| METHODE ELECTRONICS INC Item 1A Risk Factors Certain statements in this report are forward-looking statements that are subject to certain risks and uncertainties |
| Our business is highly dependent upon three 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, computer and telecommunications industries, such as general economic conditions, interest rates, consumer spending patterns and technological changes |
| Other factors, which may result in materially different results for future periods, include the risk factors listed below |
| 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 |
| We depend on a small number of large customers |
| If we were to lose any of these customers or any of these customers decreased the number of orders it placed, our future results would be adversely affected |
| During the year ended April 30, 2006, shipments to Ford Motor Company, Daimler Chrysler AG (either directly or through their Tier 1 suppliers) and Delphi Corporation, each were 10prca or greater of consolidated net sales and, in the aggregate, amounted to approximately 64dtta7prca of consolidated net sales |
| The loss of all or a substantial portion of the sales to any of these customers would have a material adverse effect on our sales, margins, profitability and, as a result, our share price |
| The contracts we have entered into with many of our customers provide for supplying the customers’ requirements for a particular model, rather than for manufacturing a specific quantity of products |
| Such contracts range from one year to the life of the model, which is generally three to seven years |
| Therefore, the loss of a contract for a major model or a significant decrease in demand for certain key models or group of related models sold by any of our major customers could have a material adverse impact on our results of operations and financial condition by reducing cash flows and our ability to spread costs over a larger revenue base |
| We also compete to supply products for successor models and are subject to the risk that the customer will not select us to produce products on any such model, which could have a material adverse impact on our results of operations and financial condition |
| In addition, we have significant receivable balances related to these customers and other major customers that would be at risk in the event of their bankruptcy |
| Due to the financial stresses within the worldwide automotive industry, certain automakers and Tier 1 customers have already declared bankruptcy or may be considering bankruptcy |
| On October 8, 2005, a major customer, Delphi Corporation and its US subsidiaries (Delphi) filed Chapter 11 petitions for bankruptcy |
| As of the filing date, we had approximately dlra7dtta6 million of accounts receivable from Delphi and an intangible asset on our balance sheet of approximately dlra4dtta6 million relating to our Delphi supply agreement |
| We recorded a bad debt provision of dlra2dtta3 million in fiscal 2006 for Delphi receivables impaired by the bankruptcy filing |
| If more of our larger customers declare bankruptcy, it could adversely impact the collectability of our accounts receivable, bad debt expense and net income |
| Because we derive a substantial portion of our revenues from customers in the automotive, computer and communications industries, we are susceptible to trends and factors affecting those industries |
| 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 |
| Factors negatively affecting these industries and the demand for products also negatively affect our business, financial condition and operating results |
| Any adverse occurrence, including industry slowdown, recession, political instability, costly or constraining regulations, armed hostilities, terrorism, excessive inflation, prolonged disruptions in one or more of 3 _________________________________________________________________ [54]Table of Contents our customers’ production schedules or labor disturbances, that results in significant decline in the volume of sales in these industries, or in an overall downturn in the business and operations of our customers in these industries, could materially adversely affect our business, financial condition and operating results |
| Because we derive approximately 75prca of our revenues from the automotive industry, any downturns or challenges faced by this industry may have an adverse effect on our business, financial condition and operating results |
| Approximately 75prca of our net sales are to customers within the automotive industry |
| Supplying products to the automotive industry involves increasing financial and production stresses due to continuing pricing pressures by automobile manufacturers; market share gains of North American subsidiaries of foreign-based automobile manufacturers; overcapacity; supplier bankruptcies; more automotive supplier-funded design, engineering and tooling costs previously funded directly by automobile manufacturers; continued customer migration to low-cost Eastern European and Asian suppliers; and commodity material cost increases |
| Due to the just-in-time supply chains within the automotive industry, a disruption in a supply chain caused by an unrelated supplier due to bankruptcy, work stoppages, strikes, etc could disrupt our shipments to one or more automaker customers, which could adversely affect our sales, margins, profitability and, as a result, our share price |
| Automakers are experiencing increased volatility and uncertainty in executing planned new programs which have, in some cases, resulted in cancellation or delays of new vehicle platforms, package reconfigurations and inaccurate volume forecasts |
