Methode Electronics, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2018, the three months ended July 29, 2017. Results are unaudited and compared with the three months ended July 30, 2016. Methode designs and manufactures electronic and electromechanical components and subsystems, with Automotive, Interface, Power Products and Other segments.
Financial performance
| Metric | Q1 FY2018 | Q1 FY2017 |
|---|---|---|
| Net sales | $201.2 million | $191.9 million |
| Gross profit / margin | $55.6 million / 27.6% | $54.1 million / 28.2% |
| Operating income | $25.4 million | $26.7 million |
| Net income | $20.5 million | $21.2 million |
| Diluted EPS | $0.55 | $0.57 |
| Operating cash flow | $23.6 million | $34.4 million |
- Sales rose 4.8%; cost of products sold grew 5.7%, faster than sales. Selling and administrative expense increased 10.4% to $29.6 million.
- Effective tax rate was 17.1%, versus 20.6%, primarily reflecting income mix in lower-tax jurisdictions and favorable discrete adjustments.
- Cash and cash equivalents were $297.9 million at quarter-end, versus $294.0 million at April 29, 2017. Of quarter-end cash, $289.6 million was held outside the U.S. and deemed permanently reinvested, so unavailable for domestic operations.
- Balance-sheet debt comprised $3.8 million short-term and $47.6 million long-term debt. Separately, the company reported $25.0 million outstanding under its credit facility. The filing also describes Procoplast debt assumed at acquisition; verify how these balances relate before totaling them.
- Current assets were $546.9 million and current liabilities $126.5 million. The $150 million credit facility matures November 18, 2021, with an option to increase capacity by up to $100 million. Methode reported covenant compliance.
- Investing cash outflow was $29.9 million, including $22.2 million for Procoplast, net of cash acquired, and $8.0 million of capital expenditures. Financing cash outflow was $5.7 million, including $3.4 million of dividends.
Material changes and segment results
- Automotive: Sales increased 6.4% to $156.5 million; operating income edged down to $35.8 million from $36.1 million. Margin pressure reflected higher product-development costs, unfavorable commodity pricing and prior-year favorable adjustments.
- Interface: Sales fell 10.6% to $29.4 million, mainly because the Connectivity reporting unit was shuttered at fiscal 2017 year-end. Operating results improved to $0.4 million income from a $0.7 million loss, helped by lower expenses.
- Power Products: Sales grew 26.7% to $15.2 million and operating income rose 32.0% to $3.3 million. Gross margin declined amid unfavorable mix and commodity pricing.
- Other: Operating loss increased to $2.7 million from $2.3 million, reflecting investment in medical-device sales, clinical resources, research and development, and professional services. The Active Energy Solutions unit had been shuttered at fiscal 2017 year-end.
- Comprehensive income was $45.1 million, including a $24.6 million foreign-currency translation gain, versus $14.5 million in the prior-year quarter, which included a $6.7 million translation loss.
- Operating cash flow declined by $10.8 million, principally because operating asset and liability changes used $6.6 million of cash, compared with generating $3.8 million a year earlier.
Transactions, outlook and risks
- On July 27, 2017, Methode acquired 100% of Procoplast, a European automotive-assembly manufacturer, for $22.2 million cash net of cash acquired and assumed $26.5 million of debt. Purchase accounting was preliminary; acquired goodwill was estimated at $16.3 million and intangible assets at $12.0 million.
- On August 1, 2017, the company agreed to acquire Pacific Insight Electronics for approximately $114 million in cash, funded with available cash and the existing credit facility. Closing was subject to customary conditions, including shareholder and regulatory approvals, and was expected in Q2 fiscal 2018.
- No quantified earnings or revenue guidance is provided in the supplied filing text. Management said cash, expected operating cash flows and the committed credit facility would support current operations.
- Key stated risks include dependence on two large automotive customers and specific vehicle programs; automotive-industry and pricing pressures; commodity, foreign-exchange and supply-chain exposure; product-launch execution; and integration and profitability risks from acquisitions. A 10% currency-rate change was estimated to affect pretax income by $11.8 million and the value of net foreign investments by $45.4 million as of July 29, 2017.
- Hetronic litigation remained in discovery; the company said it had adequate reserves for pending litigation and claims. Hetronic-related legal fees were $2.9 million in the quarter, versus $4.3 million a year earlier.
Important facts for investors to verify
- Procoplast purchase-price allocation, assumed debt, and its contribution to results after acquisition.
- Pacific Insight transaction approvals, financing, closing timing and expected impact on leverage and liquidity.
- The extent to which overseas cash is practically accessible for domestic needs, given the permanent-reinvestment designation.
- Whether margin pressure from commodity costs, product mix and development spending persists, and how segment results evolve.
- Exposure to major automotive customers, foreign exchange, and the Hetronic litigation and other contingencies.