Methode Electronics, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter ended January 31, 2015, and nine months then ended. The filing compares the quarter with the three months ended February 1, 2014 and the nine-month period with the nine months ended February 1, 2014. The current periods had one fewer week: 13 versus 14 for the quarter and 39 versus 40 for the nine months.
Business context
Methode designs and manufactures electronic and electromechanical components and subsystems for automotive, appliance, communications, aerospace, industrial, and other markets. It reports Automotive, Interface (formerly Interconnect), Power Products, and Other segments. Management identifies dependence on two large automotive customers as a significant business risk.
Financial performance and liquidity
- Third-quarter results: Sales were $206.0 million, up 8.5%; gross profit was $56.2 million, up 46.0%, and gross margin was 27.3%, compared with 20.3%. Operating income was $34.7 million versus $16.4 million; net income was $27.1 million versus $14.6 million. Diluted EPS was $0.68 versus $0.38.
- Nine-month results: Sales were $653.8 million, up 19.3%; gross profit was $166.8 million, up 46.4%, and gross margin was 25.5%, compared with 20.8%. Operating income was $97.7 million versus $53.3 million; net income was $74.5 million versus $48.0 million. Diluted EPS was $1.90 versus $1.26.
- Cash flow: Nine-month operating cash flow was $108.6 million, versus $49.4 million. Capital expenditures were $12.8 million, versus $23.5 million. Cash and cash equivalents increased by $51.4 million to $167.8 million.
- Balance sheet and debt: At January 31, cash was $167.8 million, current assets $415.1 million, current liabilities $125.2 million, and total assets $587.6 million. Long-term debt was $20.0 million, down from $48.0 million at May 3, 2014. The company had $80.0 million available under its $100 million credit facility, was in covenant compliance, and reported a facility rate of 1.5% plus LIBOR.
- Cash location: $156.6 million of cash was held outside the United States and deemed permanently reinvested, so management said it was not available to fund domestic operations.
- Dividends: Cash dividends were $0.09 per share for the quarter and $0.27 per share for the nine months, compared with $0.07 and $0.21, respectively, in the prior-year periods.
Material changes and management commentary
- Automotive drove growth: third-quarter segment sales increased 9.6% to $141.1 million, primarily on higher GM Center Console Program volumes. Nine-month sales rose 29.2% to $463.4 million. Automotive operating income increased to $29.5 million for the quarter and $92.8 million for the nine months.
- Power Products third-quarter sales rose 45.0% to $26.1 million, and operating income increased to $9.3 million. Higher volumes, manufacturing efficiencies, and favorable raw-material pricing supported margins.
- Interface sales fell 11.1% to $36.9 million for the quarter and 6.7% to $121.4 million for the nine months. Lower appliance and radio remote-control volumes, development costs, and higher expenses weighed on results; quarterly operating income fell to $3.8 million.
- Other segment operating losses widened to $4.1 million for the nine months, mainly due to medical-products development costs, professional fees, and headcount.
- Management attributed consolidated margin improvement principally to higher Automotive and Power Products volumes, manufacturing efficiencies, production ramp-up in Egypt, improvements at its captive molding business, and favorable commodity pricing. Foreign-currency translation reduced reported sales by $3.4 million in both the quarter and nine-month period.
- Income tax expense rose to $8.1 million for the quarter and $23.8 million for the nine months. Effective tax rates were 23.0% and 24.2%, respectively, versus 8.8% and 8.0% in the comparable prior-year periods. The filing attributes the increase in part to the fiscal 2014 reversal of substantially all of the U.S. deferred-tax valuation allowance.
Outlook, risks, contingencies, and unusual items
- The filing provides no specific revenue, earnings, or margin guidance. Management said worldwide cash, expected operating cash flows, and the committed credit facility should support current operations.
- Key stated risks include dependence on two large automotive customers and specific vehicle programs; pricing pressure; program-launch execution; supply-chain and materials risks; foreign-currency exposure; industry conditions; and potential product defects, impairment charges, and IT or business interruptions.
- A 10% currency-rate change could affect income before taxes by an estimated $2.5 million and the translated value of net foreign investments by $26.3 million at January 31, 2015. Management estimated a one-percentage-point interest-rate change would not materially affect fiscal 2015 results at current and expected debt levels.
- Hetronic Germany-GmbH and related parties are litigating against the company following termination of distribution and assembly agreements. The defendants deny Methode’s allegations and have filed counterclaims, including an amended claim in January 2015. Discovery had commenced; management said it had adequate reserves for litigation and claims generally.
- On February 3, 2015, after quarter-end, the company sold the assets of Trace Laboratories. It estimated a pretax gain of $7.3 million to $7.6 million to be recorded in fiscal fourth-quarter results. The business had trailing twelve-month revenue of $7.3 million and pretax income of $1.3 million.
- The company reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether growth and elevated margins persist, particularly given reliance on the GM Center Console Program and two large automotive customers.
- Whether weakness in Interface and losses in Other stabilize, and how development spending affects those segments.
- How much reported cash is practically available to U.S. operations, given the $156.6 million held abroad and deemed permanently reinvested.
- The outcome and potential financial impact of the Hetronic litigation and counterclaims.
- The final Trace Laboratories sale gain and any resulting changes to the company’s business or reported results.
- Future effective tax rates and the utilization or expiration of tax-credit and net-operating-loss carryforwards.