Methode Electronics Inc (MEI) 2006 Q3 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Methode Electronics Incorporated Third Quarter Fiscal Year 2006 Earnings Conference Call. [OPERATOR INSTRUCTIONS] Certain statements in this conference call on March 9, 2006, containing information on Methode's third quarter reporting period for fiscal 2006 and offering guidance for its fourth quarter and full-year reporting periods for fiscal 2006 are forward-looking statements that are subject to certain risks and uncertainties. Our business is highly dependent upon three large automotive customers and specific makes and models of automobiles. The company's results will be subject to many of the same risks that apply to the automotive, computer, and telecommunications industries such as general economic conditions, interest rates, consumer spending patterns, and technological changes.

Other factors which may result in materially differing results for future periods 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 macro economic environment , including higher petroleum and copper prices affecting material and components used by Methode, potential manufacturing plant shutdowns by automotive customers, potential strikes of automotive customers, and significant fluctuations in the demand for certain automobile models.

In addition, market growth, operating costs, currency exchange rates and devaluation, delays in development, production and marketing new products, and other factors set forth from time to time in our reports filed with the Securities and Exchange Commission impact our business. Any of these factors could cause our actual results to differ materially from these described in forward-looking statements.

The forward-looking statements on this conference call are subject to the Safe Harbor protection provided under the securities laws. All information on this conference call is as of March 9, 2006.

Methode undertakes no duty to update any forward-looking statement to conform to 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. Sir, you may now begin your conference.

Thank you Jen. Good morning everyone. Thank you for joining us today for our third 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'sTreasurer and Controller. 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. He 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 its third quarter with sales of 95.1 million and net income of 2.8 million or $0.08 per share. This compares to last year's second quarter results of 92.4 million in sales and net income of 4.7 million or $0.13 per share. Sales were up for the third quarter and first nine months of 2006 fiscal year in our electronics segment. This increase is mainly from sales of our occupant weight sensing product, European automotive sales, and PC card sales for wireless applications. Increased sales were also generated from our other business segments primarily from bus bar and power cable sales. Sales were above our previously reported guidance, however earnings did not keep pace.

Methode is faced with many of the same challenges as other manufacturers, increased raw material and energy costs, continued pricing pressure around the globe, and lower U.S. production volumes from Detroit automakers. As an example, Comex copper prices again climbed n the quarter and reached $2.26 per pound, up over 7.5% from last quarter, a 37% increase since the start of fiscal year 2006, and up three-fold from two years ago when it was $0.77 per pound. While these challenges may be with us for some time, we believe there are near-term opportunities for margin improvement. Specifically in our Shanghai and European operations. I'll walk you through these.

We consider our Shanghai operations to being varying degrees of start-up. Each business, Interconnect, Power Distribution, and Automotive, continue to develop infrastructure and add product lines. All essential to establishing a solid foothold in the Chinese market. As we continue to develop this market, it is anticipated that these costs will continue for the near-term. That said, our plan is on track and we expect these investments to reach profitability. For example, Methode's start-up Power Distribution business in China has been qualified by several major OEMs. Products are being shipped and we expect to see increased revenue contribution from this business in the fourth quarter of this current fiscal year with profitability in early fiscal year 2007.

In Europe, our Scotland automotive facility has continued to perform poorly as a result of problem launches and has been a significant drain on earnings. We recently took more aggressive steps to address these issues by transferring operational control of this facility to our Malta Business Unit, while implementing several redundancies within Scotland's management. For those of you not familiar with the Malta operation, it is a world class, full service automotive supplier designing and manufacturing electromechanical switches, electronic controls, and sensors for OEMs worldwide. Major customers include Volvo, BMW, Alpha, Volkswagen, Audi, and Saab. The Malta team has already made significant improvement in Scotland's customer service and supplier management.

Domestically, power bus bar orders in the U.S. remain strong and new business continues to be booked with major OEMs. Our power cabling business acquisition, Cableco, increased our revenue base over last year and is now enhancing bottom line performance.

On the new product front, we have combined our expertise in high current bus bar and power cable systems to develop a product called Power Rail. It uses a bus bar and a high power cable interconnect system capable of quick connect and disconnect. The modular design allows customers to use standard components to customize a complete high current power distribution system from 200 to 2,000 amps. This patented product is being introduced at the Applied Power and Electronic Conference in Dallas this month and we expect the product to be well received.

Also in North America, sales of optical products slowed for the quarter as several customers delayed capital spending three to six months. We are optimistic that these sales were not lost, but merely pushed out to the fourth quarter of this fiscal year and into the early part of our next fiscal year.

