Methode Electronics, Inc. — Form 10-Q Summary
Business context and reporting period
The filing covers the fiscal second quarter and first six months of fiscal 2015, ended November 1, 2014. Financial statements are unaudited. Methode designs and manufactures electronic and electromechanical components and subsystems. Its reportable segments are Automotive, Interface (formerly Interconnect), Power Products and Other.
Key financial metrics
Amounts are in millions of dollars except per-share data and percentages.
| Metric | Three months ended Nov. 1, 2014 | Three months ended Oct. 26, 2013 | Six months ended Nov. 1, 2014 | Six months ended Oct. 26, 2013 |
|---|---|---|---|---|
| Net sales | $229.7 | $190.9 | $447.8 | $358.2 |
| Gross profit / margin | $60.2 / 26.2% | $41.4 / 21.7% | $110.6 / 24.7% | $75.4 / 21.0% |
| Operating income | $34.8 | $21.7 | $63.0 | $36.9 |
| Net income attributable to Methode | $26.0 | $19.8 | $47.4 | $33.5 |
| Diluted EPS | $0.66 | $0.51 | $1.21 | $0.87 |
| Cash dividends per common share | $0.09 | $0.07 | $0.18 | $0.14 |
- For the six months, operating cash flow was $63.2, capital expenditures were $10.8, and cash increased $27.8 to $144.2. Operating cash flow compared with $30.8 in the prior-year period; management attributed the improvement to higher net income and a favorable $17.8 year-over-year swing in changes in operating assets and liabilities, principally collection timing, partly offset by higher inventory.
- At November 1, cash was $144.2, current assets $412.8 and current liabilities $130.0. Long-term debt was $30.0, down from $48.0 at May 3, 2014. Total assets were $593.5 and total equity was $422.6.
- The $100.0 credit facility matures September 21, 2017; $70.0 was available at quarter-end, excluding an option to increase commitments. The borrowing rate was 1.5% plus LIBOR, and the company reported compliance with covenants.
- Cash dividends paid were $6.9 in the first half. Foreign currency translation reduced first-half comprehensive income by $16.1; the prior-year period had a positive $8.1 translation adjustment.
Material changes versus the prior comparable period
- Second-quarter sales rose 20.3%; first-half sales rose 25.0%. Automotive drove the increase, with first-half segment sales up 40.1%, primarily on higher GM Center Console Program volumes. Interface first-half sales fell 4.7%; Power Products rose 4.7%; Other was flat.
- First-half gross margin expanded to 24.7% from 21.0%, primarily reflecting Automotive and Power Products manufacturing efficiencies, higher volumes, improvements at the captive molding business, and the ramp-up of lower-cost production in Egypt. Selling and administrative expense rose 23.6% to $47.6, though it declined slightly as a share of sales to 10.6% from 10.7%.
- First-half net income increased 41.5%, despite higher taxes. The effective tax rate was 24.9%, versus 7.5% in the prior-year period; the filing attributes the comparison mainly to the prior year’s U.S. valuation allowances and their release in fiscal 2014.
- Interface operating income declined to $11.9 from $15.4, with lower volumes, unfavorable mix and increased legal and compensation costs. Other segment operating loss widened to $3.0 from $1.3, mainly due to medical-product development costs, headcount and professional fees.
Outlook, commentary, risks and unusual items
- Management said worldwide cash, expected operating cash flows and the committed credit facility should support current operations. No numerical revenue or earnings guidance is provided in the filing.
- Of $144.2 in cash, $134.8 was held outside the United States and deemed permanently reinvested, and therefore unavailable to fund domestic operations. Management noted U.S. net operating loss carryforwards could reduce cash taxes on any future repatriation.
- Management cited high dependence on two large automotive customers and specific vehicle programs, along with risks from automotive and other end-market conditions, program launches, price pressure, supply and material availability, foreign operations and currencies, tax rates, margins, technology, competition and potential impairment.
- In the Hetronic dispute, Methode terminated agreements with former distributors and filed an Oklahoma lawsuit seeking damages and injunctive relief. The defendants denied the allegations and filed counterclaims; discovery had begun. The company had withdrawn a separate German preliminary-injunction proceeding without prejudice. Methode stated it had adequate reserves for litigation and claims, but outcomes could not be determined.
- Second-quarter Automotive results included a $1.3 customer reimbursement for prior-period costs related to a cancelled program and $0.6 of nonrecurring price adjustments. These items, along with operating efficiencies, supported margins. Currency fluctuations reduced reported second-quarter sales by $1.2.
- A 10% currency-rate change from quarter-end levels could affect pretax income by $3.6 and the translated value of net foreign investments by $25.9, according to the filing. Management estimated a one-percentage-point interest-rate change would not materially affect fiscal 2015 results at then-current and expected debt levels.
Important facts for investors to verify
- Whether Automotive growth and improved margins are sustainable as GM and other vehicle programs, volumes and production efficiencies evolve; assess dependence on the two major automotive customers.
- How much reported profitability benefited from nonrecurring customer adjustments and reimbursement, and whether Interface weakness and Other-segment development spending persist.
- Availability and practical usability of overseas cash for U.S. needs, and the effect of foreign exchange movements on earnings and equity.
- Progress and possible financial consequences of the Hetronic litigation and counterclaims, as well as the status and realizability of tax attributes and credits.
- Whether cash generation, capital spending, dividends and debt repayment remain consistent with management’s liquidity assessment and credit-facility covenants.