METHODE ELECTRONICS INC - Quarter Report: 2010 January (Form 10-Q)

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 

 

FORM 10-Q

 

(Mark One)

 

x  Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

for the quarterly period ended January 30, 2010

 

or

 

o  Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

 

 

Commission file number 0-2816

 

METHODE ELECTRONICS, INC.

(Exact name of registrant as specified in its charter.)

 

 

 

(708) 867-6777

(Registrant’s telephone number, including area code)

 

None

(Former name, former address, former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or smaller reporting company.  See definitions of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

 

At March 2, 2010, registrant had 37,232,359 shares of common stock outstanding.

 

 

Table of Contents

 

METHODE ELECTRONICS, INC.

FORM 10-Q

January 30, 2010

 

TABLE OF CONTENTS

 

 

								Page
PART I.  FINANCIAL INFORMATION
Item 1.				Financial Statements
				Condensed consolidated balance sheets as of — January 30, 2010 (unaudited) and May 2, 2009				2
				Condensed consolidated statements of operations (unaudited) — Three months and nine months ended January 30, 2010 and January 31, 2009				3
				Condensed consolidated statements of cash flows (unaudited) — Nine months ended January 30, 2010 and January 31, 2009				4
				Notes to condensed consolidated financial statements — January 30, 2010				5
Item 2.				Management’s Discussion and Analysis of Financial Condition and Results of Operations				22
Item 3.				Quantitative and Qualitative Disclosure About Market Risk				46
Item 4.				Controls and Procedures				46
PART II. OTHER INFORMATION
Item 6.			Exhibits					47
SIGNATURES								48
INDEX TO EXHIBITS								49

 

Table of Contents

 

PART I - FINANCIAL INFORMATION

 

Item 1 - Financial Statements

 

METHODE ELECTRONICS, INC AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

 

		As of			As of
		January 30, 2010			May 2, 2009
		(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	57,245		$	54,030
Accounts receivable, net		67,595			60,406
Inventories:
Finished products		4,615			11,865
Work in process		6,494			7,583
Materials		19,370			17,796
		30,479			37,244
Deferred income taxes		4,948			4,928
Prepaid and refundable income taxes		6,401			14,764
Prepaid expenses and other current assets		5,927			6,692
TOTAL CURRENT ASSETS		172,595			178,064
PROPERTY, PLANT AND EQUIPMENT		286,504			289,084
Less allowances for depreciation		221,514			219,167
		64,990			69,917
GOODWILL		11,771			11,771
INTANGIBLE ASSETS, net		19,276			20,501
PRE-PRODUCTION COSTS		8,700			3,182
OTHER ASSETS		20,916			21,853
		60,663			57,307
TOTAL ASSETS		$	298,248		$	305,288
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Accounts payable		$	27,989		$	24,495
Other current liabilities		28,128			29,023
TOTAL CURRENT LIABILITIES		56,117			53,518
OTHER LIABILITIES		10,809			13,561
DEFERRED COMPENSATION		2,014			3,308
SHAREHOLDERS’ EQUITY
Common stock, $0.50 par value, 100,000,000 shares authorized, 38,315,225 and 38,290,776 shares issued as of January 30, 2010 and May 2, 2009, respectively		19,158			19,145
Unearned common stock issuances		(3,632		)	(3,632		)
Additional paid-in capital		69,218			68,506
Accumulated other comprehensive income		19,278			15,675
Treasury stock, 1,372,188 shares as of January 30, 2010 and May 2, 2009		(11,495		)	(11,495		)
Retained earnings		133,313			143,577
TOTAL METHODE ELECTRONICS, INC. SHAREHOLDERS’ EQUITY		225,840			231,776
Noncontrolling interest		3,468			3,125
TOTAL EQUITY		229,308			234,901
TOTAL LIABILITIES AND EQUITY		$	298,248		$	305,288

 

See notes to condensed consolidated financial statements.

