METHODE ELECTRONICS INC

Previous wording

Dependence on the automotive and commercial vehicle industries;

Current wording

Dependence on the automotive, commercial vehicle, and construction industries;

Previous wording

Dependence on our supply chain, including semiconductor suppliers;

Current wording

Dependence on our supply chain;

Previous wording

Ability to remediate a material weakness in our internal control over financial reporting;

Current wording

Ability to remediate material weaknesses in our internal control over financial reporting;

Previous wording

Impact from climate change and related regulations;

Current wording

Impact from climate change and related regulations; and

Previous wording

Our solutions are found in the end markets of transportation (including automotive, commercial vehicle, e-bike, aerospace, bus and rail), cloud computing infrastructure, construction equipment and consumer appliance. Our business is managed on a segment basis, with those segments being Automotive, Industrial, Interface and Medical.

Current wording

Our solutions are found in the end markets of transportation (including automotive, commercial vehicle, e-bike, aerospace, bus and rail), cloud computing infrastructure, construction equipment and consumer appliance.

Previous wording

Adverse macroeconomic conditions, including but not limited to inflation, slower growth or recession, changes to fiscal and monetary policy, higher interest rates, wage and commodity inflation, currency fluctuations and new or increased tariffs, could adversely affect demand for our products. We continue to monitor the Russia-Ukraine war and the associated sanctions and other restrictions. We also are monitoring the Israel-Hamas war. Although we have no operations in Russia, Ukraine or Israel, certain of our customers and suppliers have been negatively impacted by these events, which in turn has impacted markets where we do business, including EMEA and Asia. The economic sanctions imposed on Russia have further increased existing global supply chain, logistics, and inflationary challenges. The full impact of the conflicts on our business operations and financial performance remains uncertain and will depend on future developments, including the severity and duration of the conflicts and their impact on regional and global economic conditions. We will continue to monitor the conflicts and assess the related restrictions and other effects on our employees, customers, and business.

Current wording

Russia’s invasion of Ukraine and the resulting economic sanctions imposed by the international community impacted the global economy and gave rise to potential global security issues that may adversely affect international business and economic conditions. Given our manufacturing operations in the Middle East and Asia, the continuation of the military conflict between Russia and Ukraine, the escalation or expansion of the Israel-Hamas war, or renewed terrorist attacks on Red Sea shipping, such as those by the Houthi, could lead to other supply chain disruptions, increased inflationary pressures, higher freight costs and volatility in global markets and industries that could negatively impact our operations. The full impact of the conflicts on our business operations and financial performance remains uncertain and will depend on future developments, including the severity and duration of the conflicts and their impact on regional and global economic conditions. We will continue to monitor the conflicts and assess the related restrictions and other effects on our employees, customers, suppliers and business.

Previous wording

The table below compares our results of operations between the three and nine months ended January 27, 2024 and the three and nine months ended January 28, 2023:

Current wording

The table below compares our results of operations between the three months ended July 27, 2024 and the three months ended July 29, 2023:

Previous wording

Cost of products sold increased $16.3 million, or 2.4%, to $693.9 million (82.9% of net sales) in the nine months ended January 27, 2024, compared to $677.6 million (77.1% of net sales) in the nine months ended January 28, 2023. The acquisition of Nordic Lights and foreign currency translation accounted for $46.6 million and $3.9 million, respectively, of the increase. Excluding Nordic Lights and foreign currency translation, cost of products sold decreased $34.2 million. The decrease was primarily due to lower material costs as a result of a decrease in sales volumes, partially offset by higher salary, freight and operating expenses. Restructuring costs were $0.9 million in the nine months ended January 27, 2024, compared to $0.1 million in the nine months ended January 28, 2023.

