Methode Electronics Inc. (MEI) Q4 2021 Earnings Call Transcript

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Methode Electronics Inc. (MEI 1.91%)
Q4 2021 Earnings Call
Jun 24, 2021, 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen and welcome to the Methode Electronics Fourth Quarter Fiscal 2021 Results. At this time, all participants have been placed on a listen-only mode and the floor will be open for your questions and comments following the presentation.

It is now my pleasure to turn the floor over to your host, Rob Cherry, Vice President of Investor Relations. Sir, the floor is yours.

Robert Cherry -- Vice President, Investor Relations

Thank you, operator. Good morning and welcome to Methode Electronics fiscal 2021 fourth quarter earnings conference call. For this call, we have prepared a presentation entitled Fiscal 2021 Fourth Quarter Financial Results, which can be viewed on the webcast of this call or found at methode.com on the Investors page.

This conference call contains certain forward-looking statements, which reflect management's expectations regarding future events and operating performance and speak only as of the date hereof. These forward-looking statements are subject to the safe harbor protection provided under the securities laws. Methode undertakes no duty to update any forward-looking statement to conform the statement to actual results or changes in Methode's expectations on a quarterly basis or otherwise.

The forward-looking statements in this conference call involve a number of risks and uncertainties. The factors that could cause actual results to differ materially from our expectations are detailed in Methode's filings with the Securities and Exchange Commission, such as our 10-K and 10-Q reports.

At this time, I'd like to turn the call over to Mr. Don Duda, President and Chief Executive Officer.

Donald W. Duda -- Director, President and Chief Executive Officer

Thank you, Rob and good morning everyone. Thank you for joining us for our fiscal 2021 fourth quarter earnings conference call. I'm joined today by Ron Tsoumas, our Chief Financial Officer. Both Ron and I will have opening comments and then we will take your questions.

Let's begin with the business highlights on Slide 4. Our sales for the quarter were $301 million. Excluding favorable currency translation, our organic growth was up 37% from the prior year. It should be noted, however, that our prior-year quarter was significantly impacted by the pandemic. In this year's fourth quarter, our team faced multiple challenges, first with the chip shortages and then with the plastic resin shortages, resulting from the freeze in Texas. These issues, along with the ongoing port congestion, created meaningful headwinds. In response the Methode team did what it does best, recognize the challenge early, work with the customers and suppliers to develop solutions and then execute. As a result, we were able to meet the high end of our sales guidance for the quarter.

However, the supply chain disruptions required remedial actions such as expedited shipping and premium component pricing that significantly impacted our margins. Moving forward, these challenges are lingering into the first quarter and some may continue until the end of this calendar year. However, we have confidence in the situation improving as evidenced by our guidance for the full fiscal year.

The growth that we realized in the fourth quarter was due to increased demand across most of our businesses that was especially focused in auto and commercial vehicle. We also saw growth in our Dabir business as a result of a major hospital system order. Overall, we had strong awards for EV, LED, lighting and e-Bikes.

Focusing on EV. Last quarter we reported that sales into EV applications were over 12% of consolidated sales. This quarter, EV sales were over 13% of consolidated sales and we continue to expect the number to be in the mid-teens for fiscal 2022.

Methode's combination of user interface, LED lighting and power distribution solutions is a winning formula in EV, but we are especially seeing growth in our power offering. This is where Methode leverages over 40 years of auto grade manufacturing operations and power distribution expertise to supply busbars, connectors and battery disconnect units to the EV OEMs.

Regarding our balance sheet. We generated $31 million in free cash flow and further reduced our net debt in the quarter. We continue to have ample liquidity and our net leverage ratio is now near zero. The strength and flexibility of our balance sheet allows us to consider multiple paths to invest in the business in order to drive growth and ultimately shareholder return. As an example, this quarter, we initiated a stock buyback program and purchased $7.5 million in Methode shares. After the quarter end, we also announced a 27% increase to our dividend. Methode's business model continues to generate excellent free cash and we are allocating capital per our balanced approach.

