Methode Electronics, Inc. — Form 10-K Summary
Period clarification: The filing is for the fiscal year ended April 28, 2018 (52 weeks), not a standalone 2017 fourth-quarter filing. It includes quarterly results, including the quarter ended April 28, 2018.
Business context
Methode designs and manufactures electronic and electromechanical components and subsystems across automotive, interface, power products and medical-device activities. Automotive accounted for 80.3% of fiscal 2018 sales. GM and Ford, including sales through tiered suppliers, represented 43.3% and 12.3% of consolidated sales, respectively.
The company acquired automotive suppliers Procoplast and Pacific Insight during fiscal 2018, adding automotive assemblies and LED lighting capabilities. Most of the $249.2 million year-end order backlog was expected to ship in fiscal 2019.
Financial performance and liquidity
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Net sales | $908.3 million | $816.5 million | Up 11.2% |
| Gross profit / margin | $239.6 million / 26.4% | $218.3 million / 26.7% | Profit up 9.8%; margin down 0.3 points |
| Operating income | $118.3 million | $110.8 million | Up 6.8% |
| Income before tax | $123.8 million | $115.9 million | Up 6.8% |
| Net income / diluted EPS | $57.2 million / $1.52 | $92.9 million / $2.48 | Net income down 38.4% |
| Operating cash flow | $117.8 million | $145.2 million | Down $27.4 million |
| Capital expenditures | $47.7 million | $22.4 million | Up $25.3 million |
Revenue growth primarily reflected the acquired businesses and favorable currency translation; acquired businesses contributed $80.8 million of Automotive sales. Interface sales fell 9.1%, while Automotive and Power Products sales grew 15.3% and 12.3%. The effective tax rate rose to 53.8% from 19.9%, principally because of a provisional $53.7 million charge from U.S. tax reform, including a $48.5 million deemed-repatriation tax and $5.2 million deferred-tax remeasurement. The filing reports a $9.8 million foreign investment tax-credit benefit.
Cash and cash equivalents were $246.1 million, versus $294.0 million a year earlier; $239.3 million was held outside the U.S. Current assets were $550.0 million and current liabilities $157.0 million. Balance-sheet debt comprised $4.4 million short-term and $53.4 million long-term debt. The company also had a $150 million committed credit facility, with $30.0 million outstanding under its main facility; it reported compliance with covenants. Operating cash flow less capital expenditures was approximately $70.1 million.
Material changes, outlook and risks
- Fiscal 2018 included $8.1 million in Hetronic litigation legal expense and $6.8 million in acquisition-related expenses. Government-grant income was $7.3 million. A $6.0 million reversal of prior-period stock compensation followed revised expectations for fiscal 2020 performance.
- The Hetronic dispute remained in litigation; discovery was closed and summary-judgment briefing was underway. Management considered reserves for ordinary-course claims adequate, but outcomes are uncertain.
- The company shuttered its Connectivity business at fiscal 2017 year-end and its Methode Development Company business at fiscal 2018 year-end. Dabir Surfaces remains a developing medical-device business; management cited slower-than-planned hospital adoption and continued investment needs.
- Management stated that cash, expected operating cash flows and committed credit facilities should support current operations. The filing provides no specific fiscal 2019 earnings or revenue guidance.
- Key risks include dependence on GM and Ford and automotive model demand, pricing pressure, lengthy automotive product-development cycles, acquisition integration, commodity and foreign-exchange exposure, international operations, supply interruptions, product quality, cybersecurity, and tax-law uncertainty. Copper costs increased during fiscal 2018.
- Management and the auditor reported effective internal controls; however, the acquired Pacific Insight and Procoplast businesses were excluded from the internal-control assessment. The auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- How much future growth and profitability depends on GM/Ford programs and successful integration of Pacific Insight and Procoplast.
- The final tax effects of U.S. tax reform, including the provisional repatriation-tax estimate and installment payments.
- Hetronic litigation developments, potential exposure and associated legal costs.
- Dabir Surfaces adoption, commercialization milestones, cash investment and progress against fiscal 2020 performance targets.
- Cash availability for U.S. operations given the large offshore cash balance, and debt levels, maturities and covenant headroom.
- Whether backlog converts to shipments and whether margins recover from acquisition mix, pricing pressure, currency effects and higher input costs.