 

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METHODE ELECTRONICS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

(in thousands, except per share data)

 

		Three Months Ended						Nine Months Ended
		January 30,			January 31,			January 30,			January 31,
		2010			2009			2010			2009
INCOME
Net sales		$	89,127		$	80,781		$	277,398		$	336,599
Other		1,116			751			3,575			2,443
		90,243			81,532			280,973			339,042
COSTS AND EXPENSES
Cost of products sold		74,924			70,512			223,617			273,757
Restructuring		559			3,796			7,327			14,997
Impairment of goodwill and intangible assets		—			32,678			—			32,678
Selling and administrative expenses		17,075			14,688			49,358			49,624
		92,558			121,674			280,302			371,056
Income/(loss) from operations		(2,315		)	(40,142		)	671			(32,014		)
Interest income/(expense), net		(22		)	212			(169		)	1,215
Other income/(expense), net		264			(346		)	12			(1,225		)
Income/(loss) before income taxes		(2,073		)	(40,276		)	514			(32,024		)
Income tax expense/(benefit)		2,249			(13,346		)	2,760			(12,314		)
Net loss		(4,322		)	(26,930		)	(2,246		)	(19,710		)
Less: Net Income attributable to noncontrolling interest		(153		)	(55		)	(195		)	(222		)
NET LOSS ATTRIBUTABLE TO METHODE ELECTRONICS, INC.		$	(4,475	)	$	(26,985	)	$	(2,441	)	$	(19,932	)
Amounts per common share attributable to Methode Electronics, Inc.:
Basic and diluted net loss		$	(0.12	)	$	(0.74	)	$	(0.07	)	$	(0.54	)
Cash dividends:
Common stock		$	0.07		$	0.07		$	0.21		$	0.19
Weighted average number of Common Shares outstanding:
Basic and diluted		36,644			36,597			36,642			36,964

 

See notes to condensed consolidated financial statements.

 

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METHODE ELECTRONICS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(in thousands)

 

		Nine Months Ended
		January 30, 2010			January 31, 2009
OPERATING ACTIVITIES
Net loss		$	(2,246	)	$	(19,710	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Non-cash translation loss		—			2,463
Provision for depreciation		13,691			19,937
Impairment of tangible assets		710			3,177
Impairment of goodwill and intangible assets		—			32,678
Amortization of intangibles		1,689			5,408
Amortization of stock awards and stock options		724			696
Changes in operating assets and liabilities		1,319			(6,844		)
Other		—			576
NET CASH PROVIDED BY OPERATING ACTIVITIES		15,887			38,381
INVESTING ACTIVITIES
Purchases of property, plant and equipment		(7,816		)	(12,242		)
Acquisition of businesses		—			(57,457		)
Acquisition of technology licenses		(440		)	(903		)
Proceeds from life insurance policies		2,407			—
Other		—			(425		)
NET CASH USED IN INVESTING ACTIVITIES		(5,849		)	(71,027		)
FINANCING ACTIVITIES
Repurchase of common stock		—			(5,137		)
Proceeds from exercise of stock options		—			110
Tax benefit from stock options and awards		—			46
Cash dividends		(7,823		)	(7,154		)
NET CASH USED IN FINANCING ACTIVITIES		(7,823		)	(12,135		)
Effect of foreign currency exchange rate changes on cash		1,000			(5,097		)
INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS		3,215			(49,878		)
Cash and cash equivalents at beginning of period		54,030			104,305
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	57,245		$	54,427

 

See notes to condensed consolidated financial statements.

 

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METHODE ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Dollar amounts in thousands, except share data)

 

January 30, 2010

 

1.             BASIS OF PRESENTATION

 

Methode Electronics, Inc. was incorporated in 1946 as an Illinois corporation and reincorporated in Delaware in 1966.  As used herein, “we,” “us,” “our,” the “Company” or “Methode” means Methode Electronics, Inc. and its subsidiaries.  The condensed consolidated financial statements and related disclosures as of January 30, 2010 and results of operations for the three months and nine months ended January 30, 2010 and January 31, 2009 are unaudited, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).  The May 2, 2009 condensed consolidated balance sheet was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (“U.S. GAAP”).  Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations.  In our opinion, these financial statements include all adjustments (consisting only of normal recurring adjustments) necessary for the fair statement of the results for the interim periods.  These financial statements should be read in conjunction with the financial statements included in our latest Form 10-K for the year ended May 2, 2009 filed with the SEC on July 2, 2009.  Results may vary from quarter to quarter for reasons other than seasonality.