In our electronics segment, our investment in new PCMCIA and Express Card packaging is coming to fruition. Our decision to invest in the infrastructure to manage - - or to manufacture these products in Shanghai, along with increasing our sales and marketing capabilities, has allowed our teams to penetrate troubled multinational accounts. As a result, the business we anticipated in the North American and European memory and wireless broadband markets is now being booked. At the current booking rate we expect this business to double during the coming 12 months. This adds further support that our investments in China will reach profitability.

Sales of our occupant weight sensing product remain solid in the third quarter. From time to time I've mentioned that Methode is a world-class manufacturer. Today I'm pleased to inform you that our Monterrey, Mexico facility, which produces the weight sensing product has been awarded the coveted Shingo Prize for Excellence in Manufacturing. The prize was established in 1988 to promote awareness of lean manufacturing concepts and to recognize companies in the United States, Canada, and Mexico that achieve world-class manufacturing. The Monterey plant has been in operation for four years and has embraced lean manufacturing concepts for the past two years. During this time, the plant has achieved substantial improvements in quality, cost, and delivery, such as 100% on-time delivery, a 99% reduction in customer PPMs, 31% up-time improvement, and a 76% scrap reduction. Also, parts produced per person have increased by 130%. We congratulate the plant on their efforts and look forward to their future contributions to Methode.

Moving forward, Methode expects to achieve fiscal year 2006 sales results between 405 and 410 million. Fiscal year 2006 earnings per share are expected to be in the range of 0.53 to $0.55, which reflects the second quarter $0.06 per share Delphi bad debt provision, but does not include the potential tax expense for any cash repatriation under the American Jobs Creation Act of 2004, which we continue to analyze and evaluate. At this time I will turn the call over to Doug for further financial review and his comments.

Thanks, Don. As usual, let me start with sales for our segments. All the sales numbers will exclude customer tooling sales on a consolidated basis that was 2.9 million for the current quarter compared to 2 million last year. For the nine months, tooling sales were 8.8 million compared to 3.9 million last year.

Our automotive businesses within the electronics segment had third quarter net sales of 69.3 million compared to last year's 67.3. That's a 3% increase in automotive sales year-over-year. For the nine-month period the automotive businesses had net sales of 223.4 million compared to 206.9 million last year. That's an 8% increase year-over-year.

For both the quarter and nine-month periods, the year-over-year improvement is primarily due to increased occupant weight sensing product sales and new launches at our European automotive businesses. The automotive businesses in the electronics segments were generally flat year-over-year. Third quarter net sales were 10.3 million in the current quarter, down slightly from the 10.8 million last year. And for the nine-month period, these businesses had net sales of 33.9 million in the current nine-month period compared to 33.4 million last year.

The businesses in our optical segment were down year-over-year with sales of 3.5 million in the current quarter compared to 6.3 million last year. As Don mentioned earlier, this was due to the deferral of many data center capital projects by our customers. For the nine-month period sales were 13.4 million compared to 15.7 last year. The decrease here is primarily because last year's nine-month period included a large one-time infrastructure sale at our Czech Republic business.

The other segment had first quarter - - or third quarter net sales of 9 million compared to 6 million last year. For the nine-month period sales were 25.8 million compared to last year's 17.2 million. In this segment we had new sales from the Cableco Technologies acquisition, also had increased sales of power distribution products with two large OEMs and improved sales from our test laboratories, in part due to expanding the service offering to include 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 103,000 compared to 373,000 last year. The decrease is due to less design engineering fees earned at our European automotive businesses and lower joint venture income as the JV product nears end of life. For the nine-month period the income is 661,000, that's down from 1.2 million last year. Again, the difference is the design engineering fees and the joint venture.

Cost of product sold for the quarter was 18 - - or 81.6% of net sales, compared to 77.8% last year. For the nine-month period, cost of goods sold was 80.4% of net sales compared to 78.5 last year. The increase is primarily due to price reductions on our legacy automotive products and also lower unit sales of those products, increased material costs, primarily copper and various petroleum-based products, launch issues in our Scotland operation, and start-up and new product launches at our Shanghai facility.

Selling and administrative expense in the quarter was 13.9% of net sales compared to 15.3% last year. This is primarily due to lower third-party SOX audit and consulting expense recorded in the quarter. For the nine-month period, selling and administrative expense was 14% of net sales compared to 13.8% last year. In the nine-month period the lower third-party SOX expense was offset by the charge for impaired Delphi receivables, higher intangible asset amortization, and higher stock-based compensation expense.

