Methode Electronics, Inc. (MEI)

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Methode Electronics (MEI)

Q3 2012 Earnings Call

March 01, 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

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

Presentation

Operator

Welcome to the Methode Electronics' Fiscal 2012 Third 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 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 technological 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 Chief Executive Officer for Methode Electronics.

Donald W. Duda

Thank you, Louis, and good morning, everyone. Thank you for joining us today for our fiscal 2012 third 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 nearly 10% in both the third quarter and first 9 months of fiscal 2012 compared to the same periods last year. The sales improvement was driven primarily by new product introductions and higher market penetration in our North American and Asian automotive business units. Sales gains were partially offset by declines in our Interconnect segment, a direct result of continued softness in the appliance market and the sale of our Optical business in the fourth quarter of last fiscal year.

We posted third quarter net income of $0.8 million or $0.02 per share compared to $5.9 million or $0.16 per share in the same quarter of last year. For the first 9 months of fiscal 2012, we had net income of $2.6 million or $0.07 per share compared to $9.4 million or $0.25 per share in the comparable period last year. For both periods of fiscal 2012, net income was negatively impacted by higher foreign income taxes. Additionally, the settlement of the Blue Angel dispute in the second quarter of fiscal 2011 skewed the year-over-year net income comparison in both the third quarter and first 9 month periods. Excluding the benefit for settlement of the Blue Angel dispute of $1.7 million in the fiscal 2011 period, Methode's net income was $4.1 million or $0.11 per share in last year's fiscal third quarter.

As in the last several quarters, design, development and launch costs in both our Automotive and Power Products segments continued to impact net income and gross margins. Additionally, vendor production and delivery issues and increased sales of products with higher prime cost further affected our North American automotive income. In total, the development and launch costs and vendor charges lowered our third quarter net income by approximately $3 million or $0.08 per share and lowered our gross margins by 2.7 percentage points. In the 9-month comparison, these costs and charges lowered net income by $6 million or $0.16 per share and lowered our gross margins by 1.8 percentage points.

While vendor production and delivery issues for the Ford Center Console Program impacted the first 9 months of fiscal 2012 by $3.1 million. The vertical integration project is on track which will alleviate this issue. That being said, we anticipate the vendor production and delivery issues will impact net income by approximately $0.6 million in the fourth quarter of fiscal 2012. Additionally, our Ford Center Console Program currently carries a higher prime cost due to the higher purchase content which reduced the program's overall gross margins. This should also be mitigated by the vertical integration.

We also incurred costs related to the design, development and launch of the General Motors Center Console Program. Thus far, in fiscal 2012, we have incurred $2.9 million for this program and anticipate another $1.3 million in the fourth quarter of this fiscal year and approximately $4.5 million in fiscal 2013 in total launch costs. These costs will also be absorbed as the product launches and revenue is realized. The majority of those costs being the first 2 quarters of fiscal 2013. While these costs are having an impact on our results now, this program which launches in the fourth quarter of fiscal 2013 has total anticipated revenue well in excess of $0.5 billion over the life of the program.

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