| This increased volatility and uncertainty has made it more difficult for us to forecast future sales and effectively utilize capital, engineering, research and development, and human resource investments |
| We are subject to intense pricing pressures in the automotive industry |
| We supply products to automobile OEMs, either directly or through their Tier 1 suppliers |
| The OEM supply industry has undergone a significant consolidation as OEMs have sought to lower costs, improve quality and increasingly purchase complete systems and modules rather than separate components |
| As a result of the cost focus of these major customers, we have been, and expect to continue to be, required to reduce prices |
| Because of these competitive pressures, we cannot assure you that we will be able to increase or maintain gross margins on product sales to OEMs |
| In addition to price reductions over the life of our long-term agreements, we continue to experience pricing pressures from our automotive customers and competitors, which have affected, and which will continue to affect our margins to the extent that we are unable to offset the price reductions with productivity and manufacturing yield improvements, engineering and purchasing cost reductions, and increases in sales volume |
| In addition, profit pressures at certain automakers are resulting in increased cost reduction efforts by them, including requests for additional price reductions, discontinuing certain features from vehicles, and warranty cost-sharing programs, any of which could adversely impact our sales growth, margins, profitability and, as a result, our share price |
| 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 |
| The markets in which we operate are highly competitive and characterized by rapid changes due to technological improvements and developments |
| We compete with a large number of other manufacturers in each of our product areas; many of these competitors have greater resources and sales |
| Price, service and product performance are significant elements of competition in the sale of our products |
| We may be at a competitive disadvantage with respect to price when compared to manufacturers with lower cost structures, particularly those with significant offshore facilities located where labor and other costs are lower |
| Competition may intensify further if more companies enter the markets in which we operate |
| Our failure to compete effectively could materially adversely affect our business, financial condition and operating results |
| Our business is cyclical and seasonal in nature and further downturns in the automotive industry could reduce the sales and profitability of our business |
| A significant portion of our business is dependent on automotive sales and the vehicle production schedules of our customers |
| The automotive market is cyclical and depends on general economic conditions, interest rates and consumer spending patterns |
| Any significant reduction in vehicle production by our customers would have a material adverse effect on our business |
| Our business is moderately seasonal as our North American 4 _________________________________________________________________ [55]Table of Contents automotive customers historically halt operations for approximately two weeks in July for mandatory vacations and model changeovers and one to two weeks during the December holiday period |
| Accordingly, our first and third fiscal quarter results may reflect this seasonality |
| 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 have numerous United States and foreign patents and license agreements covering certain of our products and manufacturing processes, several of which are considered material to our business |
| Our ability to compete effectively with other companies depends, in part, on our ability to maintain the proprietary nature of our technology |
| Although we have been awarded, have filed applications for, or have been licensed under numerous patents in the United States and other countries, there can be no assurance concerning the degree of protection afforded by these patents or the likelihood that pending patents will be issued |
| The loss of any significant combination of patents and trade secrets could adversely affect our sales, margins, profitability and, as a result, share price |
| We may become involved in litigation in the future to protect our intellectual property or because others may allege that we infringe on their intellectual property |
| These claims and any resulting lawsuit could subject us to liability for damages and invalidate our intellectual property rights |
| If an infringement claim is successfully asserted by a holder of intellectual property rights, we may be required to cease marketing or selling certain products, pay a penalty for past infringement and spend significant time and money to develop a non-infringing product or process or to obtain licenses for the technology, process or information from the holder |
| We may not be successful in the development of a non-infringing alternative, or licenses may not be available on commercially acceptable terms, if at all, in which case we may lose sales and profits |
| In addition, any litigation could be lengthy and costly and could materially adversely affect us even if we are successful in the litigation |
| We may be unable to keep pace with rapid technological changes, which would adversely affect our business |
