Methode Electronics, Inc. — Q1 FY2012 Form 10-Q
Reporting period: Three months ended July 30, 2011; comparison is the three months ended July 31, 2010. Methode designs and manufactures electronic and electromechanical components and subsystems across Automotive, Interconnect, Power Products and Other segments.
Financial performance
| Metric | Q1 FY2012 | Q1 FY2011 |
|---|---|---|
| Net sales | $110.8 million | $99.0 million |
| Gross profit / margin | $20.0 million / 18.1% | $19.4 million / 19.7% |
| Operating income / margin | $1.4 million / 1.3% | $3.8 million / 3.9% |
| Net income attributable to Methode | $1.5 million | $4.1 million |
| Diluted earnings per share | $0.04 | $0.11 |
| Operating cash flow | $6.5 million | $(2.2) million |
| Capital expenditures | $4.6 million | $2.0 million |
Sales rose 11.9%, but attributable net income fell 63.4%. Cost of products sold increased faster than sales, reducing gross margin by 1.6 percentage points. Selling and administrative expense rose 19.2% to $18.6 million, including higher performance-based compensation, severance and stock-award expense. Lower life-insurance-related income also weighed on the comparison.
Automotive sales increased 25.4% to $62.7 million, largely reflecting North American program growth, but operating income declined to $2.2 million from $2.9 million amid launch and engineering costs, vendor delivery issues and higher utilities. Interconnect sales fell 6.4% to $32.4 million, while operating income increased to $4.3 million on favorable mix and lower expenses. Power Products sales grew 11.3% to $12.8 million, but operating income declined to $0.2 million due partly to development costs. Other segment operating loss widened to $1.0 million.
Balance sheet, liquidity and debt
- Cash and cash equivalents were $84.4 million at July 30, 2011, up from $57.4 million at April 30, 2011. Current assets were $222.7 million and current liabilities $64.8 million.
- Long-term debt was $27.0 million, versus none at April 30. The company borrowed $27.0 million under its $75.0 million credit facility, which matures February 25, 2016 and may be increased by $25.0 million subject to conditions. Methode reported covenant compliance.
- Cash flow from operations improved mainly because operating assets and liabilities used only $0.2 million of cash, versus $10.5 million used in the prior-year quarter. Financing cash flow included the credit-facility borrowing and $2.6 million of dividends.
- Management says worldwide cash and expected operating cash flows should support current operations, but significant cash is held outside the U.S.; repatriation could have adverse tax consequences.
Changes, outlook and risks
- Management expects European businesses to face softer demand and plans to reduce European selling and administrative costs. It anticipates softer North American automotive production, modest improvement in Power Products, and continued weakness in appliance-related Interconnect sales.
- New North American automotive programs are expected to begin production in fiscal 2013 and require substantial equipment, tooling, inventory and staffing investment before sales begin. Management expects higher design, development and engineering costs through fiscal 2012. Vendor supply issues are expected to continue until internal capabilities come online late in fiscal 2012.
- In July, Methode increased its Eetrex ownership from 70% to 80% for $0.6 million. It may acquire another 10% for $0.48 million during September–October 2011; further put and call options could require or permit later purchases.
- Delphi-related litigation includes a dispute over termination of a seat-bladder supply agreement and a separate claim seeking approximately $19.7 million in alleged preference payments. The company is contesting the claims. It says it has adequate reserves for ordinary-course claims, but outcomes cannot be determined.
- Other key risks include dependence on two large automotive customers, automotive and other end-market cycles, materials and supply-chain availability, competitive pricing and technology changes, foreign-exchange exposure, and execution of product launches. A 10% currency-rate move could affect pretax income by $3.0 million, according to the filing.
- The company recorded a $56.1 million valuation allowance against deferred tax assets and said it cannot forecast when sufficient positive evidence may support a reversal. No quantified earnings guidance was provided.
Investor facts to verify
- Whether automotive program growth and fiscal 2013 launches offset lower margins, launch costs and vendor-related production constraints.
- Whether customer concentration, especially reliance on two large automotive customers, changes or materially affects sales.
- Cash needs for program launches, capital spending and any additional borrowing under the credit facility.
- Developments and potential financial effects of the Delphi litigation and Eetrex ownership options.
- Progress in addressing European softness, appliance weakness, tax-asset realizability and foreign-currency exposure.