 65% complete on the implementation
phase and expects to complete the upgrade and replacement of remaining systems
by September 1999. For its' Non-IT Systems, the Company is in the process of
bringing such systems into Year 2000 compliance. This remediation is 55%
complete. The Company expects to substantially complete this remediation effort
by August 1999.
The Company is in the process of working with third party suppliers to
ensure that the Company's systems that interface directly with third parties are
Year 2000 compliant. The company has completed 80% of its remediation efforts on
these systems with testing to be completed on all significant systems no later
than June 1999. We have been informed that these key suppliers are in the
process of making their billing systems Year 2000 compliant by the end of 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 plans to make inquiry as to the
Year 2000 readiness of selected customers and service vendors.
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Costs:
As of January 31, 1999, the Company's total incremental costs (historical
plus estimated future costs) of system upgrades and addressing Year 2000 issues
are estimated to be $4,100,000 of which $1,500,000 has been incurred ($350,000
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 ($2,600,000), approximately $1,900,000 is attributable to the purchase of
new software and equipment that will be capitalized. The remaining $700,000 will
be expensed as incurred. The Company estimates that substantial portions of
these costs are attributable to system upgrades that would have been incurred
regardless of the Year 2000 issue. Implementation of our 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 compliance program is directed primarily toward
ensuring that the Company will be able to continue to perform five critical
functions: (A) order and receive raw material and supplies, (B) make and sell
its products, (C) invoice customers and collect payments, (D) pay its employees
and suppliers, and (E) maintain accurate accounting records. While the Company
currently believes that it will be able to modify or replace its affected
systems in time to minimize any significant detrimental effects on its
operations, failure to do so, or the failure of key third parties to modify or
replace their affected systems, could have materially adverse impacts on the
Company's business operations or 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 compliance, the impact on its operations and its ability to bring each of
its systems into Year 2000 compliance 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. We anticipate completion of
the Year 2000 Contingency Plans by June 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 issued, 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.
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SIGNATURES
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Methode Electronics, Inc.
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By:____________________________________
Kevin J. Hayes
Chief Financial Officer
Dated: March 12, 1999
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