Methode Electronics, Inc. — Form 10-Q Summary
Business context and reporting period
Global manufacturer of electronic and electromechanical components and subsystems, reporting across Automotive, Interconnect, Power Products and Other. This fiscal second-quarter report covers the three and six months ended October 29, 2011; comparisons are with the periods ended October 30, 2010. Dollar amounts below are in millions unless stated otherwise.
Key financial metrics
| Metric | Quarter | Six months |
|---|---|---|
| Net sales | $115.9, up 7.6% | $226.7, up 9.7% |
| Gross profit / margin | $20.9 / 18.0%, versus $23.6 / 21.9% | $40.9 / 18.0%, versus $43.9 / 21.2% |
| Operating income | $2.6, versus $2.4 | $4.1, versus $6.2 |
| Net income attributable to Methode | $0.3 ($0.01 per diluted share), versus a $0.5 loss | $1.8 ($0.05 per diluted share), versus $3.6 ($0.10 per share) |
| Operating cash flow | Not presented quarterly | $1.7, versus $3.8 |
At October 29, 2011, cash and equivalents were $75.5, current assets $225.9 and current liabilities $66.6. Long-term debt was $36.5; the company had no current debt shown. Equity totaled $257.1. Cash exceeded reported debt by approximately $39.0, although $67.6 of cash was held outside the U.S. and deemed permanently reinvested. The $75.0 credit facility matures in February 2016, with an option to increase capacity by $25.0; the company reported covenant compliance.
Six-month investing cash use was $15.5, including $9.1 of capital expenditures and $6.4 for the Advanced Molding and Decoration acquisition. Financing provided $31.5, including $36.5 of net borrowings; dividends paid were $5.2. Cash rose by $18.1 to $75.5, principally supported by financing rather than operating cash generation. Quarterly and six-month dividends were $0.07 and $0.14 per share, respectively.
Material changes and operating performance
- Automotive drove growth: quarterly sales rose 20.8% to $67.5, aided by the Ford Center Console program and the AMD acquisition. Six-month sales rose 23.1% to $130.2. Higher launch and development costs, vendor production problems and greater purchased-content costs pressured margins.
- Interconnect sales fell 13.7% in the quarter and 10.3% for six months. Weak white-goods and interface-solutions sales and the prior-year sale of the optical business contributed; segment operating income declined.
- Power Products sales rose 14.2% in the quarter and 12.3% for six months, but operating income declined as product-development spending, including an electric-truck onboard charger, increased.
- Consolidated gross margin fell despite higher sales, reflecting launch/development costs, vendor issues and product mix. Selling and administrative expense declined, partly because the prior-year quarter included a $3.8 charge tied to Delphi-related claims.
- Quarterly other expense was substantially lower year over year, partly reflecting the prior-year period’s currency-related expense. The current period included a $0.3 gain on the AMD acquisition. Six-month earnings also faced lower life-insurance proceeds and higher income taxes.
Outlook, commentary, risks and unusual items
No specific earnings or revenue guidance was provided. Management expects production and sales from new North American automotive programs to begin in fiscal 2013. Equipment, tooling, inventory and staffing for those launches are expected to require significant cash before corresponding sales begin; management anticipates cash balances may decline.
The company acquired an additional 20% of Eetrex, bringing ownership to 90%, and acquired AMD assets and liabilities for $6.4. AMD added injection-molding and painting capacity and transferred 228 employees. Eetrex’s remaining shareholders have put rights after fiscal 2014 or 2016; the company’s purchase price would be based on a percentage of future net sales. The remaining 10% interest is classified as mezzanine equity, and future adjustments could affect earnings per share.
Management cited dependence on two large automotive customers, exposure to automotive and other cyclical end markets, pricing pressure, material availability and supply-chain disruption, foreign-currency exposure, and execution risks related to acquisitions and new program launches. A 10% currency-rate change could affect pretax income by $2.8 and the net foreign investment by $19.8, based on period-end exposures. The company reported $67.6 of offshore cash as permanently reinvested and noted possible adverse tax consequences from repatriation.
Delphi-related litigation remains pending, including a dispute over termination of a supply agreement and a separate claim seeking approximately $19.7 in alleged preference payments. The company stated it has adequate reserves for pending litigation and claims. Management tested TouchSensor goodwill amid weakness in the U.S. white-goods market and reported no impairment. U.S. deferred-tax-asset valuation allowances were $59.5; the company said it could not forecast when sufficient positive evidence would support a reversal. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported.
Most important facts for investors to verify
- Whether automotive launch costs, vendor issues and higher purchased-content costs abate, and whether new programs deliver the expected fiscal 2013 production and sales.
- Whether weak Interconnect demand and lower segment margins persist, and how much consolidated profitability depends on Automotive growth.
- Cash-generation needs for program launches, capital expenditures and acquisitions, alongside the availability and practical usability of offshore cash and credit-facility capacity.
- Developments and potential financial exposure in the Delphi litigation and the Eetrex put-option arrangements.
- The sustainability of reported earnings given lower margins, tax expense, stock-based compensation and the deferred-tax valuation allowance.