Methode Electronics, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2013, the three months ended July 28, 2012. Financial statements are unaudited; comparisons are with the three months ended July 30, 2011. Dollar amounts below are in millions unless noted.
Financial performance
| Metric | Q1 FY2013 | Q1 FY2012 | Change |
|---|---|---|---|
| Net sales | $118.7 | $110.8 | +7.1% |
| Gross profit | $21.5 | $20.0 | +7.0% |
| Gross margin | 18.0% | 18.1% | Down 0.1 percentage point |
| Operating income | $4.2 | $1.4 | +194% |
| Net income attributable to Methode | $3.9 | $1.5 | +160% |
| Basic and diluted EPS | $0.10 | $0.04 | +$0.06 |
| Operating cash flow | $6.2 | $6.5 | Down $0.3 |
| Capital expenditures | $11.4 | $4.6 | Up $6.9 |
Operating margin rose to approximately 3.5% from 1.3%; net margin was approximately 3.3% versus 1.3%. Operating cash flow less capital expenditures was negative approximately $5.2 million. The company paid $2.6 million in dividends, or $0.07 per common share.
Automotive sales increased 13.2% to $71.0 million, led by North American programs and the acquired AMD business. Interconnect sales declined 2.2% to $31.7 million, Power Products declined 5.5% to $12.1 million, and Other increased 34.5% to $3.9 million. Operating income improved in each segment; Other moved from a $1.0 million operating loss to $1.0 million of income.
Balance sheet and liquidity
- Cash and cash equivalents were $85.1 million at July 28, 2012, down from $86.8 million at April 28, 2012. Current assets were $240.2 million and current liabilities $89.8 million; the current ratio was approximately 2.7.
- Long-term debt was $56.5 million, up from $48.0 million. Cash exceeded debt by approximately $28.6 million. The $75 million revolving facility matures February 25, 2016, bears interest at 1.5% plus LIBOR, and had $18.5 million available. The company reported covenant compliance.
- Cash fell by $1.7 million during the quarter. Higher capital spending, primarily for expansion and equipment for programs expected to launch in late fiscal 2013, was the main investment outflow.
- $77.9 million of cash was held outside the United States and considered permanently reinvested, limiting its availability for domestic operations. Management cited U.S. net operating loss carryforwards of $62.9 million that could reduce taxes on any future repatriation.
Material changes, outlook, and risks
- Sales growth was offset by nearly flat gross margin: automotive launch and development expenses and a higher purchased-content mix pressured margins. Lower selling and administrative costs, including lower Delphi legal expenses, helped lift operating income.
- Management said cash and expected operating cash flows should support current operations, but anticipated cash could decline as it funds equipment, tooling, inventory, and staffing for a GM center-stack program scheduled to begin production in late fiscal 2013. No specific earnings or revenue guidance was provided.
- After quarter-end, Methode agreed to settle all Delphi-related litigation for $20.0 million, payable in two installments in October 2012 and January 2013. The settlement also requires assignment of certain patents and a non-compete related to the technology. The company expected to record the entire gain in fiscal Q2 2013.
- The company had a non-binding memorandum of understanding to purchase assets of a financially distressed Interconnect distributor, anticipated in fiscal Q2. If completed, $1.2 million of receivables would be reclassified; if not, management said those receivables could be impaired and written off.
- Key risks include reliance on two large automotive customers, industry and product demand, pricing and material costs, supply-chain disruption, international operations and currency movements, and successful execution of new program launches. A 10% currency-rate change could affect pretax income by $2.7 million and the translated value of foreign net investments by $19.5 million, based on quarter-end exposure.
- Management maintained a $60.1 million valuation allowance against deferred tax assets, citing recent cumulative U.S. losses and uncertainty about when sufficient positive evidence would support a reversal. Unrecognized tax benefits were $66,000; approximately $37,000 could be recognized if certain statutes of limitation expire.
Important facts for investors to verify
- Whether automotive growth and planned late-fiscal-2013 launches translate into sustained sales and improved margins after development and start-up costs.
- Completion and cash collection of the $20.0 million Delphi settlement, along with the accounting gain and effects of the patent assignment and non-compete.
- Outcome of the proposed distributor-asset purchase and recoverability of the $1.2 million receivable if the transaction does not close.
- Capital-spending needs, overseas cash availability, and headroom under the credit facility as program launches progress.
- Customer concentration, foreign-exchange sensitivity, and the outlook for deferred tax asset realization.