METHODE ELECTRONICS INC — Interim / Quarterly Report 2005

Sep 9, 2004

10-Q 1 c88094e10vq.htm QUARTERLY REPORT e10vq PAGEBREAK

Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)	Quarterly Report Pursuant to Section 13 or 15(d)
	of the Securities Exchange Act of 1934
	for the quarterly period ended July 31, 2004
	or
( )	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.)

Delaware	36-2090085
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)
7401 West Wilson Avenue, Harwood Heights, Illinois	60706-4548
(Address of principal executive offices)	(Zip Code)

(Registrant’s telephone number, including area code) (708) 867-6777

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 ( )

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes (X) No ( )

At September 3, 2004, Registrant had 35,815,254 shares of common stock outstanding.

PAGEBREAK

Table of Contents

TOC

METHODE ELECTRONICS, INC. FORM 10-Q July 31, 2004

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed consolidated balance sheets as of July 31, 2004 and April 30, 2004	1
Condensed consolidated statements of income — Three months ended July 31, 2004 and 2003	2
Condensed consolidated statements of cash flows — Three months ended July 31, 2004 and 2003	3
Notes to condensed consolidated financial statements — July 31, 2004	4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	10
Item 3. Quantitative and Qualitative Disclosure About Market Risk	13
Item 4. Controls and Procedures	13
PART II. OTHER INFORMATION
Item 6. Exhibits and reports on Form 8-K	15
SIGNATURES	15
INDEX TO EXHIBITS	16
Certification of Principal Executive Officer
Certification of Principal Financial Officer
Certification of Periodic Financial Report

PAGEBREAK

Table of Contents

/TOC

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

METHODE ELECTRONICS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

	July 31,	April 30,
	2004	2004
	(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$ 65,970	$ 61,757
Accounts receivable, net	58,139	65,360
Inventories:
Finished products	6,660	5,462
Work in process	16,381	17,596
Materials	7,256	6,149
	30,297	29,207
Deferred income taxes	7,941	7,901
Prepaid expenses	3,709	5,130
TOTAL CURRENT ASSETS	166,056	169,355
PROPERTY, PLANT AND EQUIPMENT	254,584	250,305
Less allowance for depreciation	164,961	162,550
	89,623	87,755
GOODWILL, net	20,341	19,559
INTANGIBLE ASSETS, net	23,311	24,266
OTHER ASSETS	13,431	13,253
	$ 312,762	$ 314,188
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable	$ 23,151	$ 28,542
Other current liabilities	29,107	28,718
TOTAL CURRENT LIABILITIES	52,258	57,260
OTHER LIABILITIES	4,033	4,059
DEFERRED COMPENSATION	4,064	4,285
SHAREHOLDERS’ EQUITY
Common stock	18,103	17,955
Paid in capital	42,819	39,719
Retained earnings	190,023	187,207
Other shareholders’ equity	1,462	3,703
	252,407	248,584
	$ 312,762	$ 314,188

See notes to condensed consolidated financial statements.

1

PAGEBREAK

Table of Contents

METHODE ELECTRONICS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(in thousands, except per share data)

	Three Months Ended July 31, — 2004	2003
INCOME
Net sales	$ 85,021	$ 77,957
Other	655	620
Total	85,676	78,577
COSTS AND EXPENSES
Cost of products sold	67,781	62,799
Selling and administrative expenses	11,388	9,121
Total	79,169	71,920
Income from operations	6,507	6,657
Interest, net	113	187
Other, net	37	(578	)
Income before income taxes	6,657	6,266
Income taxes	2,065	1,975
NET INCOME	$ 4,592	$ 4,291
Basic and diluted earnings per common share	$ 0.13	$ 0.12
Cash dividends per share:
Common stock	$ 0.05	$ 0.05
Class B	—	$ 0.05
Weighted average number of common
shares outstanding:
Basic	35,500	36,106
Diluted	35,776	36,334

See notes to condensed consolidated financial statements.

2

PAGEBREAK

Table of Contents

METHODE ELECTRONICS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(in thousands)

	Three Months Ended July 31, — 2004	2003
OPERATING ACTIVITIES
Net income	$ 4,592	$	4,291
Provision for depreciation
and amortization	5,280		4,880
Changes in operating assets
and liabilities	4,006		8,809
Other	198		47
NET CASH PROVIDED BY OPERATING ACTIVITIES	14,076		18,027
INVESTING ACTIVITIES
Purchases of property, plant and
equipment	(5,799	)	(3,694	)
Acquisitions of businesses	(2,671	)	(1,253	)
Collection of note receivable from a related party	—		6,000
Other	(503	)	(135	)
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES	(8,973	)	918
FINANCING ACTIVITIES
Purchase and retirement of Class B shares	—		(17,063	)
Options exercised	160		1,397
Dividends	(1,775	)	(1,819	)
Other	—		357
NET CASH USED IN FINANCING ACTIVITIES	(1,615	)	(17,128	)
Effect of foreign exchange rate changes on cash	725		18
INCREASE IN CASH AND CASH EQUIVALENTS	4,213		1,835
Cash and cash equivalents at
beginning of period	61,757		64,261
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$ 65,970	$	66,096

See notes to condensed consolidated financial statements.

