Methode Electronics, Inc. — Form 10-Q Summary
Business context and period: Methode supplies engineered mechatronic products across automotive, industrial, interface and medical markets. This report covers the second quarter and first six months of fiscal 2023, ended October 29, 2022; comparable periods ended October 30, 2021. Amounts are in millions except per-share data.
Financial results
| Metric | Three months ended Oct. 29, 2022 | Year-over-year | Six months ended Oct. 29, 2022 | Year-over-year |
|---|---|---|---|---|
| Net sales | $315.9 | +6.9% | $598.3 | +2.6% |
| Gross profit | $74.1 | $69.2 prior year | $135.9 | $140.9 prior year |
| Gross margin | 23.5% | 23.4% prior year | 22.7% | 24.2% prior year |
| Operating income | $32.8 | $33.2 prior year | $54.6 | $67.3 prior year |
| Net income | $27.6 | $27.5 prior year | $49.1 | $56.6 prior year |
| Diluted EPS | $0.75 | $0.72 prior year | $1.33 | $1.48 prior year |
| Operating cash flow | Not separately provided | $28.1 | $36.7 prior year |
Second-quarter revenue growth reflected stronger Industrial sales, partly offset by lower Interface sales. Foreign currency translation reduced sales by $22.2; excluding currency effects and customer cost recoveries, sales increased 14.2%. First-half sales were reduced by $36.5 from currency translation; excluding currency effects and customer cost recoveries, sales increased 6.8%. First-half earnings declined as higher material and supply-chain costs, weaker Automotive performance, and increased selling and administrative costs more than offset Industrial growth.
Segment trends: Second-quarter Industrial sales rose 28.6% to $103.8 and operating income rose to $25.0; Automotive sales were nearly flat at $196.9 and operating income was $23.4. Interface sales declined 21.7% to $14.1 and operating income fell to $1.6. Medical sales were $1.1, with a $1.4 operating loss. For the first half, Industrial sales increased 23.1%, while Automotive sales declined 4.7% and operating income fell 25.1%; Interface sales and operating income also declined.
Financial position and liquidity
- At October 29, cash and equivalents were $129.6, down from $172.0 at April 30. Current assets were $658.4 and current liabilities $213.0.
- Total debt was $204.0, including $13.0 current and $191.0 long-term, compared with $210.5 at April 30. Cash exceeded reported debt by $74.4.
- First-half operating cash flow of $28.1 was pressured by working-capital outflows of $54.0, primarily higher receivables and inventory. Capital expenditures were $18.0; cash dividends were $9.9 and share repurchases were $31.6. Cash decreased $42.4 over the six months.
- On October 31, 2022, the company entered a new credit agreement with $750.0 of multicurrency revolving commitments, replacing and refinancing the prior term-loan facility. The agreement matures October 31, 2027. The company reported compliance with prior agreement covenants at October 29.
- Management said existing liquidity should fund operations and current commitments for at least 12 months, while warning that prolonged pandemic, supply-chain, inflationary or geopolitical disruption could materially affect liquidity.
Outlook, commentary and risks
- No quantified financial guidance is provided. Management expects the semiconductor shortage to continue affecting results and financial condition for the remainder of fiscal 2023.
- Risks described include semiconductor availability, material and freight costs, labor shortages, inflation, customer production interruptions, COVID-19 restrictions in China, foreign exchange, and the Russia-Ukraine conflict. European operations could face higher energy costs if Russian gas supplies are further reduced.
- Currency translation was a significant headwind: first-half net income was reduced by an estimated $6.3. The company also received $4.3 of government assistance in the first half, reported in other income.
- A jury previously awarded Methode approximately $102 in compensatory and $11 in punitive damages in its Hetronic dispute. The U.S. Supreme Court granted defendants’ petition for review on November 4, 2022; briefing was ongoing, and the company cautioned that recovery of all or any judgment is not assured.
- The company repurchased $31.6 of shares in the first half; $97.2 remained available under its buyback authorization. A 1% U.S. excise tax on certain share repurchases begins after December 31, 2022; management preliminarily expected no material financial-statement impact.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether semiconductor constraints, inflation and customer production interruptions persist through the remainder of fiscal 2023, and their effect on margins and cash conversion.
- Whether Industrial growth can offset continued weakness in Automotive and Interface, including the effects of program roll-offs and segment mix.
- Post-refinancing borrowing levels, interest costs, covenant terms and availability under the $750.0 revolving facility.
- Working-capital trends, particularly receivables and inventory, given their significant first-half cash use.
- Developments in the Hetronic Supreme Court case and the collectability and timing of any damages.