Methode Electronics, Inc. — FY2015 Form 10-K
Reporting period: Fiscal year ended May 2, 2015 (52 weeks), compared mainly with the 53-week fiscal year ended May 3, 2014. Amounts are in U.S. dollars; financial statement figures are in millions except per-share data.
Business context
Methode designs and manufactures electronic and electromechanical components and subsystems for automotive and other industrial, communications, aerospace, appliance and transportation markets. Automotive was the largest segment, representing 71.3% of FY2015 sales. The company sold its Trace Laboratories businesses in February 2015.
Financial performance and liquidity
| Metric | FY2015 | FY2014 |
|---|---|---|
| Net sales | $881.1 | $772.8 |
| Gross profit / gross margin | $218.8 / 24.8% | $156.7 / 20.3% |
| Operating income | $112.2 | $73.6 |
| Income before taxes | $120.8 | $75.9 |
| Income tax expense/(benefit) | $19.8 | $(20.3) |
| Net income attributable to Methode | $101.1 | $96.1 |
| Basic / diluted EPS | $2.61 / $2.57 | $2.53 / $2.51 |
| Operating cash flow | $122.9 | $72.4 |
| Capital expenditures | $22.5 | $29.0 |
| Cash and cash equivalents at year-end | $168.1 | $116.4 |
| Long-term debt at year-end | $5.0 | $48.0 |
Current assets were $438.3 and current liabilities $130.6, implying a current ratio of approximately 3.4. The $100 million revolving credit facility had $95 million available at year-end, with maturity in September 2017; the company reported covenant compliance. Of year-end cash, $160.9 was held outside the U.S. and foreign earnings were designated indefinitely reinvested. Cash dividends were $0.36 per share, up from $0.30.
Material changes versus the prior comparable year
- Sales increased 14.0%, led by Automotive growth of 20.3% to $628.4, primarily from higher GM Center Console Program volumes. Power Products sales rose 18.2% to $85.7; Interface sales fell 5.3% to $161.7.
- Gross margin expanded 4.5 percentage points, mainly from higher volumes and manufacturing efficiencies in Automotive and Power Products, Egypt production ramp-up, and favorable commodity pricing. Interface faced lower appliance volumes and higher development costs.
- Operating income increased $38.6 to $112.2. Net income rose 5.2%, with operating improvement and a $7.7 gain on the Trace Laboratories sale partly offset by higher tax expense, an $11.1 goodwill impairment and increased selling and administrative costs.
- Operating cash flow improved by $50.5. Investing cash use was $11.3, including $22.5 of capital spending and proceeds from the Trace sale. Financing cash use increased to $48.5, principally reflecting $43.0 of debt repayments and $13.8 of dividends.
- Foreign currency translation reduced comprehensive income: translation adjustments were a $33.0 loss, versus a $9.0 gain in FY2014. Currency translation reduced FY2015 reported sales by $10.9.
- Backlog declined to approximately $150.0 from $218.2; the company expected most of the year-end backlog to ship in FY2016.
Outlook, commentary, risks and unusual items
- No quantified revenue or earnings guidance is provided in the supplied filing text. Management stated that worldwide cash, expected operating cash flows and the committed credit facility were expected to support current operations.
- Customer concentration is substantial: GM represented 44.8% and Ford 12.8% of FY2015 sales. Orders generally reflect customer requirements rather than fixed purchase quantities, and model awards and production volumes can change.
- FY2015 included an $11.1 goodwill impairment for TouchSensor following a fourth-quarter strategic-direction change, a $7.7 pre-tax Trace Laboratories sale gain, and tax benefits from valuation-allowance releases. The filing reports an $8.6 total FY2015 valuation-allowance release in the tax discussion; the fourth-quarter note separately identifies a $5.0 net tax benefit adjustment.
- Other principal risks include automotive cyclicality and pricing pressure; lengthy automotive product-development cycles and launch execution; foreign exchange exposure; supply-chain and material availability; international operating and regulatory risks; product defects and intellectual-property disputes; cyber threats; and possible additional asset impairments.
- Environmental remediation accruals were $2.8 for two inactive sites; costs could exceed accruals if remediation proves more extensive. The company reported ongoing litigation involving former Hetronic distributors and stated that ordinary-course claims were adequately reserved; it did not expect pending matters to materially affect consolidated statements.
- Management and the independent auditor reported effective internal control over financial reporting. The financial statement audit opinion was unqualified.
Most important facts for investors to verify
- Customer and program concentration: GM and Ford together accounted for 57.6% of sales; assess sustainability of GM program volumes and Ford exposure.
- Backlog conversion and segment trends, particularly the declining Interface business and continued Automotive dependence.
- Underlying earnings quality: separate recurring operations from the Trace sale gain, goodwill impairment and tax valuation-allowance releases.
- Cash accessibility: most cash was held overseas and repatriation could trigger significant tax expense; the filing estimates approximately $96.6 of additional tax before available foreign tax credits if undistributed foreign earnings were distributed.
- Check the filing’s numerical presentation: selected financial data lists FY2015 total assets as $604.1, while the audited balance sheet reports $605.8; the statements of operations report diluted EPS of $2.57, while selected financial data lists $2.58. The audited statements report FY2015 basic EPS of $2.61.