Moving to Slide 5. Methode finished the fiscal year with another strong quarter of business awards. These awards continue to capitalize on key market trends like vehicle electrification, LED lighting in auto and cloud computing. The awards identified here represent a cross-section of the business wins in the quarter and represent over $40 million in annual business at full production.

In vehicle electrification, we won awards for power distribution, user interface and LED lighting programs. We continue to win programs with OEMs globally in both auto and commercial vehicle applications. In non-EV LED lighting, we were awarded programs for automotive and motorcycle applications. In cloud computing, we continue to see demand for our power distribution products and data center applications.

Additionally, we continue to participate in the growth of e-bikes which utilizes our proprietary magnetoelastic technology. We also won two awards for traditional user interface solutions as well as secured a power distribution award for our wind farm application.

Turning to Slide 6. As noted in our release this morning, the Company's accounting period for fiscal 2021 included 52 weeks as compared to 53 weeks for fiscal 2020. Despite having one less week, we were able to deliver year-over-year organic growth and finished with our good sales of $1,088 million for the year. Also a record for the year was our free cash flow of $155 million. The team's disciplined focus on working capital improvements throughout the year made this result possible.

The strong fourth quarter drove our EV sales for the full year to over 12% of total consolidated sales. All of our key solutions, user interface, LED lighting and power distribution contributed to our EV growth.

Lastly, for the full year Methode's business awards were over $200 million in estimated annual sales at full production with the majority being in our target markets of EV, commercial vehicle, e-bike and cloud computing.

As I mentioned last quarter, our business awards over the last couple of years have put us on track in aggregate to replace the sales from the roll off of our largest auto program. As such our customer and program concentrations continue to improve and our foundation for organic growth is building.

On a sidenote, moving to Slide 7, you will see that we recently celebrated our 75th anniversary. Methode Electronics was founded in 1946 by William J. McGinley in Chicago. The Company started with the production of tube-sockets used in radios and early television sets. It was named from an anagram of a good manufacturing method and the electrode and cathode of a vacuum tube, forming the word Methode. Today, Methode has grown into a world-class manufacturer and continues to develop new technology and innovative solutions for our customers worldwide. The entire Methode team is proud to carry on the legacy of Mr. McGinley.

To conclude, given the recent supply chain challenges, I am extremely pleased that our team was able to deliver at the high end of our guidance, generate solid free cash flow and win substantial program awards in the quarter. As I articulated earlier, these supply chain issues are still present and are impacting our first quarter. However, we believe they will diminish over the course of our fiscal year, which would put us in a position to deliver strong organic growth for fiscal 2022.

At this point, I'll turn the call over to Ron who will provide more detail on our fourth quarter and full-year financial results.

Ronald L.G. Tsoumas -- Chief Financial Officer and Vice President, Corporate Finance

Thank you, Don and good morning everyone. Please turn to Slide 9. Fourth quarter sales were $301 million in fiscal year 2021 compared to $210.6 million in fiscal year 2020, an increase of $90.4 million or 42.9%. The year-over-year quarterly comparisons included a favorable foreign currency impact on sales of $11.5 million in the quarter. The increase was mainly due to lower sales in the prior-year quarter from the impact of the COVID-19 pandemic and to higher sales of electric and hybrid vehicle products.

Fourth quarter net income increased $1 million to $31.1 million or $0.81 per diluted share from $30.1 million or $0.79 per diluted share in the same period last year. Net income benefited from lower income tax expense and favorable foreign currency translation, offset by higher costs from supply chain shortages, higher sales and administrative expenses and lower other income.

Please turn to Slide 10. Fourth quarter gross margins were lower in the fiscal year '21 as compared to fiscal year '20, mainly due to higher material costs, higher logistics costs, including freight and supply chain shortages. Fiscal year '21 fourth quarter margins were 25.1% as compared to 28.1% in the fourth quarter of fiscal year '20. This supply disruption accounted for over 200 basis points of the margin decrease.

