Methode Electronics, Inc. (MEI)

MEI 
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Methode Electronics (MEI)

Q4 2011 Earnings Call

June 30, 2011 11:00 am ET

Executives

Douglas Koman - Chief Financial Officer, Principal Accounting Officer and Vice President of Corporate Finance

Donald Duda - Chief Executive Officer, President and Director

Analysts

Joseph Vruwink - Robert W. Baird & Co. Incorporated

Jeremy Hellman - Singular Research

Gregory Macosko - Lord Abbott

Presentation

Operator

[Audio Gap]

to the Methode Electronics Fiscal 2011 Fourth Quarter and Full Year Earnings Presentation. [Operator Instructions] As a reminder, this conference is being recorded. This conference call does contain certain forward-looking statements, which reflects management's expectations regarding future events and operating performances, 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 statements to conform the statements 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 annual and quarterly reports. Such factors may include, without limitations: dependence on a small number of large customers, including 2 large Automotive customers; dependence on the automotive, appliance, computer and communications industries; further downturns in the automotive industry or the bankruptcy of certain Automotive customers; ability to compete effectively; customary risks related to conducting global operations; dependence on the availability and price of raw materials; dependence on our supply chain, ability to keep pace with rapid technological changes; ability to avoid design or manufacturing defects; ability to protect our intellectual property; ability to withstand price pressure; allocation of a significant amount of cash outside of the U.S.; currency fluctuations; ability to successfully benefit from acquisitions and divestitures; ability to withstand business interruptions and unfavorable tax laws; ability to implement and profit from newly acquired technology; and the future trading price of our stock.

It is now my pleasure to introduce your host, Don Duda, President and Chief Executive Officer for Methode Electronics. Mr. Duda, you may begin.

Donald Duda

Thank you, Diego, and good morning, everyone. Thank you for joining us today for our fiscal 2011 fourth quarter and full year financial results conference call. I'm joined today by Doug Koman, Chief Financial Officer; and Ron Tsoumas, Controller. Both Doug and I have comments today, and afterwards, we will be pleased to take your questions.

Our strong sales performance in the fourth quarter and fiscal year 2011 demonstrates the continuing success of our strategy to offer customers system solutions with brand-differentiating technology. With over 23% sales growth for the quarter, we continued the momentum we established last year, ending with over 13% sales growth for the year. Adjusting the fiscal 2011 results for the loss of sales to Delphi and planned lower sales of legacy automotive products, which together totaled $32.3 million in fiscal 2010, consolidated sales in fiscal 2011 increased 24%. A key point is that in just one short year, we have rebuilt Methode's revenue from a 7-year low of $378 million in fiscal 2010 despite the reduction of legacy automotive products and the loss of the Delphi business and accomplishments all Methode employees should be very proud of.

As we reported in this morning's release, in March, we sold Methode's 75% ownership in Optokon, a fiber-optic interconnect company in the Czech Republic to the minority shareholder for $10 million resulting in a gain net of taxes of $0.6 million or $0.02 per share. Additionally, we had a number of expenses and benefits in the fourth quarter and year, which Don will expand upon in his discussion.

For the fourth quarter, consolidated gross margins were 21.7% compared to 23.3% a year ago. And for the year consolidated gross margins were 20.8% compared to 21.2% in fiscal 2010. In both periods of 2011, vendor production and delivery issues, as well as higher designing, developing and engineering costs to support production -- to support products expected to launch in fiscal 2013, negatively impacted results. Additionally, full year gross margin were negatively affected by the loss of the Delphi business, which was a higher-margin business line for us.

We are taking steps to rectify our vendor production and delivery issues. Specifically, these issues relate to an intricate paying for automotive center consoles. Although we put in place a number of fixes and process improvements at the suppliers between the third and fourth quarters, as I said, these parts are particularly complex. As such, we are not going to receive consistent automotive quality from any supplier, at least not in high volumes.

For that reason, we have decided to vertically integrate a portion of these processes. That being said, this is vertical integration we have planned to make prior to launching the GM consoles expected to launch this fiscal 2013 but have decided to implement sooner based on the issues we are currently having, which we anticipate will have a $1.5 million to $2.5 million effect on Methode's fiscal 2012 income.

It's our intent to have our in-house capabilities online as we enter fiscal 2013. Capital cost to vertically integrate the paint processes are likely to be $10 million to $15 million, depending on how much qualified used equipment is available. That estimate is still preliminary.

Moving now to segment results. In the fourth quarter, Automotive segment net sales increased over 38% due to higher sales in our transmission lead frame and steering angle sensor products, as well as from the MyFord Touch center console program. Sales in Asia grew 44%. In North America, sales grew 160%. But bear in mind, that business was down to very little due to the exit of legacy automotive products in North America and the loss of the Delphi business. For the year, Automotive segment sales increased 11%, but were negatively impacted by the loss of sales to Delphi and the planned lower sales of legacy Automotive products. If we take out these 2 items, Automotive segment sales increased over 32% in fiscal 2011 compared to 2010.

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