Methode Electronics, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2015, three months ended August 2, 2014; comparable period ended July 27, 2013. Unaudited results. Methode designs and manufactures electronic and electromechanical components across Automotive, Interface, Power Products and Other segments.
Financial performance
| Metric | Q1 FY2015 | Q1 FY2014 | Change |
|---|---|---|---|
| Net sales | $218.1 million | $167.3 million | +30.4% |
| Gross profit / margin | $50.5 million / 23.2% | $34.0 million / 20.3% | Margin +2.9 percentage points |
| Operating income | $28.3 million | $15.1 million | +87.4% |
| Net income | $21.4 million | $13.6 million | +57.4% |
| Diluted EPS | $0.55 | $0.36 | +$0.19 |
| Operating cash flow | $33.2 million | $8.7 million | +$24.5 million |
| Capital expenditures | $3.3 million | $9.3 million | Down $6.0 million |
| Cash and cash equivalents at quarter-end | $135.7 million | $73.4 million | Up $62.3 million year over year |
| Long-term debt at quarter-end | $38.0 million | Not stated here | Down from $48.0 million at May 3, 2014 |
Gross margin improved primarily from higher Automotive volumes and manufacturing efficiencies, including ramp-up at the lower-cost Egypt facility. Selling and administrative expense rose 17.5% to $22.2 million, but declined to 10.2% of sales from 11.3%. Effective tax rate increased to 24.6% from 8.7%; the prior-year comparison reflects the absence of U.S. income tax expense then, following a later fiscal 2014 release of most domestic valuation allowance.
Segment and period changes
- Automotive: Sales rose 50.6% to $156.3 million; operating income increased to $27.3 million from $12.0 million. Higher GM Center Console, steering-angle sensor and hidden-switch volumes, plus improved manufacturing efficiencies, were key contributors.
- Interface: Sales decreased 0.7% to $44.0 million; operating income fell to $7.0 million from $7.9 million, partly due to lower volumes, unfavorable mix and increased Hetronic-related legal costs.
- Power Products: Sales declined 6.4% to $16.2 million, principally from lower European bypass-switch sales; operating income edged up to $3.0 million from $2.9 million.
- Other: Sales fell 11.1% to $1.6 million and operating loss widened to $1.9 million from $0.6 million, mainly from medical-product development expense and additional headcount.
Operating cash flow improvement reflected higher earnings and a $4.8 million cash contribution from operating asset and liability changes, versus a $12.0 million use in the prior period, primarily due to receivables collection timing; increased inventory partly offset the benefit. Financing used $8.9 million, including $10.0 million of net debt repayments and $3.4 million of dividends, partly offset by $4.5 million of stock-option proceeds. Cash increased $19.3 million during the quarter.
Liquidity, outlook and risks
- At August 2, 2014, the company had $135.7 million cash and $38.0 million drawn under a $100 million revolving credit facility, leaving $62.0 million available; the facility matures September 21, 2017. The company reported covenant compliance and an interest rate of 1.5% plus LIBOR.
- Management said worldwide cash, expected operating cash flows and the committed facility should support current operations. However, $124.4 million of cash was held outside the U.S. and deemed permanently reinvested, so it was not available to fund domestic operations.
- The filing provides no specific revenue, earnings or margin guidance. Management cautions that results can vary for reasons beyond seasonality.
- Key stated exposures include dependence on two large automotive customers and particular vehicle programs, industry and product-launch volatility, pricing pressure, supply-chain and material risks, foreign currency and tax-rate changes, impairment risk, competition, technology changes, product defects, intellectual-property risks and potential business interruptions. A 10% currency move was estimated to affect pretax income by $2.7 million and the translated value of foreign net investments by $25.4 million.
- Hetronic dispute: Methode terminated agreements with German distributor-related Fuchs companies after alleged material breaches. It filed proceedings in Germany seeking an injunction over use of the Hetronic name and a separate Oklahoma lawsuit seeking damages and injunctive relief. Outcomes are uncertain; legal expenses increased.
- Routine litigation and claims are pending; management stated it believes reserves are adequate. No off-balance-sheet arrangements were reported other than ordinary-course operating leases and purchase obligations.
Important facts for investors to verify
- Whether Automotive sales growth and improved margins—especially those tied to major customers and specific vehicle programs—continue.
- How much cash remains overseas and the practical availability of U.S. liquidity, including facility availability and covenant compliance.
- Whether the higher tax rate persists and the realizability of tax-loss and investment-credit carryforwards.
- Developments, costs and potential financial effects of the Hetronic litigation and the separate torque-sensing patent lawsuit referenced by management.
- Whether medical-products development spending and the Other segment operating loss improve, and whether currency movements materially affect reported results.