Methode Electronics Inc (MEI) 2006 Q2 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Methode Electronics, Inc. second quarter fiscal year 2006 earnings conference call. [OPERATOR INSTRUCTIONS] Certain statements in this conference call containing information on Methode's second quarter reporting period for fiscal 2006 and offering guidance for its third quarter and full-year reporting period for fiscal 2006 are forward-looking statements that are subject to certain risks and uncertainties. The Company's results will be subject to many of the same risks that apply to the automotive, computer, and telecommunication industries, such as general economic conditions, interest rates, consumer spending patterns, and technological change.

Other factors, which may result in materially different results, include: Delphi Corporation's bankruptcy petition; other significant customer bankruptcy filings; restructuring operational improvement, and cost reduction programs currently under review by Methode; the current macroeconomic environment, including higher petroleum and copper prices affecting material and components used by Methode; potential manufacturing plant shutdowns by automotive customers; and significant fluctuations in the demand for certain automobile models.

In addition, market growth, operating costs, currency exchange rates, and devaluations, delays in development, production and marketing of new products, and other factors set forth from time-to-time in the Company's Form 10-K and other reports filed with the Securities and Exchange Commission may also affect the Company's results. The forward-looking statements in this press release are subject to the Safe Harbor protection provided under the securities law. All information in this conference call is as of December 8, 2005. Methode undertakes no duty to update any forward-looking statements to conform the statement to actual results or changes in the Company's expectations.

I will now turn the conference over to Mr. Donald Duda, Chief Executive Officer and President of Methode Electronics. Thank you, sir. You may begin your conference,

Thank you, Heidi. Good morning, everyone. Thanks for joining us today for our second quarter fiscal 2006 conference call. Most of you should have received our earnings results released earlier today. If not, you can obtain copies from the investor relations page on our website. With me are Doug Koman, Chief Financial Officer, and Bob [Kuehnau], Methode's Treasurer and Comptroller Also with us is Joey Iske, Director of Investor Relations. Feel free to contact Joey in the future if you have questions or need additional investor information. She can be reached at the number listed in the contact information section on our press release. Both Doug and I have comments today and, afterwards, we will be pleased to take your questions.

Methode completed the second quarter with sales of 116.3 million, a net income of 5.2 million or $0.14 per share. Without the effect of the Delphi bankruptcy, net income was 7.3 million or $0.20 per share, as compared to last year's second quarter sales of 99.7 million and net income of 6.5 million or $0.18 per share. Methode continues to perform in line with our expectations, notwithstanding the challenging operating environment of the domestic automotive industry. Doug will provide a more detailed discussion of the financials later in the call.

Moving forward to discuss the business segments, for the quarter Methode's Electronic segment increased sales year-over-year by 12%, excluding tooling. This increase is mainly as a result of increased shipments of our seat sensor products used in passenger-occupant protection systems and increased automotive switch sales in Europe. Increases also came from shipments of PCMCIA packages used in white area network products that enables the user to connect to the World Wide Web on a laptop computer anywhere cellular phone signals can be received. We are also receiving early sales for the new express card package, as well as seeing increased coding opportunities. While we believe interest will intensify for this new interface standard and the associated Methode products, we do not anticipate a significant increase in sales until the standard is integrated into mainstream procure hardware over the next 18 months.

In automotive, new programs are launched with General Motors, Mercedes, Nissan, Saab and Subaru for our seat sensor product. In Europe during the quarter, we launched new window lift switches for Alpha in Italy. In China we launched two switch bank lines for General Motors and anticipate launching several switches for [Cherry] Automotive for Shanghai in the 2008 model year. New program wins in the European automotive market include tailgate switches for Volvo and wheel switches for Jaguar, both products scheduled to launch in the 2008 model year. New auto business obtained in the U.S. includes switches and position sensors for DaimlerChrysler. In fact, Methode's cruise control switch will be the standard on over 80% of Chrysler's domestic vehicles beginning in the 2008 model year.

In Methode's other segment, orders remain strong and new business continues to be booked with OEMs for our power distribution products. Recently the group received a prototype order from a large U.S. medical equipment manufacturer, which repres -- represents a new market penetration for the group. As we indicate in our press release, our manufacturing facility in Shanghai, China is now operational. The transition to Mexico of the cable coproduct line acquired earlier this year is complete, and the business is meeting custom requirements out of Methode's Reynosa facility.

