Methode Electronics, Inc. — FY2014 Form 10-K
Business context and reporting period. Methode designs and manufactures electronic, electrical, interconnect and power components for automotive and other markets. The fiscal year ended May 3, 2014 included 53 weeks; the prior fiscal year included 52 weeks. This is an annual report, not a quarterly filing.
Financial performance and liquidity
| Metric | FY2014 | FY2013 |
|---|---|---|
| Net sales | $772.8 million | $519.8 million |
| Gross profit / margin | $156.7 million / 20.3% | $91.6 million / 17.6% |
| Operating income | $73.6 million | $39.2 million |
| Net income attributable to Methode | $96.1 million | $40.7 million |
| Diluted earnings per share | $2.51 | $1.08 |
| Cash from operations | $72.4 million | $33.2 million |
- Sales increased 48.7%, mainly from Automotive growth, including the GM Center Console Program launch. Automotive generated $522.1 million, about 68% of sales; Interconnect generated $167.9 million, Power Products $72.5 million, and Other $10.2 million.
- Gross margin improved 2.7 percentage points, primarily on higher volumes and manufacturing efficiencies in Automotive, plus favorable commodity pricing and mix in Power Products. Interconnect margin declined to 25.0% from 26.2%; Other reported a $1.7 million operating loss.
- FY2014 net income included a $31.7 million deferred-tax benefit from releasing most U.S. valuation allowances. It also included a $3.2 million pre-tax gain on the Lumidigm investment sale and a $1.7 million intangible impairment. FY2013 included a $20.0 million Delphi settlement gain and a $4.3 million goodwill impairment. These items affect year-over-year comparability.
- Cash and equivalents were $116.4 million, up from $65.8 million; $105.8 million was held outside the U.S. Total assets were $575.5 million. Long-term debt was $48.0 million, with $52.0 million available on the $100 million credit facility; the company reported compliance with covenants. The facility matures in September 2017 and carried interest at 1.5% plus LIBOR.
- Capital expenditures were $29.0 million; dividends paid totaled $11.3 million. The company reported $178.8 million of contractual obligations, including $109.3 million of purchase obligations, mostly due within one year.
Material changes, outlook and risks
- Automotive sales rose 68.4%, led by the GM program and other launches; Interconnect increased 19.8% and Power Products 37.6%. Other sales fell 38.9%, primarily because of lower torque-sensing demand and planned product-line exits.
- Backlog was approximately $218.2 million at year-end, versus $154.6 million a year earlier; the company expected most of it to ship in FY2015. The filing provides no specific earnings or revenue guidance.
- GM and Ford, directly or through tiered suppliers, represented 36.4% and 14.5% of sales, respectively. Dependence on these customers and on particular vehicle models is a major risk.
- Other disclosed risks include automotive cyclicality and pricing pressure; product-launch execution, quality and warranty exposure; supply-chain and commodity availability; foreign currency and international operating risks; technology and competition; and potential impairment charges. A 10% currency-rate change could affect pre-tax income by an estimated $3.0 million.
- Foreign earnings are considered indefinitely reinvested; repatriation could create additional tax. Environmental remediation accruals were $2.7 million, and management noted costs could exceed accruals. Subsequent to year-end, Methode terminated agreements with the Fuchs companies and filed legal actions in Germany and Oklahoma concerning alleged agreement breaches and use of the Hetronic name.
- Management and the auditor reported effective internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and controls.
Important facts for investors to verify
- How much of FY2014’s earnings growth reflects sustainable operating performance versus the $31.7 million tax benefit and other unusual items.
- Whether the GM program and other launches can sustain sales, margins and cash generation, and how customer concentration evolves.
- Whether working-capital requirements, capital spending and the large offshore cash balance constrain domestic liquidity or future investment.
- Progress on the Other segment’s torque-sensing business, Eetrex impairment exposure, environmental remediation and the Fuchs-related litigation.