Methode Electronics Inc (MEI) 2006 Q4 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Methode Electronics Inc. fourth-quarter and year end 2006 earnings conference call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded.

Certain statements in this conference call on July 13, 2006 containing information on Methode's fourth-quarter and year end reporting period for fiscal 2006 and offering guidance for its first quarter and full year reports periods for fiscal 2007 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 telecommunication industries, such as general economic conditions, interest rates, consumer spending patterns and technological changes. Other factors which may result in materially different results for future periods, including Delphi Corporation's bankruptcy pension, 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 manufacturer and plant shutdowns by automotive customers, potential strikes at 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 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 those described in the forward-looking statements. The forward-looking statements on this conference call are subject to the Safe Harbor protection provided under the security laws.

All information on this conference call is as of July 13, 2006. Methode undertakes no duty to update any forward-looking statement 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. Sir, you may begin your conference.

Thank you. Good morning, everyone. Thank you for joining us today for our fourth-quarter and 2006 fiscal year financial results conference call. I am joined today by Doug Koman, Chief Financial Officer; Bob Kuehnau, Methode's Treasurer and Controller; and Joey Iske, Director of Investor Relations. Both Doug and I have comments today and afterwards we will be pleased to take your questions.

Methode completed its fourth quarter with sales of $116.3 million and net income of $4.3 million or $0.12 per share. Included in these results is a tax charge of $4.5 million or $0.12 per share resulting from the repatriation of $38.1 million of foreign earnings to the U.S. This compares to last year's second quarter results of $115.6 million in sales and net income of $9.7 million or $0.27 per share. We had a $2 million in tooling sales in this year's fourth quarter compared to $13.3 million last year. Therefore, excluding tooling, fourth-quarter fiscal 2006 sales were $114.3 million compared to $102 million in the same quarter last year.

For the full 2006 fiscal year Methode reported sales of $421.6 million and net income of $17 million or earnings of $0.47 per share. Again, including the tax charge of $4.5 million or $0.12 per share resulting from the repatriation of foreign earnings to the U.S. Doug will provide a more detailed discussion of the quarter and full year financials later in this call. At this point I would like to move forward to discuss our businesses.

In our automotive segment sales of our weight sensing product used in a passenger occupant detection system increased in the 2006 fiscal year as 100% compliance with the MTSA requirement became effective. This program has been a tremendous growth program for Methode over the past several years as business grew with the industries' adoption of the federal mandated regulations.

Moving forward into fiscal year 2007, we expect a significant sales increase experienced in the past few years with this product to slow and remain relatively flat. However, it remains a stable business for Methode. Our engineers continue to develop next generation products as we seek to enhance our market position in vehicle safety.

In other areas of our automotive segment contractual price concessions, along with lower production volumes and material cost increases which the automakers continue to refuse to accept, has significantly eroded profits in our domestic automotive business. We continue to seek ways to combat these factors and have become increasingly more selective with regard to automotive programs in which we participate and customers in which we do business. Notwithstanding the tough market environment, Methode remains active in booking new business with a significant win at General Motors for the Epsilon platform to be produced in our Shanghai facilities. We expect the column electrical assembly and steering angle sensor to generate over $40 million of sales commencing with the 2009 model year. We are also pleased that General Motors has recognized Methode as one of its 2006 suppliers of the year.

Another noteworthy program awarded during the 2006 fiscal year is a third Honda clockspring program to begin with the 2008 model year. As we prepare for the new model year, close attention will be paid to production volumes. We have become increasingly cautious about the outlook for the U.S. auto demand, especially when looking at market share for the big three and in particular Ford Motor Company. The U.S. market share for these automakers is forecasted to decline again 53.5% in 2007 from 58.1% in 2005. This market share erosion has had and will continue to have an impact on Methode's domestic automotive business.

In our 2006 fiscal year Methode will have new program launches in North America with Ford and a steering angle sensor for Chrysler. In addition, to the Honda Civic program initiated last year, we will launch the CRV program this year. And in Mexico we will launch several seat sensor products across a broad number of OEMs.

