Methode Electronics, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2016, the three months ended August 1, 2015. Comparisons are with the three months ended August 2, 2014, unless otherwise noted. Methode is a global manufacturer of electronic and electromechanical components and subsystems, reporting Automotive, Interface, Power Products and Other segments.
Financial performance
| Metric | Quarter ended August 1, 2015 | Prior-year quarter | Change |
|---|---|---|---|
| Net sales | $203.3 million | $218.1 million | Down 6.8% |
| Gross profit / margin | $53.6 million / 26.4% | $50.5 million / 23.2% | Profit up 6.1%; margin up 3.2 percentage points |
| Operating income | $30.4 million | $28.3 million | Up $2.1 million |
| Net income | $23.5 million | $21.4 million | Up 9.8% |
| Diluted EPS | $0.60 | $0.55 | Up $0.05 |
| Operating cash flow | $19.0 million | $33.2 million | Down $14.2 million |
| Capital expenditures | $5.9 million | $3.3 million | Up $2.6 million |
Gross margin improvement primarily reflected favorable raw-material pricing and foreign-currency effects on materials and labor, plus increased production in Egypt. The Automotive segment also benefited from a $1.3 million refund of import duties related to prior periods. These benefits were partly offset by customer price concessions, lower volumes, relocation costs and manufacturing inefficiencies.
Segments
- Automotive: Sales fell 2.0% to $153.1 million; operating income rose 31.5% to $35.9 million. Lower Ford Center Console volumes, currency effects and pricing concessions were partly offset by growth in GM Center Console and transmission lead-frame products.
- Interface: Sales fell 23.4% to $33.7 million; operating income fell 90.0% to $0.7 million. Lower appliance and data-solutions volumes and costs and inefficiencies from moving radio remote-control operations from the Philippines to Egypt pressured results. The move included $1.0 million of moving, severance and redundant-staffing costs.
- Power Products: Sales increased 1.9% to $16.5 million and operating income increased 3.3% to $3.1 million; North American volume-related manufacturing inefficiencies weighed on margins.
- Other: No sales were reported, versus $1.6 million a year earlier. The company sold Trace Laboratories in fiscal 2015; the remaining businesses generated a $2.3 million operating loss.
Financial position and liquidity
- At August 1, 2015, cash and cash equivalents were $167.9 million, total assets $587.8 million, and total equity $470.0 million. Cash was nearly unchanged from $168.1 million at May 2, 2015.
- Current assets were $427.1 million and current liabilities $104.0 million. Long-term debt was $2.0 million, down from $5.0 million at May 2, 2015.
- The $100 million revolving credit facility matures September 21, 2017. $98.0 million was available at quarter-end; the company reported covenant compliance. The stated rate was 1.5% plus LIBOR.
- Operating cash flow was lower mainly because operating assets and liabilities used $11.1 million of cash, versus providing $4.8 million in the prior-year quarter; management cited bonus and payroll-tax payments, partly offset by receivables-collection timing. Cash declined $0.2 million overall to $167.9 million.
- Virtually all cash was held in foreign subsidiaries and deemed permanently reinvested, and management said it was not available to fund domestic operations. Management believed cash, expected operating cash flow and the credit facility would support current operations.
Outlook, commentary and risks
- The filing provides no quantified financial guidance. Management cautioned that results may vary between quarters and highlighted dependence on two large automotive customers and particular vehicle programs.
- Other stated risks include customer pricing pressure, industry and program-volume changes, foreign-exchange movements, supply-chain and materials availability, product-launch execution, margin variability, technology and competition, impairment, and potential product defects or recalls.
- A 10% exchange-rate change could affect pretax income by an estimated $6.6 million and the translated value of foreign net investments by $29.8 million. Management estimated that a one-percentage-point interest-rate change would not materially affect fiscal 2016 results at current and expected debt levels.
- Hetronic Germany-related litigation remains pending: Methode alleges contract breaches and other claims; defendants have counterclaims. Motions to dismiss were awaiting a court ruling and discovery was ongoing. The company stated it believed reserves for ordinary-course claims were adequate, but litigation outcomes were uncertain.
- Disclosure controls and procedures were reported effective, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether stronger Automotive margins persist after the favorable commodity, currency, Egypt-ramp and prior-period tariff-refund effects.
- Whether Interface sales and profitability recover as the Philippines-to-Egypt transition progresses, and whether further transition costs arise.
- How much sales and earnings depend on the two large automotive customers and programs with changing production volumes.
- The geographic accessibility of cash for U.S. needs and any potential tax consequences of repatriation.
- Developments in the Hetronic litigation and any resulting financial exposure.
- Foreign-exchange exposure, operating cash-flow conversion, and future capital spending and borrowing needs.