Methode Electronics Inc. is bracing for the usual turbulence and poor visibility in several of its market segments but the components vendor appears well buffered by new design wins at major customers, improving manufacturing efficiencies and prospects for higher sales into the automotive markets. With quarterly sales surging the supplier of interconnects, power and other electronic sensing products is on track to close its current fiscal year with one of its best results in years.
There are many challenges ahead for the company, though. Visibility into market demand remains problematic in some industry sectors and it must as a result ensure its manufacturing operations are optimized to meet unexpected sales opportunities while simultaneously dodging spiraling costs associated with unanticipated order cutbacks.
While Methode (NYSE: MEI) battles pressures in interconnects and power markets, it is recording major design wins in the automotive sector where visibility remains strong on solid demand in Europe, North America and the Asia-Pacific region. In addition to the automotive gains, Methode’s management said they are intensifying efforts in non-automotive markets especially in areas where margins are fatter where they can also sell multiple products to customers. These markets, however, have the added challenge of low visibility and wild demand gyrations that could hurt operational performance and margins, admit company executives in statements to analysts.
“We don’t have visibility in non-automotive,” said Donald Duda, president and CEO of Methode during a conference call to discuss the company’s latest quarter results. “I’m not exaggerating when I say that a customer could call tomorrow and say I need products and they would expect us to ship it immediately. These non-automotive businesses are very important to us because we introduce new products at higher margins so our margins will improve in that area.”
In the fiscal third quarter ended Feb. 1, Methode reported strong rise in year-over-year sales and profits and projects the entire fiscal year would improve sharply from the previous period. Nevertheless, some analysts were disappointed didn’t hit their elevated forecasts and there are signs the company itself is uncertain about how the current calendar year will unfold in Europe. Nevertheless, previous actions taken by Methode to gain new businesses and operational improvements should position it well for gains as conditions improve, according to company executives.
"In the third quarter, revenue grew 54 percent, earnings per share improved over fourfold and gross margins increased 400 basis points. Year over year, first nine-month revenue grew over 47 percent, earnings per share improved over fourfold, excluding last year's legal settlement, and consolidated gross margins improved 360 basis points,” Duda said in a statement announcing the latest results. "Comparing the third quarter to the second quarter, operating and selling and administrative expenses as a percentage of sales were about 1.1 percent higher, primarily the result of salary expense during the holiday shutdowns, which impacted our margins. Further, in the Interconnect and Power Product segments, lower sequential sales, unfavorable sales mix and increased development expenses affected our profitability. We expect similar results for these segments in the fourth quarter."
Methode has scored some major wins at several automotive companies in the last year and predicts sales from these programs should increase substantially as they ramp production, boosting sales and leading to further improvements in operating margins. The company is a major supplier to General Motors and is currently building a console for some of the American automaker’s SUVs in addition to other wins at Ford Motor Co., Tesla and other manufacturers in Europe (BMW) and Asia.
The new contracts, which include consoles, battery connectors and a roll-stabilization system expected to replace BMW’s current hydraulic unit, are already contributing heavily to Methode’s sales improvements and this is expected to accelerate in coming years. The company said automotive sales rose 74 percent in the just-ended fiscal third quarter and 59 percent for the first nine months of fiscal 2014, lifted by “new program launches in Europe and higher sales in Asia.”
Although the automotive business reported the strongest sales improvement during Methode’s latest quarter other units also posted solid revenue increases. Sales of power products rose 41 percent, on a jump in demand for by-pass switch and electric busbar in Europe and Asia, where revenue increased 329 percent and 36 percent, respectively. Power sales in North America rose approximately 19 percent, the company said.
The interconnects business did not perform as well as the other two divisions but it still posted a 29 percent rise in sales on strong demand in North America from appliance, data solutions and radio remote control equipment manufacturers. The unit reported a 23 percent decrease in sales in Asia “driven by lower legacy product sales due to the planned exit of a product line,” Methode said.
Analysts expressed concerns both about the performance of Methode’s interconnects and power divisions but also noted the wide range the company offered for fiscal 2014 revenue, which it forecasts would be between $720 million and $750 million. With only two months left to the fiscal year as at when Methode provided the forecast analysts thought the range would narrower.
“The low end of the guidance reflects our concern regarding stabilization of the European economy as well as softening in our Interconnect and Power Products segments and possible production delays of new products,” said Methode’s Duda in the press statement. “The high-end of the range anticipates stabilization in Europe and higher domestic automotive revenues.”