Methode Electronics, Inc. — Form 10-Q Summary
Business context and reporting period
Methode designs and manufactures custom electronic and electromechanical products for transportation, industrial, interface and medical markets. This unaudited filing covers the third quarter and first nine months of fiscal 2022, ended January 29, 2022; comparable periods ended January 30, 2021. Amounts below are in millions of dollars except per-share data.
Key financial metrics
| Metric | Quarter ended Jan. 29, 2022 | Prior-year quarter | Nine months ended Jan. 29, 2022 | Prior-year nine months |
|---|---|---|---|---|
| Net sales | $291.6 | $295.3 | $874.9 | $787.0 |
| Gross profit / margin | $69.1 / 23.7% | $72.6 / 24.6% | $210.0 / 24.0% | $198.5 / 25.2% |
| Operating income | $29.8 | $35.4 | $97.1 | $94.2 |
| Net income | $29.4 | $31.9 | $86.0 | $91.2 |
| Diluted EPS | $0.78 | $0.83 | $2.26 | $2.39 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $56.8 | $143.8 |
- Balance sheet at Jan. 29, 2022: Cash $153.1; current assets $640.4; current liabilities $203.7; total debt $215.6; shareholders’ equity $916.4. Cash was $233.2 and debt $240.1 at May 1, 2021. Cash exceeded reported debt by $62.5.
- Liquidity: No borrowings were outstanding on the $200.0 revolving facility, leaving $200.0 available. The $209.4 term loan matures in September 2023. Management said liquidity should fund operations and commitments for at least 12 months, while cautioning that a prolonged pandemic impact could materially affect liquidity.
- Cash uses and returns: Nine-month capital expenditures were $29.6; share repurchases $63.9; cash dividends $15.4. Quarterly dividend increased from $0.11 to $0.14 per share in fiscal 2022.
Material changes versus prior comparable periods
- Quarterly sales declined 1.3%, while nine-month sales rose 11.2%. Quarterly net income fell 7.8%; nine-month net income fell 5.7%.
- Gross margin contracted by 0.9 percentage points for the quarter and 1.2 points year to date, reflecting supply-chain-related material and logistics costs, inefficiencies and, in the quarter, lower sales volumes. Premium-freight cost recovery partly offset quarterly pressure.
- Nine-month operating cash flow fell by $87.0 to $56.8, principally as working capital consumed cash: operating assets and liabilities used $80.7, including a $45.1 inventory increase. Cash declined $80.1 from the fiscal-year opening balance.
- Automotive quarterly sales fell 7.2% to $195.4 and operating income fell to $24.5, with semiconductor shortages reducing customer production. Industrial sales rose 20.3% to $80.0, but margin declined to 34.0% from 37.1%. Interface sales fell 13.6% to $15.2. Medical sales remained small at $1.0 and the segment recorded a $1.6 operating loss.
- Debt declined $24.5 from May 1, 2021. The company repurchased 1.43 million shares for $63.7 during the nine months and had $28.8 remaining under its $100.0 buyback authorization.
Outlook, risks, contingencies and unusual items
- No quantified revenue or earnings guidance is provided. Management expected semiconductor shortages to continue affecting results and financial condition through the remainder of fiscal 2022; COVID-19 impacts were expected to persist for the foreseeable future.
- Management cited customer shutdowns, semiconductor and other supply constraints, labor shortages, higher material and freight costs, and manufacturing inefficiencies. Other stated risks include automotive-industry and major-customer concentration, pricing pressure, program launches, tariffs, currency movements and debt/refinancing exposure.
- A new Industrial-segment consolidation, initiated in the quarter in response to logistics issues and tariffs, generated $3.1 of restructuring costs; a further $0.2 of severance was expected before fiscal year-end.
- Other income included $7.1 of COVID-related government assistance and a $1.1 international government grant in the nine-month period. Quarterly net sales included $8.6 of premium-freight cost recovery. These items affect comparability.
- The company disclosed a Hetronic litigation judgment of approximately $113 million, affirmed by the Tenth Circuit with a modification to the geographic scope of the injunction. Defendants sought Supreme Court review; the company said collection is not assured, particularly from foreign defendants. No clear value for expected collections is provided in this filing.
- The company was in compliance with credit-agreement covenants. Its December 2021 credit amendment provides for transition from LIBOR to an alternative rate, potentially SOFR; the company noted borrowing costs could increase.
Important facts for investors to verify
- Whether semiconductor availability, customer production schedules, labor constraints and freight/material costs improve or continue to weigh on sales and margins.
- Whether inventory and other working-capital balances normalize and operating cash flow recovers after the nine-month decline.
- Progress on the Industrial consolidation, associated remaining costs and realized savings.
- Debt repayment and refinancing plans ahead of the September 2023 term-loan maturity, including the LIBOR transition and covenant headroom.
- Status, enforceability and collectability of the Hetronic judgment and any related legal costs or cash receipts.
- How much reported performance depends on government assistance and premium-freight recoveries, and whether these benefits recur.