Current wording

Cost of products sold decreased $21.8 million, or 9.2%, to $213.9 million (82.7% of net sales) in the three months ended July 27, 2024, compared to $235.7 million (81.4% of net sales) in the three months ended July 29, 2023. Foreign currency translation decreased cost of products sold by $1.4 million. Excluding foreign currency translation, cost of products sold decreased $20.4 million. The decrease was primarily due to lower material costs as a result of a decrease in sales volumes, partially offset by higher salary expense and higher costs due to program launches. Restructuring and asset impairment charges included within cost of products sold were $0.3 million in the three months ended July 27, 2024, compared to $0.6 million in the three months ended July 29, 2023.

Previous wording

Gross profit margin was 14.3% of net sales in the three months ended January 27, 2024, compared to 23.2% of net sales in the three months ended January 28, 2023. The decrease in gross profit margin was primarily a result of lower sales and higher costs in the Automotive segment related to operational inefficiencies and upcoming product launches.

Current wording

Gross profit margin was 17.3% of net sales in the three months ended July 27, 2024, compared to 18.6% of net sales in the three months ended July 29, 2023. The decrease in gross profit margin was primarily a result of lower sales.

Previous wording

Interest expense, net was $5.0 million in the three months ended January 27, 2024, compared to $0.8 million in the three months ended January 28, 2023. Interest expense, net was $12.2 million in the nine months ended January 27, 2024, compared to $1.3 million in the nine months ended January 28, 2023. The increase in both periods was due to a higher level of borrowings and increased interest rates.

Current wording

Interest expense, net was $4.8 million in the three months ended July 27, 2024, compared to $2.8 million in the three months ended July 29, 2023. The increase was due to a higher level of borrowings and increased interest rates.

Previous wording

Other expense, net was $2.3 million in the nine months ended January 27, 2024, compared to other income, net of $1.7 million in the nine months ended January 28, 2023. Net foreign exchange loss was $2.2 million in the nine months ended January 27, 2024, compared to $3.1 million in the nine months ended January 28, 2023. In the nine months ended January 27, 2024, we received $0.3 million of international government assistance, compared to $4.6 million in the nine months ended January 28, 2023. In the nine months ended January 27, 2024, we recognized a $0.6 million loss on the sale of certain assets of Dabir.

Current wording

Other expense, net was $0.8 million in the three months ended July 27, 2024, compared to other expense, net of zero in the three months ended July 29, 2023. Other expense, net in the three months ended July 27, 2024 includes a non-cash write-off of $1.2 million of unamortized debt issuance costs. Net foreign exchange loss was $0.6 million in the three months ended July 27, 2024, compared to net foreign exchange loss of zero in the three months ended July 29, 2023. In the three months ended July 27, 2024, we received $0.9 million of international government assistance.

Previous wording

Income tax expense was $1.1 million (-10.5% effective tax rate) in the three months ended January 27, 2024, compared to $3.1 million (13.5% effective tax rate) in the three months ended January 28, 2023. Income tax expense was $1.0 million (-1.5% effective tax rate) in the nine months ended January 27, 2024, compared to $13.3 million (16.2% effective tax rate) in the nine months ended January 28, 2023.

Current wording

Income tax expense was $5.2 million (-39.7% effective tax rate) in the three months ended July 27, 2024, compared to $0.1 million (10.0% effective tax rate) in the three months ended July 29, 2023.

Previous wording

The effective tax rate for the three months ended January 27, 2024 was lower than the U.S. federal statutory tax rate of 21% primarily due to the impact of income derived from foreign operations with lower statutory tax rates and research deductions claimed in foreign jurisdictions, partially offset by global intangible low-tax income. The effective tax rate for the nine months ended January 27, 2024 was lower than the U.S. federal statutory tax rate of 21% primarily due to the impact of an impairment of goodwill which is non-deductible for tax purposes, income derived from foreign operations with lower statutory tax rates and research deductions claimed in foreign jurisdictions, partially offset by global intangible low-tax income. The effective tax rate for the three and nine months ended January 28, 2023 was lower than the U.S. federal statutory tax rate of 21% primarily due to income derived from foreign operations with lower statutory tax rates and research deductions claimed in foreign jurisdictions, partially offset by non-deductible expenses.