3

PAGEBREAK

Table of Contents

METHODE ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Dollar amounts in thousands, except per share data)

July 31, 2004

1. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month period ended July 31, 2004 are not necessarily indicative of the results that may be expected for the year ending April 30, 2005. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended April 30, 2004.

Certain prior year amounts have been reclassified to conform to the current year presentation.

Comprehensive income consists of net income and foreign currency translation adjustments and totaled $5,259 and $4,567 for the first quarters of fiscal 2005 and 2004, respectively.

1. RESTRUCTURING AND IMPAIRMENT OF ASSETS

Fiscal 2004 Restructuring

In the third quarter of fiscal 2004, due in part to price erosion and lost sales to lower cost Eastern European and Asian suppliers, the Company adopted a restructuring plan to discontinue copper cable assembly operations at its Ireland facility and dispose of or close its United Kingdom optical cable assembly operation. In the fourth quarter of fiscal 2004, the Company closed its United Kingdom optical cable assembly operation, transferring some production to its Czech Republic fiber optic facility and executing an agreement to sell the balance to local management for cash of $272. The sale closed in June 2004.

Fiscal 2002 Restructuring

In the fourth quarter of fiscal 2002, in response to the weak economic conditions in the telecommunications and computer sectors, the Company adopted a restructuring plan in an effort to better align the Company’s operations with industry conditions. The restructuring included integrating the operations of Duel Systems, Inc. and Adam Technologies, Inc. into the Company’s domestic and foreign interconnect products group and closing the California and New Jersey manufacturing and distribution operations.

Accrued expenses, primarily severance pay and lease obligations that run through September 2011, related to restructurings included in other current liabilities in the Condensed Consolidated Balance Sheets were:

	Involuntary — Severance	Other		Total
Balance April 30, 2004	$ 137	$	250	$	387
Provision
Payments made	(117	)	(185	)	(302	)
Reversals	(7	)	(40	)	( 47	)
Balance July 31, 2004	$ 13	$	25	$	38

4

PAGEBREAK

Table of Contents

METHODE ELECTRONICS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – Continued (Dollar amounts in thousands, except per share data)

1. GOODWILL AND INTANGIBLE ASSETS

In connection with the acquisition of Automotive Safety Technologies, Inc. (AST), additional contingent cash consideration is due based on a percentage of AST’s annual sales. The increase in goodwill from April 30, 2004 to July 31, 2004 represents the accrual of the earned portion of the contingent payment that will be due in the first quarter of fiscal 2006. Additional goodwill of up to $6,501 may result from future contingent payments for this acquisition.

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

	July 31, 2004
		Accumulated
	Gross	Amortization	Net
Customer relationships and agreements	$ 19,591	$ 4,713	$ 14,878
Patents	9,383	1,792	7,591
Covenants not to compete	2,100	1,258	842
Total	$ 31,074	$ 7,763	$ 23,311

	April 30, 2004
		Accumulated
	Gross	Amortization	Net
Customer relationships and agreements	$ 19,586	$ 4,011	$ 15,575
Patents	9,383	1,634	7,749
Covenants not to compete	2,100	1,158	942
Total	$ 31,069	$ 6,803	$ 24,266

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

2005	4,369
2006	4,456
2007	4,222
2008	3,455
2009	1,590

1. INCOME TAXES

The effective income tax rate in the first quarter was 31.0% in fiscal 2005 and 31.5% in fiscal 2004. The effective rates for both fiscal 2005 and 2004 reflect the effect of lower tax rates on income of the Company’s foreign subsidiaries.

1. COMMON STOCK AND EARNINGS PER SHARE

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

2004	2003
Common	Common Stock
Stock	Class A	Class B
Balance at the beginning of the period	35,909,815	35,533,049	1,099,505
Repurchase and retirement	—	—	(750,000	)
Options exercised	20,009	201,351	—
Restricted stock awards granted	275,680	—	—
Balance at the end of the period	36,205,504	35,734,400	349,505

5

PAGEBREAK

Table of Contents

METHODE ELECTRONICS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – Continued (Dollar amounts in thousands, except per share data)

1. COMMON STOCK AND EARNINGS PER SHARE (Continued)

The following table sets forth the computation of basic and diluted earnings per share:

	Three Months Ended July 31, — 2004	2003
Numerator — net income	$ 4,592	$ 4,291
Denominator:
Denominator for basic earnings per
share — weighted-average shares	35,500	36,106
Dilutive
potential common shares —
employee stock awards/options	276	228
Denominator for diluted earnings per
share — adjusted weighted-average
shares and assumed conversions	35,776	36,334
Basic and diluted earnings per share	$ 0.13	$ 0.12

Options to purchase 595,434 shares of common stock at a weighted average option price of $13.13 per share were outstanding at July 31, 2004, but were not included in the computation of diluted earnings per share because the exercise prices were greater than the average market price of the common stock and, therefore, the effect would be antidilutive.