 

2.             RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

 

In September 2009, the Financial Accounting Standards Board “FASB” issued Accounting  Standards Update 2009-13, “Multiple-Deliverable Revenue Arrangements,” which amends the multiple-element arrangement guidance under Accounting Standards Codification “ASC” No. 605, “Revenue Recognition.”  This guidance amends the criteria for separating consideration of products or services in multiple-deliverable arrangements.  This guidance establishes a selling price hierarchy for determining the selling price of a deliverable, eliminates the residual method of allocation, and requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method.  In addition, this guidance significantly expands required disclosures related to a vendor’s multiple-deliverable revenue arrangements.  This guidance is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, which is our fiscal year 2012, that begins May 1, 2011.  The adoption of this standard will not have a material impact on our financial statements.

 

In January 2010, the FASB issued a new accounting standard which updates some new disclosures and clarifies some existing disclosure requirements about fair value measurements codified within ASC 820, “Fair Value Measurements and Disclosures,” (“ASC No. 820”).  The majority of the provisions of this update are effective for interim and annual reporting periods beginning after December 15, 2009.  The adoption of this standard will not have a material impact on our financial statements.

 

3.             RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

 

Effective November 1, 2009, we adopted ASC No. 810, “Consolidation” (“ASC No. 810”).  ASC No. 810 is intended to improve financial reporting by providing additional guidance to companies involved with variable interest entities and by requiring additional disclosures about a company’s involvement in variable interest entities.  This standard is effective for interim and annual periods ending after November 15, 2009.  The adoption of this standard did not have an impact on our financial statements.

 

Effective November 1, 2009, we adopted ASC No. 860, “Transfers and Servicing” (“ASC No. 860”).  ASC No. 860 requires more information about transfers of financial assets, including continuing exposure to the risk related to transferred financial assets.  It eliminates the concept of a qualifying special purpose entity, changes the requirements for derecognizing financial assets, and requires additional disclosure.  This standard is effective for interim and annual periods ending after November 15, 2009.  The adoption of this standard did not have an impact on our financial statements.

 

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METHODE ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Dollar amounts in thousands, except share data)

 

3.             RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS - Continued

 

Effective October 31, 2009, we adopted ASC No. 105, “Generally Accepted Accounting Principles,” (“ASC No. 105”), the FASB Accounting Standards Codification the “Codification” and the Hierarchy of Generally Accepted Accounting Principles.  The Codification is now the single source of authoritative GAAP for all non-governmental entities.  The Codification changes the referencing and organization of accounting guidance.  The issuance of ASC No. 105 did not change GAAP and therefore the adoption of ASC No. 105 will only affect how specific references to GAAP literature are disclosed in the notes to our consolidated financial statements.

 

In December 2007, the FASB issued new guidance under ASC No. 810, an Amendment of Accounting Research Bulletin No. 51, “Consolidated Financial Statements”.  ASC No. 810 establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary.  It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements.  We adopted ASC No. 810 on May 3, 2009.  As a result, we have reclassified financial statement line items within our condensed consolidated balance sheet and statement of income for the prior period to conform with this standard.  Additionally, see Note 5 for disclosure reflecting the impact of ASC No. 810 on our reconciliation of comprehensive income.

 

In June 2008, the FASB issued ASC No. 260, “Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities” (“ASC No. 260”).  ASC No. 260 was issued to clarify that unvested share-based payment awards with a right to receive non-forfeitable dividends are participating securities.  This ASC also provides guidance on how to allocate earnings to participating securities and compute basic earnings per share using the two-class method.  We adopted ASC No. 260 on May 3, 2009.  The adoption did not have a material impact on our earnings per share calculations.

 

In February 2008, the FASB issued new guidance under ASC No. 820, (FASB Staff Position No. 157-2), which delays the effective date of SFAS No. 157 for non-financial assets and liabilities, which are not measured at fair value on a recurring basis (at least annually) until fiscal years beginning after November 15, 2008, which is our fiscal year 2010 that began May 3, 2009.  The adoption of ASC No. 820 for non-financial assets and liabilities did not have a material impact on our condensed consolidated financial statements.

 

On May 3, 2009, we adopted the provisions of ASC No. 805-10, “Business Combinations” (“ASC No. 805-10”).  ASC No. 805-10 establishes principles and requirements on how an acquirer recognizes and measures in its financial statements identifiable assets acquired, liabilities assumed, noncontrolling interests in the acquiree, goodwill or gain from a bargain purchase and accounting for transaction costs. Additionally, ASC No. 805-10 determines what information must be disclosed to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The adoption of ASC No. 805-10 did not have a material impact on our consolidated financial statements, but will have an impact on the accounting for future business combinations.

