Methode Electronics, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter ended January 27, 2024 (13 weeks), with nine-month results compared with the periods ended January 28, 2023. Amounts are in millions except per-share data.
Business context
Methode designs and manufactures engineered mechatronic products for transportation, industrial, interface and medical markets. It completed its acquisition of Nordic Lights, a heavy-duty lighting supplier, in October 2023 and reports it in Industrial. The company also sold certain Dabir medical-business assets and discontinued that business.
Financial results
| Metric | Three months ended Jan. 27, 2024 | Prior-year quarter | Nine months ended Jan. 27, 2024 | Prior-year period |
|---|---|---|---|---|
| Net sales | $259.5 | $280.1 | $837.2 | $878.4 |
| Gross profit / margin | $37.0 / 14.3% | $64.9 / 23.2% | $143.3 / 17.1% | $200.8 / 22.9% |
| Operating income (loss) | $(3.0) | $27.3 | $(50.5) | $81.9 |
| Net income (loss) | $(11.6) | $19.9 | $(66.0) | $69.0 |
| Diluted EPS | $(0.33) | $0.54 | $(1.86) | $1.87 |
- Sales and margins: Quarterly sales fell 7.4%; nine-month sales fell 4.7%. Excluding Nordic Lights, currency and specified customer cost recoveries, management reported sales declines of 15.2% for the quarter and 10.9% for the nine months. The primary driver was lower Automotive volume, including a major North American center-console program roll-off.
- Profitability: Automotive operations weakened sharply amid lower volumes and labor/vendor-related inefficiencies, inventory shortages, spot purchases, premium freight and delayed shipments. In the quarter, Automotive operating loss was $11.0; its nine-month loss of $75.3 included a $56.5 non-cash goodwill impairment. Industrial sales benefited from Nordic Lights, while its margins were lower; Interface improved modestly.
- Cash flow: Nine-month operating cash flow was $22.6, down from $83.8. Capital expenditures were $41.1, up from $30.8; investing cash outflow was $39.0. Financing cash outflow was $15.0. Cash declined $34.1 to $122.9.
- Liquidity and debt: At period-end, total debt was $331.3 (including $332.6 outstanding on the revolver before other debt and issuance-cost adjustments); cash was $122.9. The $750.0 revolving facility matures October 2027. Current assets were $629.8 and current liabilities $229.9. Management said liquidity should be sufficient for operations and commitments for at least 12 months, subject to risks.
- Other measures: Interest expense rose to $5.0 for the quarter and $12.2 for the nine months, mainly from higher borrowings and rates. Dividends were $0.14 per share in the quarter and $0.42 year to date. The company repurchased $10.8 of shares year to date.
Material changes, outlook and risks
- In the nine-month period, Methode recorded a $56.5 goodwill impairment for North American and European Automotive reporting units after lower-than-expected performance and a sustained share-price and market-capitalization decline. The subsequent North American Automotive impairment test found less than 10% valuation headroom; management cautioned that a discount-rate increase of more than 100 basis points, all else equal, could have caused further impairment.
- Methode was not in compliance with its original leverage covenant for the quarter ended January 27, 2024. A March 6, 2024 credit amendment revised the covenant through the quarter ending October 26, 2024, changed certain interest provisions and waived any resulting default. The company reported compliance after the amendment, but gave no assurance of future compliance.
- Management expected semiconductor shortages to continue affecting fiscal 2024 results. It also cited inflation, supply-chain and labor disruption, customer production changes, geopolitical conflicts and foreign-exchange movements as uncertainties. No specific financial guidance is provided in the supplied filing text.
- Disclosure controls were deemed ineffective at January 27, 2024 because of a previously identified material weakness concerning review, approval and validation of Automotive-unit pricing data and non-standard contract terms. Remediation is underway; the weakness was not yet considered remediated.
- The company is pursuing a Hetronic-related judgment of approximately $113 million, but collection is uncertain. Related defendants in Germany entered insolvency proceedings, and the appeal continued after Supreme Court remand.
- Avinash Avula became CEO on January 29, 2024. The company also reported the Dabir asset sale and a $0.6 loss on that sale, plus $1.4 of nine-month restructuring costs.
Important facts for investors to verify
- Whether Automotive operations recover from program roll-offs and the disclosed labor, vendor, launch and shipment inefficiencies.
- Compliance with amended leverage covenants, future borrowing costs and the company’s ability to preserve liquidity while funding capital spending and dividends.
- Whether the limited goodwill headroom in North American Automotive leads to another impairment.
- Progress and testing of remediation for the revenue-related material weakness.
- Collection prospects and legal developments concerning the Hetronic judgment, including the impact of German insolvency proceedings.
- Nordic Lights’ contribution to Industrial growth and profitability, and the effects of the Dabir exit.