The higher logistics costs, including freight and supply chain shortages that were experienced in the fourth quarter, are expected to continue into fiscal '22. In addition, we anticipate a degree of cost inflation continuing into fiscal year '22.

Fourth quarter selling and administrative expenses as a percentage of sales increased to 12.3% as compared to 8.6% in the fiscal year '20 fourth quarter. The fiscal year '21 fourth quarter percentage increase was attributable to higher stock-based and performance-based compensation expenses, mainly as a result of compensation accrual reversals in the prior-year quarter related to the negative impact of the COVID-19 pandemic on the fiscal 2020 financial performance measures.

The fourth quarter fiscal '21 SG&A percentage is more in line with the historical norm which should still yield an efficient flow-through from gross margin to operating income.

Please turn to Slide 11. In addition to the gross margins and SG&A items mentioned above, two other non-operational items significantly impacted net income in the fourth quarter of fiscal year '21 as compared to the comparable quarter last fiscal year. First, other income net was lowered by $2.1 million mainly due to lower international government assistance between the comparable quarters. Second, income tax expense in the fourth quarter of fiscal year '21 was $5.5 million or 15% as compared to a tax expense of $10 million or 24.9% in the fourth quarter of fiscal year '20. The effective tax rate was higher in the fourth quarter of fiscal year '20 due to an increase in tax reserves in the quarter.

Shifting to EBITDA, a non-GAAP financial measure, fiscal '21 fourth quarter EBITDA was $50.8 million versus $54.5 million in the same period last year. EBITDA was negatively impacted by lower operating income and lower other income.

Please turn to Slide 12. Net sales increased by $64.1 million to $1.088 billion of which $26.7 million was attributable to foreign exchange. The $1.088 billion in sales was a record for Methode. Net income was virtually flat as supply chain disruptions, higher performance-based compensation and increased restructuring, contributed to lower pre-tax income, which was partially offset by the lower income tax rate.

Please turn to Slide 13. In fiscal year '21, we reduced gross debt by $112 million resulting from the full repayment of the $100 million precautionary draw we initiated in March 2020. Since our acquisition of Grakon in September 2018, we have reduced gross debt by $118 million. Net debt, a non-GAAP financial measure, decreased by $127.9 million to $6.9 million in the fiscal year '21 from $134.8 million at the end of fiscal year '20.

We ended the fourth quarter with $233.2 million in cash. Our debt to trailing 12-month EBITDA ratio, which is used for our bank covenants, is approximately 1.25. Our net debt to trailing 12-months EBITDA ratio was 0.04, virtually nil.

Please turn to Slide 14. Free cash flow, a non-GAAP financial measure, which effective in fiscal year '21 is defined as net cash provided from operating activities less capex. For fiscal year '21 fourth quarter, free cash flow was $31.2 million as compared to $47.8 million in the fourth quarter of fiscal '20. The decrease was mainly due to higher working capital in the quarter to support year-over-year increased sales.

For the full fiscal year '21, we produced record net cash provided by operating activities of nearly $180 million and record free cash flow of $155 million. While we don't expect to equal the fiscal year '21 free cash flow results in fiscal '22, largely due to increased working capital to support fiscal year '22 sales growth and increased capex, we do expect to generate sizable free cash flow.

We anticipate continuing our proven history of consistently generating reliable cash flows which allow for ample funding of future organic growth, inorganic growth and return of capital to the shareholders. In the fourth quarter of fiscal year '21, we invested approximately $4.8 million in capex as compared to $10.2 million in the fourth quarter of fiscal year '20. The lower fourth quarter capex was simply due to timing as opposed to a conscious effort to curtail capex.

We approved capex during the quarter and the full fiscal year that is not yet reflected in the cash flow statement as the actual cash outlay for these approved expenditures will occur in future reporting periods. We have a strong balance sheet and we'll continue utilizing it by continuing investment in our businesses to grow them organically in the future. In addition, we continue to pursue opportunities for inorganic growth.