Current wording

The effective tax rate for the three months ended July 27, 2024 was higher than the U.S. federal statutory tax rate of 21% primarily due to an increase in a valuation allowance for U.S. deferred tax assets and global intangible low-tax income, partially offset by the impact of income derived from foreign operations with lower statutory tax rates and research deductions claimed in foreign jurisdictions. The effective tax rate for the three months ended July 29, 2023 was lower than the U.S. federal statutory tax rate of 21% primarily due to income derived from foreign operations with lower statutory tax rates and research deductions claimed in foreign jurisdictions, partially offset by global intangible low-tax income and non-deductible expenses.

Previous wording

Net loss was $11.6 million in the three months ended January 27, 2024, compared to net income of $19.9 million in the three months ended January 28, 2023. The acquisition of Nordic Lights contributed $0.9 million of net income and the impact of foreign currency translation increased net income by $0.3 million. Excluding Nordic Lights and foreign currency translation, net income decreased $32.7 million as a result of the reasons described above.

Current wording

Net loss was $18.3 million in the three months ended July 27, 2024, compared to net income of $0.9 million in the three months ended July 29, 2023. The net loss was a result of the reasons described above.

Previous wording

Net sales in North America decreased $26.2 million to $56.7 million in the three months ended January 27, 2024, compared to $82.9 million in the three months ended January 28, 2023. Excluding customer cost recoveries, net sales decreased $26.0 million primarily due to lower sales volumes from program roll-offs. Net sales in EMEA decreased $4.3 million to $52.0 million in the three months ended January 27, 2024, compared to $56.3 million in the three months ended January 28, 2023. The stronger euro, relative to the U.S. dollar, increased net sales in EMEA by $1.8 million. Excluding foreign currency translation and customer cost recoveries, net sales in EMEA decreased $5.9 million primarily due to lower sales volumes of sensor products. Net sales in Asia decreased $6.3 million to $31.0 million in the three months ended January 27, 2024, compared to $37.3 million in the three months ended January 28, 2023. The weaker Chinese renminbi, relative to the U.S. dollar, decreased net sales in Asia by $0.7 million. Excluding foreign currency translation and customer cost recoveries, net sales in Asia decreased $5.6 million due to a program roll-off and lower sales volumes of overhead consoles and lead-frame assemblies.

Current wording

Net sales in North America decreased $0.5 million to $66.3 million in the three months ended July 27, 2024, compared to $66.8 million in the three months ended July 29, 2023. The decrease was due to the roll off of legacy programs offset by new program launches. Net sales in EMEA increased $7.1 million to $59.3 million in the three months ended July 27, 2024, compared to $52.2 million in the three months ended July 29, 2023. The weaker euro, relative to the U.S. dollar, decreased net sales in EMEA by $0.7 million. Excluding foreign currency translation, net sales in EMEA increased $7.8 million due to increased demand for user interface and switch products, partially offset by lower sales volumes of sensor products. Net sales in Asia decreased $30.1 million to $9.2 million in the three months ended July 27, 2024, compared to $39.3 million in the three months ended July 29, 2023. The decrease was primarily due to a program roll-off and lower sales volumes of lead frame products.

Previous wording

Industrial segment net sales increased $56.0 million, or 19.5%, to $342.9 million in the nine months ended January 27, 2024, compared to $286.9 million in the nine months ended January 28, 2023. The increase was primarily due to the acquisition of Nordic Lights, which contributed $63.3 million of net sales, and favorable foreign currency translation of $2.2 million, partially offset by lower customer cost recoveries from spot buys of materials and premium freight costs of $3.5 million. Excluding the impact of Nordic Lights, foreign currency translation and customer cost recoveries, net sales decreased $6.0 million, or 2.1%, primarily due to lower demand for power distribution products in the electric vehicle and data center markets, partially offset by higher sales volumes of commercial vehicle lighting solutions products.

