Methode Electronics Inc (MEI) 2010 Q2 法說會逐字稿

Welcome to the Methode Electronics, Incorporated fiscal 2010 second quarter earnings conference call. At this time, participants are in a listen-only mode. And a brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. This conference call does contain certain forward-looking statements which reflect management's expectations regarding future events and operating performance 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 reports. Such factors may include, without limitation, the following. One, dependence on a small number of large consumers within the automotive industry. Two, rising oil prices could affect our automotive consumer future results. Three, the seasonal and cyclical nature of some of our businesses. Four, dependence on the automotive industry. Five, dependence on the appliance, computer and communications industry. Six, intense pricing pressures in the automotive industry. Seven, increase in raw material prices. And eight, customary risks related to conducting global operations.

It is now my pleasure to introduce your host, Mr. Donald Duda, President and Chief Executive Officer of Methode Electronics, Incorporated. Thank you, Mr. Duda, you may now begin.

Thank you, Chris and good morning everyone. Thank you for joining us today for our fiscal 2010 second quarter financial results conference call. I am joined today by Doug Koman, Chief Financial Officer, and Ron Tsoumas, Methode's Controller. Both Doug and I have comments today and afterwards we'll be pleased to take your questions. Methode's performance in the second quarter of fiscal 2010 improved on a sequential basis for both our automotive and interconnect segments with sales in both segments increasing over the first quarter of this year. Additionally, even though consolidated revenues declined approximately 19% year-over-year, Methode achieved earnings per share of $0.06 for the second quarter of this fiscal year, compared to $0.01 a year ago. Additionally, consolidated gross margins improved to 22.1% in the second quarter compared to 20.2% for the same period last year. During the second quarter, net sales benefited by $1.7 million relating to a one-time reversal of price contingencies which were accrued over several years and are no longer required.

Additionally, the second quarters of both fiscal 2010 and fiscal 2009 were impacted by restructuring charges, $3.2 million, and $6.3 million respectively. If we remove these items, non-GAAP earnings per share were $0.10 in the second quarter of fiscal 2010 compared to $0.11 in the same period of fiscal 2009. Hence, despite an almost 19% drop in sales, non-GAAP earnings were only slightly off the year-ago number. We are very pleased with the sequential improvement in our interconnect segment. Although there was a year-over-year decline in sales, this segment did improve sequentially by nearly $6 million from the first quarter to the second quarter. This revenue improvement was related to higher sales at TouchSensor, dataMate and Hetronic. Although second quarter automotive segment sales improved sequentially, there were a few items which impacted the quarter both favorably and unfavorably, and will impact our results in the second half of fiscal 2010. In this segment, net sales to Delphi decreased $6.8 million in the quarter compared to the second quarter last year.

Additionally, selling and administration expense included $1.5 million in legal fees relating to the Delphi litigation. Again, the third and fourth quarter of fiscal 2010 will continue to be impacted by the cancellation of the Delphi supply agreement and the associated litigation expense as well as continued volatility in all our business segments. As I mentioned earlier, consolidated gross margins improved to 22.1% in the second quarter of 2010, compared to 20.2% in the same quarter of last year. Excluding a $0.7 million asset write-down relating to the termination of the Delphi supply agreement, and the $1.7 million reversal of pricing contingencies I talked about at the beginning of the call, consolidated non-GAAP gross margins still improved to 21.5%. Throughout this fiscal year and last we've taken actions to align our expense levels with the expectations of a long challenging economic environment. The key objective was to lower our breakeven and our results thus far in fiscal 2010 helped validate our strategy. In terms of liquidity and capital resources, we generated $7.9 million in net operating cash flow during the quarter. Given our cash balance of $60.3 million, coupled with no debt, we continue to enhance our ability to pursue and fund strategic initiatives, despite the economic environment and the uncertainty in the credit markets. We will continue to pursue complementary acquisitions and technologies that will help us grow our business.

In the user interface or UI market, we were awarded another contract for infotainment center consoles from Ford on four additional models launching in model year 2013. Six distinct center stacks, two of which are Sony branded and all of which employ our TouchSensor technology. At full launch, we anticipate this award, combined with the previously announced Ford center stack business, which launches next spring, will generate approximately $40 million in annual sales. We thank Ford Motor Company for this business. Methode is also in final negotiation stages with a large Asian OEM for a global center stack program again utilizing TouchSensor technology.

Lastly, our automotive engineers recently entered three technologies magneto-elastics, biometrics and field-effect into the Annual Society of Automotive Engineers MIT Vehicle Innovation Competition. All three technologies made it to the semifinals and TouchSensor's Field-Effect technology was one of the two finalists in its category. Our Field-Effect technology was also integrated into a fluid level sensor launched in the second quarter for a pump OEM. This represents one of the first significant uses of TouchSensor's technology for fluid level sensing. As I mentioned last quarter, we have received a number of opportunities in our power products segment. Although some of them may be small, we believe they will position us for larger opportunities next fiscal year.

