Methode Electronics, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and first six months of fiscal 2024, ended October 28, 2023. Each period comprised 13 and 26 weeks, respectively. Comparisons are with the periods ended October 29, 2022. Amounts are in millions except per-share data.
Business context
Methode designs and manufactures custom mechatronic products for transportation, industrial, interface and medical markets. It operates four reporting segments: Automotive, Industrial, Interface and Medical. The company completed its purchase of the remaining Nordic Lights shares during the half-year, bringing ownership to 100%; Nordic Lights is reported in Industrial. Methode also discontinued and sold certain assets of its Dabir medical business in October 2023.
Financial performance
| Metric | Three months ended Oct. 28, 2023 | Prior-year quarter | Six months ended Oct. 28, 2023 | Prior-year half-year |
|---|---|---|---|---|
| Net sales | $288.0 | $315.9 | $577.7 | $598.3 |
| Gross profit | $52.3 | $74.1 | $106.3 | $135.9 |
| Gross margin | 18.2% | 23.5% | 18.4% | 22.7% |
| Operating income (loss) | $(51.3) | $32.8 | $(47.5) | $54.6 |
| Net income (loss) | $(55.3) | $27.6 | $(54.4) | $49.1 |
| Diluted EPS | $(1.55) | $0.75 | $(1.52) | $1.33 |
- Quarterly sales fell 8.8% year over year; six-month sales fell 3.4%. Management attributed the declines primarily to lower Automotive volumes. Excluding Nordic Lights, currency effects and customer cost recoveries, sales declined 15.2% for the quarter and 8.8% for the half-year.
- Automotive was the principal weakness: quarterly segment sales declined 21.6%, and six-month sales declined 16.3%. Management cited program roll-offs, lower volumes, and operational problems involving labor and vendors, shortages, spot purchases, premium freight and delayed shipments.
- A $56.5 non-cash goodwill impairment in Automotive drove much of the reported operating loss. It followed sustained declines in share price and market capitalization and operating results below forecasts. The charge comprised $50.4 for North American Automotive and $6.1 for European Automotive.
- Industrial sales rose, chiefly because of Nordic Lights; excluding that acquisition, currency and customer recoveries, segment sales were down 3.4% for the quarter and 0.3% for the half-year. Industrial operating income was $25.7 for the quarter and $49.9 for the half-year. Interface and Medical remained smaller contributors.
- Interest expense rose to $4.4 for the quarter and $7.2 for the half-year, from $0.5 in each prior-year comparable period, reflecting higher borrowings and interest rates. The six-month effective tax rate was 0.2%, affected in part by the non-deductible goodwill impairment and foreign income and deductions.
Cash flow, liquidity and debt
- Six-month operating cash flow was a use of $6.2, versus cash provided of $28.1 a year earlier. Working-capital movements used $41.7, primarily from higher inventory and prepaid items and lower payables and other liabilities, partly offset by lower receivables.
- Investing cash outflow was $22.3, including $24.5 of capital expenditures. Financing cash flow was positive $1.9, including net borrowings of $34.6, dividends of $10.1, share repurchases of $7.8 and $10.9 to acquire Nordic Lights’ remaining noncontrolling interest. Cash declined $34.5 to $122.5.
- At October 28, cash was $122.5 and total debt was $332.0, including $330.6 outstanding under the revolving facility. Net debt was approximately $209.5, calculated as debt less cash. The $750.0 multicurrency credit facility matures October 31, 2027; Methode reported compliance with its covenants. Weighted-average rates were approximately 7.2% on U.S.-dollar and 5.6% on euro borrowings.
- Current assets were $636.5 and current liabilities $218.3. Management said liquidity should be sufficient for operations and current commitments for at least 12 months, while cautioning that prolonged supply-chain, inflationary or geopolitical pressures could severely affect liquidity. Cash included $107.4 held outside the U.S.
Outlook, commentary and notable items
- No numerical financial guidance is provided in the supplied filing text. Management expects semiconductor shortages to continue affecting fiscal 2024 results and describes exposure to inflation, supply-chain and labor disruptions, tariffs, foreign exchange, interest rates, customer concentration, automotive demand and geopolitical conflicts.
- Management said gross-margin pressure reflected lower sales and Automotive inefficiencies; higher labor costs, vendor issues and premium freight were cited. Nordic Lights contributed $20.9 of quarterly and $42.1 of six-month sales.
- On December 5, 2023, the board removed and terminated COO Joseph Khoury and eliminated the COO position for the present time. Methode expects to reverse $3.5–$3.9 of previously recognized compensation expense in fiscal third quarter 2024. On December 6, the board declared a $0.14-per-share quarterly dividend.
- The Dabir asset sale generated $1.5 consideration and a $0.6 loss, including transaction costs. Restructuring costs were $1.3 for the half-year, including costs associated with Dabir discontinuation.
- A previously disclosed material weakness in Automotive revenue controls remained unremediated at October 28, 2023; disclosure controls and procedures were therefore deemed ineffective. The weakness concerns review, approval and validation of pricing data and non-standard contract terms. Management reported remediation efforts were underway.
- In the Hetronic litigation, the company disclosed a prior jury award of approximately $102 in compensatory and $11 in punitive damages. The Supreme Court vacated the appellate decision and remanded the case; further proceedings were pending. The company cautioned that collection is uncertain, and two defendants entered German insolvency proceedings.
Most important facts for investors to verify
- Whether Automotive volumes, margins and operational execution improve, and whether additional goodwill impairment is required.
- Whether cash conversion and working capital recover while debt, variable-rate interest costs and capital spending remain manageable.
- Progress and testing results for remediation of the revenue-control material weakness.
- Actual Nordic Lights contribution and integration performance, and the financial effects of exiting Dabir.
- Developments in semiconductor availability, customer demand, geopolitical and inflationary risks, and the collectability and outcome of the Hetronic judgment.
- Whether the expected compensation reversal occurs and whether dividends or repurchases remain consistent with liquidity and credit covenants.