Methode Electronics, Inc. — Q1 FY2022 Form 10-Q
Reporting period: Three months ended July 31, 2021 (13 weeks), compared with the three months ended August 1, 2020. Methode supplies engineered mechatronic products across automotive, industrial, interface and medical markets.
Financial performance
| Metric | Q1 FY2022 | Prior-year quarter | Change |
|---|---|---|---|
| Net sales | $287.8 million | $190.9 million | +50.8% |
| Gross profit / margin | $71.7 million / 24.9% | $45.1 million / 23.6% | Margin +1.3 percentage points |
| Operating income / margin | $34.1 million / 11.8% | $13.8 million / 7.2% | Operating income +$20.3 million |
| Net income | $29.1 million | $20.7 million | +40.6% |
| Diluted EPS | $0.76 | $0.54 | +$0.22 |
| Operating cash flow | $9.7 million | $16.4 million | -$6.7 million |
| Capital expenditures | $15.9 million | $11.6 million | +$4.3 million |
Revenue growth excluding foreign currency translation was $86.6 million. Gross profit increased on higher volumes; cost of sales also rose, including from higher material and logistics costs. Operating margin figures are calculated from reported operating income and sales.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $207.9 million at July 31, down $25.3 million from the start of the quarter; $97.4 million was held by non-U.S. subsidiaries.
- Total debt was $235.4 million, including $14.8 million current debt; cash exceeded debt by approximately $27.5 million. The $200 million revolver had $8.7 million drawn and $191.3 million available. Methode reported compliance with credit agreement covenants.
- Current assets were $660.9 million and current liabilities were $204.1 million. Management said liquidity should be sufficient for operations and current commitments for at least 12 months, while warning prolonged pandemic impacts could materially affect liquidity.
- Cash used in investing was $15.4 million and cash used in financing was $18.3 million. Financing outflows included $8.4 million of share repurchases, $5.2 million of dividends and $4.7 million of net debt repayments.
- The quarterly dividend increased from $0.11 to $0.14 per share. The $100 million repurchase authorization had $84.9 million remaining at quarter-end.
Material changes and segment results
- Automotive: Sales rose 56.5% to $195.8 million; operating income increased to $27.3 million from $15.3 million. Higher volume supported results, partly offset by premium freight and factory inefficiencies.
- Industrial: Sales rose 51.0% to $78.5 million; operating income increased to $20.2 million from $7.0 million. Better volume and mix supported margins, while busbar products faced higher material costs.
- Interface: Sales declined 5.2% to $12.7 million and gross margin fell to 13.4% from 18.7%, primarily reflecting lower appliance and data-solutions volumes and higher material costs. Operating income remained $1.1 million.
- Medical: Sales increased to $0.8 million from $0.4 million; operating loss narrowed to $1.2 million from $1.6 million.
- Operating cash flow fell despite higher earnings, principally because of a $35.4 million net use of cash from operating assets and liabilities, including inventory growth and lower payables and other liabilities.
Outlook, risks and unusual items
- No specific revenue or earnings guidance is provided in the filing. Management expects the semiconductor shortage to continue affecting operating results and financial condition in fiscal 2022.
- COVID-19-related disruptions continued to affect supply chains, production efficiency, material and logistics costs, and customer demand. The duration and total financial impact remain uncertain; management reported no material impairment or increase in credit or valuation allowances in the quarter.
- Government assistance recorded as other income was $1.9 million, compared with $2.9 million in the prior-year quarter. The prior-year tax benefit of $5.1 million included $6.6 million of foreign tax credits and $1.2 million of other beneficial tax attributes; the current-quarter effective tax rate was 16.4%.
- The Hetronic litigation jury verdict included approximately $102 million in compensatory and $11 million in punitive damages. On August 24, 2021, the appellate court affirmed the ruling but limited the injunction to countries where Hetronic sells products. Further appeal is possible, and collection of the judgment is not assured.
- Credit agreement borrowings are variable-rate and reference LIBOR. Management noted uncertainty around LIBOR replacement and the possibility of higher interest expense.
- Other stated risks include reliance on automotive markets and a small number of large customers, supply and materials availability, program launches, pricing pressure, foreign exchange, and global operations.
Important facts for investors to verify
- Whether semiconductor constraints, customer production schedules and elevated freight and materials costs continue to limit shipments or margins.
- Whether working-capital demands persist, given the quarter’s lower operating cash flow and higher inventory.
- The terms and financial effect of any LIBOR replacement, and the company’s ability to refinance or repay debt due in September 2023.
- The status, appeal prospects and collectability of the Hetronic judgment; the filing does not recognize a clear expected collection value.
- Progress and performance of the repurchase program and increased dividend relative to liquidity and capital needs.