Interest net was 647,000 for the quarter compared to 326,000 last year. And it was 1.9 million for the nine-month period compared to about 700,000 last year. This is the result of higher investment rates on cash balances.

Other net was an expense of 719,000 for the quarter compared to 248,000 in last year's quarter, and for the nine-month period was an expense of 625,000 compared to 385,000 last year. For both the quarter and the nine-month periods, reflects a charge for a building which was put up for sale in the period and was written down to its realizable value, and also the impact of foreign currency losses at our foreign operations is reflected in this line.

Now looking at the balance sheet. Accounts receivable is down from year-end, which is primarily the result of the extended plant shutdowns in December and January by several of our automotive customers. Inventory is up, primarily because of our decision to advance purchase several months of plastic resins as a hedge against the anticipated shortages because of the 2005 hurricanes. We have also been building finished goods inventory in anticipation of transferring certain lines to Mexico, and also increased automotive tooling inventory primarily in China and Europe, corresponding to the new launches.

Other current assets increased due to increased deferred taxes. That's primarily related to the charge for the impaired Delphi receivables. And we also increased prepaid expenses. That's primarily because of insurance.

Goodwill is up primarily due to accrued contingent purchase price obligations on the occupant weight sensing business, and the acquisition - - acquisitions of the power cable and drinking water businesses. Intangible assets were reduced as normal amortization over the first nine months offset the increase for the technology licenses signed in the first quarter. Other assets increased because of the change in cash surrender value of life insurance policies and also because of change in deferred income taxes. Accounts payable is down from year-end, which is primarily related to the extended plant shutdowns in December and January by automotive customers. Other current liabilities are down because of income taxes paid in the quarter and other normal accrual adjustments. Other liabilities are basically unchanged from year-end.

On 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, accounts receivable, and inventory, the provision recorded for impaired receivables and the change in the provision for deferred income taxes, including the effect of the timing difference on the provision for impaired Delphi receivables. The change in cash used in investing activities is due to a deferred purchase price payment on our occupant weight sensing business, up-front payment on the technology licenses, and 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 repurchase of the portion of the stock issued to the sellers of Cableco Technologies under the terms of the purchase agreement. Don, that's all I have for now.

Thank you very much, Doug. Jen, we are ready for questions.

Thank you. [OPERATOR INSTRUCTIONS] Our first question comes from David Leiker with Robert W. Baird.

Good morning.

Good morning, David.

I'll start first with a number of questions on the revenue side. Is there a way you could break out for us your revenue contribution from revenue from currency and from acquisitions? In the quarter?

Sure. We - - for the quarter, it was - - hold on a minute. We've got it here.

Got it handy, Don?

I think it was - - here it is. In the quarter it was 1.3 million decrease to sales. And for the nine-month period it was 1.4 million.

For currency?

For currency.

And what about acquisition? What did that add in revenue line?

The acquisitions, Cableco and the water testing, probably a little over 2 million. And that's for the quarter.

Okay. And then your royalty income line keeps coming down pretty meaningfully. I mean is that - - where's the long-term trend in that? Is that just patents and things that are running off that that's going to 0?

Yes, there's -- again, David, there's the joint venture is in there, and as that product comes end of life, those numbers are going to be coming down. We also pushed through design engineering fees in Europe - - do run through there when we do have those types of projects that we're working on, and then the royalties is not that significant of a contribution to that line item going forward.

It's not?

No.

Okay. And then the last thing is, if we look at the cash flow this year, take it right off the cash from operations line, or the change in cash in equivalents, you have a pretty meaningful negative swing there - -

Mm-hmm.

- - of which a lot of it is driven that working capital line.

Correct.

Can you talk about where - - what we should be looking for in terms of working capital use or source here going forward and what - - is there some sort of anomaly going on there? I mean what you're dealing with.

What's impacting the current nine-month period is, we did that - - do that significant buy of resins. We're still working that balance off, and because of the transfer of product into - - primarily into Mexico, we're building up some significant banks there. We are taking a hard look, though, at just inventory and, after you take out those usual events, trying to get - - to make sure that that's in a reasonable range, but we would expect not to have significant swings in inventory going forward for those types of events.

Okay. Great. Thank you.

[OPERATOR INSTRUCTIONS] I'm showing no further questions in queue at this time.

Then we'll conclude the call and wish everybody a pleasant day. Thank you.

This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time.