Methode Electronics, Inc. — Form 10-Q Summary
Reporting period: Quarter ended February 1, 2020 (14 weeks) and first nine months of fiscal 2020 (40 weeks). Comparatives ended January 26, 2019 and covered 13 weeks and 39 weeks, respectively; the differing period lengths affect comparisons. All amounts below are in millions of dollars except per-share data.
Business context and results
Methode designs and manufactures engineered electrical, electronic, lighting, wireless and sensing products. Its reportable segments are Automotive, Industrial, Interface and Medical. Grakon, acquired in September 2018, is included for the full nine-month period this year but only part of the prior-year comparative period.
| Metric | Q3 FY2020 | Q3 FY2019 | Nine months FY2020 | Nine months FY2019 |
|---|---|---|---|---|
| Net sales | $285.9 | $246.9 | $813.3 | $734.3 |
| Gross profit | $79.3 | $64.3 | $223.7 | $195.2 |
| Gross margin | 27.7% | 26.0% | 27.5% | 26.6% |
| Operating income | $41.5 | $26.0 | $110.8 | $73.8 |
| Net income | $41.2 | $30.7 | $93.3 | $69.0 |
| Diluted EPS | $1.09 | $0.82 | $2.47 | $1.83 |
Financial position, cash flow and liquidity
- Cash: $79.9 at February 1, 2020, versus $83.2 at April 27, 2019. Of quarter-end cash, $69.7 was held outside the U.S.; the company said it could be repatriated without material additional income tax expense.
- Cash flow, nine months: Operating cash flow was $82.6, compared with $64.3 in the prior-year period. Investing used $34.4, principally for capital expenditures of $34.9; financing used $49.7. Cash declined $3.3 during the period. Operating cash flow less capital expenditures was $47.7, a simple derived measure.
- Debt: Total debt was $257.0, including $15.1 current maturities; long-term debt was $241.9. Credit-agreement principal outstanding was $244.5. Debt declined from $292.6 at April 27, 2019. The company reported covenant compliance; the term loan matures in September 2023.
- Liquidity: Current assets were $463.9 and current liabilities $163.6. Management said cash, expected operating cash flows and its committed credit facility should support current operations. No undrawn facility amount is stated in the provided filing text.
- Dividends: $0.11 per share for the quarter and $0.33 per share for the nine months; cash dividends paid during the nine-month period were $12.2.
Material changes and drivers
- Quarterly sales rose 15.8%, with the increase mainly from Automotive; foreign currency translation reduced sales by $2.2. Automotive sales benefited from higher product volumes, including additional GM orders after the UAW strike settlement. Gross margin improved, reflecting volume and cost-reduction benefits.
- Nine-month sales rose 10.8%, but Grakon contributed $91.9 of the increase and currency translation reduced sales by $10.4. Excluding Grakon and currency, sales decreased $2.5; the GM labor strike reduced North American sales by $28.7.
- Nine-month net income rose 35.2%; the filing attributes $24.3 of the increase to Grakon. Excluding Grakon and currency effects, net income increased $2.1, primarily due to lower selling and administrative expenses, partly offset by the GM strike, higher interest expense and higher taxes.
- Segment trends were mixed: nine-month Industrial sales increased 40.1%, substantially reflecting Grakon; Automotive sales increased 4.9%; Interface sales declined 9.8%; and Medical sales remained small, with an operating loss of $4.9.
Outlook, risks and unusual items
- No specific revenue, earnings or margin guidance is provided. Management stated it expects available cash, operating cash flows and committed credit to support current operations.
- Key risks include dependence on two large automotive customers, industry demand and vehicle-program volumes, price pressure, tariffs and trade disputes, foreign currency movements, raw-material and supply-chain disruptions, and execution of new program launches. The filing newly highlights potential impacts from the coronavirus outbreak on international facilities, suppliers, customers and demand.
- Debt bears variable interest. The company estimated that a 1% rate increase would add $2.4 of annual interest expense; it also cautioned that the planned phaseout of LIBOR could raise borrowing costs.
- Other income includes international government grants of $5.6 in both the quarter and nine-month period, associated with maintaining certain employment levels. The nine-month period also included a $0.5 gain on asset sales.
- Post-quarter legal development: On March 2, 2020, a jury returned a verdict in Methode’s favor in the Hetronic/Fuchs litigation, awarding approximately $102 in compensatory and $12 in punitive damages. A final judgment had not been entered; post-trial motions, possible appeal and collection uncertainty remain. The filing does not present this as collected cash.
- The company adopted lease accounting in fiscal 2020, recording operating lease assets and liabilities; it said adoption did not significantly affect operating results or cash flows. Operating lease liabilities were $27.9 at February 1, 2020.
Important facts for investors to verify
- How much of reported growth and profitability is sustainable apart from Grakon, the additional reporting week and recovery from the GM labor strike.
- Whether Automotive customer and vehicle-program concentration, and ongoing price and volume pressures, could materially affect future results.
- The status, final amount, appeal prospects and collectability of the Hetronic verdict; the award is not equivalent to realized proceeds.
- Future cash conversion, working-capital needs, capital spending and progress in reducing debt, including exposure to variable rates and LIBOR transition.
- The durability of government-grant income and the potential operational and financial effects of coronavirus-related disruption, tariffs, currency moves and supply constraints.