Both our trace laboratory facilities have added testing capabilities and are achieving modest sales increases. Our mid-west lab added sterile lithography prototyping capabilities. They've also been successful marketing lead-free testing, as companies move towards lead-free compliance in their products. This testing helps to determine the extent of certain problems associated with the manufacture of lead-free products, such as the presence of tin whisker particles. Our east coast lab has added x-ray capabilities, drinking and waste water testing, and is also offering lead-free analysis.

In our Optical segment, Methode's connectivity group in Dallas, Texas, had a strong sales quarter, in part bolstered by the launch of new mobile showroom. With reduced travel budgets and tight schedules, this traveling showroom makes us convenient for data center managers across the U.S. to see firsthand the unique cabling infrastructure solutions offered by Methode. We had an opportunity to tour the showroom model in Chicago in mid-November. It is an impressive display that will help generate increased sales of our data center wiring products. In addition, many of Methode's other interconnect solutions are on display, providing greater visibility for Methode's broad capabilities.

Looking at our third quarter, Methode expects to achieve third quarter fiscal 2006 sales between $86 and $91 million, and earnings per share in the range of $0.07 to $0.09, with fiscal year 2006 sales between $385 and $400 million and earnings per share in the range of $0.50 to $0.57, which reflects the second quarter's $0.06 Delphi bad debt provision.

At this point, I'll turn the call over to Doug for his financial review.

Thank you, Don. Let me start with sales for our three segments. All net sales numbers will exclude customer tooling sales, which were 5.2 million in the current quarter compared to 1.6 million last year, and 5.9 million in the current six-month period compared to 1.9 million last year. Our automotive businesses within the Electronic segment had second quarter net sales of 85.2 million compared to last year's 74.8 million, a 14% increase in sales year-over-year. The improvement is primarily the result of increased seat sensor sales, due to the government requirement that all model year 2006 vehicles sold in North America must have a passive-occupant protection system. Also sales increased because of new launches at our European automotive businesses. In the second quarter, we saw additional sales from our traditional American OEMs related to their employee pricing incentives and increased vehicle production, possibly as a hedge against the uncertainty regarding the Delphi bankruptcy filing.

For the six-month period, the automotive businesses had net sales of 154.2 million compared to 139.6 million last year, as in the quarter of the year-over-year improvement in the six-month period is primarily due to the increased seat sensor sales and new launches at our European automotive businesses. The nonautomotive businesses in the Electronic segment have first quarter net sales of 11.8 million in both the current quarter and last year. For the six-month period, these businesses had net sales of 23.6 million in fiscal -- in the current fiscal period and 22.6 million last year. In both the quarter and six-month period, we saw higher interconnect product sales from our Shanghai operation, as that manufacturing is now fully transferred to Singapore. The other businesses in this group were down slightly year-over-year.

The businesses in our Optical segment were flat year-over-year, with sales of 5.7 million currently, compared to 5.6 last year. For the six-month period, sales were 9.8 million compared to 9.4 million last year. Our U.S. operation was up, due to increased data center installations, while the Czech Republic operation was down, primarily because last year's period included a large one-time infrastructure sale. The other segment had first quarter sales of 8.4 million compared to 5.9 million last year. For the six-month period, sales were 16.8 million compared to 11.2 last year. In this segment, we had new sales from Cable Code Technologies; that's the recent acquisition. Also had increased organic sales of power distribution products and improved sales from our test laboratories, in part due to the expanding services for x-ray analysis and water testing.

Now let's look at the year-over-year changes for the line items on the consolidated income statement. Other income for the quarter is 333,000 compared to 190,000 last year. That increase is due to higher design engineering fees recorded at our European automotive business. For the six-month period, other income is -- is down slightly from last year. Again, the difference is primarily the timing of design engineering fees in Europe.

Cost of products sold for the quarter was 79.9% of net sales compared to last year's 78%. The increase is primarily due to increased material costs, primarily copper and various petroleum-based products, some predic -- production issues at our Shanghai facility and price reductions on our legacy automotive products. For the six-month period, cost of goods sells was 79.8% of net sales compared to 78.8 last year. As noted in the earnings release, in last year's quarter and six-month period, the cost of goods sold, we had incurred 1.3 million for costs related to impaired assets and other expenses related to closing manufacturing in Singapore. And also we had costs related to relo -- relocating tools from an insolvent molder.

Selling and administrative expense in the quarter was 14.3% of net sales compared to 12.8 last year. And for the six-month period, it was 14% compared to 13.1% last year. The year-over-year increase is primarily due to the provision for Delphi receivables being impaired, offset by lower stock-based compensation expense, because of the effect of our lower stock price on certain awards subject to variable accounting. We also showed lower legal expense in the period. Interest net is up year-over-year for both the quarter and six-month period, due to generally higher average cash balances and higher investment rates on those balances. Other income expense net for both the quarter and the six-month period reflects the impact of the strengthening dollar on our foreign operations.