Moving to China, our automotive lines will be in full production this model year. It is anticipated that the General Motors GMT 900 programs along with the GM 2001 switch banks and two Mitsubishi programs transferred to Shanghai from Scotland, will produce approximately 1.4 million units this fiscal year. This is in sharp contrast to the few thousand units produced just two years ago. It is important to no that the long-term strategy for automotive business in China is not just to manufacture for U.S.-based OEMs but also to develop Asian customers to further diversify Methode's customer base. China and Asia in general are untapped markets for Methode.

Automotive business in Europe continues to increase. Business expanded in 2006 to include several window lift and ergonomic switches for Fiat Alpha and additional products for Aston Martin, Jaguar, Volvo and Ford of Europe, as well as GM Brazil. Programs to be launched for the 2007 model year include several ergonomic and hidden switches and new mechatronic devices and electronic steering lock assembly and starter control units for several OEMs.

We remain focused on reducing costs at our Scotland automotive facility. We've made positive strides continuing to identifying implement opportunities for margin improvement. We anticipate obtaining profitability in the coming 12 to 18 months at this facility.

Methode's interconnect segment had solid demand of the telecommunications market for our 1-gigabit copper transceiver product. We expect this trend to continue in the 2007 fiscal year, and we've also developed a 10-gigabit transceiver to meet the market demand for this higher speed.

PC card sales and profits more than doubled during the 2006 fiscal year as consumer demand for wireless Internet increased. In fiscal 2007 we again anticipate increased sales for these cards as well as the next generation ExpressCard technology as this new standard gains global acceptance. Due to the early adoption of the ExpressCard technology in a certain model laptops, we are actively developing a new adapter device to connect current PCMCIA cards to new ExpressCard interface to provide backwards compatibility. The majority of PC card and ExpressCard manufacturing will be produced in our Shanghai facility while retaining the U.S. operation as our main design and sales center for this growing market.

Significant progress has been made on the development of our Genesis RFID solution for automated management of the data center infrastructure and asset. Genesis consists of two basic components, a software application and the RFID components that interface with the proprietary software. The system automatically identifies data connections while maintaining asset records. We are encouraged with the opportunities this product presents but believe sales will generally begin in fiscal 2008.

In our power distribution segment bus bar orders remain strong, and additional business continues to be booked with major OEMs across several markets. Military and commercial aircraft demand also continues to grow. We are actively pursuing several design opportunities for the new Boeing 787 aircraft.

We also made an entrance in the medical community with bus bar solutions for [MRI] machines. Our power distribution business grew to 7.3% of Methode's total sales for the fiscal 2006 year compared with 5.1 of sales last year.

The integration of our high current flexible cable acquisition is complete with the majority of manufacturing transferred to Mexico. Power distribution has also opened its China operation and has been qualified by several OEMs. Business transfer from the U.S. for production in this facility include products for the computer, telecommunications, industrial and transportation markets.

I would like to make one additional note about our China operations. As our customers and product base continues to expand and we develop our local supply base, we anticipate that the Shanghai operations will reach profitability across all business lines in fiscal 2007.

In the last year we have researched a significant number of potential acquisition candidates. However, we believe the Company is meeting our criteria, we are at unacceptable valuations. That said, acquisitions remain one of our highest priorities. We are enhancing our current in-house acquisition team with an individual that has an intimate understanding of Methode's operations as well as an outside individual adviser with tremendous experience in the M&A field.

We are also in the early planning stages of hosting an investor day at our corporate office in Chicago. This will be scheduled either late September or early October, and we intend to focus on several key business units and products. Invitations will be going out in the coming months. If you wish to ensure you receive an invitation please contact Joey Iske directly. One of the companies we will present is MDI, our noncontacting magnetic torque sensing business unit. I am pleased to report that the technology has been refined, standard product offerings have been developed and brought to market, and a number of customers' specific designs have been completed. The most exciting aspect of this business is the breadth of industries it can serve. Potential industries include automotive, industrial, aerospace, farming and heavy road equipment along with power and impact tools. We believe this business has the potential to become a $10 to $15 million business in the next three to five years producing solid double-digit growth or returns. We are currently investing between $1.5 and $2 million in this business.

