Methode Electronics, Inc. — Form 10-Q Summary
Reporting period: Second quarter and first six months of fiscal 2014, ended October 26, 2013. Comparisons are with the periods ended October 27, 2012. Dollar amounts are in millions unless stated otherwise.
Financial performance
| Metric | Three months | Six months |
|---|---|---|
| Net sales | $190.9, up 47.1% from $129.8 | $358.2, up 44.1% from $248.5 |
| Gross profit / margin | $41.4 / 21.7%; prior $22.3 / 17.2% | $75.4 / 21.0%; prior $43.8 / 17.6% |
| Operating income | $21.7; prior $27.1 | $36.9; prior $31.3 |
| Net income attributable to Methode | $19.8; prior $23.4 | $33.4; prior $27.3 |
| Diluted EPS | $0.51; prior $0.62 | $0.87; prior $0.72 |
| Cash dividends per share | $0.07; prior $0.07 | $0.14; prior $0.14 |
Quarterly sales growth was led by Automotive, particularly the GM Center Console program, and also by Interconnect and Power Products. Gross margin improvement reflected higher volumes, manufacturing efficiencies and, in Power Products, favorable commodity costs and product mix. Selling and administrative expenses rose in dollars but declined as a percentage of sales.
Cash flow, balance sheet and debt
- First-half cash from operations was $30.8, versus $22.7 a year earlier. Investing used $16.5, including capital expenditures of $16.5; financing provided $5.1. Cash increased $22.0 to $87.8.
- Cash was $87.8 at October 26, 2013, compared with $65.8 at April 27, 2013. Current assets were $317.6 and current liabilities $106.6.
- Long-term debt was $51.5, up from $43.5 at fiscal year-end. The $100.0 credit facility matures September 21, 2017; $48.5 remained available, excluding the optional additional $50.0. The interest rate was 1.5% plus LIBOR, and the company reported compliance with covenants.
- Of cash on hand, $81.2 was held by foreign subsidiaries and deemed permanently reinvested, so management said it was not available to fund domestic operations. Management expects worldwide cash, operating cash flow and the committed facility to support current operations.
Material changes, outlook and risks
- Prior-period unusual item: The year-ago quarter and first half included a $20.0 gain from the Delphi litigation settlement. The settlement also involved assignment of certain patents and a non-compete agreement. The absence of this gain is a major reason quarterly operating income and net income were lower year over year, despite substantially higher sales and gross profit.
- For the first half, net income increased 22.8% despite the prior-year settlement. The filing attributes performance to the GM program launch, higher volumes and improved manufacturing efficiency.
- The Other segment weakened: first-half sales fell 35.1% and it reported a $0.1 operating loss, associated with lower torque-sensing demand, planned product-line exits and production transfer to Malta.
- The company reported a full valuation allowance on domestic federal and state net deferred tax assets. Sustained improvement in domestic results could lead to a future reversal, but management concluded the full allowance remained appropriate at quarter-end. The six-month effective tax rate was 7.8%, versus 11.9%.
- Key disclosed risks include dependence on two large automotive customers and specific vehicle models; automotive and other end-market conditions; new-program launch execution; material availability and supply-chain disruption; competition, pricing pressure, product defects and technology change; foreign operations and currency exposure; and potential goodwill or intangible impairment. A 10% currency-rate change could affect pretax income by an estimated $2.7 and the translated value of foreign net investments by $22.6.
- Routine litigation and claims were pending; management stated reserves were adequate based on available information. No specific forward financial guidance was provided in the filing.
Important facts for investors to verify
- Whether GM Center Console program volumes and other automotive launches sustain growth, and how concentrated revenue remains among the two major automotive customers.
- Whether gross-margin improvements persist as volumes, manufacturing efficiencies, commodity prices and product mix change.
- Domestic cash needs and the practical availability of foreign-held cash, alongside borrowing levels, variable-rate exposure and credit-facility capacity.
- Progress in the Other segment’s product exits and Malta production transfer, and whether lower torque-sensing demand continues.
- Developments in domestic profitability and the deferred-tax valuation allowance, as well as any changes in litigation, customer claims or other contingencies.