Methode Electronics, Inc. — Form 10-Q Summary
Reporting period: Second quarter of fiscal 2022, three months ended October 30, 2021; six-month results compared with the periods ended October 31, 2020. Methode supplies engineered electronic and electromechanical products across Automotive, Industrial, Interface and Medical segments.
Financial performance
| Metric | Three months ended Oct. 30, 2021 | Year-over-year change | Six months ended Oct. 30, 2021 | Year-over-year change |
|---|---|---|---|---|
| Net sales | $295.5 million | Down 1.8% | $583.3 million | Up 18.6% |
| Gross profit | $69.2 million | Down from $80.8 million | $140.9 million | Up from $125.9 million |
| Gross margin | 23.4% | Down from 26.9% | 24.2% | Down from 25.6% |
| Operating income | $33.2 million | Down from $45.0 million | $67.3 million | Up from $58.8 million |
| Net income | $27.5 million | Down from $38.6 million | $56.6 million | Down from $59.3 million |
| Diluted earnings per share | $0.72 | Down from $1.01 | $1.48 | Down from $1.56 |
- Cash flow: Six-month operating cash flow was $36.7 million, versus $56.7 million; capital expenditures were $21.3 million, versus $15.2 million. Investing cash outflow was $20.7 million and financing cash outflow was $69.7 million. Cash declined $56.0 million to $177.2 million.
- Liquidity and debt: Current assets were $643.1 million and current liabilities $207.8 million. Cash was $177.2 million, including $131.4 million held outside the U.S. Debt totaled $223.1 million, including $14.7 million current; approximate net debt was $45.9 million. The $200 million revolver was undrawn, leaving $200 million available. The company reported compliance with credit covenants.
- Capital returns: Methode repurchased $42.4 million of shares in the first half and paid $10.3 million in dividends. The quarterly dividend increased from $0.11 to $0.14 per share. About $50.1 million remained under the $100 million buyback authorization.
Material changes and segment trends
- Quarterly sales fell mainly because Automotive volumes weakened; Industrial growth partly offset the decline. For the first half, sales rose as Automotive and Industrial recovered from pandemic-affected comparisons in 2020.
- Quarterly Automotive sales declined 9.1% to $196.0 million, and segment operating income fell to $23.6 million from $38.8 million. Management cited semiconductor-related production interruptions, lower volumes and higher input costs. First-half Automotive sales rose 15.0%, but operating income declined.
- Industrial sales increased 18.9% for the quarter and 32.8% for the first half; first-half operating income rose to $39.0 million from $23.1 million. Quarterly gross margin nevertheless fell to 32.8% from 35.9%, mainly due to materials, logistics and product mix.
- Interface sales and operating income increased in both comparisons. Medical remained loss-making, with a $3.0 million operating loss for the first half, slightly improved from $3.1 million.
- Quarterly gross margin pressure reflected higher material, logistics and other operating costs, supply disruptions and factory inefficiencies. First-half comparisons also reflect prior-year temporary salary reductions, shorter workweeks and restructuring costs.
Outlook, risks and unusual items
- Management expects COVID-19 and supply-chain disruptions to continue affecting operations. It specifically expects the semiconductor shortage to likely affect fiscal 2022 results and financial condition; no quantitative earnings or revenue guidance is provided.
- Management said liquidity should be sufficient for existing operations and commitments for at least 12 months, but warned a longer-lasting pandemic impact could severely affect liquidity.
- Government assistance recognized as other income was $4.0 million for the first half, compared with $6.2 million. Foreign-exchange losses and lower assistance contributed to reduced other income. The prior-year first-half effective tax rate benefited from $8.2 million of discrete tax benefits; the current-period rate was 16.5%, versus 4.0%.
- A U.S. jury awarded Methode approximately $102 million in compensatory and $11 million in punitive damages in the Hetronic dispute. The appeals court largely affirmed the ruling in August 2021, with a change to the geographic scope of the injunction. Defendants were considering a petition to the U.S. Supreme Court, and the company cautioned that collection is not guaranteed.
- Other risks include dependence on automotive markets and a small number of large customers, material availability and pricing, program launches, foreign exchange, and debt. The credit agreement matures in September 2023; the company also noted uncertainty around LIBOR replacement. No material change to previously disclosed risk factors was reported.
Important facts for investors to verify
- Whether semiconductor availability, customer production schedules and freight/material costs improve or continue to constrain margins and cash conversion.
- Whether working-capital investment—particularly inventory, which rose to $149.0 million from $124.2 million—normalizes.
- Progress in restoring Automotive profitability and sustaining Industrial segment growth and margins.
- Cash generation, planned buybacks and dividends relative to debt service and the September 2023 term-loan maturity.
- Developments in the Hetronic appeals and the collectability and timing of any judgment proceeds.
- The effects of lower prior-year tax benefits, foreign-exchange movements and remaining government assistance on future earnings.