As part of our continuing focus to improve costs and worldwide efficiencies we expect to reorganize portions of our business in fiscal year 2007. We anticipate this could result in a $0.06 to $0.08 charge to earnings per share. In addition, it is anticipated that margin improvements expected to be gained at our Scotland and Shanghai operations will be significantly offset by the profit erosion related to our traditional Detroit customers due to product pricing, raw material increases and customer market share losses. Therefore Methode is forecasting 2007 fiscal year net sales of between $430 million and $445 million, including $15 million of tooling sales. With net income including the effect of the aforementioned reorganization in the range of $0.40 to $0.48 per share.

For the first quarter of fiscal year 2007, which includes temporary plant shutdowns due to the automotive model year changeover period, Methode is projecting net sales of $100 million to $103 million with a net income between $0.09 and $0.11 per share.

At this point I will turn the call over to Doug for his detailed financial review.

Thanks, Don. During the quarter management realigned certain executive responsibilities and has changed the way it views its business. Therefore, effective with fiscal year end ended April 30, 2006 we will begin reporting in four operating segments, automotive, interconnect, power distribution and other. There will be a more detailed segment information provided in our form 10-K but in general the automotive segment includes businesses that supply electronics and electromechanical products to automotive OEMs, either directly or through their tiered suppliers. The interconnect segment provides a variety of copper and fiber-optic interconnect product solutions and services to industries such as computer telecommunications, medical and aerospace. This interconnect segment now includes the businesses formally reported in the old optical segment.

The power distribution segment manufactures current carrying bus devices and high current flexible cabling used in various markets such as telecommunications, computer transportation, industrial, aerospace and military. And finally, the other segment includes a designer and manufacturer of noncontacting magnetic torque sensing products and independent laboratories that provide qualification testing, product certification and product failure analysis.

All of the net sales amounts for these segments that I report will exclude customer tooling sales, which as Don mentioned earlier, were $2 million in the current quarter compared to $13.3 million last year, and for the full year was $10.8 million this year versus $17.2 million last year.

The automotive segment had fourth-quarter net sales of $85.1 million compared to last year's $78.5 million. So an 8.4% increase in automotive product sales. For the fiscal year the automotive businesses had net sales of $306.2 million compared to $202.4 million. Also an 8.4% increase over last year. Both for the quarter and fiscal year the year over year improvement is primarily due to increased weight sensing product sales and new launches at our European and Shanghai automotive businesses. That is offsetting reduced business from our traditional North American OEMs.

The interconnect segment had net sales of $17.8 million in the fourth quarter, up from $16.1 million last year. For the fiscal year this segment had net sales of $66.9 million compared to $67.8 million last year. This segment had increased sales of wide area network PC card packaging to mobile phone providers, and modest increased sales of high-speed 1-gigabit copper transceivers. The balance of the businesses in this segment experienced sales declines because of competitive pressures from low-cost Eastern European and Asian manufacturers. The fiscal 2005 sales number also benefited from a onetime sale of $2 million at our Czech Republic fiber-optic operation.

The power distribution segment was up year-over-year with sales of $9.6 million in the current quarter compared to $6.3 million last year. For the fiscal year sales were $30.9 million compared to $19.8 million last year. The increase both for the quarter and the fiscal year is due to new sales from the Cableco Technologies acquisition; also increased sales of power distribution products with two large domestic OEMs for computer and transportation applications and sales from the startup bus bar operation in Shanghai in the fourth quarter.

Finally, the other segment had first quarter sales of $1.8 million compared to $1.5 million last year. For the year sales in this group were $6.8 million compared to last year sales of $5.5 million. The improved sales were primarily from our test laboratories and in part due to expanding the service offering including x-ray and water testing.

Continuing with the income statement we can look at the year-over-year changes for some of the other line items. Other income for the quarter is $412,000 compared to about $0.5 million last year. The decrease is primarily due to less design engineering fees earned at our European automotive businesses. For the fiscal year other income is down to $1.1 million from last year's $1.7 million. Again the difference is design engineering fees.

Cost of products sold for the quarter was 78.2% of net sales compared to 77.1% last year. For the fiscal year cost of goods sold was 79.8% compared to last year's 78.1%. The increase is due primarily to price reductions from our North American OEMs for our legacy automotive products and also lower vehicle sales for those OEMs. Increased material costs, primarily copper and various petroleum-based products, launch issues in Scotland and startup and launch issues at our Shanghai facility.