 

In April 2009, the FASB issued three FASB Staff Positions, (“FSPs”) related to fair value measurements. The first, FSP ASC No. 820, “Fair Value Measurements and Disclosures,” provides guidance on determining whether a market is inactive and whether transactions in that market are distressed. The second FSP issued, ASC No. 320, “Investments — Debt and Equity Securities,” and EITF 99-20-2, “Recognition and Presentation of Other-Than-Temporary Impairments,” provides guidance on how to assess whether an asset has experienced an other-than-temporary impairment and, if so, where the impairment should be recorded in the financial statements. The third FSP issued, ASC No. 825, “Financial Instruments,” and ASC No. 270, “Interim Reporting,” requires that disclosures currently required under ASC No. 825, Disclosures about Fair Value of Financial Instruments, be presented for interim periods as well as annual periods. The Company adopted these FSPs during the first quarter of fiscal 2010. The adoption of these FSPs did not have a material impact on the Company’s consolidated financial statements.

 

In May 2009, the FASB issued ASC No. 855, “Subsequent Events” (“ASC No. 855”). ASC No. 855 establishes general standards of accounting for, and disclosure of, events that occur after the balance sheet date but before financial statements are issued or are available to be issued.  In particular, this statement sets forth:  (1) the period after the balance sheet date during which management of a reporting entity should evaluate events or

 

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METHODE ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Dollar amounts in thousands, except share data)

 

3.             RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS - Continued

 

transactions that may occur for potential recognition or disclosure in the financial statements, (2) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in the financial statements and (3) the disclosure that an entity should make about events or transactions that occurred after the balance sheet date.  We adopted ASC No. 855 on August 1, 2009 and the adoption did not have a material impact on our financial statements.

 

4.             RESTRUCTURINGS

 

March 2009 Restructuring

 

In March 2009, we announced several additional restructuring actions to further reduce our exposure to the North American automotive industry and to consolidate manufacturing facilities in lower cost regions.  The restructuring is expected to be completed during the fourth quarter of fiscal 2010.  We record the expense in the restructuring section of our condensed consolidated statement of operations. As of January 30, 2010, we have recorded a total of $12,459 of charges related to this restructuring.  We estimate that we will record additional pre-tax restructuring charges in the fourth quarter of fiscal 2010 of between $250 and $500.

 

During the three months ended January 30, 2010, we recorded a restructuring charge of $277, which consisted of $22 for employee severance and $255 relating to other costs.  During the nine months ended January 30, 2010, we recorded a restructuring charge of $5,196, which consisted of $3,512 for employee severance and $1,684 relating to other costs.  As of January 30, 2010, we had an accrued restructuring liability of $282 reflected in the current liabilities section of our consolidated balance sheet.  We expect this liability to be paid out during the fourth quarter of fiscal 2010.

 

The table below reflects the March 2009 restructuring activity for the first, second and third quarters of fiscal 2010:

 

		One-Time
		Employee			Other
		Severance			Costs			Total
Accrued balance at May 2, 2009		$	140		$	—		$	140
First quarter fiscal 2010 restructuring charges		1,671			270			1,941
First quarter fiscal 2010 payments		(1,625		)	(270		)	(1,895		)
Accrued balance at August 1, 2009		186			—			186
Second quarter fiscal 2010 restructuring charges		1,819			1,159			2,978
Second quarter fiscal 2010 payments		(1,688		)	(879		)	(2,567		)
Accrued balance at October 31, 2009		$	317		$	280		$	597
Third quarter fiscal 2010 restructuring charges		22			255			277
Third quarter fiscal 2010 payments		(339		)	(253		)	(592		)
Accrued balance at January 30, 2010		$	—		$	282		$	282

 

January 2008 Restructuring

 

In January 2008, we announced a restructuring of our U.S.-based automotive operations and a decision to discontinue producing certain legacy products in the Interconnect segment.  The Automotive and Interconnect restructuring is expected to be completed during the fourth quarter of fiscal 2010.  We record the expense in the restructuring section of our condensed consolidated statement of operations.  As of January 30, 2010, we have

 

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METHODE ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Dollar amounts in thousands, except share data)

 

4.             RESTRUCTURINGS - Continued

 

recorded charges totaling $25,304 related to this restructuring.  We estimate that we will record additional pre-tax restructuring charges in the fourth quarter of fiscal 2010 of between $250 and $750.

