Methode Electronics, Inc. (MEI)

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Methode Electronics (MEI)

Q2 2012 Earnings Call

December 08, 2011 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

David Leiker - Robert W. Baird & Co. Incorporated, Research Division

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

Jeremy Hellman - Divine Capital Markets LLC, Research Division

Presentation

Operator

Welcome to the Methode Electronics' Fiscal 2012 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 performance and speaks 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 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 technology changes; 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; 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 CEO of Methode Electronics.

Donald W. Duda

Thank you, and good morning, everyone. Thank you for joining us today for our Fiscal 2012 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.

On a consolidated basis, net sales grew over 7% in the second quarter and nearly 10% in the first half of fiscal 2012 compared to the same period last year. The sales improvement was driven by organic growth in our North American and Asian Automotive business units as well as increased power product demand in North America, as well as Asia.

These results reflect the impact of our new product introductions and higher market penetration. Sales gains were partially offset by sales declines in our Interconnect segment, a direct result of continued softness in the appliance market.

We posted second quarter net income of $0.3 million or $0.01 per share compared to a loss of $0.5 million or $0.01 per share in the second quarter of last year. For the first half of fiscal 2012, we have net income of $1.8 million per share or $0.05 per share compared to $3.6 million or $0.10 per share in the comparable period last year. For both periods of fiscal 2012, net income was negatively impacted by foreign income taxes. In the fiscal 2012 second quarter, income tax expense increased $1.4 million, primarily related to income taxes on foreign profits and a foreign dividend on money we transferred out of China.

Also impacting net income and gross margins in both periods were design, development and launch costs in both our Automotive and Power Products segments. Vendor production and delivery issues and increased sales of products with a higher prime cost further affected North American Automotive income.

In total, the development and launch costs and vendor charges lowered our second quarter net income by approximately $2.3 million or $0.06 per share and lowered our gross margin by 2 percentage points.

Now as I stated in the past, we see the opportunity for meaningful improvement in our margins once the vertical integration project is complete and we reach full launch of a few major programs in fiscal 2014.

Some additional detail on the major items that impacted our results. First, we incurred costs related to the vendor production and delivery issue of $0.7 million in the second quarter. As we announced in September, we closed on the acquisition of an injection molding and painting operation in Monterrey, Mexico. This acquisition and the vertical integration of these critical processes will be a key step in mitigating the vendor issue.

We anticipate investing approximately $7.4 million in additional capital to complete the vertical integration process. And again, we believe this vertical integration will not only enhance quality, mitigate supply risk but also improve our gross margins on the production of center consoles. We are on track in attempt to complete the integration of the operation by the end of fiscal 2012. That being said, we anticipate the vendor production and delivery issues will impact net income by approximately $1.3 million for the remainder of fiscal 2012.

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