Methode Electronics, Inc. (MEI)

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Methode Electronics, Inc. (MEI)

F2Q2011 Earnings Call Transcript

December 9, 2010 11:00 am ET


Don Duda – President and CEO

Doug Koman – VP, Corporate Finance and CFO


Jeremy Hellman – Divine Capital Markets

Keith Schicker – Robert W. Baird



Greetings and welcome to the Methode Electronics fiscal 2011 second quarter earnings presentation. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal 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 statement 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, the following

dependence on a small number of large customers, including two large automotive customers; dependence on the automotive appliance, computer and communications industries; seasonal and cyclical nature of some of our businesses; dependence on the availability, price, and risk of substitution or counterfeit of components and raw materials; ability to compete effectively; customary risks related to conducting global operations; ability to keep pace with rapid technology changes; ability to avoid design or manufacturing defects; ability to protect our intellectual property; ability to successfully benefit from acquisitions; currency fluctuations; unfavorable tax laws; 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.

Don Duda

Thank you Kristine, and good morning everyone. Thank you for joining us today for our fiscal 2011 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 today and afterwards, we will be pleased to take your questions.

This morning, I am pleased to report that the second quarter of fiscal 2011, Methode continued to post strong net sales, which improved 8.2% year-over-year, and 8.5% sequentially over the first quarter, led by improved sales in our Asian automotive and power product segments as well as in our North American and European semiconductor segments.

We achieved this revenue improvement despite the loss of the Delphi business, which represented 6.6 million in sales in the second quarter of last year, and planned lower legacy automotive products sales of 3.9 million. Excluding these two items from the year-over-year comparison, second quarter fiscal 2011 sales increased 18.6 million or in excess of 21% over the last year, which I believe reflects the true measure of our success.

For the first six months of fiscal 2011, net sales increased 8.8% compared to the same period of fiscal 2010. Excluding the loss of 14.1 million in sales to Delphi and planned lower legacy automotive products sales of 10.2 million, sales increased 40.9 million or almost 25%. As we announced this morning, Methode recorded an expense of 3.8 million in the second quarter for unsecured claims Methode had filed against Delphi in Delphi’s bankruptcy proceedings, which we sold to Credit Suisse in 2006 and they subsequently assigned to Blue Angel.

We recorded this expense as mandated by accounting rules, although we believe we have defenses to the complaint. This expense adds a considerable negative impact in earnings in the second quarter of fiscal 2011 and as a derivative of the unusual manner in which Delphi filed and served the preference complaints.

Additionally, we had several other charges and costs in the second quarter that makes an apples-to-apples comparison a little difficult. Doug will expand upon these in his discussion, but let me give you a brief overview.

Consolidated gross margins were 22.1% in both the fiscal 2011 and 2010 second quarters. Even though our sales increased year-over-year, gross margins in the second quarter remained constant due to the loss of sales to Delphi, which was a higher margin business line for us, and our negotiated program termination charge, which was part of the negotiations on a recent major program reward. For the same reason, consolidated gross margins were down 1% early in the first half of fiscal 2011.

Moving on to the segment results, in the second quarter, automotive segment sales were down 2.5% year-over-year, again mainly due to the loss of sales to Delphi and the planned lower legacy automotive product sales. If we take these two items out of the second quarter, automotive segment’s net sales increased almost 20%. Again excluding Delphi and legacy automotive, sales in six-month period, net sales increased over 25% year-over-year.

If we also exclude the planned transfer of manufacturing with the (inaudible) China, North American automotive segment sales increased 40% and Asian sales increased 63% in the second quarter. This was primarily the result of the upturn in the U.S. automotive market. Sequentially, the second quarter automotive sales were up more than 11% over the first quarter.

Automotive segment gross margins in the second quarter and first half were negatively impacted by the loss of the higher margin sales to Delphi as well as other charges and costs in the quarter. As we launch more programs, margins should improve.

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