Selling and administrative expense in the quarter was 11.1% net sales which was about flat compared to last year, which was at 11.2%. For the fiscal year selling and administrative was 13.2% of net sales compared to 13% last year. In the fiscal year the charge for uncollectible Delphi receivables and higher intangible asset amortization was offset significantly by lower third party Sarbanes-Oxley expense.

Interest net was $452,000 in the quarter compared to $438,000 last year and for the year we reported $2.1 million for the current year compared to $1.1 million last year. This is primarily the result of higher investment rates on cash balances. Other net was a gain of $168,000 for the quarter compared to a gain last year of $1.1 million, which reflects the impact of the stronger dollar on our foreign operations. In the fiscal year other was a net loss of $457,000 compared to a gain of $679,000 last year. This reflects a loss on the write-down of the building in Scotland that is scheduled to be sold and the impact of currency to losses at our foreign operations.

As we mentioned in the earnings release, we repatriated $38.1 million under the Jobs Creation Act for which we provided $4.5 million of taxes. Excluding this amount the fiscal year effective tax rate was 33.4%, which is in line with last year's effective tax rate of 33.6%.

Now looking at the balance sheet, Accounts Receivable are at $74.2 million, up from $65.7 million last year. This is primarily the result of Delphi precondition receivables net of the allowance for bad debt, increased business levels especially at our foreign subsidiaries where payment terms can be as long as 120 days. And we are carrying higher receivable balances for customer tooling projects related to the recent product launches.

Inventory is $4.7 million, up from $41.6 million last year because we continued to build finished goods inventory in advance transferring certain North American automotive lines to Mexico, increased shipping volumes to General Motors North American hub from our Shanghai subsidiary and increased automotive tooling inventory primarily in China and Europe.

Other current assets are $19.7 million, up from $10.9 million last year due to an increase in current tax assets primarily related to refundable withholding taxes in Germany associated with the cash repatriation and the timing differences related to the charge for impaired Delphi receivables. Also in other current assets we had an increase in prepaid expenses primarily for insurance premiums.

Property, plant and equipment is down primarily due to the impact of the stronger dollar on foreign assets held. Goodwill is $28.9 million, up from $24.7 million last year primarily due to accrued contingent purchase price obligations on the seat sensor business and the acquisition of the power cable business. Intangible assets are $17.5 million, down from $20.4 million last year as normal amortization more than offset the increase from technology licenses signed in the first quarter of this year.

Other assets increased $2.8 million to $16.4 million because of the increase in cash and surrender value of life insurance policies and changes in current deferred tax assets. Accounts Payable is up from last year, reflecting the general increase in sales levels and our chance to match the increased days outstanding on the receivable side.

Other current liabilities are $32.6 million, down slightly from $32.8 million last year reflecting an increase in deferred taxes due to the repatriation of cash being more than offset by a reduction in accrued expenses. Other liabilities are relatively flat compared to last year.

On the cash flow statement the cash, the change in cash provided by operating activities primarily is due to net income offset by working capital account changes, primarily Accounts Payable and Accounts Receivable inventory. The provision recorded for impaired receivables and the change in the provision for deferred income tax including the effect of the timing difference on the provision for uncollectible Delphi receivables and the additional taxes due on the repatriation of cash. The change in cash used in investing activities is due to a deferred purchase price payment on our weight sensing business. Also upfront payments on our four technology licenses and proceeds received from the sale of a building in Singapore.

The change in financing activities is due primarily to fewer stock options being exercised this year compared to last year and repurchase of a portion of the stocks issued to the former owners of Cableco Technologies under the terms of the purchase agreement. That concludes my remarks.

Thank you very much. For us, we are ready to take questions.

(OPERATOR INSTRUCTIONS) Richard Montsori, [Power Partners].

A few questions actually. The first one as far as the purchase of PP&E effectively capital expenditures -- it has been around the 18, $19 million range over the last couple years. Is that safe to assume as the ongoing maintenance CapEx rate or do you think that has been artificially inflated over the last year or two?

No, I don't think that has been inflated. I think we have been on a slightly higher run rate as we invest more in the business and as OEMs push more of the tooling to the customers.

Understood. Second question, as far as the Accounts Receivable, you've had a spike up. I wonder if you can explain again; maybe I didn't understand it. You had a spike up from 60 I believe last quarter to 74. What exactly were the components associated with that spike?