 

During the three months ended January 30, 2010, we recorded a restructuring charge of $282, which consisted of $456 for employee severance, a gain on the sale of assets of $180 and $6 related to other costs.  During the nine months ended January 30, 2010, we recorded a restructuring charge of $2,130, which consisted of $636 for employee severance, $1,358 in impairments and accelerated depreciation and $136 relating to other costs.  As of January 30, 2010, we had an accrued restructuring liability of $321 reflected in the current liabilities section of our consolidated balance sheet.  We expect this liability to be paid out during the fourth quarter of fiscal 2010.

 

The table below reflects the January 2008 restructuring activity for the first, second and third quarters of fiscal 2010:

 

		One-Time
		Employee			Asset			Other
		Severance			Write-Downs			Costs			Total
Accrued balance at May 2, 2009		$	1,849		$	—		$	—		$	1,849
First quarter fiscal 2010 restructuring charges		180			1,450			40			1,670
First quarter 2010 payments and asset write-downs		(368		)	(1,450		)	(40		)	(1,858		)
Accrued balance at August 1, 2009		1,661			—			—			1,661
Second quarter fiscal 2010 restructuring charges		—			88			90			178
Second qtr fiscal 2010 payments and asset write-downs		(244		)	(88		)	(90		)	(422		)
Accrued balance at October 31, 2009		$	1,417		$	—		$	—		$	1,417
Third quarter fiscal 2010 restructuring charges		456			(180		)	6			282
Third qtr fiscal 2010 payments and asset write-downs		(1,552		)	180			(6		)	(1,378		)
Accrued balance at January 30, 2010		$	321		$	—		$	—		$	321

 

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METHODE ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Dollar amounts in thousands, except share data)

 

5.             COMPREHENSIVE INCOME/(LOSS)

 

The components of our comprehensive income/(loss) for the three and nine months ended January 30, 2010 and January 31, 2009 include net income/(loss) and adjustments to stockholders’ equity for foreign currency translations.  The foreign currency translation adjustment was due to exchange rate fluctuations in our foreign affiliates’ local currency versus the U.S. dollar.

 

The following table presents details of our comprehensive income/(loss) (unaudited):

 

		Three Months Ended January 30, 2010									Nine Months Ended January 30, 2010
					Methode			Noncontrolling						Methode			Noncontrolling
		Total			Shareholders			Interest			Total			Shareholders			Interest
Net income/(loss)		$	(4,322	)	$	(4,475	)	$	153		$	(2,246	)	$	(2,441	)	$	195
Translation adjustment		(4,613		)	(4,442		)	(171		)	3,603			3,418			185
Total comprehensive income/(loss)		$	(8,935	)	$	(8,917	)	$	(18	)	$	1,357		$	977		$	380

 

		Three Months Ended January 31, 2009									Nine Months Ended January 31, 2009
					Methode			Noncontrolling						Methode			Noncontrolling
		Total			Shareholders			Interest			Total			Shareholders			Interest
Net income/(loss)		$	(26,930	)	$	(26,985	)	$	55		$	(19,710	)	$	(19,932	)	$	222
Translation adjustment		(507		)	(114		)	(393		)	(17,416		)	(16,499		)	(917		)
Total comprehensive loss		$	(27,437	)	$	(27,099	)	$	(338	)	$	(37,126	)	$	(36,431	)	$	(695	)

 

6.             GOODWILL AND INTANGIBLE ASSETS

 

We review our goodwill and other intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable, and we also review our goodwill annually in accordance with ASC No. 350, “Intangibles — Goodwill and Other,” (“ASC No. 350”).  The values assigned to goodwill and intangible assets are normally based on estimates and judgments regarding expectations for the success and life cycle of products and technologies acquired.  A severe decline in expectations could result in significant impairment charges, which could have a material adverse effect on our financial condition and results of operations.  We did not perform impairment testing on our goodwill and intangible assets during the third quarter of fiscal 2010 because there were no additional indicators of impairment.

