Methode Electronics, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2014, the three months ended July 27, 2013; comparative quarter ended July 28, 2012. Financial statements are unaudited. Dollar amounts below are in millions unless noted.
Financial performance
| Metric | Q1 FY2014 | Q1 FY2013 | Change |
|---|---|---|---|
| Net sales | $167.3 | $118.7 | +40.9% |
| Gross profit / margin | $34.0 / 20.3% | $21.5 / 18.0% | Margin +2.3 pts |
| Operating income | $15.1 | $4.2 | +262.7% |
| Net income attributable to Methode | $13.6 | $3.9 | +248.7% |
| Diluted EPS | $0.36 | $0.10 | Up $0.26 |
| Operating cash flow | $8.7 | $6.2 | +$2.5 |
| Capital expenditures | $9.3 | $11.4 | Down $2.1 |
Sales growth was driven mainly by higher volumes. Automotive sales rose 45.8% to $103.5 million, Interconnect rose 37.9% to $43.7 million, and Power Products rose 43.0% to $17.3 million. Other segment sales fell 30.8% to $2.7 million. Management attributed improved overall gross margin and earnings principally to higher volumes, manufacturing efficiencies and vertical integration in Automotive; favorable raw-material pricing and product mix benefited Power Products. Interconnect margins declined as sales mix shifted toward higher-material-content white-goods products.
Selling and administrative expense increased 9.9% to $18.9 million, but fell to 11.3% of sales from 14.5%. The effective tax rate was 8.7%, versus 10.0%; the filing cites foreign investment tax credits, lower-tax foreign operations and use of net operating loss carryforwards. Basic and diluted EPS were both $0.36. Quarterly dividends were $0.07 per share.
Balance sheet, cash flow and liquidity
- Cash and cash equivalents were $73.4 million at July 27, 2013, up from $65.8 million at April 27, 2013. Operating activities provided $8.7 million; investing used $9.3 million; financing provided $7.5 million. Working-capital changes used $12.0 million of cash, principally reflecting higher business levels.
- Total debt was $52.5 million, all under the revolving credit facility, compared with $43.5 million at fiscal year-end. The $100 million facility matures September 21, 2017; $47.5 million remained available, excluding an option to increase commitments by $50 million. The stated rate was 1.5% plus LIBOR; the company reported compliance with covenants.
- Current assets were $292.2 million and current liabilities $103.3 million. Total assets were $473.9 million and shareholders’ equity, including noncontrolling interest, was $305.3 million.
- Of cash, $69.2 million was held outside the U.S. and deemed permanently reinvested, so management said it was not available to fund domestic operations. Management believed worldwide cash, expected operating cash flows and the committed facility would support current operations.
Material changes, outlook and risks
- Management provided no specific revenue, earnings or margin guidance in this filing. It noted results may vary between quarters for reasons beyond seasonality.
- The Other segment’s torque-sensing business faced lower demand, planned product-line exits and production-transition inefficiencies. Production was being moved from North America to Malta, with full production expected in the second quarter of fiscal 2014.
- Pre-production tooling costs rose to $14.9 million from $11.5 million; the company said customer reimbursement was contractually guaranteed or supported by a non-cancelable right to use the tooling.
- The company remains highly dependent on two large automotive customers and specific vehicle models. Other disclosed risks include industry and economic downturns, customer concentration, launch execution, materials and supply-chain disruption, pricing pressure, competition, international operations, foreign-exchange movements, intellectual-property exposure, impairment and tax uncertainty.
- A 10% currency-rate change could affect pretax income by an estimated $2.6 million and the value of net foreign investments by $21.0 million. Management said a one-percentage-point interest-rate change was not expected to materially affect fiscal 2014 results at current and expected debt levels.
- Routine litigation and claims were pending; management considered existing reserves adequate, while noting outcomes could not be determined. The company had $393,000 of unrecognized tax benefits and a $44.5 million valuation allowance against deferred tax assets; it could not forecast when sufficient positive evidence would support reversing the allowances.
- The prior-year comparison is not directly affected by the $20 million Delphi litigation settlement: the gain was recorded in Q2 FY2013, not in either quarter compared here. The settlement also involved assignment of certain patents and a technology-related non-compete.
Important facts for investors to verify
- Whether Automotive volume growth, including new program launches, is sustainable and remains concentrated among the two major customers.
- Whether stronger overall margins persist, particularly given Interconnect’s less favorable product mix and Power Products’ favorable commodity pricing.
- Whether working-capital investment continues to absorb cash as sales grow, and whether capital spending and additional borrowing remain manageable.
- Whether the Malta production transfer achieves expected timing and efficiency, and whether the torque-sensing business stabilizes.
- How much cash is practically available for U.S. needs, given the $69.2 million held abroad and classified as permanently reinvested.
- Developments in tax-asset realizability, litigation, foreign-exchange exposure and compliance with credit-facility covenants.