Methode Electronics, Inc. — Form 10-Q Summary
Reporting period: Second quarter and six months ended October 29, 2016. Dollar amounts are in millions except per-share data. The company designs and manufactures electronic and electromechanical components across Automotive, Interface, Power Products and Other segments.
Financial performance
| Metric | Three months ended Oct. 29, 2016 | Prior-year quarter | Six months ended Oct. 29, 2016 | Prior-year six months |
|---|---|---|---|---|
| Net sales | $209.3 | $208.4 | $401.1 | $411.7 |
| Gross profit / margin | $55.6 / 26.6% | $50.9 / 24.4% | $109.6 / 27.3% | $104.5 / 25.4% |
| Operating income | $29.1 | $26.4 | $55.6 | $56.9 |
| Net income | $24.9 | $21.2 | $45.9 | $44.8 |
| Diluted EPS | $0.66 | $0.54 | $1.23 | $1.15 |
- Quarterly change: Sales rose 0.4%, while net income increased 17.5%. Gross margin improved 2.2 percentage points, reflecting lower product costs, favorable raw-material pricing and currency effects, and Power Products cost reductions.
- Six-month change: Sales declined 2.6%, but net income rose 2.5%. Gross margin improved 1.9 points; higher selling and administrative expense more than offset gross-profit gains, contributing to lower operating income.
- Cash flow and liquidity: First-half operating cash flow was $63.7, versus $49.1 a year earlier. Capital expenditures were $9.5; financing cash outflow was $23.5. Cash increased to $249.6 from $227.8 at April 30, 2016.
- Debt and equity: Long-term debt was $49.0, down from $57.0 at April 30. The company reported $113.9 in current liabilities and $492.8 in shareholders’ equity. First-half dividends were $6.6; stock repurchases were $9.8.
Material changes and segment performance
- Automotive: Second-quarter sales rose 2.1% to $164.2 and operating income rose 9.4% to $38.4. For the first half, sales declined 0.8% to $311.3, while operating income increased 4.8% to $74.5. North American program volumes supported results; European tooling and design-service sales declined.
- Interface: Second-quarter sales fell 9.2% to $32.5 and the segment recorded an operating loss of $0.4, versus income of $1.4. First-half sales fell 6.3% to $65.2 and the operating result shifted to a $1.3 loss, primarily due to lower data-solutions and appliance volumes and higher legal and stock-compensation costs.
- Power Products: Second-quarter sales increased 5.9% to $12.5 and operating income rose to $2.1. First-half sales declined 13.4% to $24.5, but operating income improved to $4.5, with higher margins attributed to commodity pricing, currency and overhead reductions.
- Other: First-half operating loss widened to $4.7 from $4.1 as professional fees and marketing expenses rose; the segment’s medical-device and other new products generated minimal sales.
Outlook, commentary and risks
- The filing gives no specific numerical revenue or earnings guidance. Management stated that cash balances, expected operating cash flows and committed credit availability should support current operations.
- Other income included a $1.5 international government grant for maintaining employment levels. First-half Automotive results also benefited from $1.0 in commodity-pricing adjustments and a $1.0 reversal of accruals related to resolved customer commercial issues.
- Hetronic litigation with former distributors remained in discovery; the defendants had filed counterclaims. Hetronic-related legal fees were $6.6 for the first half, compared with $4.1 a year earlier. The company said it had adequate reserves for pending litigation and claims.
- On November 18, 2016, after quarter-end, the company entered a new five-year credit agreement with a $150.0 facility and an option to increase it by up to $100.0, subject to conditions. The facility is for general corporate purposes and has variable interest rates.
- Cash held by foreign subsidiaries was $241.8 of the $249.6 total and was deemed permanently reinvested, making it unavailable for domestic operations. Currency exposure was material: a 10% exchange-rate change could affect income before taxes by an estimated $8.7 and the net foreign investment by $37.5.
- Principal stated risks include reliance on two large automotive customers, customer pricing pressure, program-launch execution, foreign-currency and international exposure, supply-chain and material availability, product defects, competition, technology changes, and acceptance of emerging medical products. The filing added uncertainty concerning possible changes to NAFTA and other trade agreements.
Important facts for investors to verify
- Whether Interface sales and profitability stabilize, particularly in data-solutions products, and whether higher legal costs persist.
- How much of earnings improvement reflects sustainable operating performance versus the $1.5 government grant and the Automotive accrual reversal and pricing adjustments.
- Automotive customer concentration, vehicle-program volumes and the effects of pricing concessions and European demand.
- Availability of cash for U.S. needs given the foreign cash deemed permanently reinvested, and the terms and covenant headroom under the new credit agreement.
- Progress and potential financial exposure in the Hetronic litigation, plus the company’s stock-compensation expense and remaining repurchase authorization.