Effective April 30, 2003, the Company adopted the disclosure provisions of Statement of Financial Accounting Standards (SFAS) No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure.” As it relates to stock options, the Company continues to apply the provisions of Accounting Principles Board Opinion (APB) No. 25, “Accounting for Stock Issued to Employees.” Under APB No. 25, no compensation cost related to stock options granted has been recognized in the Company’s Consolidated Statements of Income because the option terms are fixed and the exercise price equals the market price of the underlying stock on the grant date. In accordance with SFAS No. 123, “Accounting for Stock-Based Compensation,” the fair value of option grants is estimated on the date of grant using the Black-Scholes option pricing model for pro forma footnote purposes.

The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to all its stock-based compensation plans outstanding during the periods presented:

	Three Months Ended July 31, — 2004	2003
Net income:
As reported	$ 4,592	$	4,291
Add stock-based compensation expense
included in earnings, net of tax	281		—
Less total
stock-based compensation
expense determined under fair value
based method for all awards, net of tax	(588	)	(351	)
Pro forma	$ 4,285	$	3,940
Basic and diluted earnings per share:
As reported	$ 0.13	$	0.12
Pro forma	0.12		0.11

6

PAGEBREAK

Table of Contents

METHODE ELECTRONICS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – Continued (Dollar amounts in thousands, except per share data)

1. SEGMENT INFORMATION

Methode Electronics, Inc. is a global manufacturer of component and subsystem devices. The Company designs, manufactures and markets devices employing electrical, electronic, wireless, sensing and optical technologies. Methode’s components are found in the primary end markets of the automotive, communications (including information processing and storage, networking equipment, wireless and terrestrial voice/data systems), aerospace, rail and other transportation industries; and the consumer and industrial equipment markets.

The Company reports three business segments: Electronic, Optical and Other. The business units whose results are identified in the Electronic segment principally employ electronic processes to control and convey signals. The business units whose results are identified in the Optical segment principally employ light to control and convey signals. The Company’s business that manufactures bus systems as well as its independent laboratories, which provide services for qualification testing and certification of electronic and optical components, are included in the Other segment.

The Company allocates resources to and evaluates performance of its technology segments based on operating income. Transfers between technology segments are recorded using internal transfer prices set by the Company.

The table below presents information about the Company’s reportable segments:

	Three Months Ended July 31, 2004 — Electronic	Optical		Other		Eliminations		Consolidated
Total net sales	$ 75,778	$	3,814	$	5,496	$	67	$	85,021
Transfers between technology segments	(8	)	(4	)	(55	)	(67	)	—
Net sales to unaffiliated customers	$ 75,770	$	3,810	$	5,441	$	—	$	85,021
Income before income taxes	$ 9,035	$	133	$	825			$	9,993
Corporate expenses, net									(3,336	)
Total income before income taxes								$	6,657

	Three Months Ended July 31, 2003 — Electronic	Optical		Other	Eliminations		Consolidated
Total net sales	$ 68,687	$ 3,818		$ 5,518	$	66	$	77,957
Transfers between technology segments	—	—		(66	)	(66	)	—
Net sales to unaffiliated customers	$ 68,687	$ 3,818		$ 5,452	$	—	$	77,957
Income (loss) before income taxes	$ 8,357	$ (91	)	$ 582			$	8,848
Corporate expenses, net								(2,582	)
Total income before income taxes							$	6,266

1. RELATED PARTY TRANSACTIONS

James W. McGinley and Robert R. McGinley were both members of the Company’s Board of Directors until their resignation in October 2003. James W. McGinley and Robert R. McGinley, together with their sister, Margaret J. McGinley, are special fiduciaries, co-trustees and beneficiaries of Marital Trust No. 1 and Marital Trust No. 2, each created under the William J. McGinley Trust (Marital Trusts). The Company entered into an agreement dated August 19, 2002, and amended December 26, 2002, with the Marital Trusts, Jane R. McGinley, Margaret J. McGinley, James W. McGinley, and Robert R.

