Methode Electronics, Inc. (MEI)

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Methode Electronics (MEI)

Q2 2013 Earnings Call

December 06, 2012 11:00 am ET

Executives

Donald W. Duda - Chief Executive Officer, President and Director

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

Analysts

Jimmy Baker - B. Riley & Co., LLC, Research Division

Joseph D. Vruwink - Robert W. Baird & Co. Incorporated, Research Division

Gregory M. Macosko - Lord, Abbett & Co. LLC

Presentation

Operator

Welcome to the Methode Electronics Fiscal 2013 Second Quarter Earnings Conference Call. [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, which is our annual and quarterly report. Such factors may include, without limitations, the following: 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 improve gross margins due to a variety of factors; ability to avoid design or manufacturing defects; ability to protect our intellectual property; ability to withstand price pressure; the usage of a significant amount of our cash and resources to launch new North American automotive programs; location 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; income tax rate fluctuations; ability to implement and profit from the 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. Thank you. Mr. Duda, you may begin.

Donald W. Duda

Thank you, Kevin, and good morning, everyone. Thank you for joining us today for our fiscal 2013 second quarter financial results conference call. I am joined today by Doug Koman, Chief Financial Officer; and Ron Tsoumas, Controller. Both Doug and I have comments, and afterwards, we will be pleased to take your questions. Methode's second quarter sales grew 12% to $130 million, and in the first six months of fiscal 2013, net sales increased nearly 10% to $249 million. In both periods, improved volumes are driven mainly by increased sales of the Ford center console program and lead frame assembly products, new product launches in our European Automotive business, torque-sensing products sales for e-bikes, motorcycles and ATB's, as well as higher appliance and data solution sales. These sales improvements were partially offset by softness in our Power Products segment. As we announced this morning, we received half of the fund coming [indiscernible] the other half in January of next year. We recorded the entire gain in the second quarter in the income from settlement section of the income statement. Including the impact of [indiscernible] second quarter net income is $5 million or $0.13 per share from, $0.01 last year and its first-half net income is $8.8 million or $0.23 per share compared to $0.05 last year. The earnings improvement was driven by higher overall sales volume, lower selling and administrative expenses, the one-time reversal of accruals related to a customer bankruptcy, higher other segment income, commodity pricing adjustments and lower legal expenses. Second quarter earnings were negatively impacted this year by higher cost related to the design, development, engineering and launch of the General Motors center console program, higher income tax expenses, absence of the gain on the acquisition of AMD, from which we've benefited last year, cost related to the delayed launch of the laundry program, as well as manufacturing efficiencies, lower sales and an unfavorable product mix within the Power Products segment. Loss related to the design, development and launch of the General Motors center console program for their next-generation truck platform lowered second quarter net income by approximately $2 million or $0.05 per share and lowered first half net income by $3.4 million or $0.09 per share. In fiscal 2013, we anticipate approximately $4.5 million in total launch cost for the program, with the majority of those cost having already occurred in the first half. Consolidated gross margins fell about 1% in the second quarter and less than 1% in the first 6 months compared to the same periods of last year. The decrease was due primarily to increased design development and engineering cost for the General Motors center console program, as well as increased sales of the Ford center console program, which carries a higher prime cost due to the high purchase content. Additionally, the delayed launch of the laundry program in the Interconnect segment, as well as manufacturing inefficiencies and an unfavorable product mix in the Power Products segment negatively impacted our second quarter and first half gross margins. The development launch cost for the General Motors center console program lowered Automotive second quarter gross margins by 2.5 percentage points and first 6 months gross margin by 2.2 percentage points. As I mentioned last quarter, we are successfully producing all of the decorative components for Ford's D Car platforms. However, due to higher-than-anticipated volumes of the U Car, we continue to utilize the outside suppliers to supplement our production in the second quarter. While our charges for inspection and freight were lower this quarter over last year, we anticipate incurring charges in the third quarter as we ramp up to meet towards demand.

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