Methode Electronics Reports Fiscal Q3 2021 Financial Results

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Methode Electronics, Inc., a global developer of custom engineered and application specific products and solutions, announced financial results for the fiscal third quarter of 2021 ended January 30, 2021. 

For the fiscal third quarter ended January 30, 2021, the company's accounting period included 13 weeks compared to 14 weeks for the fiscal third quarter ended February 1, 2020. The following discussions of comparative results between these two periods should be reviewed in this context. 

Fiscal Third Quarter 2021 Highlights

• Net sales were $295.3 million
• Electric and hybrid vehicle applications were over 12 percent of net sales
• Net income was $31.9 million, or $0.83 per diluted share
• Net cash provided by operating activities was $87.1 million
• Debt was $244.6 million, compared to $352.1 million at the end of fiscal 2020

Consolidated Fiscal Third Quarter 2021 Financial Results

Methode's net sales were $295.3 million, which included a favorable foreign currency impact of $9.7 million, as compared to $285.9 million in the same quarter of fiscal 2020. On a weekly run rate basis and excluding the foreign currency impact, adjusted net sales, a non-GAAP financial measure, were up 7.6% compared to the same quarter of fiscal 2020. The increase was due in part to higher sales of electric and hybrid vehicle products. 

Gross margin as a percentage of sales was 24.6 percent, compared to 27.7 percent in the same quarter of fiscal 2020. The decrease was primarily due to premium freight and factory inefficiencies resulting from supply chain disruptions due to COVID-19 and to a lesser extent tariff expense and product sales mix.

Selling and administrative expense as a percentage of sales was 11.0 percent, compared to 11.5 percent in the same quarter of fiscal 2020. Selling and administrative expense decreased $0.6 million from the same quarter of fiscal 2020 primarily due to lower compensation expense, travel expense and restructuring costs, which were partially offset by higher stock-based compensation expense. The decrease in compensation expense was primarily related to the benefit of restructuring actions taken in the first quarter of fiscal 2021. 

Other income was $2.4 million, compared to $4.9 million in the same quarter of fiscal 2020. Included in other income was $2.7 million of government assistance at certain of our international locations with respect to the COVID-19 pandemic. In the same quarter of fiscal 2020, other income included $5.6 million for an international government grant for maintaining certain employment levels.

Income tax expense was $4.6 million, compared to $2.8 million in the same quarter of fiscal 2020. The income tax expense increase was primarily due to changes related to U.S. Tax Reform that favorably impacted the prior year period. The effective tax rate was 12.6%, compared to an effective tax rate of 6.4% in the same quarter of fiscal 2020.

Net income was $31.9 million, or $0.83 per diluted share, compared to $41.2 million, or $1.09 per diluted share, in the same quarter of fiscal 2020. The decrease was primarily due to premium freight and factory inefficiencies resulting from supply chain disruptions due to COVID-19 and to a lesser extent tariff expense and product sales mix. Also contributing were lower other income and higher income tax expense.

EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization of Intangibles), a non-GAAP financial measure, was $51.3 million, compared to $58.7 million in the same quarter of fiscal 2020.

Debt was $244.6 million at the end of the quarter, compared to $352.1 million at the end of fiscal 2020. The company repaid $100.0 million on its revolving credit facility from its March 2020 draw. Net debt, a non-GAAP financial measure and includes debt less cash and cash equivalents, was $25.9 million, compared to $134.8 million at the end of fiscal 2020.

Free cash flow, a non-GAAP financial measure and includes cash provided by operating activities less purchases of property, plant, and equipment, was $82.2 million, compared to $6.7 million in the same quarter of fiscal 2020. The increase was mainly due to working capital improvements. 

Segment Fiscal Third Quarter 2021 Financial Results

Comparing the Automotive segment's quarter to the same quarter of fiscal 2020

• Net sales were $210.5 million, up $0.2 million, or 0.1% from $210.3 million. Higher sales of electric and hybrid vehicle products were offset by lower lighting and sensor product sales. The segment net sales in the quarter were positively impacted $7.5 million from foreign currency translation
• Gross margin as a percentage of sales was 21.0 percent, down from 26.2 percent primarily due to premium freight and factory inefficiencies resulting from supply chain disruptions due to COVID-19 and to a lesser extent tariff expense and product sales mix
• Income from operations was $29.6 million, down $9.6 million, or 24.5% from $39.2 million primarily due to lower gross profit, partially offset by favorable foreign currency translation and lower selling and administrative expenses

Comparing the Industrial segment's quarter to the same quarter of fiscal 2020 

• Net sales were $66.5 million, up $6.4 million or 10.6% from $60.1 million primarily due to higher sales volumes of EV busbar products and radio remote control devices, partially offset by lower sales from commercial vehicle lighting solutions. The segment net sales in the quarter were also positively impacted $2.2 million from foreign currency translation.
• Gross margin as a percentage of sales was 37.1 percent, up from 36.4 percent primarily due to the higher sales volumes.
• Income from operations was $16.9 million, an increase from $13.2 million primarily due to higher gross profit, lower selling and administrative expenses, and favorable foreign currency translation.

Comparing the Interface segment's quarter to the same quarter of fiscal 2020

• Net sales were $17.6 million, up $2.7 million or 18.1% from $14.9 million primarily due to higher sales volume of appliance products, partially offset by a decrease in legacy data solutions products
• Gross margin as a percentage of sales was 22.7 percent, up from 12.1 percent also due to higher sales and lower direct labor costs
• Income from operations was $3.2 million, up from $0.7 million primarily due to higher gross profit and lower selling and administrative expense

Comparing the Medical segment's quarter to the same quarter of fiscal 2020

• Net sales were $0.7 million, up from $0.6 million. The higher net sales were due to increased product acceptance
• Loss from operations was $1.0 million, compared to a loss of $1.6 million

Fiscal Fourth Quarter 2021 Guidance

For the fiscal fourth quarter of 2021, the company expects net sales in to be in the range of $270 to $300 million and diluted earnings per share to be in the range of $0.60 to $0.82, which is subject to disruption due to a variety of factors including the ongoing semiconductor shortage and COVID-19 pandemic situations. The lower end of the guidance ranges contemplates additional supply chain disruptions.

Management Comments

President and Chief Executive Officer Donald W. Duda said, “Despite supply chain challenges, Methode was able to meet the high end of our sales guidance and increase our EV sales. In doing so, we also generated substantial free cash flow, which in turn allowed us to further pay down debt providing Methode with an even stronger balance sheet."

Duda added, "We will continue to face near term market uncertainty due to the semiconductor shortage as well as other supply chain and related factory inefficiencies. Those factors, along with weather-related supply chain disruptions are driving our wide guidance range. However, our order book for EV programs gives us the confidence to increase our projection for fiscal 2022 sales from EV applications to a mid-teens percentage. Furthermore, and subject to resolution of the supply chain challenges by mid-calendar year, we anticipate Methode’s consolidated fiscal 2022 organic sales to grow in excess of 10%."