Methode Electronics, Inc. (NYSE:MEI) is a leading global supplier of custom engineered solutions with sales, engineering and manufacturing locations in North America, Europe, Middle East and Asia. Methode designs, engineers and produces mechatronic products for Original Equipment Manufacturers (OEMs) utilizing its broad range of technologies for user interface, light-emitting diode (LED) lighting system, power distribution and sensor applications. Methode's 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.

Financials

In the fourth quarter of fiscal 2024, Methode reported net sales of $277.3 million, down 8% from the prior year period. For the full fiscal year 2024, Methode reported net sales of $1,114.5 million, a 6% decrease from fiscal 2023. The decline in sales was primarily due to the roll-off of major automotive programs in North America and Asia, as well as continued softness in the e-bike market and some weakness in electric vehicle (EV) demand.

Methode's Automotive segment, which accounted for 52% of total revenue in fiscal 2024, saw net sales decrease 17.8% for the full year to $452.3 million. The decrease was driven by the roll-off of the major automotive programs, as well as lower sales volumes across all three of Methode's reporting regions - North America, Europe, Middle East and Africa (EMEA), and Asia. Gross profit margins in the Automotive segment declined to 6.9% in fiscal 2024, compared to 18.1% in the prior year, due to the lower sales volumes and operational inefficiencies, particularly in Methode's North American operations.

The Industrial segment, which accounted for 39% of total revenue, saw net sales increase 19.5% to $342.9 million in fiscal 2024, driven by the acquisition of Nordic Lights in April 2023. Excluding the impact of the Nordic Lights acquisition and foreign currency, Industrial segment net sales decreased 2.1% for the year. Gross profit margins in the Industrial segment declined to 30.3% from 32.9% in the prior year, impacted by product mix and higher operating expenses.

The Interface segment, which made up 4% of total revenue, saw net sales increase 1.3% to $39.6 million in fiscal 2024. Gross profit margins in the Interface segment improved to 19.4% from 16.9% in the prior year, driven by higher sales volumes of appliance products.

The Medical segment, which accounted for less than 1% of total revenue, was discontinued in the first quarter of fiscal 2024 with the sale of the Dabir Surfaces business.

Methode reported a net loss of $66.0 million, or $3.48 per diluted share, for fiscal 2024, compared to net income of $69.0 million, or $2.10 per diluted share, in the prior year. The net loss was driven by a $56.5 million goodwill impairment charge in the Automotive segment, as well as the lower sales volumes and operational inefficiencies, particularly in Methode's North American Automotive operations. Adjusting for the goodwill impairment, restructuring costs, and other one-time items, Methode's non-GAAP adjusted diluted EPS was a loss of $0.43 for the full year.

Methode's adjusted EBITDA, a non-GAAP measure, decreased 64% to $55.3 million in fiscal 2024, compared to $142.3 million in the prior year. The decline was driven by the lower gross profit, lower sales, and higher selling, general and administrative expenses.

Liquidity

On the cash flow front, Methode generated $47.5 million in net cash from operating activities in fiscal 2024, compared to $132.8 million in the prior year. Free cash flow, another non-GAAP measure, was a negative $2.7 million, compared to a positive $90.8 million in fiscal 2023. The decrease in cash flow was primarily due to the lower net income.

As of the end of fiscal 2024, Methode had $161.5 million in cash and cash equivalents, and $169.4 million in net debt, a non-GAAP measure. Methode was in compliance with its debt covenants as of the end of the fourth quarter, but proactively entered into an amendment to its credit facility agreement to provide further confidence in its ability to remain compliant over the next 12 months.

Outlook

Looking ahead, Methode provided guidance for fiscal 2025, expecting net sales to be similar to fiscal 2024 levels and adjusted pre-tax income to approach breakeven. Methode noted that the first quarter of fiscal 2025 is expected to be similarly negative to the fourth quarter of fiscal 2024, with gradual improvement and stronger performance in the second half of the year.

Methode's outlook for fiscal 2026 is more positive, with the company expecting net sales to be greater than fiscal 2025 and pre-tax income to be positive and notably higher than fiscal 2025. This improvement is expected to be driven by the ramp-up of new program launches, particularly in the EV market, as well as Methode's cost reduction initiatives.

Methode noted that it has a strong pipeline of new program awards, with $141 million in annual sales at full production awarded in the fourth quarter of fiscal 2024. These awards were primarily for power products associated with the EV skateboard architecture, as well as sensors, user interface, and solutions for applications in e-bikes, traditional automotive, and commercial vehicles. However, Methode acknowledged that the profile of these program awards and the pipeline are heavily weighted towards EV and are subject to reduction or delay due to customer decisions or market conditions.

Conclusion

In summary, Methode Electronics faced significant headwinds in fiscal 2024, with declining sales, profitability, and cash flow. Methode's Automotive segment, which is its largest business, was particularly impacted by the roll-off of major programs and operational inefficiencies. While Methode's outlook for fiscal 2025 remains cautious, it sees a path to returning to profitability and growth in fiscal 2026, driven by new program launches, cost reduction initiatives, and a recovery in the EV market. Investors will be closely watching Methode's execution on its turnaround plan and the company's ability to navigate the current market challenges.