Methode Electronics, Inc. — Form 10-Q Summary
Business context and reporting period. This unaudited filing covers the three and six months ended October 27, 2018 (fiscal 2019 second quarter and first half), compared with the periods ended October 28, 2017. Methode manufactures electronic and electro-mechanical components and subsystems. Its reportable segments are Automotive, Industrial, Interface and Medical; segment reporting was reorganized to reflect the Grakon acquisition.
Financial performance
| Metric | Three months ended Oct. 27, 2018 | Six months ended Oct. 27, 2018 |
|---|---|---|
| Net sales | $264.0 million, up 14.7% | $487.4 million, up 13.0% |
| Gross profit / margin | $70.8 million / 26.8% (26.9% prior year) | $130.9 million / 26.9% (27.3% prior year) |
| Operating income | $19.1 million, versus $29.7 million | $47.8 million, versus $55.1 million |
| Net income | $14.6 million, versus $24.2 million | $38.3 million, versus $44.7 million |
| Diluted earnings per share | $0.39, versus $0.64 | $1.02, versus $1.19 |
| Operating cash flow | Not separately reported for the quarter | $36.2 million, versus $45.2 million |
For the six months, operating cash flow less capital expenditures was approximately $7.6 million. Cash and equivalents were $110.9 million at October 27, down from $246.1 million at April 28, 2018. Current assets were $491.1 million and current liabilities $192.2 million.
Total debt on the balance sheet was $357.6 million, including $15.3 million short-term and $342.3 million long-term. The company separately reported $88.0 million drawn on its revolving facility and a $250.0 million term loan, plus debt at subsidiaries. Net interest expense was $1.6 million for the quarter and $1.8 million for the half year. The company said it was compliant with credit-agreement covenants.
Material changes versus prior comparable periods
- Sales growth reflected acquisitions and organic activity, but earnings fell as acquisition-related costs, higher stock-based compensation, acquired-intangible amortization and interest expense more than offset higher sales.
- Grakon was acquired on September 12, 2018 for $421.6 million cash, net of cash acquired. It contributed about six weeks of results: $24.2 million revenue and a $0.2 million net loss. The preliminary purchase-price allocation included $175.2 million goodwill and $220.9 million acquired intangible assets.
- Industrial segment sales rose 91.9% in the quarter to $47.4 million, largely including Grakon; operating income increased to $5.1 million. Automotive sales rose 8.0% to $201.6 million, but operating income fell 14.2% to $36.8 million. Interface sales declined 21.4% to $14.7 million and the segment posted a $0.6 million operating loss. Medical sales were $0.3 million and the segment’s operating loss was $2.5 million.
- Cash used in investing activities was $449.5 million, including the Grakon acquisition and $28.6 million capital expenditures. Financing activities provided $291.1 million, primarily from borrowings. Cash fell by $135.2 million over the half year.
- ASC 606 was adopted April 29, 2018. Its impact was described as immaterial overall, but the new accounting reduced reported current-period sales and costs of products sold. For the quarter, reported sales of $264.0 million would have been $272.9 million under the prior ASC 605 basis; for the half year, $487.4 million would have been $503.4 million.
Outlook, commentary, risks and unusual items
- Management stated that cash balances, expected operating cash flows and committed credit facilities should support current operations. Of the $110.9 million cash balance, $96.7 million was held outside the U.S.; $72.7 million was considered permanently reinvested.
- The amended credit agreement matures September 12, 2023 and includes a $200 million revolving facility and $250 million term loan. At period end, the rate was 1.50% plus LIBOR; the filing estimates a one-percentage-point rate change would not materially affect fiscal 2019 results at then-current and expected debt levels.
- No specific earnings or revenue guidance was provided in the supplied filing text. Management highlighted customer concentration—dependence on two large automotive customers—pricing pressure, automotive and other end-market exposure, tariffs and trade disputes, foreign-exchange movements, supply-chain and materials risks, acquisition integration and potential impairment charges.
- Acquisition-related costs were $10.9 million in the quarter and $11.5 million in the half year. A $7.4 million catch-up stock-compensation charge followed management’s change to expect achievement of the fiscal 2020 EBITDA target; management noted future estimate changes could materially affect expense.
- The company is a party to pending litigation involving former Hetronic distributors and their affiliates; the case remained in pre-trial proceedings. Management said it believed reserves for litigation and claims were adequate. The company also identified potential additional goodwill and intangible-asset impairment as a risk.
Most important facts for investors to verify
- Reconcile the filing’s apparent borrowing discrepancy: the cash-flow statement and debt note report $348.0 million of six-month borrowings, while the MD&A liquidity section states $98.0 million, despite also referring to the $250.0 million term loan.
- Assess the acquired businesses’ ongoing contribution, Grakon integration, final purchase-price allocation and resulting amortization and debt burden.
- Track whether sales growth converts into operating profit and cash generation, particularly amid lower Automotive margins and Interface weakness.
- Evaluate the extent to which reported sales comparisons are affected by ASC 606 versus ASC 605 accounting and by acquisition timing.
- Monitor customer concentration, tariff and currency exposure, debt covenant compliance, and management’s estimates for performance-based stock compensation.