Methode Electronics, Inc. — Form 10-Q Summary
Reporting period: Third quarter and nine months ended January 28, 2017; comparisons are to the periods ended January 30, 2016. Dollar amounts are in millions, except per-share data. The company designs and manufactures electronic and electromechanical components and subsystems, reporting across Automotive, Interface, Power Products and Other segments.
Financial performance
| Metric | Q3 FY2017 | Q3 FY2016 | Nine months FY2017 | Nine months FY2016 |
|---|---|---|---|---|
| Net sales | $195.6 | $184.6 | $596.7 | $596.3 |
| Gross profit | $53.4 | $47.6 | $163.0 | $152.1 |
| Gross margin | 27.3% | 25.8% | 27.3% | 25.5% |
| Operating income | $29.1 | $21.5 | $84.8 | $78.4 |
| Net income | $23.7 | $17.2 | $69.7 | $62.0 |
| Diluted EPS | $0.63 | $0.45 | $1.86 | $1.60 |
| Operating cash flow | — | — | $106.7 | $83.8 |
| Capital expenditures | — | — | $13.2 | $17.2 |
Q3 net sales rose 6.0% and net income rose 37.8%. For the nine-month period, sales were essentially flat while net income increased 12.4%. Nine-month selling and administrative expense increased to $78.2 million from $73.7 million; the company cited higher stock-award amortization and legal and professional fees. The effective tax rate was 21.8% in Q3 and 20.8% year to date, versus 24.2% and 23.1%, respectively, a year earlier.
Balance sheet and liquidity at January 28, 2017: Cash and cash equivalents were $268.8 million, compared with $227.8 million at April 30, 2016. Current assets were $499.1 million and current liabilities $111.2 million. Long-term debt was $37.0 million, down from $57.0 million. Shareholders’ equity was $507.9 million. Of cash, $258.7 million was held outside the U.S. and deemed permanently reinvested, limiting its availability for domestic operations. Management said cash, expected operating cash flows and the committed credit facility were sufficient to support current operations.
Cash increased by $41.0 million over the first nine months. Operating cash flow was $106.7 million; investing cash outflow was $13.2 million; financing cash outflow was $38.0 million. Financing included $20.0 million of debt repayments, $10.3 million of dividends and $9.8 million of share repurchases. The credit facility carried an interest rate of 1.25% plus LIBOR, and the company reported covenant compliance.
Material changes and segment performance
- Automotive: Nine-month sales increased 1.9% to $461.6 million and operating income increased 11.5% to $111.2 million. Higher volumes and favorable material, labor and currency effects supported results; customer pricing concessions and lower European sales were offsets.
- Interface: Nine-month sales fell 9.0% to $94.9 million, and the segment moved from $2.6 million operating income to a $0.1 million operating loss. Lower data-solutions volumes and higher legal and stock-compensation costs were cited.
- Power Products: Nine-month sales increased 2.0% to $39.9 million and operating income rose 63.8% to $7.7 million, benefiting from cost reductions, favorable commodity and currency effects, and higher volumes in Asia.
- Other: Nine-month operating loss widened to $8.0 million from $6.2 million, primarily due to medical-device research and development, professional fees and marketing. Sales remained minimal.
Q3 sales growth was led by Automotive (+8.6%) and Power Products (+36.3%); Interface sales declined 14.4%. Consolidated margin improvement reflected favorable currency effects on materials and labor and other cost factors, partly offset by unfavorable raw-material pricing and Interface sales mix. Foreign-currency translation reduced reported sales by $3.2 million for the nine months.
Outlook, risks and unusual items
- The filing provides no specific financial guidance or quantified forecast.
- Other income included an international government grant of $1.5 million in Q3 and $3.0 million year to date for maintaining certain employment levels.
- Automotive results benefited year to date from $1.0 million in commodity-pricing adjustments and a $1.0 million reversal of accruals for resolved customer commercial issues. Management also identified favorable currency and commodity effects; these factors may not recur at the same level.
- Hetronic litigation with former distributors remains in discovery, with counterclaims pending. Related legal fees were $9.0 million year to date, versus $6.9 million in the prior-year period. The company stated that it had adequate reserves for pending claims; the ultimate outcome is uncertain.
- Performance-based restricted stock awards are being expensed at target. Management said a future catch-up or reversal could be material if its assessment of the likelihood of meeting fiscal 2020 performance goals changes.
- Key risks include dependence on two large automotive customers and particular vehicle programs; automotive and other end-market conditions; pricing pressure; launch execution; foreign-exchange exposure; supply-chain and material risks; and acceptance of emerging medical-device products. A 10% currency-rate change could affect pretax income by an estimated $9.1 million and the translated value of foreign net investments by $38.8 million.
- The company reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether Automotive growth and improved gross margins persist if favorable currency and commodity effects moderate.
- Whether Interface sales recover, and how lower data-solutions volumes and ongoing Hetronic legal costs develop.
- How much foreign-held cash is practically accessible for U.S. needs, given the company’s permanent-reinvestment position.
- The credit facility’s remaining capacity and terms, alongside debt repayment, capital spending, dividends and repurchases.
- Progress and commercialization prospects for Dabir Surfaces and other Other-segment products, including related spending and losses.
- Potential changes in stock-award expense tied to fiscal 2020 performance expectations, and the outcome or cost of litigation and other contingencies.