Current wording

Industrial segment net sales decreased $3.9 million, or 3.4%, to $111.5 million in the three months ended July 27, 2024, compared to $115.4 million in the three months ended July 29, 2023. Excluding foreign currency translation, net sales decreased $3.2 million. The decrease was primarily due to lower sales volumes for lighting products in the commercial vehicle and off-road equipment markets, partially offset by higher sales volumes of power distribution products for electric vehicle and data centers.

Previous wording

Industrial segment gross profit decreased $0.4 million, or 1.3%, to $30.3 million in the three months ended January 27, 2024, compared to $30.7 million in the three months ended January 28, 2023. The acquisition of Nordic Lights and favorable foreign currency translation accounted for $5.4 million and $0.1 million, respectively, of gross profit. Excluding the impact of Nordic Lights and foreign currency translation, gross profit decreased $5.9 million. Gross profit margins decreased to 28.3% in the three months ended January 27, 2024, compared to 33.7% in the three months ended January 28, 2023. Gross profit margins were impacted by product mix and higher operating expenses.

Current wording

Industrial segment gross profit decreased $2.8 million, or 7.9%, to $32.8 million in the three months ended July 27, 2024, compared to $35.6 million in the three months ended July 29, 2023. Excluding foreign currency translation, gross profit decreased $2.6 million. Gross profit margins decreased to 29.4% in the three months ended July 27, 2024, compared to 30.8% in the three months ended July 29, 2023. Gross profit margins were impacted by product mix.

Previous wording

Our liquidity requirements are primarily to fund our business operations, including capital expenditures and working capital requirements, as well as to fund debt service requirements, dividends and stock repurchases. Our primary sources of liquidity are cash flows from operations, existing cash balances and borrowings under our senior unsecured credit agreement. We believe our liquidity position will be sufficient to fund our existing operations and current commitments for at least the next twelve months. However, if economic conditions remain impacted for longer than we expect due to supply chain disruptions, inflationary pressure or other geopolitical risks, including the Russia-Ukraine war and Israel-Hamas war, our liquidity position could be severely impacted.

Current wording

Our liquidity requirements are primarily to fund our business operations, including capital expenditures and working capital requirements, as well as to fund debt service requirements, dividends and stock repurchases. Our primary sources of liquidity are cash flows from operations, existing cash balances and borrowings under our senior secured credit agreement. We believe our liquidity position will be sufficient to fund our existing operations and current commitments for at least the next twelve months. However, if economic conditions remain impacted for longer than we expect due to supply chain disruptions, inflationary pressure or other geopolitical risks, or if we are unable to maintain compliance with our debt covenants, our liquidity position could be severely impacted.

Previous wording

As of January 27, 2024, we had $122.9 million of cash and cash equivalents, of which $93.9 million was held in subsidiaries outside the U.S. Cash held by these subsidiaries is used to fund operational activities and can be repatriated, primarily through the payment of dividends and the repayment of intercompany loans, without creating material additional income tax expense.

Current wording

As of July 27, 2024, we had $111.3 million of cash and cash equivalents, of which $57.4 million was held in subsidiaries outside the U.S. Cash held by these subsidiaries is used to fund operational activities and can be repatriated, primarily through the payment of dividends and the repayment of intercompany loans, without creating material additional income tax expense.

Previous wording

The Board of Directors authorized a program to purchase up to $200.0 million of our outstanding common stock through June 14, 2024. Purchases may be made in private transactions or on the open market, including pursuant to purchase plans designed to comply with Rule 10b5-1 of the Securities Exchange Act of 1934. As of January 27, 2024, a total of 3,243,746 shares have been purchased at a total cost of $130.1 million since the commencement of the share buyback program. As of January 27, 2024, the dollar value of shares that remained available to be purchased under this share buyback program was $69.9 million.

