Methode Electronics, Inc. — Form 10-Q Summary
Business context and reporting period
Global manufacturer of electronic and electromechanical components and subsystems serving automotive, appliance, communications, aerospace, transportation, consumer and industrial markets. The filing reports the unaudited fiscal third quarter and first nine months ended January 30, 2016, compared with the periods ended January 31, 2015. Dollar amounts are in millions unless stated otherwise.
Financial performance and liquidity
- Third quarter: Net sales were $184.6, down 10.4%; gross profit was $47.6, down 15.3%; operating income was $21.5, versus $34.7; and net income was $17.2, down 36.5%. Diluted EPS was $0.45, versus $0.68.
- First nine months: Net sales were $596.3, down 8.8%; gross profit was $152.1, down 8.8%; operating income was $78.4, versus $97.7; and net income was $62.0, down 16.8%. Diluted EPS was $1.60, versus $1.90.
- Margins: Third-quarter gross margin declined to 25.8% from 27.3%; nine-month gross margin remained 25.5%. Net income margin was 9.3% versus 13.2% for the quarter and 10.4% versus 11.4% year to date.
- Cash flow: Nine-month cash provided by operations was $83.8, down from $108.6. Capital expenditures were $17.2, compared with $12.8. Cash increased $34.2 to $202.3.
- Balance sheet and debt: Cash was $202.3; current assets were $453.7 and current liabilities $109.3. Long-term debt was $55.0, up from $5.0 at May 2, 2015. The $100.0 credit facility matures September 21, 2017; $45.0 remained available, excluding the option to increase commitments. The rate was 1.5% plus LIBOR, and the company reported covenant compliance.
- Cash location: $191.0 of cash was held outside the U.S. and deemed permanently reinvested, so it was not available to fund domestic operations. Management said worldwide cash, expected operating cash flows and the committed facility would support current operations.
Material changes and drivers
- Quarterly Automotive sales fell 1.8% to $138.5, chiefly reflecting the wind-down of the Ford Center Console program, pricing concessions and currency effects; GM Center Console sales partly offset declines. Automotive nine-month operating income rose 7.4% to $99.7, helped by lower commodity costs and favorable currency effects on inputs and labor.
- Interface quarterly sales fell 5.7% to $34.8 and operating income fell to $0.5 from $3.8. Nine-month sales fell 14.1% to $104.3 and operating income fell 83.4% to $2.6. Lower appliance and data-solutions volumes, higher legal and professional costs, and costs and inefficiencies from moving radio-remote-control production from the Philippines to Egypt weighed on results. The move included $1.0 of moving, severance and redundant-staffing costs in the first quarter.
- Power Products was the largest sales decline: quarterly revenue fell 56.7% to $11.3 and nine-month revenue fell 38.8% to $39.1, primarily from lower datacom, cabling and busbar volumes. Lower utilization sharply reduced segment margins and operating income.
- Other-segment sales were minimal following the fiscal 2015 sale of Trace Laboratories. The company had sold the businesses for $11.7 in February 2015 and recorded a $7.7 pretax gain in fiscal 2015. Remaining medical-device, inverter and battery operations continued to incur losses.
- Consolidated quarterly selling and administrative expense rose 21.4% to $26.1, including higher legal and professional fees, compensation and amortization. Year-to-date expense rose 6.7% to $73.7; increased legal and professional, compensation and other costs were partly offset by lower bonus expense.
Outlook, risks, contingencies and unusual items
- The filing provides no quantified revenue, earnings or margin guidance. Management’s stated liquidity assessment is noted above.
- The company identifies dependence on two large automotive customers and specific vehicle programs as a key risk, alongside automotive and other end-market conditions, pricing pressure, program-launch execution, supply-chain and material risks, foreign operations and currency movements, technology and competition, product defects, cybersecurity, and impairment risk.
- Foreign-exchange exposure is significant: management estimated a 10% currency-rate change could affect pretax income by $8.1 and the translated value of net foreign investments by $32.3 as of January 30, 2016. A one-percentage-point interest-rate change was not expected to materially affect fiscal 2016 results at current and expected debt levels.
- Litigation includes a lawsuit against the former German distributors, the Fuchs companies, and their counterclaims alleging breach of contract, interference and business slander. The company said it had adequate reserves for pending claims; the filing does not provide a quantified potential exposure for this case.
- The board authorized up to $100.0 of share repurchases through September 1, 2017. The company had repurchased $59.8 by January 30, 2016. It paid $10.2 in dividends during the first nine months; the quarterly dividend was $0.09 per share.
- A five-year employee incentive program introduced in the quarter includes performance-based awards tied to fiscal 2020 adjusted EBITDA and time-based restricted stock units. Expected compensation expense is $21.8 for target performance awards and $16.5 for the units; changes in expected performance could cause material catch-up expense or reversals.
- Management concluded disclosure controls were effective and reported no materially affecting change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether the sharp Power Products decline and weakness in Interface volumes persist, and the pace of any recovery in margins.
- Automotive program volumes, pricing concessions and customer concentration, particularly the Ford and GM programs.
- Whether the Egypt production transfer achieves expected efficiencies after the reported transition costs.
- How legal and professional expenses, including the distributor dispute, develop and whether the litigation requires additional reserves.
- Availability of cash for U.S. needs given the $191.0 held abroad, and the effect of repurchases, dividends and borrowing on liquidity and debt.
- Foreign-exchange exposure, incentive-award expense assumptions and the realizability of deferred tax assets and carryforwards.