Methode Electronics, Inc. — Q3 FY2013 Form 10-Q
Reporting period: Third quarter and nine months ended January 26, 2013; comparisons are with the periods ended January 28, 2012. Dollar figures are in millions unless stated otherwise. Methode designs and manufactures electronic and electromechanical components across Automotive, Interconnect, Power Products and Other segments.
Financial highlights
| Metric | Three months | Nine months |
|---|---|---|
| Net sales | $123.0; up 9.8% | $371.5; up 9.7% |
| Gross margin | $20.0; 16.3% of sales, versus 17.2% | $63.8; 17.2% of sales, versus 17.7% |
| Operating income | $4.3, versus $2.4 | $35.5, versus $6.5 |
| Net income attributable to Methode | $3.3, versus $0.8; diluted EPS $0.09, versus $0.02 | $30.6, versus $2.6; diluted EPS $0.81, versus $0.07 |
| Operating cash flow | Not presented separately for the quarter | $32.9, versus $11.9 |
| Capital expenditures | Not presented separately for the quarter | $30.0, versus $16.6 |
Quarterly sales growth was led by Automotive (+12.7%) and Interconnect (+7.8%); Power Products sales declined 1.5%. For the nine months, Automotive sales grew 15.0%, Interconnect 3.6% and Other 20.0%, while Power Products fell 5.6%. Gross-margin pressure reflected new-program costs, higher purchased-content automotive products, Interconnect launch delays and Power Products inefficiencies and mix.
Liquidity, debt and cash flows
- Cash and equivalents were $73.4 at January 26, 2013, down from $86.8 at April 28, 2012. Current assets were $233.5 and current liabilities $78.9 (approximately 3.0x current ratio).
- Long-term debt was $40.0, down from $48.0. The amended credit facility has a $100.0 commitment, $60.0 available, and matures September 21, 2017; the company reported covenant compliance. The stated rate was 1.5% plus LIBOR.
- Nine-month investing cash use was $31.4, primarily including $30.0 of capital expenditures; financing cash use was $15.8, including $8.0 net debt repayments and $7.8 dividends. Cash declined $13.4 overall.
- $58.8, or 80.1% of cash, was held outside the U.S. and considered permanently reinvested, limiting availability for domestic operations. Management said current worldwide cash and expected operating cash flows should support operations.
Material changes, outlook and risks
- Nine-month results include a one-time $20.0 Delphi settlement gain, recognized in Q2 FY2013. The settlement resolved related litigation; Methode assigned certain patents and agreed to a technology-related non-compete. Half the payment was received in October 2012 and half in January 2013. This item materially elevates year-to-date operating income and earnings.
- Lower selling and administrative expense also supported year-to-date results; the company cited a $1.1 reversal of customer-bankruptcy-related accruals, lower legal costs and reduced compensation and other expenses.
- A North American automotive program was expected to begin production in Q1 FY2014 and requires significant launch spending. The company expected cash balances to decline before related sales ramp. A delayed Interconnect white-goods program was then expected to launch in Q4 FY2013.
- Hetronic Italy was acquired in September 2012 for $1.4 cash plus forgiveness of $1.3 in debt, totaling $2.7 consideration; it is included in Interconnect.
- Key disclosed risks include dependence on two large automotive customers, industry cyclicality, execution and profitability of new launches, competitive and pricing pressure, materials and supply-chain availability, international and foreign-exchange exposure, and product defects or intellectual-property claims. A 10% currency-rate change could affect pretax income by $2.6 and the translated value of foreign net investments by $17.8, based on January 26 exposures.
- No specific consolidated earnings guidance was provided. Management cautioned that new launches may not be timely, successful or profitable. The company reported effective disclosure controls and no material quarter changes to internal control over financial reporting; ordinary-course litigation was described as adequately reserved.
Important facts for investors to verify
- How much reported year-to-date earnings growth remains after excluding the $20.0 settlement gain and the $1.1 accrual reversal.
- Whether planned FY2014 automotive launches and the delayed white-goods program meet timing, cost and profitability expectations.
- Whether elevated capital spending and working-capital needs affect cash, particularly given the large balance held abroad and upcoming program launches.
- Whether gross-margin pressure in Interconnect and Power Products, and the company’s dependence on two major automotive customers, persist.
- Current customer concentration, credit-facility covenant headroom and any material developments in litigation, tax positions or foreign-exchange exposure.