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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. 18-------------------------------------------------------------------------------- Table of Contents • 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. 19-------------------------------------------------------------------------------- Table of Contents 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 % 20-------------------------------------------------------------------------------- Table of Contents 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. 21-------------------------------------------------------------------------------- Table of Contents 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. 22-------------------------------------------------------------------------------- Table of Contents 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 23-------------------------------------------------------------------------------- Table of Contents 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. 24-------------------------------------------------------------------------------- Table of Contents 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. 25-------------------------------------------------------------------------------- Table of Contents 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. 26-------------------------------------------------------------------------------- Table of Contents 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. 27-------------------------------------------------------------------------------- Table of Contents 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 28-------------------------------------------------------------------------------- Table of Contents 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. 29-------------------------------------------------------------------------------- Table of Contents 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 30-------------------------------------------------------------------------------- Table of Contents 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. 31-------------------------------------------------------------------------------- Table of Contents 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. 32-------------------------------------------------------------------------------- Table of Contents 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. 33-------------------------------------------------------------------------------- Table of Contents 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. 34-------------------------------------------------------------------------------- Table of Contents 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 35-------------------------------------------------------------------------------- Table of Contents 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. |