Methode Electronics, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended October 28, 2017; comparative periods ended October 29, 2016. Amounts are in U.S. dollars unless noted.
Financial performance
| Metric | Three months | Six months |
|---|---|---|
| Net sales | $230.1 million, up 9.9% | $431.3 million, up 7.5% |
| Gross profit / margin | $62.0 million / 26.9%, versus $55.6 million / 26.6% | $117.6 million / 27.3%, versus $109.6 million / 27.3% |
| Income from operations | $29.7 million, versus $29.1 million | $55.1 million, versus $55.6 million |
| Net income | $24.2 million, down 2.8% | $44.7 million, down 2.6% |
| Diluted EPS | $0.64, versus $0.66 | $1.19, versus $1.23 |
Quarterly net sales growth was led by Automotive, up 13.7% to $186.7 million; Interface sales fell 10.8% to $29.0 million, while Power Products rose 15.2% to $14.4 million. For the six-month period, Automotive sales increased 10.2% to $343.2 million, Interface declined 10.4% to $58.4 million, and Power Products grew 20.8% to $29.6 million.
Six-month operating cash flow was $45.2 million, compared with $63.7 million. Investing cash outflow was $146.0 million, including acquisitions and $16.4 million of capital spending; financing provided $51.2 million. Cash declined $35.4 million from fiscal year-end to $258.6 million. Operating cash flow less capital spending was $28.8 million.
At October 28, 2017, current assets were $568.9 million and current liabilities were $152.3 million. Total debt reported on the balance sheet was $107.8 million, including $2.3 million short-term and $105.5 million long-term; total liabilities were $291.5 million. The company reported $85.0 million outstanding under its principal credit facility and $4.0 million under Pacific Insight’s Roynat facility. Cash was $258.6 million, of which $253.8 million was held outside the U.S. and deemed permanently reinvested, limiting its availability for domestic operations.
Material changes and unusual items
- Methode acquired Procoplast on July 27, 2017, and Pacific Insight on October 3, 2017, adding automotive assemblies and automotive lighting/electronics capabilities. Pacific Insight contributed about one month of reported results: $7.0 million revenue and a $0.2 million net loss.
- Six-month investing cash outflow included $129.9 million for acquisitions, net of cash received. Acquisition-related fees were $6.0 million in the first half; the quarter included $4.0 million of Pacific Insight acquisition costs. The quarter also included $0.8 million of one-time purchase-accounting adjustments.
- Quarterly net income was pressured by acquisition costs and purchase-accounting adjustments, the absence of a prior-year government grant, and higher labor/production costs related to currency movements. Lower taxes and higher sales volumes partly offset these impacts. The six-month comparison also reflects prior-year commodity adjustments, resolved-customer accrual reversals and a $1.5 million government grant.
- For the six months, effective tax rate was 17.1%, versus 20.2%; management attributed the decline mainly to income mix in lower-tax jurisdictions and favorable discrete adjustments.
- The company paid $6.8 million in dividends in the first half. Its $100 million share-repurchase authorization expired September 1, 2017; no shares were repurchased during the period.
Liquidity, outlook and risks
Management stated that worldwide cash, expected operating cash flows and committed credit capacity should support current operations. The principal $150 million credit facility matures November 18, 2021, with an option to increase capacity by up to $100 million subject to conditions. Methode was in compliance with its covenants at quarter-end. No specific earnings or revenue guidance was provided in the filing.
Key risks include dependence on two large automotive customers, customer and vehicle-program volumes and pricing, launch execution, competitive pricing pressure, supply-chain and materials availability, foreign currency exposure, and successful integration and performance of Procoplast and Pacific Insight. The company also identified uncertainty from potential U.S. tax reform and acceptance of its emerging medical-device products. A 10% currency-rate change could affect pretax income by $4.8 million and the translated value of foreign net investments by $56.1 million, according to the filing.
Hetronic-related litigation and counterclaims remained in discovery; the company said it believed its reserves were adequate, but did not quantify them. Other litigation and claims arise in the ordinary course of business. Disclosure controls were concluded to be effective, with no material change in internal control over financial reporting reported for the quarter.
Important facts for investors to verify
- How much acquisition-related revenue and earnings were contributed by Procoplast and Pacific Insight, and whether integration delivers expected growth and synergies.
- Whether operating cash flow recovers from working-capital uses, particularly receivables and inventory, and how acquisition spending affects cash and debt.
- Domestic liquidity implications of $253.8 million of cash held outside the U.S. and deemed permanently reinvested.
- Automotive customer concentration, pricing pressure, program launches, and currency exposure—especially the Mexican peso and euro.
- Final purchase-price allocations, goodwill and acquired-intangible valuations, and the eventual outcome or financial effect of the Hetronic litigation.