Methode Electronics, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and first six months ended October 31, 2015, compared with the periods ended November 1, 2014. The filing describes Methode as a global manufacturer of electronic and electromechanical components and subsystems, reported in Automotive, Interface, Power Products and Other segments. Dollar amounts below are in millions except per-share data.
Financial performance
| Metric | Three months ended Oct. 31, 2015 | Year-over-year change | Six months ended Oct. 31, 2015 | Year-over-year change |
|---|---|---|---|---|
| Net sales | $208.4 | Down 9.3% | $411.7 | Down 8.1% |
| Gross profit / margin | $50.9 / 24.4% | Margin down from 26.2% | $104.5 / 25.4% | Margin up from 24.7% |
| Operating income | $26.4 | Down from $34.8 | $56.9 | Down from $63.0 |
| Net income | $21.2 | Down 18.5% | $44.8 | Down 5.5% |
| Diluted EPS | $0.54 | Down from $0.66 | $1.15 | Down from $1.21 |
- Cash flow: Six-month operating cash flow was $49.1, versus $63.2 a year earlier. Capital expenditures were $9.5, versus $10.8. Cash increased $18.5 to $186.6, including a $5.2 adverse foreign-exchange effect on cash.
- Liquidity and debt: Current assets were $450.4 and current liabilities $111.5 at October 31. Long-term debt was $22.0, compared with $5.0 at May 2, 2015. The $100.0 credit facility matures September 21, 2017; $78.0 remained available, excluding the option to increase commitments. The company was in covenant compliance; the borrowing rate was 1.5% plus LIBOR.
- Cash location: Of $186.6 cash, $177.0 was held outside the U.S. and deemed permanently reinvested, and therefore not available to fund domestic operations.
- Dividends: $0.09 per common share for the quarter; six-month dividends totaled $6.9.
Material changes and drivers
- Automotive sales fell 3.1% in the quarter and 2.6% for six months, mainly reflecting the wind-down of the Ford Center Console program, foreign-exchange effects and pricing concessions. Higher GM Center Console and transmission lead-frame volumes partly offset declines. Automotive operating income rose 0.3% in the quarter and 13.4% for six months, supported by favorable commodity costs, currency effects on inputs and labor, and Egypt production ramp-up.
- Interface sales fell 11.8% in the quarter and 17.6% for six months. Six-month operating income declined 82.4% to $2.1, reflecting lower appliance and data-solutions volumes, higher legal and other expenses, and costs and inefficiencies from transferring radio remote-control production from the Philippines to Egypt. The move incurred $1.0 of moving, severance and redundant-staffing costs in the first quarter.
- Power Products sales fell 45.4% in the quarter and 25.1% for six months, primarily from lower datacom, cabling and busbar volumes. Operating income declined 91.1% in the quarter and 59.3% for six months as lower volumes drove manufacturing inefficiencies.
- Consolidated sales also reflected the prior-year contribution of Trace Laboratories, sold in fiscal 2015. The sale generated a $7.7 pretax gain in fiscal 2015; that gain is not included in the current-period results.
- Foreign-currency translation reduced reported sales by $4.6 in the quarter and $10.3 for six months, primarily due to U.S. dollar strength against the euro. Six-month gross margin improved despite lower sales, but the quarterly margin declined; lower-volume manufacturing inefficiencies, especially in Power Products, were important pressures.
- Six-month selling and administrative expense was flat at $47.6, but increased as a share of sales to 11.6% from 10.6%. Lower bonus expense partly offset higher legal/professional fees, compensation and other costs.
Outlook, risks and unusual items
- The filing provides no quantified revenue, earnings or margin guidance. Management stated that cash balances, expected operating cash flows and the committed credit facility should support current operations.
- Management identified dependence on two large automotive customers and vehicle programs as a major risk. Other stated risks include industry demand and pricing pressure, product-launch execution, supply-chain and material availability, foreign-exchange exposure, international operations, technology competition, product defects, impairment, and IT or facility disruptions.
- A 10% currency-rate change could affect pretax income by an estimated $7.0 and the reported value of net foreign investments by $31.2. Management estimated a one-percentage-point interest-rate change would not materially affect fiscal 2016 results at then-current and expected debt levels.
- In September 2015, the board authorized repurchases of up to $100.0 through September 1, 2017. The company had repurchased $22.8 by October 31; 710,502 shares were bought during the reported quarter at an average $31.99.
- New five-year equity incentives included performance-based awards tied to fiscal 2020 adjusted EBITDA and 516,000 time-based restricted stock units. Expected expense was $21.8 for target performance-based awards and $16.5 for the restricted stock units. A future catch-up adjustment could be material if performance awards are expected to exceed target.
- The company is pursuing litigation against former distributors Hetronic Germany-GmbH and related parties, alleging contractual violations and other claims; defendants have asserted counterclaims. Discovery is ongoing. The company said it considers its reserves for ordinary-course claims adequate, but litigation outcomes are uncertain.
- Tax matters include $0.9 of unrecognized tax benefits, a $1.2 valuation allowance, and tax-credit and net-operating-loss carryforwards with stated expiration dates. The effective tax rate was 21.2% for the quarter and 22.7% for six months, with foreign investment credits and lower foreign tax rates cited as factors.
- Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the sales declines in Interface and Power Products persist, and whether transferred production achieves expected cost and efficiency improvements.
- The pace of the Ford program wind-down, replacement-program volumes, and concentration of sales with the two large automotive customers.
- Cash generation and domestic funding needs given that most reported cash was held abroad and deemed permanently reinvested.
- Progress and remaining authorization under the share-repurchase plan, alongside borrowing and dividend needs.
- Developments in the Hetronic dispute, including counterclaims, potential costs and any financial-statement impact.
- Whether currency, commodity, tax and performance-award assumptions change materially in subsequent filings.