Regarding capital allocation, we recently announced two initiatives. First, on March 31 we announced a $100 million share repurchase program, which we executed $7.5 million of repurchases during the fourth quarter of fiscal year '21. In addition, last week we announced a 27% increase in our quarterly dividend from $0.11 per share to $0.14 per share. We are confident in our cash-generating ability to simultaneously invest in organic growth, inorganic growth and provide an ample return of capital to the shareholders.

Please turn to Slide 15. Don mentioned in his remarks, we are providing revenue and earnings per share guidance in the first quarter of fiscal '22 due to the uncertain direct and indirect impacts from the ongoing semiconductor supply shortage and the continued challenges from other supply disruptions, including port congestion.

The revenue range for the first quarter of fiscal year '22 is between $285 million and $300 million. Diluted earnings per share range is between $0.68 per share to $0.80 per share. The revenue range for the full fiscal year '22 is between $1.175 billion and $1.235 billion. Diluted earnings per share ranges between $3.35 per share to $3.75 per share. The midpoint of the range represents an 11% increase over fiscal '21 despite having a significantly higher tax rate in fiscal year '22.

The wider range is due to the uncertainty from the supply chain disruption for semiconductors and other materials on both Methode and its customers. Factors that could result in us moving toward the higher end of the sales range include higher sales due to lesser disruption of supply to us and/or our customers which would result in higher demand for our products. Lesser disruption would also minimize the cost of sales impact from premium freight, factory inefficiencies and, to a lesser extent, tariffs and other logistic factors such as port congestion.

Don, that concludes my comments.

Donald W. Duda -- Director, President and Chief Executive Officer

Ron, thank you very much. Kathryn, we are ready to take questions.

Questions and Answers:

Operator

[Operator Instructions] Your first question is coming from Luke Junk. Sir, your line is live.

Luke Junk -- Robert W. Baird & Co. -- Analyst

Great. Thank you. Good morning, everyone.

Donald W. Duda -- Director, President and Chief Executive Officer

Good morning, Luke

Luke Junk -- Robert W. Baird & Co. -- Analyst

So, wanted to start with a question on electrification. So electrification net sales came in at over 12% of sales this year. That's versus what you had indicated if we look in the first half of the fiscal year of an expectation that that would be in the high single digits. So on a relative basis, about a third higher than you were expecting. What I'm wondering is as we unpack that, are we seeing benefits from the market in that upside or should we read this higher electrification mix as Methode specific, and if so if you could help us understand what's driving that fundamentally?

Donald W. Duda -- Director, President and Chief Executive Officer

Sure. It's really both. The market is helping us, particularly in Europe and our new launches, which came from our business wins year and a half, two years ago. So it's really both. And percentage wise, I don't know that we could -- we can give that now, but we have that. You want to comment, Ron?

Ronald L.G. Tsoumas -- Chief Financial Officer and Vice President, Corporate Finance

Yeah. No, I agree with that, Don. And the other 12% -- the split now between automotive and industrial, it's more weighted toward industrial, which means we're getting more activity from the power side of the vehicle electrification which seems to be strengthening. So --

Donald W. Duda -- Director, President and Chief Executive Officer

Yeah. And the power side probably is more weighted toward market growth because it's in the batteries and the more batteries -- the more cars the OEMs sell, more batteries and more busbars also [Phonetic]. So I would say that's weighted more toward the market effect.

Luke Junk -- Robert W. Baird & Co. -- Analyst

Okay. Thank you for that. Next, cost related question in terms of the higher material and logistics costs that you're seeing right now. What I'm wondering is, if we look in the near term what your level of visibility is into that? You mentioned that you're expecting a continued impact as we move into the first fiscal quarter. But as we look over the next few quarters, let's say, is there any visibility into those cost headwinds starting to abate as we move through the fiscal years you've built into the guidance effectively?