 

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METHODE ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Dollar amounts in thousands, except share data)

 

6.             GOODWILL AND INTANGIBLE ASSETS - Continued

 

The following tables present details of the Company’s intangible assets:

 

		As of January 30, 2010
											Wtd. Avg.
											Remaining
					Accumulated						Amortization
		Gross			Amortization			Net			Periods (Years)
Customer relationships and agreements		$	14,995		$	12,977		$	2,018		13.9
Patents and technology licenses		23,708			6,561			17,147			13.1
Covenants not to compete		480			369			111			2.1
Total		$	39,183		$	19,907		$	19,276

 

		As of May 2, 2009
											Wtd. Avg.
											Remaining
					Accumulated						Amortization
		Gross			Amortization			Net			Periods (Years)
Customer relationships and agreements		$	14,995		$	12,718		$	2,277		14.7
Patents and technology licenses		23,244			5,169			18,075			13.4
Covenants not to compete		480			331			149			2.8
Total		$	38,719		$	18,218		$	20,501

 

The estimated aggregate amortization expense for fiscal 2010 and each of the four succeeding fiscal years is as follows:

 

2010		$	2,248
2011		2,210
2012		1,698
2013		1,321
2014		1,208

 

As of January 30, 2010, the patents and technology licenses include $2,400 of trade names that are not subject to amortization.

 

7.             ACQUISITIONS

 

On September 30, 2008, we acquired certain assets of Hetronic LLC (Hetronic) for $53,639 in cash.  We also incurred $2,447 in transaction costs.  Hetronic is a global leader in industrial safety radio remote controls with locations in the U.S., Malta, the Philippines and Germany.

 

Based in part on a third-party valuation report, management determined that the tangible net assets acquired had a fair value of $20,533.  The fair values assigned to intangible assets acquired were $12,170 for customer relationships, $2,700 for the trade name and trademarks, $1,450 for technology valuation, and $170 for non-competes, resulting in $19,063 of goodwill.  The customer relationships, technology valuation and non-compete agreements will be amortized over 5 to approximately 12 years.  The trade name and trademarks are not subject to amortization but will be subject to periodic impairment testing.  The accounts and transactions of Hetronic have been included in the Interconnect segment in the consolidated financial statements from the effective date of the acquisition.

 

At the end of fiscal 2009, in accordance with ASC No. 350 and ASC No. 360, “Property, Plant, and Equipment,” it was determined that the goodwill and intangible assets for Hetronic were impaired.  Therefore, in the

 

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METHODE ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Dollar amounts in thousands, except share data)

 

7.             ACQUISITIONS - Continued

 

fourth quarter of fiscal 2009, we recorded an impairment charge of $19,063 and $11,587 for goodwill and intangible assets, respectively.

 

8.             INCOME TAXES

 

At January 30, 2010, we had valuation allowances against our deferred tax assets of $56,723.  In accordance with ASC No. 740, “Income Taxes,” a valuation allowance is required to be recorded when it is more likely than not that deferred tax assets will not be realized.  Future realization depends on the existence of sufficient taxable income within the carry-forward period available under the tax law.  Sources of future taxable income include future reversals of taxable temporary differences, future taxable income exclusive of reversing taxable differences, taxable income in carry-back years and tax planning strategies.  These sources of positive evidence of realizability must be weighed against negative evidence, such as cumulative losses in recent years.

 

In forming a judgment about the future realization of our deferred tax assets, we considered both the positive and negative evidence of realizability and gave significant weight to the negative evidence from our recent cumulative loss.  We will continue to assess this situation and make appropriate adjustments to the valuation allowance based on our evaluation of the positive and negative evidence existing at the time.  We are currently unable to forecast when there will be sufficient positive evidence for us to reverse the valuation allowances that we have recorded.

 

The valuation allowance is associated with the deferred tax assets for the differences between book and tax that result from net operating losses (NOLs), foreign investment tax credits with unlimited carryovers generated in the current and prior years and temporary differences which become deductible when the related asset is recovered or related liability is settled.

 

During the third quarter of fiscal 2010, we recognized a benefit of $3,092 in uncertain tax positions due to settlements.  We believe that it is reasonably possible that the total amount of unrecognized tax benefits will change within the next twelve months.  We have certain tax return years subject to statutes of limitation, which will close within twelve months of the end of the quarter.  Unless challenged by tax authorities, the closure of those statutes of limitation is expected to result in the recognition of uncertain tax positions in the range of between $300 and $2,600.

 

We recognize interest and penalties accrued related to the unrecognized tax benefits in the provision for income taxes.  During the three months ended January 30, 2010, we recognized a reversal of $161 in interest and $50 in penalties.  We had approximately $1,380 accrued at January 30, 2010 for the payment of interest and penalties.  The total unrecognized tax benefit as of January 30, 2010 was $3,034.

