Methode Electronics, Inc. — FY2022 Form 10-K
Reporting period: Fiscal year ended April 30, 2022 (52 weeks), compared with fiscal 2021 ended May 1, 2021 (52 weeks). The filing is an annual report, not a standalone Q4 filing. Methode supplies engineered electronic and electromechanical products across Automotive, Industrial, Interface and Medical markets; Automotive generated 67.2% of FY2022 sales.
Financial results and liquidity
| Metric | FY2022 | FY2021 |
|---|---|---|
| Net sales | $1,163.6 million | $1,088.0 million |
| Gross profit / margin | $264.9 million / 22.8% | $274.1 million / 25.2% |
| Operating income | $111.7 million | $127.9 million |
| Net income | $102.2 million | $122.3 million |
| Diluted earnings per share | $2.70 | $3.19 |
| Operating cash flow | $98.8 million | $179.8 million |
| Capital expenditures | $38.0 million | $24.9 million |
Sales grew 6.9%; excluding foreign-exchange translation and customer recoveries of material and premium-freight costs, growth was 4.4%. Cost of products sold rose 10.4%, driven by material, logistics, labor and other costs, as well as supply-chain disruption and factory inefficiencies. The resulting gross-margin contraction contributed to a 16.4% decline in net income. Effective tax rate was 13.8%, versus 9.3%; FY2021 included a $7.2 million benefit from a favorable foreign tax ruling.
FY2022 fourth quarter: Sales were $288.7 million, gross profit $54.9 million and net income $16.2 million, compared with $301.0 million, $75.6 million and $31.1 million, respectively, in FY2021’s fourth quarter.
Cash and cash equivalents were $172.0 million at year-end, including $107.0 million held outside the U.S. Current assets were $629.0 million and current liabilities $188.6 million. Operating cash flow fell by $81.0 million, chiefly from working-capital outflows: inventory increased to $158.5 million from $124.2 million. Financing outflows included $64.5 million of share repurchases and $20.4 million of dividends.
Debt was $210.5 million on the balance sheet, including $206.3 million outstanding on the term loan; the $200 million revolving facility was undrawn, with $199.9 million available. The term loan matures in September 2023, with $3.1 million quarterly principal payments and the remaining balance due at maturity. Methode reported compliance with all debt covenants. The quarterly dividend increased from $0.11 to $0.14 per share during FY2022.
Material changes and segment performance
- Automotive: Sales rose 3.4% to $781.5 million, but gross margin fell to 19.2% from 21.6% and operating income declined to $92.6 million from $107.6 million. Asia sales growth, including higher EV product volumes, was partly offset by weaker North American lighting volumes.
- Industrial: Sales increased 18.7% to $318.1 million and operating income rose to $67.1 million from $64.3 million. Gross margin declined to 31.9% from 36.6%, reflecting product mix, costs and restructuring charges.
- Interface: Sales declined 2.9% to $59.8 million, while operating income increased to $9.9 million from $8.9 million.
- Medical: Sales rose to $4.2 million, but operating loss widened to $5.5 million from $4.6 million.
FY2022 restructuring costs were $3.6 million, compared with $8.2 million in FY2021. The company also recorded a $3.1 million long-lived-asset impairment charge. Net income included $10.0 million of pandemic-related government assistance and a further $1.1 million international government grant, reported within other income.
Outlook, risks and contingencies
Management expects the semiconductor shortage to continue affecting operating results and financial condition in fiscal 2023. It described ongoing exposure to COVID-19 disruptions, including China lockdowns affecting manufacturing and customer schedules; inflation in materials, labor and freight; logistics constraints and labor shortages; and the Russia-Ukraine conflict’s effects on suppliers, markets and supply chains. The filing provides no quantified revenue or earnings guidance.
Key risks include customer and industry concentration: the five largest customers represented about 50% of sales, and GM and its tiered suppliers represented 23.3%. Customer releases are generally not firm minimum-volume commitments. Other stated risks include price pressure, raw-material availability and cost, foreign exchange, technology and cybersecurity, product defects, tariffs, and potential goodwill impairment. Goodwill was $233.0 million; the annual review found no impairment, but forecasts and market conditions remain uncertain.
A long-running Hetronic dispute resulted in a jury verdict of approximately $102 million in compensatory and $11 million in punitive damages. The appellate court affirmed the ruling except for a required revision to the injunction’s geographic scope; further proceedings and a Supreme Court petition remained pending. The company cautioned that it might not collect any or all of the judgment. It reported $1.0 million of environmental remediation accruals and stated it was not aware of legal proceedings expected to have a material adverse effect.
Management and Ernst & Young reported effective internal controls over financial reporting, and the auditor issued an unqualified opinion. Goodwill impairment was identified as a critical audit matter.
Investor verification priorities
- Track whether semiconductor availability, China-related disruptions and inflation continue to pressure production, costs and gross margins.
- Assess working-capital conversion, particularly inventory growth and the decline in operating cash flow.
- Review the September 2023 term-loan maturity, refinancing plans, interest-rate exposure and covenant headroom.
- Evaluate the concentration in major customers and the non-binding nature of many customer forecasts and releases.
- Verify developments, collectability and accounting treatment of the Hetronic judgment, and monitor environmental remediation exposure.
- Separate recurring operating performance from customer cost recoveries, government assistance, restructuring costs and other unusual items.