If we look at that that increase there is again general sales levels are increasing, and they are increasing in our foreign locations where the payment terms are a little longer and as I mentioned earlier, up to 120 days. So as we see the sales shifting from our U.S. businesses to our foreign businesses, we are going from probably in the U.S. we do 25 to 60 days. You're seeing terms that go out 90 to 120 days.

Understood.

Not negotiable either.

Not negotiable?

Because of the size of the automakers.

Sure, of course. And last question, given the cash position has stayed relatively strong over the last year, and yet I look at the publicly traded stock price and I see a disconnect because I see the stock is basically touching close to its lows over the last year or two, and I am looking at the cash balance. What is the Company's thoughts about utilizing some of that cash to effect some sort of massive stock buyback?

That is something that whenever the stock dips down does come up. It has not been discussed as an agenda item at our -- at the aboard. Generally we believe that we are better off targeting acquisitions, but I will say that we don't rule out a stock buyback. But it is not on the table at the moment.

Well, then can I just ask in terms of targeting acquisitions presumably the criteria that you are using for acquisitions is such that you could opportunistically -- you wouldn't look at buying a company if it were trading at presumably higher than say five times EBITDA because your Company is now trading at less than that; is that kind of the framework that you would look at?

I think when we look at acquisitions we look at the markets that it would take us into, the paths it would open, the synergies that we can see from that acquisition. And also we are looking for acquisitions that are going to be accretive to earnings at least in the year subsequent to the acquisition. So I wouldn't say we necessarily focus on a multiple of EBITDA.

Understood. Thank you.

David Leiker, Robert W. Baird.

This is Dave Suey (ph) on for David. I just have a couple questions about your revenue. Things like you reported revenue quite a bit above your prior guidance for this quarter. I was just wondering what happened there.

Part of it, Dave, is coming from the sales of the seat sensors. I think that business surprised us the most from where we were last quarter, and we had a number of OEMs that used Delphi's product. Were hedging against a Delphi strike, so we saw probably mid quarter a spike in demand. I think that is primarily why we were on the upside. Now that to some degree is pull forward. It just created higher inventory at those OEMs.

So a lot of it was just for the Delphi basically?

Yes, that is what we believe it is.

Can you break out a currency number on revenue? Effected currency?

We've got that -- we will give it to you in just a minute as soon as we find it, but if you've got any other questions maybe we can take those now.

I was wondering the same thing for acquisitions also.

I am sorry I didn't understand the --

The affect of acquisitions on your revenue for the quarter.

About $2 million from our Cableco acquisition, which is our flexible power cable. That is the only thing we did recently. Dave, the foreign currency on sales for the full year, the effect of foreign currency on sales was a reduction of $2.9 million.

You have that for the quarter as well?

Unfortunately I don't have the quarter affect, but we can get back to you.

Okay, great. Thanks. That's all I have.

Mike Gandrud, Johnson Asset Management.

Just a quick question for you on Scotland. Can you remind me of some of the issues there? Is it customer related? Is it efficiency related? Or what are you looking at in Scotland and how you are attacking that?

We had two issues -- really three issues in Scotland. One of them was just a ramp -- you have to get to a certain critical mass in auto to recover the quality infrastructure you need to produce a product, and we got past that in the last year and a half. We had launch issues, we had factory inefficiencies, which for the most part we also got past this fiscal 2006. The biggest issue remaining is with those materials where we've got smaller suppliers. We're not as meaningful to them as we are to some of our less suppliers, so we've had price increases. That's an area that we are vigorously attacking, and the products that are produced there across the board, the product content is probably -- purchase content is probably 70%. So that's where the issue is coming from. We've got one of the very concrete steps we took this past fiscal year is we restructured the operation from a stand-alone group to really just a manufacturing plant with the majority of you want to call it the back office operations being handled by our Maltese facility, which is much better at doing purchasing, plant layout, lean manufacturing and so on. So we got some economies of scale there and we put I think a very well-qualified team on our supplier issues.

Okay. Thank you very much.

(OPERATOR INSTRUCTIONS) Gentlemen, there are no further questions at this time. Are there any closing comments?

Other than to thank everyone for calling in and to have a pleasant day. Thank you.

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