7

PAGEBREAK

Table of Contents

METHODE ELECTRONICS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – Continued (Dollar amounts in thousands, except per share data)

1. RELATED PARTY TRANSACTIONS (Continued )

McGinley to commence a tender offer to purchase all of the outstanding Class B common stock at a price of $20 per share in cash by the terms and conditions provided for in the agreement.

Under the agreement, the Marital Trusts, the Jane R. McGinley Trust, James W. McGinley, Margaret J. McGinley and Robert R. McGinley were obligated to tender all of their Class B common stock in the offer. This represented an aggregate of 931,759 shares of Class B common stock, or 85.7% of the then outstanding Class B common stock. The agreement provided that either the Company or the Marital Trusts could terminate the agreement if the tender offer was not completed on or prior to May 31, 2003 provided that the party purporting to terminate was not the cause of the failure to be completed by such time.

On July 3, 2003, Dura Automotive Systems, Inc. (Dura) announced that it planned to commence a tender offer for all of the outstanding Class B common stock of the Company at a price of $23.00 per share in cash. The tender offer, which commenced on July 8, 2003, was subject to certain conditions, including a majority of the Company’s Class B common stock being tendered and not withdrawn and the holders of Class B common stock continuing to have the right to elect directors representing up to approximately 75 percent of the Company’s Board of Directors.

On July 14, 2003, the Marital Trusts gave notice of termination of the Agreement dated August 19, 2002, as amended December 26, 2002.

As of July 18, 2003, the Company entered into an agreement with the Marital Trusts, the Jane R. McGinley Trust, Margaret J. McGinley, James W. McGinley, and Robert R. McGinley (collectively the “McGinley Family”), pursuant to which the McGinley Family sold 750,000 shares of its Class B common stock to the Company for $22.75 per share and agreed to vote their remaining shares of Class B common stock in favor of a merger in which all then outstanding Class B common stock (including those held by the McGinley Family not previously sold to the Company) would receive $23.55 per share and the Class A common stock would be converted into new Methode common stock (the “Merger). The Merger was approved by the affirmative vote of a majority of the Company’s outstanding shares at a special shareholders meeting held on January 8, 2004. The Company recorded charges of $3,780 in fiscal 2004, primarily for legal, investment banking and other professional fees incurred in connection with the elimination of its dual-class common stock structure and the unsolicited tender offer for its Class B common stock.

Marital Trust No. 2 also owns Horizon Farms, Inc., an Illinois corporation (“Horizon”), of which Messrs. James W. McGinley and Robert R. McGinley are officers and directors. In April 2001, the Company loaned $6,000 to Horizon. The note receivable was due on June 30, 2003, bore interest at a rate of 5.25% per annum and was secured by a mortgage lien on certain real property owned by Horizon pursuant to a Mortgage and Security Agreement. The note receivable and related accrued interest, which were collected in full on June 30, 2003, were included in other current assets on the Company’s consolidated balance sheet at April 30, 2003.

The Company was also party to a Split-Dollar Insurance Agreement dated August 9, 1996, with the William J. McGinley and Jane R. McGinley Irrevocable Trust (the “Irrevocable Trust”). James W. McGinley, and Robert R. McGinley, together with their sister, Margaret J. McGinley, and other McGinley family members are beneficiaries of the Irrevocable Trust. Pursuant to the Split-Dollar Insurance Agreement, the Company agreed to pay premiums on last survivor life insurance policies owned by the Irrevocable Trust on the lives of William J. and Jane R. McGinley. The Company had collateral assignments on the policies that entitled it to receive reimbursement at the greater of the cumulative premiums paid or the cash surrender value of the policies. A receivable of $1,198 related to these policies was included in other current assets in the consolidated financial statements at April 30, 2003 and payment was received in July and August of fiscal 2004.

8

PAGEBREAK

Table of Contents

METHODE ELECTRONICS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – Continued (Dollar amounts in thousands, except per share data)

1. PENDING LITIGATION

Certain litigation arising in the normal course of business is pending against the Company. The Company is from time to time subject to various legal actions and claims incidental to its business, including those arising out of alleged defects, breach of contracts, product warranties, employment-related matters and environmental matters. Although the outcome of potential legal actions and claims cannot be determined, it is the opinion of the Company’s management, based on the information available at the time, that it has adequate reserves for these liabilities and that the ultimate resolution of these matters will not have a significant effect on the consolidated financial statements of the Company.

