Methode Electronics reports loss from tax legislation

By Alexa Adler
Medill Reports

Shares of Methode Electronics Inc., a global developer of custom-engineered and application-specific products and solutions, plunged 4.94 percent after the company reported a loss of 65 cents per share for the third quarter of its 2018 fiscal year, as compared to 63 cents per share of earnings for the comparable prior-year period.

The loss largely resulted from a $1.52 per share charge related to the recent tax reform legislation. The company failed to meet Wall Street expectations, as compiled by Yahoo Finance, of earnings of 66 cents per share.

The company’s net income for the quarter ended Jan. 27 fell to a loss of $24.3 million from the year-earlier quarter net income of $23.7 million, despite a $32.4 million, or 16.6 percent, period-over-period increase in net sales to $228.0 million from $195.6 million.

In a press release, Methode attributed its higher net sales for the quarter primarily to a $34.5 million, or a 22.9 percent, increase in automotive net sales, driven primarily by the impact of two recent acquisitions, Pacific Insight and Procoplast, which increased net sales in North America and Europe, respectively.

Methode Electronics, Inc. Graph
Methode Electronics Inc. net sales and net income. (Alexa Adler/MEDILL)

Gross margin decreased in the quarter to 26.4 percent from 27.3 percent in the prior-year period, as a result of an unfavorable sales mix resulting from the Pacific Insight and Procoplast acquisitions, warranty expense, unfavorable currency impact, and pricing reductions in the company’s automotive and interface products.

Net income for the first nine months of decreased to $20.4 million, or 54 cents per share, from $69.7 million, or $1.86 per share, for the prior-year period, also largely due to the tax charge. Net sales for the nine months increased 10.5 percent to $659.3 million from $596.7 million in the comparable period of last year, primarily as a result of higher automotive and power product sales.

In the release, the company attributed the tax charge to a one-time $52 million repatriation tax and a $4.2 million charge for revaluing U.S. deferred tax assets.

Commenting in the release on the impact of taxes on the company, Methode’s CEO Donald W. Duda said, “While tax reform will not dramatically change Methode’s tax rate, we believe it will provide greater flexibility in how we manage our cash internationally.”

Methode reduced its 2018 earnings per share guidance to a range of $1.23 to $1.33 from $2.43 to $2.63, as a result of the tax charge, and increased its sales guidance to a range of $900 million to $910 million from $880 million to $900 million, largely as a result of increased automotive sales.

In New York Stock Exchange trading, on a day when the Dow Jones Industrial Average was down 1.68 percent, Methode’s shares closed at $37.50, down $1.95.

During a conference call with analysts, in response to a question from an analyst at B. Riley/FBR, Duda expressed confidence that he could increase the margin levels at newly-acquired Pacific Insight and Procoplast to the company’s norms within 12 to 18 months.

Responding to a question from an R.W. Baird representative, Duda said the company’s Dabir Surfaces medical device product, designed to prevent impact ulcers in incapacitated patients, adaption of which has been slower than originally anticipated, has been purchased by five hospitals in the last six months, and expressed his belief in the success of this product over time.

Photo at top: Image taken from the website of Methode Electronics Inc.