Methode Electronics, Inc. (MEI)

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Methode Electronics (MEI)

Q3 2011 Earnings Call

March 03, 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

Jeremy Hellman - Singular Research

Joseph Vruwink

Presentation

Operator

Greetings, and welcome to the Methode Electronics Fiscal 2011 Third Quarter Earnings Presentation. [Operator Instructions]

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; rising crude oil prices may result in higher costs for resin and other petroleum-based material; ability to compete effectively; customary risks related to conducting global operations; ability to keep pace with rapid technological changes; ability to avoid design or manufacturing defects; currency fluctuations; ability to protect our intellectual property; ability to successfully benefit from acquisitions; unfavorable tax laws; the future trading price of our stock; and the risk of owning real property.

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

In the third quarter of fiscal 2011, Methode achieved solid sales improvement, with sales up 13.7% compared to the same period last year, and 10.4% for the nine-month period. In our Automotive segment, we experienced higher sales in our transmission lead frame, and steering-angle sensor products, as well as from the MyFord Touch center console program. Our Power Products segment also had strong sales. Interconnect sales were down, primarily as a result of Whirlpool, significantly reducing their requirements for TouchSensor products during the quarter, as a result of lower appliance sales. Adjusting the nine-month results for the loss of sales to Delphi, and planned lower sales of legacy Automotive products, which together totaled $24.3 million, consolidated sales in the nine months of fiscal 2011 increased 21%.

As we announced this morning, Methode settled the Blue Angel matter for $2.1 million. This resulted in a $1.7 million reversal off the $3.8 million expense we recorded in the second quarter, resulting in a benefit to net income in the third quarter, but a negative impact on earnings in the nine-month period. Additionally, we have several expenses and benefits in the third quarter and nine-month period that make an apples-to-apples comparison a little difficult. Doug will expand upon these in his discussion.

Consolidated gross margins were 19.2% compared to 17.2% a year ago. This was attributable mainly to higher sales, as well as margin improvement in our Automotive segment, partially offset by manufacturing inefficiencies related to multiple product launches, which I will talk about more in a moment.

In the first nine months, consolidated gross margins were 20.7% in both this year's and last year's period. Even though our sales increased year-over-year, gross margins remained constant due to loss of sales to Delphi, which was a higher margin business line for us, as well as other charges and costs that Doug will discuss shortly. While we believe the particular vendor supply and delivery issues we experienced in the second and third quarters have been resolved, we may, however, continue to experience manufacturing inefficiencies in the next few quarters due to multiple product launches, as well as component shortages, which also hamper our production efficiencies.

Some additional detail on the segment results. In this third quarter, Automotive segment sales improved over 20% year-over-year. As I mentioned, this was due to higher sales in our transmission lead frame and steering-angle sensor products in Asia, and the MyFord Touch center console program here in North America. Sequentially, we saw a 4% drop in overall Automotive sales from the second quarter due to seasonality, as December is typically our slowest month of the year, as well as the aforementioned drop in European sales.

Sales were up close to 3% in the Automotive segment in a nine-month comparison, 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 two items, Automotive segment sales increased almost 23% in the first nine months of fiscal 2011 compared to 2010. The planned transfer of the manufacturing of the T-76 lead frame product from the U.S. to China skewed our North American Automotive segment sales for the nine-month period. Excluding the loss of sales of Delphi, the planned lower sales of legacy Automotive products and the transfer of the T-76 business, North American Automotive segment sales were up about 37% in the first nine months, primarily the result of the continued launch of the MyFord Touch center console program.

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