Methode Electronics, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended May 2, 2020 (53 weeks), compared with the 52-week fiscal year ended April 27, 2019. The filing also reports fourth-quarter results; fiscal Q4 2020 ended May 2, 2020. Methode designs and manufactures engineered electrical, electronic, sensing, lighting, power and interface products across Automotive, Industrial, Interface and Medical segments.
Financial performance
| Metric | FY2020 | FY2019 |
|---|---|---|
| Net sales | $1,023.9 million | $1,000.3 million |
| Gross profit / margin | $282.9 million / 27.6% | $265.8 million / 26.6% |
| Income from operations | $147.1 million | $106.8 million |
| Net income | $123.4 million | $91.6 million |
| Diluted EPS | $3.26 | $2.43 |
| Cash from operations | $140.6 million | $102.0 million |
| Capital expenditures | $45.1 million | $49.8 million |
- Annual sales rose 2.4%, but the extra fiscal week and Grakon acquisition contributed to the comparison. Grakon added $76.2 million of sales; excluding Grakon and currency translation, sales declined $38.7 million, mainly from the GM labor strike and COVID-19 disruption.
- Annual gross margin improved by 1.0 percentage point. Selling and administrative expense fell to $116.8 million from $142.9 million, including lower stock compensation and professional fees; fiscal 2020 included a $5.2 million reversal of prior-period stock compensation expense.
- Effective tax rate was 17.0%, versus 11.6%. Interest expense rose to $10.1 million from $8.3 million, reflecting higher average borrowings.
- Fiscal Q4 sales were $210.6 million, versus $266.0 million in fiscal Q4 2019; gross profit was $59.2 million versus $70.6 million. Net income increased to $30.1 million from $22.6 million; diluted EPS was $0.79 versus $0.60.
Segments and material changes
- Automotive: Sales fell 3.1% to $712.1 million; segment operating income declined to $124.4 million from $126.3 million. COVID-19, the GM strike and product mix weighed on sales and gross margin.
- Industrial: Sales rose 21.6% to $251.4 million and operating income rose to $59.4 million from $37.4 million. Grakon contributed $44.3 million of sales growth and $21.0 million of operating-income growth.
- Interface: Sales increased 1.9% to $58.8 million; operating results improved to $5.6 million income from a $0.3 million loss.
- Medical: Sales were $1.6 million; operating loss narrowed to $6.0 million from $8.6 million. Dabir Surfaces remains an early-stage product business.
- GM and Ford, including sales through tiered suppliers, represented 26.8% and 10.7% of annual sales, respectively. Grakon was acquired in September 2018 for $422.1 million cash, net of cash acquired.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $217.3 million at year-end, up from $83.2 million; $47.0 million was held by foreign subsidiaries.
- Total debt was $352.1 million, compared with $292.6 million a year earlier. The company drew $100.0 million on its revolving facility in March 2020 as a precaution; $108.5 million was outstanding on the revolver and $91.4 million remained available. Term-loan principal outstanding was $231.2 million.
- The term loan matures in September 2023 and requires quarterly principal payments of $3.1 million, with the balance due at maturity. Methode reported compliance with credit-agreement covenants at May 2, 2020.
- Management said liquidity should fund operations and current commitments for at least 12 months, but warned prolonged pandemic effects could severely affect liquidity. Operating cash flow was $140.6 million; financing provided $41.7 million and investing used $44.5 million.
- Annual cash dividends were $0.44 per share. Future dividends remain at the board’s discretion and depend in part on results and liquidity.
Outlook, risks and unusual items
- Management expected COVID-19 to adversely affect first-quarter and full-year fiscal 2021 results, potentially materially. No numerical fiscal 2021 revenue or earnings guidance is provided.
- COVID-19 caused temporary China facility closures and lower utilization, then substantial North American and European customer shutdowns and production reductions late in fiscal 2020. Cost measures included payroll reductions, furloughs, reduced capital spending and deferred discretionary expenses.
- Other key risks include automotive and commercial-vehicle cyclicality, dependence on GM and Ford, customer model/program awards, pricing pressure, supply-chain and raw-material exposure, international operations and foreign exchange, and debt and variable interest rates. A 1% rate increase was estimated to add $3.4 million to annual interest expense.
- Hetronic litigation produced a jury verdict in Methode’s favor of approximately $102 million compensatory damages and $11 million punitive damages. The final judgment remained subject to post-trial motions and possible appeal; collection was uncertain. The filing does not provide a clear statement that the award was recognized as income in fiscal 2020.
- Fiscal 2020 other income included $11.6 million of international government grants, including approximately $1.7 million of pandemic assistance and $9.9 million tied to maintaining employment levels. Goodwill impairment testing found no impairment, but the auditor identified valuation of Grakon Industrial goodwill ($123.8 million) as a critical audit matter.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether pandemic-related customer demand and production recovered after year-end, and how much of the fiscal Q4 sales decline persisted into fiscal 2021.
- Cash generation, remaining revolver availability, debt repayment capacity and covenant headroom under weaker operating scenarios.
- How much of Industrial’s growth and profitability is sustainable apart from Grakon acquisition effects and product mix.
- The status, appeal outcome, collectability and financial-statement treatment of the Hetronic judgment.
- Whether future cash flows support the carrying value of Grakon goodwill and other acquired intangible assets.
- Progress in commercial adoption and clinical validation of Dabir Surfaces medical products.