Methode Electronics, Inc. — Form 10-Q Summary
Reporting period: Second quarter and first six months of fiscal 2021, ended October 31, 2020. Comparative periods ended October 26, 2019. All dollar amounts are in millions, except per-share data.
Business context
Methode designs and manufactures engineered electrical, electronic, lighting, sensing and related products. It reports four segments: Automotive, Industrial, Interface and Medical. Automotive remains its largest segment; the company also identifies dependence on two large automotive customers.
Key financial results
| Metric | Q2 FY2021 | Q2 FY2020 | Six months FY2021 | Six months FY2020 |
|---|---|---|---|---|
| Net sales | $300.8 | $257.2 | $491.7 | $527.4 |
| Gross profit | $80.8 | $68.6 | $125.9 | $144.4 |
| Gross margin | 26.9% | 26.7% | 25.6% | 27.4% |
| Operating income | $45.0 | $30.7 | $58.8 | $69.3 |
| Net income | $38.6 | $23.8 | $59.3 | $52.1 |
| Diluted EPS | $1.01 | $0.63 | $1.56 | $1.38 |
| Operating cash flow | Not separately provided | Not separately provided | $56.7 | $67.8 |
Q2 sales rose 17.0% year over year, and net income rose 62.2%. Six-month sales fell 6.8%, while net income increased 13.8%. Six-month results included $6.2 million of COVID-related government assistance in other income and $8.2 million of discrete tax benefits; excluding those tax benefits, the six-month effective tax rate would have been 17.3%, versus the reported 4.0%.
Q2 operating performance improved with production returning to pre-pandemic levels, higher sales volumes and product mix, and lower selling and administrative expenses. Q2 gross margin increased 0.2 percentage points year over year. For the six months, gross margin declined 1.8 points, reflecting lower volumes, mix and restructuring costs. Reported effective tax rates were 16.5% for Q2 and 4.0% for the six-month period.
Cash, debt and liquidity
- Cash and cash equivalents were $242.3 at October 31, up from $217.3 at May 2, 2020. Current assets were $682.3 and current liabilities $198.7.
- Total debt was $347.6, including $110.0 on the revolving facility and $225.0 on the term loan. The company reported $89.9 of revolver availability and compliance with all debt covenants. It repaid $50.0 of revolver borrowings after quarter-end.
- Six-month operating cash flow was $56.7; capital expenditures were $15.2. Operating cash flow was below the prior-year $67.8, principally due to a $94.3 accounts-receivable cash outflow.
- Cash dividends were $9.1 for the six months; the quarterly dividend was $0.11 per share.
Material changes, outlook and risks
- Management said North American and European production recovered during Q2 to pre-COVID levels as customer demand increased. It cautioned that renewed COVID-19 restrictions and a resurgence of cases could adversely affect the remainder of fiscal 2021; the company expects full-year fiscal 2021 results to be adversely affected, but provides no specific earnings or revenue guidance.
- Six-month segment sales were lower in Automotive ($340.8 versus $366.3) and Industrial ($119.9 versus $135.7); Interface rose to $29.8 from $24.8, while Medical remained small at $1.2. Automotive and Industrial were affected by COVID-related disruption. Q2 comparisons also benefited from the prior-year GM labor strike, which reduced prior-year automotive sales by $32.0.
- The company recorded $7.6 of restructuring costs in the first six months, including plant consolidations and workforce reductions, and expected approximately $0.7 of additional costs during the fiscal year. Further actions may follow depending on conditions.
- A jury awarded the company approximately $102 in compensatory and $11 in punitive damages in the Hetronic dispute. Defendants appealed; collection is challenged while the appeal is pending, and the company says collection is not assured.
- Other cited risks include customer concentration, automotive and commercial-vehicle exposure, supply-chain and materials costs, foreign exchange, goodwill or asset impairment, debt and LIBOR transition. A hypothetical 1% rise in credit-agreement rates would increase annual interest expense by an estimated $3.4.
Important facts for investors to verify
- Whether the Q2 production recovery persisted, particularly amid renewed COVID-19 restrictions, and how it affected full-year results.
- How much of reported six-month earnings growth came from government assistance and discrete tax benefits, and the underlying sustainable tax rate.
- Whether accounts receivable converts to cash and operating cash flow recovers after the significant first-half receivables outflow.
- Progress on debt reduction after the post-quarter $50.0 revolver repayment, and continued covenant compliance and revolver availability.
- Status of the Hetronic appeal and the practical collectability and timing of the approximately $113 million judgment.
- Whether restructuring delivers durable savings and whether further charges or impairment indicators arise.