Methode Electronics, Inc. — Form 10-Q summary
Reporting period: The filing covers the 13 weeks ended August 1, 2020, Methode’s first quarter of fiscal 2021—not calendar-year 2020 Q1. Comparatives are the 13 weeks ended July 27, 2019. Methode designs and manufactures custom electrical, electronic, lighting, sensing and related products across Automotive, Industrial, Interface and Medical segments.
Financial performance
| Metric | Quarter ended Aug. 1, 2020 | Prior comparable quarter | Change |
|---|---|---|---|
| Net sales | $190.9 million | $270.2 million | Down $79.3 million (29.3%) |
| Gross profit / margin | $45.1 million / 23.6% | $75.8 million / 28.1% | Down $30.7 million; margin down 4.5 percentage points |
| Operating income | $13.8 million | $38.6 million | Down $24.8 million |
| Net income | $20.7 million | $28.3 million | Down $7.6 million (26.9%) |
| Diluted EPS | $0.54 | $0.75 | Down $0.21 |
| Operating cash flow | $16.4 million | $19.1 million | Down $2.7 million |
| Capital expenditures | $11.6 million | $13.2 million | Down $1.6 million |
Sales declines were concentrated in Automotive, down 32.8% to $125.1 million, and Industrial, down 26.6% to $52.0 million. Interface sales rose 3.9% to $13.4 million; Medical sales were $0.4 million. Automotive and Industrial operating income fell to $15.3 million and $7.0 million, respectively. Interface operating income improved to $1.1 million; Medical reported a $1.6 million operating loss.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $211.0 million at August 1, versus $217.3 million at May 2, 2020. Current assets were $598.0 million and current liabilities $160.0 million.
- Total debt was $349.8 million, including $108.5 million outstanding on the revolving facility and $228.1 million on the term loan. The company reported $91.4 million of revolving-facility availability; the credit agreement matures in September 2023. Methode was in covenant compliance.
- Operating cash flow of $16.4 million was more than offset by investing cash outflow of $11.6 million and financing cash outflow of $13.0 million; cash decreased $6.3 million during the quarter. Higher receivables were a principal operating cash use.
- The company paid $5.0 million in dividends; the declared cash dividend per share was $0.11.
Material changes, outlook and risks
- COVID-19: Customer shutdowns and reduced production, particularly in North America and Europe, materially reduced sales and capacity utilization. Methode expects pandemic-related disruption to adversely affect results across segments for the remainder of fiscal 2021; the duration and magnitude remain uncertain.
- Cost actions: Temporary salary reductions, four-day work weeks, furloughs, reduced discretionary spending and lower non-program capital spending were among the measures taken. Some salary reductions and work-week measures were reversed after quarter-end. Plant consolidations and workforce reductions generated $3.4 million of restructuring costs; approximately $2.0 million of additional costs were expected during fiscal 2021.
- Margins and earnings quality: Lower volumes, product mix and restructuring costs reduced gross margin. Other income of $3.4 million included $2.9 million of government assistance and $0.7 million of foreign-exchange gains. A $5.1 million income tax benefit included $7.8 million of discrete tax benefits; excluding those discrete benefits, the reported effective tax rate would have been 17.2%. These items helped limit the decline in net income despite sharply lower operating income.
- Liquidity outlook: Management said liquidity should fund operations and current commitments for at least 12 months, but warned a longer-lasting downturn could severely affect liquidity and might require additional capital. The company drew $100.0 million on its revolver in March 2020 as a precaution.
- Other risks and contingencies: Methode cited customer and end-market concentration, supply-chain and business-interruption risks, pricing pressure, foreign-exchange and commodity exposure, and variable-rate debt. A 1% rate increase was estimated to add $3.4 million in annual interest expense. The company also reported a favorable jury verdict of approximately $113 million in the Hetronic dispute; defendants appealed and collection, particularly in Europe while appeals are pending, is uncertain. Legal fees were $1.9 million for the quarter.
Important facts for investors to verify
- Whether automotive and commercial-vehicle customer production and Methode’s facility utilization recover, and how that affects fiscal 2021 sales and margins.
- Receivables collection, operating cash flow and liquidity if pandemic disruption persists; confirm available revolver capacity and covenant headroom.
- Progress, total cost and expected savings from restructuring, including the additional costs anticipated for fiscal 2021.
- The sustainability of earnings excluding government assistance, discrete tax benefits and foreign-exchange gains.
- Appeal and collection developments in the Hetronic judgment, and any related financial-statement effects.
- Potential impairment or credit-loss effects if economic conditions worsen; management reported no impairment or material increase in credit or valuation allowances as of the filing.