Methode Electronics, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended May 1, 2021 (52 weeks). The comparable fiscal 2020 period ended May 2, 2020 and comprised 53 weeks. This is an annual report, not a standalone fiscal Q4 filing; Q4 figures are noted below.
Business context
Methode designs and manufactures custom mechatronic products for transportation, cloud computing, industrial, appliance and medical markets. Its four segments are Automotive, Industrial, Interface and Medical. Automotive accounted for 69.4% of fiscal 2021 sales. GM and Ford, including their tiered suppliers, represented 27.5% and 8.8% of sales, respectively.
Financial performance
| Metric | FY2021 | FY2020 | Change |
|---|---|---|---|
| Net sales | $1,088.0 million | $1,023.9 million | +6.3% |
| Gross profit / margin | $274.1 million / 25.2% | $282.9 million / 27.6% | Profit down 3.1%; margin down 2.4 points |
| Operating income | $127.9 million | $147.1 million | Down $19.2 million |
| Net income | $122.3 million | $123.4 million | Down 0.9% |
| Diluted EPS | $3.19 | $3.26 | Down $0.07 |
| Operating cash flow | $179.8 million | $140.6 million | Up $39.2 million |
Sales growth included $26.7 million from foreign-currency translation; excluding that effect, sales rose $37.4 million. Higher materials, logistics and restructuring costs contributed to the lower gross margin. Net income was supported by a 9.3% effective tax rate, including net discrete tax benefits of $8.8 million; excluding those benefits, the company reported an effective rate of 15.9%. Other income included $11.1 million of COVID-related government assistance.
Q4 snapshot: Fiscal 2021 fourth-quarter sales were $301.0 million and net income was $31.1 million, versus $210.6 million and $30.1 million in the prior-year quarter. Both quarters were 13 weeks; the prior-year quarter was affected by the pandemic-related disruption.
Segments and material changes
- Automotive: Sales increased 6.1% to $755.7 million, while operating income fell 13.5% to $107.6 million and gross margin declined to 21.6% from 25.0%. Higher material costs and restructuring weighed on profitability. Asia sales rose sharply, including electric-vehicle products shifted from North America.
- Industrial: Sales rose 6.6% to $267.9 million and operating income increased 8.2% to $64.3 million. Gross margin eased to 36.6% from 37.8%, partly due to weaker commercial-vehicle lighting.
- Interface: Sales increased 4.8% to $61.6 million; operating income rose to $8.9 million from $5.6 million, with improved gross margin.
- Medical: Sales rose to $2.8 million from $1.6 million, and operating loss narrowed to $4.6 million from $6.0 million.
Fiscal 2021 had $8.2 million of restructuring costs associated with plant consolidations and workforce reductions. Foreign-currency translation added $5.4 million to reported net income; excluding translation, net income declined $6.5 million.
Cash flow, debt and liquidity
- Cash and cash equivalents were $233.2 million at year-end, including $92.2 million held by non-U.S. subsidiaries.
- Total debt was $240.1 million, including $9.9 million drawn on the revolving facility; revolving availability was $190.1 million. The term loan had $218.7 million outstanding and matures in September 2023. The company reported compliance with its debt covenants.
- Net cash used in investing activities was $24.8 million, primarily reflecting $24.9 million of capital expenditures. Financing activities used $142.9 million, including net debt repayments, dividends and share repurchases.
- Current assets were $674.0 million and current liabilities were $222.7 million. Management said liquidity was expected to be sufficient for operations and current commitments for at least 12 months, while warning that prolonged pandemic-related economic effects could significantly affect liquidity.
- The company paid $17.4 million in dividends and repurchased $7.5 million of shares during fiscal 2021. A new $100 million repurchase authorization runs through March 31, 2023.
Outlook, risks and unusual items
- Management expected the worldwide semiconductor shortage to affect fiscal 2022 operating results and financial condition, including the ability to meet some customer demand. No numeric fiscal 2022 revenue or earnings guidance is provided in the filing.
- COVID-19 effects remained uncertain, including potential impacts on customer demand, supply chains, freight costs, manufacturing efficiency and access to financing. Production in North America and Europe returned to pre-pandemic levels during fiscal 2021 before semiconductor constraints disrupted customer schedules.
- Key risks include automotive-market cyclicality, dependence on GM and Ford, semiconductor and raw-material availability and pricing, customer pricing pressure, program-launch execution, international operations, foreign exchange, cybersecurity, product defects, and potential goodwill or long-lived-asset impairment.
- Borrowings carry variable interest rates tied to LIBOR; the expected LIBOR phaseout could increase interest expense. A 1% rate increase was estimated to add $1.3 million of annual interest expense after interest-rate swaps.
- A jury awarded the company approximately $102 million in compensatory damages and $11 million in punitive damages in the Hetronic distributor litigation. The defendants appealed; the filing states that collection is not assured, particularly given the defendants’ location outside the United States.
- The company reported $0.9 million accrued for environmental remediation at two former operating sites. Management said it believed reserves for ordinary-course litigation and claims were adequate and did not expect currently known matters to have a material adverse effect.
- The annual goodwill review found no impairment; the Grakon Industrial reporting unit’s goodwill was $127.2 million, and its valuation was identified as a critical audit matter.
Important facts for investors to verify
- Whether semiconductor availability and customer production schedules materially affected fiscal 2022 results, as management anticipated.
- Whether gross-margin pressure from materials, logistics, product mix and restructuring persisted, particularly in Automotive.
- Customer concentration and program exposure: GM and Ford together represented 36.3% of fiscal 2021 sales.
- Cash conversion and working-capital trends, especially the increase in accounts receivable to $282.5 million from $188.5 million.
- Debt repayment and refinancing capacity ahead of the September 2023 term-loan maturity, including the LIBOR transition and covenant headroom.
- Progress and collectability of the appealed Hetronic judgment, and any related accounting or cash-flow effects.
- Performance against fiscal 2025 award targets; the filing reported no compensation expense for certain performance awards because achievement was not considered probable at year-end.