METHODE ELECTRONICS INC annual report, FY2017

Methode Electronics, Inc. — FY2017 Form 10-K Summary

Reporting period: Fiscal year ended April 29, 2017 (52 weeks), compared primarily with the fiscal year ended April 30, 2016. Although the request metadata refers to 2016 Q4, this filing is an annual report for FY2017; it also reports the quarter ended April 29, 2017.

Business context

Methode designs and manufactures electronic and electromechanical components and subsystems for automotive, industrial, communications, aerospace, medical-device and other markets. Automotive accounted for 77.5% of FY2017 sales. The company’s four reporting segments are Automotive, Interface, Power Products and Other.

Financial performance and liquidity

Metric	FY2017	FY2016
Net sales	$816.5 million	$809.1 million
Gross profit / margin	$218.3 million / 26.7%	$212.9 million / 26.3%
Operating income	$110.8 million	$109.7 million
Income before taxes	$115.9 million	$110.9 million
Net income attributable to Methode	$92.9 million	$84.6 million
Diluted earnings per share	$2.48	$2.20
Cash provided by operating activities	$145.2 million	$110.7 million

Sales increased 0.9% and net income increased 9.8%. The effective tax rate fell to 19.9% from 23.8%, including a $4.0 million foreign investment tax-credit benefit, partly offset by $1.7 million of tax expense on a dividend between foreign entities. FY2017 included $4.5 million of international government grant income.

At year-end, cash and cash equivalents were $294.0 million, current assets $530.3 million and current liabilities $124.4 million. Long-term debt was $27.0 million, down from $57.0 million. The company reported $123.0 million available under its $150.0 million revolving credit facility, excluding the option to increase commitments by up to $100.0 million. The facility matures November 18, 2021; the company was in covenant compliance.

Investing cash use was $21.7 million, including $22.4 million of capital expenditures. Financing cash use was $47.0 million, including $30.0 million of net debt repayments, $13.7 million of dividends and $9.8 million of share repurchases. The dividend was $0.36 per share for the year.

Material changes and segment performance

• Automotive: Sales rose 2.9% to $632.2 million; operating income increased 8.4% to $148.3 million. North American growth, including GM center-console program volumes, and improved costs supported results. Europe and Asia sales declined, while pricing concessions and customer-model exposure remain relevant.
• Interface: Sales fell 9.5% to $127.4 million and the segment moved from $2.7 million operating income to a $0.9 million operating loss. Lower data-solutions and appliance volumes, pricing concessions, $1.1 million of exit costs and higher legal expenses contributed.
• Power Products: Sales grew 5.2% to $56.3 million and operating income rose 22.3% to $11.5 million, helped by stronger Asian PowerRail and busbar sales, favorable materials costs and overhead reductions.
• Other: Operating loss widened to $12.4 million from $8.8 million, reflecting medical-device development spending, higher professional and marketing expenses, and exit costs. Connectivity and Active Energy Solutions were shut down at fiscal year-end due to market conditions.

Fiscal 2017 quarterly results included fourth-quarter sales of $219.7 million and net income of $23.1 million, compared with $212.8 million and $22.7 million, respectively, in the prior-year fourth quarter. Fourth-quarter gross profit was $55.2 million versus $60.8 million.

Cash from operations increased by $34.5 million, with management citing higher net income and more favorable changes in operating assets and liabilities, including lower inventory and supplier-payment timing. Capital expenditures were primarily for equipment supporting new product launches and replacing older equipment.

Outlook, management commentary, risks and unusual items

• No formal earnings or revenue guidance is provided. Backlog was approximately $203.2 million at year-end, versus $137.5 million a year earlier; the company expected most of it to ship in FY2018.
• Management stated that worldwide cash, expected operating cash flows and the committed credit facility should support current operations. However, approximately 99% of cash was held by international subsidiaries and foreign earnings were treated as indefinitely reinvested. Repatriation could result in additional tax; the filing estimates approximately $142.8 million of additional income tax expense before available credits if $407.9 million of undistributed foreign earnings were distributed.
• Customer concentration is significant: GM represented 49.6% and Ford 9.3% of FY2017 sales. Demand depends on particular vehicle models and production schedules; loss of a program, lower volumes or price concessions could materially affect results.
• The Hetronic/Fuchs distributor litigation remained in discovery, with counterclaims and a separate EU trademark challenge. Related legal expenses were $11.0 million in FY2017, $9.9 million in FY2016 and $3.1 million in FY2015. Management reported adequate reserves for pending claims but did not quantify a specific reserve for this litigation in the provided text.
• Environmental remediation at two former operating sites had a $1.3 million accrual at year-end. Costs could exceed accruals if remediation does not achieve regulatory standards. No material legal proceedings were reported as of year-end.
• Currency movements, foreign operations and trade-policy changes, product quality and launch execution, supply-chain interruptions, technology competition, pricing pressure, customer and end-market cyclicality, and medical-community acceptance of Dabir Surfaces were identified as risks. A 10% foreign-exchange rate change could have affected pretax income by $13.1 million at year-end.
• After year-end, the company agreed to acquire Procoplast for an estimated $21.4 million cash plus assumption of $22.5 million debt, subject to customary conditions and approvals; closing was expected in FY2018’s second quarter.
• Other notable FY2017 items included $2.3 million of exit costs for two reporting units and $1.5 million of expenses for a potential acquisition that the company elected not to pursue. The company reported no material goodwill impairment in FY2017.

Important facts for investors to verify

• Whether the GM and Ford programs, model volumes and pricing sustain Automotive growth, and how customer concentration evolves.
• Whether Interface’s sales and margins stabilize following the Connectivity closure, and whether the remaining segment can return to operating profitability.
• How much FY2017 earnings growth depended on the government grant, tax credits, favorable commodity and currency effects, and customer accrual reversals.
• Cash accessibility and potential tax costs associated with overseas cash, as well as debt repayment and covenant capacity after the Procoplast transaction.
• Developments, potential exposure and legal costs in the Hetronic litigation, and any changes to environmental remediation estimates.
• Procopyplast’s final purchase terms, closing status, integration costs and contribution to results; and the commercial progress and funding needs of Dabir Surfaces.
• The filing reports unqualified audit opinions and effective internal controls as of April 29, 2017; investors should review subsequent filings for later developments and updated outlook.