Methode Electronics, Inc. — Form 10-Q summary
Business context and reporting period
Methode supplies custom-engineered electronic and electromechanical products to transportation, industrial, interface and medical markets. This filing covers fiscal 2023’s third quarter and first nine months: the 13 weeks and 39 weeks ended January 28, 2023, compared with the periods ended January 29, 2022. Amounts are in U.S. dollars.
Financial performance and liquidity
- Quarter: Revenue was $280.1 million, down 3.9%; gross profit was $64.9 million and gross margin was 23.2%, versus 23.7%. Operating income fell to $27.3 million from $29.8 million. Net income was $19.9 million, down 32.3%, and diluted EPS was $0.54 versus $0.78.
- Nine months: Revenue was $878.4 million, up 0.4%; gross profit was $200.8 million and gross margin was 22.9%, versus 24.0%. Operating income declined to $81.9 million from $97.1 million. Net income was $69.0 million, down 19.8%, and diluted EPS was $1.87 versus $2.26.
- Cash flow: Nine-month operating cash flow was $83.8 million, compared with $56.8 million. Capital expenditures were $30.8 million; investing cash outflow was $27.3 million. Cash declined $7.3 million from the fiscal-year opening balance to $164.7 million.
- Balance sheet and debt: At January 28, cash was $164.7 million and current assets were $671.0 million, against current liabilities of $190.9 million. Total debt was $201.3 million, including $200.0 million drawn on the revolving facility; total debt less cash was approximately $36.6 million. The $750 million revolving facility matures in October 2027. Methode reported compliance with its covenants.
- Capital returns: The company repurchased $39.6 million of shares and paid $14.9 million in dividends during the nine months. Remaining repurchase authorization was $89.2 million.
Material changes and segment trends
- Quarterly revenue was adversely affected by $13.0 million of foreign-currency translation. Excluding currency effects and customer recoveries for spot-material purchases and premium freight, management reported revenue growth of 3.8% for the quarter and 5.8% for the nine months.
- Automotive revenue declined 9.7% in the quarter, with lower North American sales following a major program roll-off and lower Asian volumes. Its operating margin fell to 10.6% from 12.5%.
- Industrial revenue rose 13.8% in the quarter, driven mainly by power-distribution products for data centers and electric vehicles. Its operating income increased to $22.3 million from $17.7 million.
- Interface revenue declined 21.1% in the quarter, primarily from weaker appliance demand; its operating income fell to $1.0 million from $2.1 million. Medical remained small and loss-making.
- Gross margin pressure reflected inflation in materials and manufacturing costs. Nine-month selling and administrative expense increased $6.3 million, while foreign-currency translation reduced nine-month revenue by $49.7 million.
Outlook, risks and unusual items
- Management expects the semiconductor shortage to continue affecting operating results and financial condition through the remainder of fiscal 2023. It cited supply-chain disruption, labor shortages, higher material, logistics and energy costs, inflation, foreign-exchange movements, and COVID-related interruptions in China. Management believes liquidity is adequate for existing operations and commitments for at least 12 months, but warned prolonged disruptions could materially affect liquidity.
- No specific revenue or earnings guidance was provided in the supplied filing text.
- Other expense was $3.5 million in the quarter, versus other income of $4.4 million a year earlier; management cited higher foreign-exchange losses and lower government assistance. Nine-month government assistance was $4.6 million, compared with $8.2 million in the prior-year period.
- A Supreme Court appeal in the Hetronic litigation was scheduled for argument on March 21, 2023. A prior jury verdict awarded Methode approximately $102 million in compensatory and $11 million in punitive damages, but the filing cautions that collection of all or any of the judgment is not assured.
- On February 28, 2023, Methode announced a proposed tender offer for Nordic Lights at €6.30 per share, implying approximately €132 million in equity value. Completion was expected in the second half of calendar 2023, subject to acceptance and regulatory conditions.
Important facts for investors to verify
- Whether automotive program roll-offs, lower volumes and inflation continue to weigh on margins, and whether industrial growth can offset them.
- Whether semiconductor and other supply-chain constraints, currency changes and geopolitical conditions develop as management expects.
- Availability and terms of revolving credit, covenant compliance, and the effect of borrowing costs on earnings.
- Developments in the Hetronic Supreme Court appeal and the practical collectability of any judgment.
- Nordic Lights tender-offer acceptance, regulatory approvals, expected funding and final transaction timing.