 

The following table presents a reconciliation of the beginning and ending amounts of unrecognized tax benefits:

 

Balance at May 2, 2009		$	6,126
Increases for positions related to the current year		—
Increases for positions related to the prior years		—
Decreases for positions related to prior years		—
Settlements		(3,092		)
Lapsing of statutes of limitations		—
Balance at January 30, 2010		$	3,034

 

The Company and all of its domestic subsidiaries file income tax returns in the U.S. federal jurisdiction and various states.  Our foreign subsidiaries file income tax returns in certain foreign jurisdictions since they have operations outside the U.S.  The Company and its subsidiaries are generally no longer subject to U.S. federal, state and local examinations by tax authorities for all years except fiscal 2009 and fiscal 2006.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Dollar amounts in thousands, except share data)

 

9.             COMMON STOCK AND STOCK-BASED COMPENSATION

 

The following table sets forth the changes in the number of issued shares of common stock during the nine-month periods presented:

 

		Nine Months Ended
		January 30,		January 31,
		2010		2009
Balance at the beginning of the period		38,290,776		38,225,379
Options exercised		—		19,089
Restricted stock awards vested		24,449		50,473
Repurchase and retirement		—		(53,012	)
Balance at the end of the period		38,315,225		38,241,929

 

We paid quarterly dividends of $2,590 on January 30, 2010.  Our Board of Directors approved a stock repurchase plan on September 18, 2008 to repurchase up to 3,000,000 shares.  The plan expires at the end of fiscal 2010.  There were no shares purchased during the first three quarters of fiscal 2010.

 

Stock Options Granted Under the 2000 and 2004 Stock Plans

 

Options to purchase 583,909 shares of our common stock were granted in previous years under the 2000 and 2004 stock plans and are outstanding and exercisable as of January 30, 2010.  Options to purchase 30,128 shares of our common stock expired and options to purchase 11,596 shares of our common stock were forfeited during the first nine months of fiscal 2010.  There was no remaining compensation expense relating to these options in the first three quarters of fiscal 2010.

 

The following tables summarize the stock option activity and related information for the stock options granted under the 2000 and 2004 stock plans for the nine months ended January 30, 2010:

 

		Summary of Option Activity
				Wtd. Avg.
		Shares		Exercise Price
Outstanding at May 2, 2009		625,633		$	10.26
Exercised		—		—
Forfeited and Expired		(41,724	)	8.17
Outstanding at January 30, 2010		583,909		$		10.52

 

Options Outstanding and Exercisable at January 30, 2010
				Wtd. Avg.			Avg.
Range of				Exercise			Remaining
Exercise Prices		Shares		Price			Life (Years)
$5.72 - $7.69		148,125		$	6.72		1.8
$8.53 - $11.44		303,085		10.86			1.8
$12.11 - $17.66		132,699		14.00			0.8
		583,909		$	10.52

 

The options outstanding had an intrinsic value of $736 at January 30, 2010.  The intrinsic value represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on the last trading day of the third quarter of fiscal 2010 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on January 30, 2010.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Dollar amounts in thousands, except share data)

 

9.             COMMON STOCK AND STOCK-BASED COMPENSATION - Continued

 

Stock Options Granted Under the 2007 Stock Plan

 

In March 2009, the Compensation Committee approved the grant of options to purchase 285,000 shares of our common stock to our executive officers under the 2007 Stock Plan.  The March 2009 stock options vest on the third anniversary of the date of grant.  In July 2009, the Compensation Committee approved the grant of options to purchase 275,000 shares of our common stock to our executive officers and other members of management under the same plan.  The July 2009 stock options vest one-third per year on each anniversary of the date of grant.  Additionally, in December 2009, the Compensation Committee approved the grant of options to purchase 35,500 shares of our common stock to some members of the management team.  The December 2009 stock options vest on the third anniversary of the date of grant.  The stock options granted under the 2007 plan have a ten-year term.