| The technologies relating to some of our products have undergone, and are continuing to undergo, rapid and significant changes |
| Specifically, end markets for electronic components and assemblies are characterized by technological change, frequent new product introductions and enhancements, changes in customer requirements and emerging industry standards |
| These changes could render our existing products unmarketable before we can recover any or all of our research, development and other expenses |
| Furthermore, the life cycles of our products vary, may change and are difficult to estimate |
| If we are unable, for technological or other reasons, to develop and market new products or product enhancements in a timely and cost-effective manner, our business, financial condition and operating results could be materially adversely affected |
| 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 |
| Despite our quality control and quality assurance efforts, defects may occur in the products we manufacture due to design or manufacturing errors or component failure |
| Product defects may result in delayed shipments and reduced demand for our products |
| We may be subject to increased costs due to warranty claims on defective products |
| Product defects may result in product liability claims against us where defects cause, or are alleged to cause, property damage, bodily injury or death |
| We may be required to participate in a recall involving products which are, or are alleged to be, defective |
| We carry insurance for certain legal matters involving product liability, however, we do not have coverage for all costs related to product defects and the costs of such claims, including costs of defense and settlement, may exceed our available coverage |
| We face risks relating to our international operations |
| Because we have international operations, our operating results and financial condition could be adversely affected by economic, political, health, regulatory and other factors existing in foreign countries in which we operate |
| Our international operations are subject to inherent risks, which may adversely affect us, including: political and economic instability in countries in which our products are manufactured; expropriation or the imposition of government controls; changes in government regulations; export license requirements; trade restrictions; earnings expatriation restrictions; exposure to different legal standards; less favorable intellectual property laws; health 5 _________________________________________________________________ [56]Table of Contents conditions and standards; currency controls; fluctuations in exchange rates; increases in the duties and taxes we pay; high levels of inflation or deflation; greater difficulty in collecting our accounts receivable and longer payment cycles; changes in labor conditions and difficulties in staffing and managing our international operations; limitations on insurance coverage against geopolitical risks, natural disasters and business operations; communication among and management of international operations |
| In addition, these same factors may also place us at a competitive disadvantage to some of our foreign competitors |
| We may acquire businesses or divest of various business operations |
| These transactions may pose significant risks and may materially adversely affect our business, financial condition and operating results |
| We intend to explore opportunities to buy other businesses or technologies that could complement, enhance or expand our current business or product lines or that might otherwise offer growth opportunities |
| Any transactions that we are able to identify and complete may involve a number of risks, including: the diversion of our management’s attention from our existing business to integrate the operations and personnel of the acquired or combined business or joint venture; possible adverse effects on our operating results during the integration process; and our possible inability to achieve the intended objectives of the transaction |
| In addition, we may not be able to successfully or profitably integrate, operate, maintain and manage our newly acquired operations or employees |
| We may not be able to maintain uniform standards, controls, procedures and policies, and this may lead to operational inefficiencies |
| In addition, future acquisitions may result in dilutive issuances of equity securities or the incurrence of additional debt |
| We have in the past, and may in the future, consider divesting certain business operations |
| Divestitures may involve a number of risks, including the diversion of management’s attention, significant costs and expenses, the loss of customer relationships and cash flow, and the disruption of operations in the affected business |
| Failure to timely complete a divestiture or to consummate a divestiture may negatively affect valuation of the affected business or result in restructuring charges |
| We are dependent on the availability and price of raw materials |
| We require substantial amounts of raw materials, including petroleum, copper and precious metals, and all raw materials we require are purchased from outside sources |
| The availability and prices of raw materials may be subject to curtailment or change due to, among other things, new laws or regulations, suppliers’ allocations to other purchasers, interruptions in production by suppliers, changes in exchange rates and worldwide price levels |
| Any change in the supply of, or price for, these raw materials could materially affect our results of operations and financial condition |