9

PAGEBREAK

Table of Contents

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Statement

Certain statements in this report are forward-looking statements that are subject to certain risks and uncertainties. Our business is highly dependent upon two large automotive customers and specific makes and models of automobiles. Therefore, our financial results will be subject to many of the same risks that apply to the automotive industry, such as general economic conditions, interest rates and consumer spending patterns. A significant portion of the balance of our business relates to the computer and telecommunication industries which are subject to many of the same risks facing the automotive industry as well as fast-moving technological change. Other factors which may result in materially different results for future periods include actual performance in our various markets; operating costs; currency exchange rates and devaluations; delays in development, production and marketing of new products; and other factors set forth from time to time in our reports filed with the Securities and Exchange Commission. Any of these factors could cause our actual results to differ materially from those described in the forward-looking statements. The forward-looking statements in this report are intended to be subject to the safe harbor protection provided under the securities laws.

Overview

We are a global manufacturer of component and subsystem devices with manufacturing, design and testing facilities in the United States, Mexico, Malta, United Kingdom, Germany, Czech Republic, Singapore, and China. We design, manufacture and market devices employing electrical, electronic, wireless, sensing and optical technologies. Our business is managed on a technology product basis, with those technology segments being Electronic, Optical and Other. The business units whose results are identified in the Electronic segment principally employ electronic processes to control and convey signals. The business units whose results are identified in the Optical segment principally employ light to control and convey signals. The Other segment includes a manufacturer of current-carrying bus devices and independent laboratories that provide services for qualification testing and failure analysis.

Our components are found in the primary end markets of the automotive, communications (including information processing and storage, networking equipment, wireless and terrestrial voice/data systems), aerospace, rail and other transportation industries; and the consumer and industrial equipment markets. Recent trends in the industries that we serve include:

•	increasing pressure by automobile manufacturers on automotive suppliers to reduce selling prices;
•	growth of North American subsidiaries of foreign-based automobile manufacturers;
•	more automotive supplier funded design, engineering and tooling
costs previously funded directly by the automobile manufacturers; and
•	continued customer migration to low-cost Eastern European and Asian
suppliers.

In response to pricing pressures, we continue to transition to lean manufacturing processes and invest in, and implement techniques such as flexible automated manufacturing cells to lower our costs in order to maintain or improve margins. We also have become more selective with regard to programs in which we participate in order to reduce our exposure to low profit programs. Our transition to lean manufacturing has helped us obtain our first contract to supply components to a North American plant of a major Japanese automobile manufacturer, expected to launch in fiscal 2006.

In an effort to better compete with low-cost manufacturers and expand our business in the Asian marketplace, we are in the process of transferring production from our Singapore facility to our new Shanghai, China plant, which began limited manufacturing in July 2004. We expect to complete the transfer of all manufacturing to Shanghai by the end of the calendar year. Singapore will remain our Asia-Pacific headquarters and will also house sales, design engineering and finance operations.

10

PAGEBREAK

Table of Contents

Results of Operations

The following table sets forth certain income statement data as a percentage of net sales for the periods indicated:

2004	2003
Income:
Net sales	100.0 %	100.0	%
Other	0.8	0.8
	100.8	100.8
Costs and expenses:
Cost of products sold	79.7	80.6
Selling and administrative expenses	13.4	11.7
Income From Operations	7.7	8.5
Interest, net	0.1	0.2
Other, net	—	(0.7	)
Income Before Income Taxes	7.8	8.0
Income taxes	2.4	2.5
Net Income	5.4 %	5.5	%

Net sales . First quarter consolidated net sales increased 9.1% to $85.0 million in fiscal 2005 from $78.0 million in fiscal 2004. Translation of foreign subsidiary net sales using a weaker US dollar in fiscal 2005 increased reported sales by $0.7 million in the first quarter of fiscal 2005, or 0.9%.

Net sales of the Electronic segment, which represented 89.1% and 88.1% of consolidated net sales in fiscal 2005 and fiscal 2004, respectively, increased 10.3% to $75.8 million in fiscal 2005 from $68.7 million in fiscal 2004. Translation of foreign sales using a weaker US dollar increased Electronic segment sales by $0.6 million in fiscal 2005. Product sales to the automotive industry, which represented 85.4% and 84.9% of Electronic segment net sales in fiscal 2005 and fiscal 2004, respectively, increased by 11.0% in fiscal 2005. The increase is primarily due to strong sales growth of sensor pads for passenger occupancy detection systems by Automotive Safety Technologies (AST) as automakers ramp up to meet increasing Federal safety requirements, and increased automotive switch sales in Europe. Other sales to North American automotive customers declined less than 1.0% as the impact of price concessions given to automakers and lower vehicle build in the first quarter of fiscal 2005 were partially offset by increased service part orders. Year over year changes in foreign currency exchange rates had the effect of increasing reported sales to the automotive industry by 1.0% in the first quarter of fiscal 2005. Net sales for the balance of the Electronic segment increased 6.6% primarily due to a strong quarter by our dataMate business unit and the success of its new small form pluggable copper transceiver, which enables high-speed 1-Gigabit data transfers over existing copper infrastructure.

