Methode Electronics, Inc. — Form 10-Q Summary
Reporting period: Second quarter and first six months of fiscal 2013, ended October 27, 2012. Comparative periods ended October 29, 2011. Financial statements are unaudited. Methode designs and manufactures electronic and electromechanical components across Automotive, Interconnect, Power Products and Other segments.
Financial performance
| Metric | Quarter | Six months |
|---|---|---|
| Net sales | $129.8 million; up 12.0% | $248.5 million; up 9.6% |
| Gross margin | $22.3 million; 17.2% of sales, down from 18.0% | $43.8 million; 17.6% of sales, down from 18.0% |
| Operating income | $27.1 million | $31.3 million |
| Net income attributable to Methode | $23.4 million, or $0.62 per diluted share | $27.3 million, or $0.72 per diluted share |
| Operating cash flow | Not presented for the quarter | $22.7 million, versus $1.7 million |
| Capital expenditures | Not presented for the quarter | $23.6 million, versus $9.1 million |
Quarterly and six-month results include a $20.0 million Delphi settlement gain; excluding it, operating income would have been $7.1 million for the quarter and $11.3 million for the six months. The filing does not provide adjusted net income excluding the settlement.
At October 27, cash was $77.0 million, down from $86.8 million at fiscal year-end. Current assets were $248.7 million and current liabilities $89.6 million (current ratio approximately 2.8). Long-term debt was $46.0 million, compared with $48.0 million at April 28. Shareholders’ equity was $277.6 million. The company paid $5.2 million in dividends during the six months.
Material changes and drivers
- Automotive sales rose 18.8% in the quarter and 16.1% for the six months, chiefly on higher North American sales, including Ford Center Console and transmission lead-frame programs, and European hidden-switch launches.
- Interconnect sales increased 5.7% for the quarter and 1.7% for the six months. Other segment sales increased 18.8% and 26.2%, respectively, supported by torque-sensing demand in e-bike and motorcycle markets.
- Power Products sales declined 8.8% for the quarter and 7.2% for the six months. Lower volume, manufacturing inefficiencies and unfavorable product mix reduced margins; the segment recorded a quarterly operating loss and broke even for the six months.
- Consolidated gross margin percentage weakened despite sales growth, mainly due to automotive product-launch and engineering costs and higher purchased-content products. Power Products inefficiencies also weighed on results.
- Selling and administrative expense declined 16.9% in the quarter and 11.7% for the six months. Drivers included lower expenses and a one-time $1.1 million reversal of customer-bankruptcy-related accruals.
Liquidity, outlook and risks
- Cash generation and investment: Six-month operating cash flow benefited from receipt of the first $10.0 million Delphi payment. Changes in operating assets and liabilities used $14.9 million, including the receivable for the remaining settlement payment and increases in receivables and inventory. Investing activities used $25.0 million, largely reflecting higher capital spending for planned launches and facility expansion.
- Credit facility: The facility was increased from $75 million to $100 million and extended to September 21, 2017; an additional $50 million may be available subject to conditions and lender approval. At period-end, $46 million was drawn and $54 million remained available. The current rate was 1.5% plus LIBOR, and the company reported compliance with covenants.
- Management outlook: Management said worldwide cash and expected operating cash flows should support operations, but anticipated cash could decline as it funds equipment, tooling, inventory and staffing for a GM center-stack program expected to begin production in late fiscal 2013. No quantified earnings or revenue guidance was provided.
- Geographic liquidity: $55.3 million, or 72.6% of cash, was held outside the U.S. and deemed permanently reinvested, limiting availability for domestic operations and potentially creating tax costs upon repatriation. Management cited $50 million of U.S. net operating loss carryforwards that could reduce cash taxes on repatriation.
- Settlement and acquisition: Delphi litigation was settled; Methode assigned certain patents and accepted a related non-compete in exchange for $20 million, half received in October and half due in January 2013. Hetronic Italy was acquired for $1.4 million cash plus forgiveness of $1.3 million of debt owed to Methode.
- Other risks: The company depends significantly on two large automotive customers and specific vehicle programs; it also cited launch execution, industry demand, competitive pricing, supply-chain and material availability, product defects, technology and intellectual-property risks, international operations, foreign exchange and customer concentration. A 10% currency-rate movement was estimated to affect pretax income by $2.1 million and the translated value of foreign net investments by $17.0 million.
- Tax and legal matters: A $49.995 million valuation allowance remained against deferred tax assets; management said it could not forecast when positive evidence would support reversal. Ordinary-course litigation remained, with management stating reserves were adequate. The filing reported $66,000 of unrecognized tax benefits and approximately $62,000 accrued for related interest and penalties.
Investor verification points
- Separate recurring operating performance from the $20 million Delphi gain and the $1.1 million accrual reversal; confirm timing and collection of the final $10 million settlement installment.
- Track Automotive launch spending, gross-margin trends and the planned late-fiscal-2013 GM center-stack program, including whether production starts as expected.
- Monitor Power Products recovery and the causes of lower volume and manufacturing inefficiency, alongside Interconnect launch delays.
- Assess cash conversion, capital spending, inventory and receivables, debt usage, covenant headroom and the availability of foreign-held cash for U.S. needs.
- Review customer concentration, foreign-exchange exposure, deferred-tax-asset realizability and developments in litigation or uncertain tax positions.