Current wording

On March 31, 2021, as subsequently amended on June 16, 2022, the Board of Directors authorized the purchase of up to $200.0 million of our outstanding common stock through June 14, 2024 (the “2021 Buyback Authorization”). On June 13, 2024, the Board of Directors approved a new share buyback authorization, commencing on June 17, 2024, for the purchase of up to $200.0 million of our outstanding common stock through June 17, 2026 (the “2024 Buyback Authorization”). Purchases may be made on the open market, including pursuant to purchase plans designed to comply with Rule 10b5-1 of the Securities Exchange Act of 1934, or in private transactions. Prior to its expiration, a total of 3,553,961 shares were purchased under the 2021 Buyback Authorization at a total cost of $134.6 million. No further shares can be purchased under the 2021 Buyback Authorization. In the three months ended July 27, 2024, we did not purchase any shares under the 2024 Buyback Authorization. As of July 27, 2024, the dollar value of shares that remained available to be purchased under 2024 Buyback Authorization was $200.0 million.

Previous wording

As of January 27, 2024, the Company was not in compliance with the original consolidated leverage ratio covenant contained in the Credit Agreement for the quarter ended January 27, 2024. On March 6, 2024, we entered into a First Amendment to Second Amended and Restated Credit Agreement (the “Amendment”) with Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer, the other Lenders party thereto and other parties thereto. Among other things, the Amendment (i) amended the consolidated leverage ratio covenant for the quarter ended January 27, 2024 and each subsequent quarter through the quarter ending October 26, 2024, (ii) amended certain interest rate provisions and (iii) waived any default or event of default that may have occurred due to the non-compliance with the consolidated leverage ratio covenant for the quarter ended January 27, 2024 that was in effect prior to the Amendment. Following the effectiveness of the Amendment, we were in compliance with the consolidated leverage ratio covenant for the quarter ended January 27, 2024.

Current wording

On October 31, 2022, we entered into a Second Amended and Restated Credit Agreement (the “Credit Agreement”) with Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer, and the Lenders and other parties named therein. On March 6, 2024, we entered into a First Amendment to Second Amended and Restated Credit Agreement (the “First Amendment”) and on July 9, 2024, we entered into a Second Amendment to Second Amended and Restated Credit Agreement and First Amendment to Second Amended and Restated Guaranty (the “Second Amendment”) with Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer, the other Lenders party thereto and other parties thereto.

Previous wording

On October 31, 2022, we entered into a Second Amended and Restated Credit Agreement (the “Credit Agreement”) with Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer, and the Lenders and other parties named therein. The Credit Agreement amended and restated the Amended and Restated Credit Agreement, dated September 12, 2018 and as previously amended (the “Prior Credit Agreement”), with Bank of America, N.A., as Administrative Agent, Swing Line Lender, and L/C Issuer, Wells Fargo Bank, National Association, as L/C Issuer, and the Lenders and other parties named therein. Among other things, the Credit Agreement (i) increased the multicurrency revolving credit commitments under the Prior Credit Agreement to $750,000,000, (ii) refinanced in full and terminated the term loan facility under the Prior Credit Agreement, and (iii) made certain other changes to the covenants, terms, and conditions under the Prior Credit Agreement. In addition, the Credit Agreement permits us to increase the revolving commitments and/or add one or more tranches of term loans under the Credit Agreement from time to time by up to an amount equal to (i) $250,000,000 plus (ii) an additional amount so long as the leverage ratio would not exceed 3.00:1.00 on a pro forma basis, subject to, among other things, the receipt of additional commitments from existing and/or new lenders. The Credit Agreement matures on October 31, 2027.

Current wording

The Amended Credit Agreement provides for a secured multicurrency revolving credit facility of $500 million. In addition, the Amended Credit Agreement permits us to increase the revolving commitments and/or add one or more tranches of term loans under the Amended Credit Agreement from time to time by up to an amount equal to (i) $250 million plus (ii) an additional amount so long as the consolidated leverage ratio would not exceed 3.00:1.00 on a pro forma basis, subject to, among other things, the receipt of additional commitments from existing and/or new lenders. The Amended Credit Agreement matures on October 31, 2027.

