Methode Electronics, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2023, the three months ended July 30, 2022; comparisons are with the three months ended July 31, 2021. Methode designs and manufactures custom engineered mechatronic products for transportation, industrial, computing, consumer and medical markets.
Financial performance
| Metric | Q1 FY2023 | Q1 FY2022 | Change |
|---|---|---|---|
| Net sales | $282.4 million | $287.8 million | Down 1.9% |
| Gross profit / margin | $61.8 million / 21.9% | $71.7 million / 24.9% | Margin down 3.0 percentage points |
| Operating income | $21.8 million | $34.1 million | Down $12.3 million |
| Net income | $21.5 million | $29.1 million | Down 26.1% |
| Diluted EPS | $0.58 | $0.76 | Down $0.18 |
| Cash from operations | $12.7 million | $9.7 million | Up $3.0 million |
| Capital expenditures | $9.6 million | $15.9 million | Down $6.3 million |
Operating cash flow less capital expenditures was $3.1 million, versus negative $6.2 million in the prior-year quarter. Cash and cash equivalents were $152.4 million at quarter-end, down from $172.0 million at April 30, 2022. Current assets were $639.1 million and current liabilities $195.8 million.
Total debt was $207.2 million, including $13.0 million current and $194.2 million long-term, versus $210.5 million at April 30. The company had no revolving-credit borrowings and reported $199.9 million of revolver availability. The term loan’s remaining balance is due at maturity in September 2023; the weighted-average rate on credit-agreement borrowings was approximately 3.6%. Methode was in covenant compliance.
Changes and segment results
- Sales declined $5.4 million. Foreign-exchange translation reduced sales by $14.2 million, partly offset by $11.1 million of customer recoveries for spot-buy materials and premium freight. Excluding these effects, sales decreased $2.3 million.
- Gross margin fell as material and other supply-chain costs rose and sales volumes weakened. Cost of products sold increased 2.1% despite lower sales; management cited $13.3 million of higher material costs before foreign-exchange effects.
- Automotive: Sales fell 9.8% to $176.6 million; operating income declined to $14.7 million from $27.3 million. Lower volumes, China lockdowns, inflation, material costs and a major North American program roll-off weighed on results.
- Industrial: Sales rose 17.3% to $92.1 million and operating income increased to $22.4 million from $20.2 million. Gross margin nevertheless decreased to 33.0% from 36.3% amid higher material costs.
- Interface: Sales were $13.0 million versus $12.7 million; operating income rose to $1.6 million from $1.1 million, aided by product mix.
- Medical: Sales were $0.7 million versus $0.8 million; operating loss widened to $1.5 million from $1.2 million.
Other income was $4.1 million, primarily from international COVID-19 government assistance, compared with $1.9 million of assistance in the prior-year quarter. The effective tax rate was 17.0%, versus 16.4%. Foreign-currency translation contributed a $10.9 million other comprehensive loss.
Liquidity, capital allocation and outlook
Cash used in investing was $9.6 million and cash used in financing was $20.8 million. Financing uses included $11.9 million for share repurchases, $5.0 million for dividends and $3.3 million of debt repayments. The board increased the repurchase authorization by $100 million and extended it to June 14, 2024; $116.9 million remained available at quarter-end. Cash held by non-U.S. subsidiaries was $104.7 million.
The filing gives no numerical earnings or sales guidance. Management expects the semiconductor shortage to continue affecting operating results and financial condition for the remainder of fiscal 2023. Management said liquidity should fund current operations and commitments for at least 12 months, while cautioning that prolonged pandemic effects, supply disruptions, inflation or geopolitical risks could significantly impair liquidity.
Risks, contingencies and unusual items
- COVID-19 lockdowns in China disrupted operations and customer production. The company also cited semiconductor shortages, material and logistics inflation, labor shortages, and Russia-Ukraine-related supply-chain, logistics and energy-cost risks, particularly in EMEA.
- Automotive exposure, customer concentration, pricing pressure, foreign exchange, program launches, debt management and other risks remain relevant; the company reported no material changes to the risk factors in its latest Form 10-K.
- A long-running Hetronic distributor lawsuit resulted in a jury verdict of approximately $102 million compensatory and $11 million punitive damages. The appellate court affirmed the judgment with an instruction to narrow the injunction geographically; further proceedings and a Supreme Court petition were pending. The company warned that collection of some or all of the judgment is not assured.
- The credit agreement terminates in September 2023. The company noted that the LIBOR transition could increase borrowing costs. The U.S. stock-repurchase excise tax enacted in August 2022 was not expected, based on preliminary assessment, to materially affect the financial statements.
Important facts for investors to verify
- Whether semiconductor availability, China-related disruptions and customer production schedules improve or continue to constrain sales and margins.
- Whether customer recoveries for spot buys and premium freight are recurring, and how material, labor and logistics inflation develops.
- Progress on refinancing or repaying the term loan before its September 2023 maturity, including borrowing costs and covenant headroom.
- Cash conversion and working-capital trends, particularly receivables and inventory, alongside continued dividends and share repurchases.
- Status, enforceability and collectability of the Hetronic judgment and any related legal costs or financial-statement effects.