Methode Electronics, Inc. — Form 10-Q Summary
Business context and reporting period. Methode designs and manufactures custom electrical, electronic, lighting, sensor and radio-remote-control products. Its reporting segments are Automotive, Industrial, Interface and Medical. This filing covers the fiscal third quarter ended January 30, 2021, and the first nine months of fiscal 2021; the comparable periods ended February 1, 2020. The current quarter had 13 weeks versus 14 weeks in the prior-year quarter, and the nine-month periods had 39 versus 40 weeks.
Key financial results
| Metric | Q3 FY2021 | Q3 FY2020 | Nine months FY2021 | Nine months FY2020 |
|---|---|---|---|---|
| Net sales | $295.3m | $285.9m | $787.0m | $813.3m |
| Gross profit / margin | $72.6m / 24.6% | $79.3m / 27.7% | $198.5m / 25.2% | $223.7m / 27.5% |
| Operating income | $35.4m | $41.5m | $94.2m | $110.8m |
| Net income | $31.9m | $41.2m | $91.2m | $93.3m |
| Diluted EPS | $0.83 | $1.09 | $2.39 | $2.47 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $143.8m | $82.6m |
Liquidity and debt at January 30, 2021: Cash and cash equivalents were $218.7m; total debt was $244.6m, including $15.4m current debt, implying net debt of approximately $25.9m. The company had $190.1m available on its $200m revolving facility and reported compliance with credit-agreement covenants. Total assets were $1,444.5m and shareholders’ equity was $897.6m. Cash was $217.3m and total debt $352.1m at May 2, 2020.
Nine-month investing cash outflow was $20.0m, principally $20.1m of capital expenditures; financing cash outflow was $127.8m, including $111.9m of borrowings repaid and $13.2m of dividends. Cash increased $1.4m over the period. The quarterly dividend was $0.11 per share.
Material changes versus comparable periods
- Q3 sales rose 3.3% reported, but were approximately flat excluding a $9.7m favorable foreign-currency translation effect. Gross profit fell 8.4%, and net income fell 22.6%. Gross margin contracted 3.1 percentage points.
- Q3 cost of products sold increased 7.8%, with management citing premium freight and factory inefficiencies from supply-chain disruption, as well as tariffs and product mix.
- Nine-month sales declined 3.2% reported; excluding favorable currency translation, they fell $41.5m. Management attributed weakness principally to COVID-19 effects in the first quarter, while noting the prior-year period was also affected by a $28.7m GM labor-strike impact.
- Nine-month gross margin declined 2.3 percentage points. Nine-month net income decreased 2.3%; operating cash flow increased to $143.8m from $82.6m, reflecting improved working-capital cash flows.
- Segment trends were mixed. Q3 Automotive sales were essentially flat, but operating income fell to $29.6m from $39.2m and margin to 14.1% from 18.6%. Industrial, Interface and Medical operating results improved year over year. For the nine months, Automotive and Industrial sales and operating income declined, while Interface improved and Medical remained loss-making.
Outlook, management commentary and risks
- Management said North American and European production returned to pre-COVID levels in Q2 and continued in Q3, but warned that the global semiconductor shortage was slowing automotive production and affecting supply to some non-automotive customers. It expected a likely short-term effect on Q4 FY2021 results and financial condition, possibly extending into FY2022. No quantitative earnings or revenue guidance was provided.
- The company reported $8.9m of COVID-related government assistance in the first nine months as other income. It also recorded $7.6m of discrete tax benefits; excluding these, the nine-month effective tax rate would have been 15.0%, versus the reported 7.2%.
- COVID-related restructuring actions included plant consolidations and workforce reductions across Automotive, Industrial and Interface. Restructuring costs were $8.3m for the nine months; approximately $0.2m of additional costs were expected in the current fiscal year, with further actions possible.
- Management believed available cash, operating cash flows and credit facilities would fund operations and commitments for at least 12 months, while cautioning that prolonged economic disruption could materially affect liquidity. LIBOR replacement could increase interest expense; management estimated a 1% rate increase would add about $2.3m in annual interest expense.
- Other risks include dependence on two large automotive customers, semiconductor, resin and other supply constraints, commodity-price increases (including copper), customer pricing pressure, foreign exchange, and potential future impairment charges. The filing reported no impairment indicators identified as of January 30, 2021.
- In the Hetronic dispute, the company had a jury verdict of approximately $102m compensatory and $11m punitive damages; appeals were pending, and collection—particularly in Europe—was uncertain. Hetronic-related legal fees were $4.8m for the nine months.
Important facts for investors to verify
- Whether semiconductor and resin shortages materially constrain customer production, Methode’s shipments, margins or FY2021–FY2022 results.
- Whether the Q3 gross-margin decline reflects temporary supply-chain costs or more persistent operating and product-mix pressure.
- The sustainability of operating cash flow, given the contribution from working-capital movements, and the company’s debt repayment trajectory.
- How reported earnings develop without COVID-related government assistance and discrete tax benefits.
- The outcomes of the Hetronic appeals and the company’s ability to collect the judgment.