Previous wording

Although we currently anticipate, based on our current projections and analyses, that we will be in compliance with the financial covenants contained in the Credit Agreement, as amended by the Amendment, no assurance can be given that we will be and remain in compliance with such covenants in the future. Factors that could increase our risk of future non-compliance include those identified in Part I – Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the year ended April 29, 2023.

Current wording

Although we currently anticipate, based on our current projections and analyses, that we will be in compliance with the financial covenants contained in the Amended Credit Agreement, no assurance can be given that we will be and remain in compliance with such covenants in the future. Factors that could increase our risk of future non-compliance include those identified in Part I – Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the year ended April 27, 2024.

Previous wording

Net cash provided by operating activities was $22.6 million in the nine months ended January 27, 2024, compared to $83.8 million in the nine months ended January 28, 2023. The decrease was due to lower net income adjusted for non-cash items. The $10.6 million of cash outflows for operating assets and liabilities in the nine months ended January 27, 2024 was primarily due to higher inventory, prepaid expenses and lower other liabilities, partially offset by lower accounts receivable and higher accounts payable.

Current wording

Net cash provided by operating activities was $10.9 million in the three months ended July 27, 2024, compared to net cash used in operating activities of $5.6 million in the three months ended July 29, 2023. The improvement was due to higher cash inflows from operating assets and liabilities. The $11.4 million of cash inflows for operating assets and liabilities in the three months ended July 27, 2024 was primarily due to lower accounts receivable and higher accounts payable, partially offset by higher inventory, prepaid expenses and lower other liabilities.

Previous wording

Net cash used in investing activities was $39.0 million in the nine months ended January 27, 2024, compared to $27.3 million in the nine months ended January 28, 2023. Capital expenditures were $41.1 million in the nine months ended January 27, 2024, compared to $30.8 million in the nine months ended January 28, 2023.

Current wording

Net cash used in investing activities was $13.6 million in the three months ended July 27, 2024, compared to $13.8 million in the three months ended July 29, 2023. The activity in both periods represented capital expenditures.

Previous wording

Net cash used in financing activities was $15.0 million in the nine months ended January 27, 2024, compared to $63.6 million in the nine months ended January 28, 2023. In the nine months ended January 27, 2024, we used $10.8 million of cash for the purchase of shares under our share buyback program, compared to $39.6 million in the nine months ended January 28, 2023. We paid cash dividends of $15.0 million in the nine months ended January 27, 2024, compared to $14.9 million in the nine months ended January 28, 2023. In the nine months ended January 27, 2024, we had net borrowings of $25.7 million, compared to net repayments of borrowings of $6.6 million in the nine months ended January 28, 2023. In addition, we paid $10.9 million for the purchase of redeemable noncontrolling interests related to Nordic Lights.

Current wording

Net cash used in financing activities was $48.2 million in the three months ended July 27, 2024, compared to net cash provided by financing activities of $12.5 million in the three months ended July 29, 2023. In the three months ended July 27, 2024, we used $1.6 million of cash for the purchase of shares under the 2021 Buyback Authorization, compared to no share repurchases in the three months ended July 29, 2023. We paid cash dividends of $5.1 million in the three months ended July 27, 2024, compared to $5.3 million in the three months ended July 29, 2023. In the three months ended July 27, 2024, we had net repayments of borrowings of $39.1 million, compared to net proceeds from borrowings of $31.9 million in the three months ended July 29, 2023. In the three months ended July 27, 2024, we paid $1.8 million of debt issuance costs associated with the Second Amendment. In the three months ended July 29, 2023, we paid $10.2 million for the purchase of redeemable noncontrolling interests related to Nordic Lights.