First quarter net sales of the Optical segment represented 4.5% of consolidated net sales in fiscal 2005 and 4.9% of consolidated net sales in the first quarter of fiscal 2004. Optical segment net sales were flat at $3.8 million in the first quarter of fiscal 2005 and 2004. Lost sales due to the closing of our fiber optic operation in the United Kingdom at the end of the fourth quarter of fiscal 2004 were offset by modest sales gains by our remaining fiber optic businesses in the U.S. and Eastern Europe.

Other segment net sales represented 6.4% of consolidated net sales in the first quarter of fiscal 2005 compared with 7.0% in the first quarter last year. First quarter net sales of the Other segment were $5.4 million in fiscal 2005 compared to $5.5 million in fiscal 2004. Net sales for both Network Bus and the test laboratories, the businesses that make up this segment, were flat year over year.

Other income . Other income consisted primarily of engineering design fees, earnings from our automotive joint venture, and royalties. The increase in other income from $620 in the first quarter of fiscal 2004 to $655 in the first quarter of fiscal 2005 was primarily due to increased design fees earned.

11

PAGEBREAK

Table of Contents

Cost of products sold . Cost of products sold as a percentage of net sales was 79.7% in the first quarter of fiscal 2005 compared with 80.6% in the first quarter of fiscal 2004.

Gross margins of the Electronic segment remained constant at 19.4% in the first quarter of fiscal 2005 compared to the first quarter of fiscal 2004. AST, our European automotive operations and our dataMate business unit had strong margin gains during the first quarter of fiscal 2005 primarily due to sales gains experienced in the quarter. These margin improvements were offset by margins declines on sales to our traditional North American automotive customers primarily due to the price concessions that were not completely recovered by cost cutting programs.

Gross margins of the Optical segment increased to 27.6% in the fiscal 2005 first quarter from 17.5% in the fiscal 2004 first quarter. The margin improvement was primarily the result of the closing of our United Kingdom fiber optic operation at the end of the fourth quarter of fiscal 2004.

Gross margins of the Other segment increased to 26.2% in the first quarter of fiscal 2005 from 21.2% in the first quarter of fiscal 2004. The margin improvement was primarily due to a change in product mix at Network Bus with lower margin product reaching end of life, and a staff reduction at one of our test laboratories.

Selling and administrative expenses . Selling and administrative expenses as a percentage of net sales were 13.4% in the first quarter of fiscal 2005 and 11.7% in fiscal 2004. In the first quarter of fiscal 2005, in lieu of stock options, the cost of which the Company has not previously recognized as compensation, the compensation committee of our board of directors granted restricted stock awards (RSAs). The compensation cost for the RSAs is amortized over the three-year vesting period with amortization beginning in the first quarter of fiscal 2005. Stock-based compensation expense, Sarbanes-Oxley initiatives, increased research and development efforts, and start-up costs for our new Shanghai, China operation were the main contributors to the increase in selling and administrative expenses in the first quarter of fiscal 2005. Also contributing to this increase was the conversion of our Ireland facility from manufacturing to a sales and distribution operation.

Interest, net . Interest income, net of interest expense decreased 39.6% in the first quarter of fiscal 2005 compared with the first quarter of fiscal 2004. Interest income in the first quarter of fiscal 2004 included interest earned at a rate of 5.25% on a $6 million note receivable from a related party that matured on June 30, 2003 (see Note 7 to the Condensed Consolidated Financial Statements).

Other, net . Other, net consists primarily of currency exchange gains and losses at the Company’s foreign subsidiaries. The functional currencies of these subsidiaries are the Maltese lira, Euro, Singapore dollar, British pound, Chinese yuan renminbi and Czech koruna. The foreign subsidiaries have transactions denominated in currencies other than their functional currencies, primarily sales in US dollars, creating exchange rate sensitivities. Modest currency exchange gains were experienced by the Company’s foreign subsidiaries in the first quarter of fiscal 2005 compared to more significant currency exchange losses experienced in the first quarter of fiscal 2004, primarily as a result of a weakening U.S. dollar.

Income taxes . The effective income tax rate in the first quarter was 31.0% in fiscal 2005 and 31.5% in fiscal 2004. The effective rates for both fiscal 2005 and 2004 reflect the effect of lower tax rates on income from foreign operations.

Financial Condition, Liquidity and Capital Resources

We have historically financed our cash requirements through cash flows from operations. Our future capital requirements will depend on a number of factors, including our future net sales and the timing and rate of expansion of our business. Cash on deposit in foreign accounts totaled $45.2 million at July 31, 2004. Income taxes would be payable if this cash were repatriated. We believe our current cash balances together with the cash flow we expect to generate from future domestic and foreign operations

12

PAGEBREAK

Table of Contents

will be sufficient to support operations and capital requirements for the foreseeable future without the need for repatriation of foreign cash balances.