Now looking at the balance sheet, accounts receivable is down slightly from year-end, reflecting the allowance made for Delphi receivables. This was offset by higher automotive and U.S. optical rec -- receivables in the second quarter. Inventory is up, due to our decision to advance the purchase several months of plastic resins as a hedge against anticipated shortages, due to the effects of Hurricane Katrina. Also for the building of finished goods inventory banks in anticipation of transferring certain automotive lines to Mexico and also we had increased automotive tooling inventory, primarily in China and Europe.

Goodwill is up, primarily due to approved contingent purchase price obligations on the seat sensor business. Intangible assets are relatively flat, as we recorded technology licenses signed in the first quarter, offset by some normal amortization in the six-month period. Accounts payable is up, primarily due to advanced purchase of the resin products. Other current liabilities are up because of higher income taxes payable and other normal accrual adjustments. Other liabilities are up slightly, due to normal reserve adjustments.

Looking at the cash flow statement, the change in cash provided by operating activities is primarily due to net income offset by working capital account changes, primarily accounts payable and accounts receivable and inventory, which we've already covered, and also due to the provision reported for impaired Delphi receivables. The change in cash used in investing activities is due to a deferred purchase price payment on our seat sensor business and up-front payments on technology licenses. We also had proceeds received from the sale of a building. The change in financing activities is due to fewer options exercised this year compared to last year and, also, because of the repurchase of a portion of the stock issued to the sellers of the Cable Code Technologies acquisition.

Don, that concludes my remarks.

Thank you very much. Heidi, we are ready for questions.

Thank you, sir. [OPERATOR INSTRUCTIONS] Our first question comes from the line of Kevin Sarsany. Please state your question.

Hello.

Good morning, Kevin.

You mentioned a new Cherry win and it starts in 2008. What is that for, and how big can that be? And can you talk about the opportunities in China?

Sure. It's for ergonomic switches within a Cherry platform for domestic Chinese consumption. It's not for export. It's -- I think when it launches, it's about $2 million a year. It's not significant. However, what is significant is its our first win with a Chinese OEM.

Okay. And any information on the Honda program? How that's going and where that stands?

We just had Honda in for a review in our Carthage facility of the line. Got very high marks for that. We have increased quoting opportunities with Honda, but nothing new to announce. And, again, I'm not -- I was not anticipating anything until this line was launched and we had, probably, the first year behind us. They have been carried over on one platform. Again, that's not significant but, as I said before, we need to prove ourselves, and we're approaching the time where we should be able to go back to Honda and see additional opportunities.

So when you say the opportunity to quote on things, is that a change in -- or more positive change in the relationship in your opinion?

Oh, absolutely. We wouldn't -- if we were having difficulty with the launch, we wouldn't even see the opportunity. Some of the opportunities, I believe, now have been more benchmarking, which is what we saw when we went after the [clasp spring] business originally. We were benchmarked for quite a while before we landed anything. So it's going according to plan. Honda's conservative, and we have to win their confidence.

Okay. And on the price reductions in the legacy North American business, has that gotten -- can you describe that relationship? Is it the Chrysler, Ford and GM getting more ask price pressure, or is it just quarter-after-quarter these legacy products just get one to 2% decrease in pricing and it's starting to show up in margins?

All of the above, I think. [ LAUGHTER ] It's a, you know -- and they have more pressure themselves. It puts more pressure on their suppliers. I've said before it, perhaps, has reached a plateau in that you're not seeing out-and-out demands for 10% price reductions. But they're probably as vigorous as ever on, an annual basis. Not something that you do every quarter, although occasionally you have something that comes up.

Is it still one to 2% price declines?

Yes, on an annual basis across the -- any given automaker, it probably averages around 2%. Higher in others and maybe nothing on some other products. But, yes, it has a certain -- it has a definite effect on margin.

Okay. And the last question, the AST business in Delphi, with Delphi in bankruptcy, it sounds like they're still doing pretty well. Are you seeing any change in pattern of buying from Delphi or their market share in the side passenger air bag systems?

No. No, nothing at all there, and we are obviously monitoring that very closely.

Okay. Thank you.

Thank you.

Thank you, sir. [OPERATOR INSTRUCTIONS] Gentlemen, it appears you have no further questions at this time.

Then, Heidi, we will conclude the call and wish everyone a safe and pleasant holiday season.

This concludes today's teleconference. Thank you for your participation, and you may disconnect your lines at this time.