Donald W. Duda -- Director, President and Chief Executive Officer

Boy, that is a tough one to answer. One of the reasons we gave quarterly guidance is just the uncertainty in the quarter on shortages and the effect. And just as a reminder, even if we could supply, if our customer does not have a complete build materials to build a vehicle, they're not going to release us. So it is very hard to forecast. And again, that's one of the reasons we gave a quarterly guidance.

Most of the reports we've seen, even the same ones we do until the end of calendar year '21, there is a concern that maybe that goes on a little bit longer. But then we can say that the resin shortages have, for the most part, abated themselves, not completely, but that's moving in the right direction.

The chip, really we're managing on a daily basis. I wish I could give you more information on that, but you probably have as much as we do. Now, do we get a better allocation of chips because of our customers wanting to shift their premium vehicles, trucks and SUVs, yes, that does help us being in the [Indecipherable] those areas, but it is still relatively unpredictable.

Ronald L.G. Tsoumas -- Chief Financial Officer and Vice President, Corporate Finance

Yeah. Luke, I -- Don said, it is spot on. In certainly the first quarter, we had 200 bps in the fourth quarter. We would expect maybe not to that level, but something -- some visibility into this quarter will be a little tough from that perspective. But beyond the first quarter this year, it still remains to be seen.

Luke Junk -- Robert W. Baird & Co. -- Analyst

Okay. Thank you for that. And yeah, appreciate the difficulty in looking into the future there. So I appreciate the color you're able to provide. And then lastly, I just wanted to touch on capital allocation. So in your prepared remarks, covered two spokes of this in terms of the recent announcement with the dividend as well as share repurchase. Just wanted to get your commentary on your interest level and M&A right now. And from a -- both from a capital allocation standpoint and strategically whether or not your focus areas have shifted at all, especially as you're seeing this lift in electrification?

Donald W. Duda -- Director, President and Chief Executive Officer

I don't know that our focus has shifted. It's been in industrial mainly and maybe to a lesser degree medical, but mainly it's industrial along the lines of EV. That would be a nice combination of an industrial business with some EV content. Again, I won't roll out automotive. I said that before, we will be optimistic there, but our focus is on industrial. We have a very high focus internally and externally on acquisitions. We've reviewed a number of books that have come in through the quarter. Nothing that we thought was actionable but we continue to look at them, because we also have our own ability to look at companies that might not be for sale and that's a big emphasis for us. So it's very key to our growth plans, our strategic plan, our long-term growth plans. So we continue and we have -- one of the reasons -- and the team did a very good job of paying down debt. We want to have liquidity to look at acquisitions as we move forward.

Ronald L.G. Tsoumas -- Chief Financial Officer and Vice President, Corporate Finance

Yeah. Luke, I -- we haven't done an acquisition since September of 2018.

Donald W. Duda -- Director, President and Chief Executive Officer

Yeah.

Ronald L.G. Tsoumas -- Chief Financial Officer and Vice President, Corporate Finance

That should not be construed that we haven't looked or we're not engaged or we're not active in the process. Methode is very smart. We're disciplined and we bet things in a very strategic and disciplined manner. So the inactivity has nothing to do with our interest or our level of wanting to grow inorganically.

Luke Junk -- Robert W. Baird & Co. -- Analyst

That all makes sense. I'll leave it there. Thanks for all the comments this morning.

Donald W. Duda -- Director, President and Chief Executive Officer

Thank you, Luke.

Operator

[Operator Instructions] We have no further questions from the lines at this time. I'd like to turn the floor back to Don for closing remarks.

Donald W. Duda -- Director, President and Chief Executive Officer

Kathryn, thank you very much and we thank everyone for listening today and wish everyone a very safe and enjoyable summer.

Operator

[Operator Closing Remarks]

Duration: 28 minutes

Call participants:

Robert Cherry -- Vice President, Investor Relations

Donald W. Duda -- Director, President and Chief Executive Officer

Ronald L.G. Tsoumas -- Chief Financial Officer and Vice President, Corporate Finance

Luke Junk -- Robert W. Baird & Co. -- Analyst

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