 

The following tables summarize the stock option activity and related information for the stock options granted under the 2007 stock plan for the nine months ended January 30, 2010:

 

		Summary of Option Activity
				Wtd. Avg.
		Shares		Exercise Price
Outstanding at May 2, 2009		285,000		$	2.72
Granted		310,500		6.65
Exercised		—		—
Cancelled		—		—
Outstanding at January 30, 2010		595,500		$	4.77

 

Options Outstanding at January 30, 2010
					Avg.
					Remaining
Exercise Price			Shares		Life (Years)
$	2.72		285,000		9.1
$	6.46		275,000		9.4
$	8.13		35,500		9.8

 

We estimated the fair value of our employee stock options on the date of grant using the Black-Scholes option-pricing model with the following assumptions:

 

		Fiscal 2009			Fiscal 2010
		Grants			Grants
Average expected volatility		69.58		%	86.88		%
Average risk-free interest rate		1.39		%	1.43		%
Dividend yield		2.26		%	2.77		%
Expected life of options		6.87 years			6.87 years
Weighted-average grant-date fair value		$	1.46		$	4.02

 

We recognized pre-tax compensation expense for stock options granted under the 2007 plan of $136 and $328 in the three months and nine months ended January 30, 2010.  There was no pre-tax compensation expense relating to these options for both the three months and nine months ended January 31, 2009.  We record the compensation expense related to the stock options in the selling and administrative section of our condensed consolidated statement of operations.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Dollar amounts in thousands, except share data)

 

9.             COMMON STOCK AND STOCK-BASED COMPENSATION - Continued

 

Restricted Stock Awards and Restricted Stock Units

 

In April 2007, 225,000 shares of common stock subject to performance-based Restricted Stock Awards (RSAs) granted to our CEO in fiscal 2006 and 2007 were converted to Restricted Stock Units (RSUs).  The RSUs were subject to the same vesting schedule and other major provisions of the RSAs they replaced, except the RSUs are not payable until the earlier of: (1) thirty days after the CEO’s date of termination of employment with the Company and all of its subsidiaries and affiliates; or (2) the last day of our fiscal year in which the payment of common stock in satisfaction of the RSUs becomes deductible to the Company under Section 162(m) of the Internal Revenue Code.  The RSUs are not entitled to voting rights or the payment of dividends.  All further discussion of RSAs in this report includes the RSUs described above.

 

At May 3, 2009, the beginning of fiscal 2010, there were 578,287 shares of common stock subject to performance-based and time-based RSAs outstanding.  The time-based RSAs vest in three equal annual installments from the grant date.  All RSAs awarded to executives are performance-based and vest after three years if the recipient remains employed by the Company until that date and we have met certain revenue growth and return on invested capital targets.  As of December 18, 2009, it was determined that based on the current economic environment, the 287,750 performance-based shares granted in fiscal years 2008 and 2009 were not expected to meet the revenue growth and return on invested capital targets, and, therefore were cancelled.  All of the unvested RSAs are entitled to voting rights and to payment of dividends.  During the nine months ended January 30, 2010, we awarded 24,000 restricted shares to our independent directors, all of which vested immediately upon grant.

 

We recognized pre-tax compensation expense for RSAs of $81 and a reversal of expense of $910 in the three months ended January 30, 2010 and January 31, 2009, respectively.  We recognized pre-tax compensation expense for RSAs of $396 and $692 in the nine months ended January 30, 2010 and January 31, 2009, respectively.  We record the expense in the selling and administrative section of our condensed consolidated statement of operations.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Dollar amounts in thousands, except share data)

 

9.             COMMON STOCK AND STOCK-BASED COMPENSATION - Continued

 

The following table summarizes the RSA activity for the nine months ended January 30, 2010:

 

		Shares
Unvested and unissued at May 2, 2009		578,287
Awarded		24,000
Vested		(24,667	)
Forfeited and Cancelled		(288,298	)
Unvested and unissued at January 30, 2010		289,322

 

The table below shows the Company’s unvested and unissued RSAs at January 30, 2010:

 

									Probable			Target
									Unearned			Unearned
Grant						Weighted			Compensation			Compensation
Fiscal						Average			Expense at			Expense at
Year		RSAs		Vesting Period		Value			January 30, 2010			January 30, 2010
2006		125,000		3-year cliff performanced-based		$	12.42		$	—		$	—
2007		100,834		3-year equal annual installments		7.67			—			—
2008		15,263		3-year equal annual installments		14.84			23			23
2009		48,225		3-year equal annual installments		10.62			148			148

 

At January 30, 2010, the aggregate unvested and un issued RSAs had a grant date weighted average fair value of $10.59 and a weighted average vesting period of approximately 11.7 months.

 

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