We have an agreement with our primary bank for a committed $30 million revolving credit facility to provide ready financing for general corporate purposes, including acquisition opportunities that may become available. The bank credit agreement requires maintenance of certain financial ratios and a minimum net worth level. At July 31, 2004, the Company was in compliance with these covenants and there were no borrowings against this credit facility.

Net cash provided by operations was $14.1 million and $18.0 million in the first quarter of fiscal 2005 and 2004, respectively. Cash provided by changes in operating assets and liabilities was less in fiscal 2005 primarily due to higher inventory levels needed to support higher production levels, and higher accounts receivable balances due to increased sales volume, mainly in Europe where payment terms are generally longer.

Net cash used in investing activities during the first quarter was $9.0 million for fiscal 2005 compared to net cash provided of $0.9 million in fiscal 2004. Net cash provided by investing activities in fiscal 2004 included the collection of a $6.0 million note receivable from a related party (see Note 7 to the Condensed Consolidated Financial Statements). Purchases of plant and equipment were $5.8 million and $3.7 million in fiscal 2005 and 2004, respectively. The increase in plant and equipment expenditures in 2005 was primarily to support increased production at AST and our European automotive facilities. Cash used in investing activities included contingent payments related to the acquisition of AST of $2.7 million in fiscal 2005 and $1.2 million in fiscal 2004. An additional $7.3 million of contingent cash consideration for this acquisition will be due in annual installments based on a percentage of AST’s annual sales. We believe cash generated from operations will cover this contingent commitment.

Net cash used in financing activities during the first quarter was $1.6 million in fiscal 2005 and $17.1 million in fiscal 2004. In the first quarter of fiscal 2004, we paid $17.1 million for the purchase of 750,000 shares of our Class B shares as an initial step in the elimination of our Class B common stock, which was completed in the third quarter of fiscal 2004 (see Note 7 to the Condensed Consolidated Financial Statements). We paid cash dividends of $1.8 million in the first quarter of both fiscal 2005 and 2004 and received proceeds from the exercise of stock options of $0.2 million in fiscal 2005 and $1.4 million in fiscal 2004.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Certain of our foreign subsidiaries enter into transactions in currencies other than their functional currency, primarily the U.S. dollar and the Euro. A 10% change in foreign currency exchange rates from balance sheet date levels could impact our income before income taxes by $1.2 million and $1.5 million at July 31, 2004 and April 30, 2004, respectively. We also have foreign currency exposure arising from the translation of our net equity investment in our foreign subsidiaries to U.S. dollars. We generally view as long-term our investments in foreign subsidiaries with functional currencies other than the U.S. dollar. The primary currencies to which we are exposed are the British pound, Chinese yuan renminbi, Czech koruna, Euro, Maltese lira, and Singapore dollar. A 10% change in foreign currency exchange rates from balance sheet date levels could impact our net foreign investments by $9.2 million and $9.3 million at July 31, 2004 and April 30, 2004, respectively.

13

PAGEBREAK

Table of Contents

ITEM 4. CONTROLS AND PROCEDURES

As of the end of the period covered by this quarterly report on Form 10-Q, we performed an evaluation under the supervision and with the participation of the Company’s management, including our Chief Executive Officer and our Chief Financial Officer, of our “disclosure controls and procedures” (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934). The Company’s disclosure controls and procedures are designed to ensure that the information required to be disclosed by the Company in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s applicable rules and forms. As a result of this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for their intended purposes.

There have been no changes in our internal control over financial reporting during the quarter ended July 31, 2004 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

14

PAGEBREAK

Table of Contents

PART II. OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

a) Exhibits — See Index to Exhibits immediately following the signature page.

b) Reports on Form 8-K

On June 24, 2004, the Company filed a report on Form 8-K reporting that it had issued a press release to announce operating results for the fourth quarter and fiscal year ended April 30, 2004.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Methode Electronics, Inc. — Douglas A. Koman
Douglas A. Koman
Chief Financial Officer
(principal financial officer)

Dated: September 8, 2004

15

PAGEBREAK

Table of Contents

INDEX TO EXHIBITS

Exhibit
Number	Description
3.1	Certificate of Incorporation of Registrant, as amended and currently in effect (1)
3.2	Bylaws of Registrant, as amended and currently in effect (1)
4.1	Article Fourth of Certificate of Incorporation of Registrant, as amended and
currently in effect (included in Exhibit 3.1) (1)
4.2	Rights Agreement dated as of January 8, 2004 between Methode Electronics, Inc.
and Mellon Investor Services LLC, which includes as Exhibit A thereto, the
Certificate of Designation of Series A Junior Participating Preferred Stock of
Methode Electronics, Inc.; as Exhibit B thereto, the Form of Right Certificate;
as Exhibit C thereto, the Summary of Rights to Purchase Preferred Shares. (2)
10.1	Methode Electronics, Inc. Managerial Bonus and Matching Bonus Plan (also referred
to as the Longevity Contingent Bonus Program) (3)
10.2	Methode Electronics, Inc. Capital Accumulation Plan (3)
10.3	Methode Electronics, Inc. 1997 Stock Plan (4)
10.4	Methode Electronics, Inc. 2000 Stock Plan (5)
10.5	Form of Agreement between Horizon Farms, Inc. and Registrant (6)
10.6	Form of Agreement between William T. Jensen and Registrant (7)
10.7	Form of Agreement between Donald W. Duda and Registrant (8)
10.8	Form of Agreement between John R. Cannon and Registrant (8)
10.9	Form of Agreement between Robert J. Kuehnau and Registrant (8)
10.10	Form of Agreement between James F. McQuillen and Registrant (8)
10.11	Form of Agreement between Douglas A. Koman and Registrant (9)
10.12	Agreement dated August 19, 2002 by and among Methode Electronics, Inc.; Marital
Trust No. 1 and Marital Trust No. 2 each created under the William J. McGinley
Trust; Jane R. McGinley; Margaret J. McGinley; James W. McGinley; and Robert R.
McGinley (10)
10.13	Credit Agreement dated as of December 19, 2002 among Methode Electronics, Inc. as
the Borrower, Bank of America, N.A., as Administrative Agent and L/C Issuer, and
The Other Lenders Party Hereto (11)
10.14	Amendment to Agreement dated August 19, 2002 by and among Methode Electronics,
Inc.; Marital Trust No. 1 and Marital Trust No. 2 each created under the William
J. McGinley Trust; Jane R. McGinley; Margaret J. McGinley; James W. McGinley; and
Robert R. McGinley (12)
10.15	Agreement dated as of July 18, 2003 by and among Methode Electronics, Inc. and
Marital Trust No. 1 and Marital Trust No. 2, each created under the William J.
McGinley Trust, Jane R. McGinley Trust, Margaret J. McGinley, James W. McGinley
and Robert R. McGinley (13)
10.16	Form of Agreement between Donald W. Duda and Registrant (14)
10.17	Stipulation and Agreement of Compromise, Settlement and Release In re Methode
Electronics, Inc. Shareholders Litigation, Civil Action No. 19899, dated July 30,
2003 (15)
10.18	Form of Agreement between William T. Jensen and Registrant (16)
31.1	Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer
31.2	Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer
32	Certification of Periodic Financial Report Pursuant to 18 U.S.C. Section 1350

| (1) | Previously filed with Registrant’s Form 8-K filed January 9, 2004, and
incorporated herein by reference. |
| --- | --- |
| (2) | Previously filed with Registrant’s Form 8-A filed January 8, 2004, and
incorporated herein by reference. |
| (3) | Previously filed with Registrant’s Form 10-Q for the three months ended January
31, 1994, and incorporated herein by reference. |
| (4) | Previously filed with Registrant’s Statement No. 333-49671 and incorporated
herein by reference. |
| (5) | Previously filed with Registrant’s Form 10-Q for the three months ended October
31, 2000, and incorporated herein by reference. |
| (6) | Previously filed with Registrant’s Form 10-K for the year ended April 30, 2001,
and incorporated herein by reference. |

16

PAGEBREAK

Table of Contents

| (7) | Previously filed with Registrant’s Form 10-K/A for the year ended April 30, 2001,
and incorporated herein by reference. |
| --- | --- |
| (8) | Previously filed with Registrant’s Form 10-Q for the three months ended January
31, 2002, and incorporated herein by reference. |
| (9) | Previously filed with Registrant’s Form 10-Q for the three months ended July 31,
2002, and incorporated herein by reference. |
| (10) | Previously filed with Registrant’s Form 8-K filed August 20, 2002, and
incorporated herein by reference. |
| (11) | Previously filed with Registrant’s Form 10-Q for the three months ended January
31, 2003, and incorporated herein by reference. |
| (12) | Previously filed with Registrant’s Form 8-K filed January 2, 2003, and
incorporated herein by reference. |
| (13) | Previously filed with Registrant’s Schedule 14D-9 filed on July 21, 2003, and
incorporated herein by reference. |
| (14) | Previously filed with Registrant’s Form 10-K/A for the year ended April 30, 2003,
and incorporated herein by reference. |
| (15) | Previously filed with Registrant’s Amendment No. 5 to Schedule 13E-3 filed on
September 8, 2003,and incorporated herein by reference. |
| (16) | Previously filed with Registrant’s Form 10-K for the year ended April 30, 2004,
and incorporated herein by reference. |

17