We remain very cautious about the second half of fiscal 2010. If you look at what has driven sequential improvement in our automotive segment, I think there are a number of underlying factors. First of all, it is clear that OEM inventory levels were reduced down to a very low point. So there was some restocking going on. Secondly, there has been a number of incentive programs offered around the world such as the Cash for Clunkers programs in the US and likewise in Europe. Automotive revenue increased sequentially based on automotive plants restarting production and likely these incentive programs kicking in. Essentially, these short-term incentives may have also driven some short-term demand and possibly pull-forward for later quarters. So while we are very pleased to see this positive momentum, I think the question we cannot answer today is how sustainable is all this. What we do know is based on the trends that we have seen, we anticipate our order rate will slow in December, which is historically a lean sales month and potentially in the first few months of calendar 2010.

Frankly, on a personal observation basis, I have not seen tremendous change in consumer sentiment. However, in the long run we see that our opportunity in all our end markets is to take advantage of the increased sophistication and electronic content in our customers' end products. This supports the realignment of our sales channel to concentrate on selling complete solutions utilizing our ability to leverage the expertise and technology of all our segments, versus as in the past simply acting as a component vendor. This effort is in its infancy but beginning to yield results and while these opportunities will take some time to mature, they represent solid growth potential for Methode Electronics.

In closing, Methode's technology and its ability to provide engineered solutions and manufacturing excellence worldwide will pave the way for our future growth. Given our competence in our technology offerings combined with improvements to our cost structure, we have an excellent opportunity to grow long-term earnings. With that, I would like to turn the meeting over to Doug for his financial comments.

Thanks, Don. Good morning everyone.

Let me start with a review of the sales gross margins and pretax income for our reporting segments. The automotive segment had second quarter sales of $56.2 million, that's down 25% compared to $75.2 million last year. For the six month period, sales were $107.4 million, down almost 33% compared to $159.9 million last year. The decrease is due to the softening of the global economic environment, especially the effect on North American automotive industry. Also, this year we had minimal sales to Chrysler in the quarter and six month period, compared to last year where we had $5.8 million in the quarter, and $16.1 million in the six month period. We substantially had completed the transfer of Chrysler product by the end of last year's second quarter. Also, sales to Delphi this year decreased $6.8 million in the second quarter and $9.8 million in the six month period. This is due to combination of both the lower sales volume year-over-year, and the cancellation of the supply arrangement effective September 10th, 2009. Additionally, as Don pointed out, sales in the second quarter and the six month period benefited from the reversal of the $1.7 million accrual for pricing contingencies that are no longer required.

In the quarter, sales were impacted by about $300,000 positively impacted in the second quarter but for the six month period the foreign exchange decreased sales by about $1.3 million. In the second quarter, gross margins for the automotive segment were $13 million or about 23% of sales, compared to $15.8 million or 21% of sales last year. For the six months, gross margins were $23.7 million or 22.1% of sales compared to $33.4 million or 20.9% of sales last year. Gross margins benefited from the $1.7 million accrual reversal. However, they were negatively impacted by the $700,000 asset write-down in the second quarter related to the termination of the Delphi supply arrangement. Pretax income in the automotive segment was $5.6 million in the second quarter, compared to $6.2 million last year. For the six month period, pretax income was $8.5 million. This year, compared to $16.6 million last year. The drop in pretax income was due to the lower sales volumes, the write-down of Delphi related assets, legal fees related to the Delphi litigation. This was offset by the accrual reversal for the pricing contingencies and the fact that we had lower restructuring costs this year compared to last year and also we saw the effect of lower cost resulting from our restructuring and consolidation efforts taken in prior periods.

Moving to the interconnect segment, we had net sales of $30.5 million in the second quarter, which is down nearly 5% from $32 million last year. For the six month period, sales were $55.2 million, down about 18% compared to $67.6 million last year. The decline reflects the general economic slowdown in the markets served by this segment and also our decision to exit certain legacy interconnect segment business. Sales in the current quarter and six months included sales from Hetronic, which was acquired on September 30th, 2008. So last year's six month period only included one month of Hetronic sales. The currency translation had no impact on foreign sales in the second quarter. But it did decrease sales by about $300,000 in the six month period. Second quarter gross margins for the interconnect segment were $7.1 million or 23.3% of sales, compared to $7.3 million or 22.8% of sales last year. For the six month period, gross margins were $13.4 million or 24.3% of sales compared to $16.3 million or 24.1% of sales last year. The increase in gross margin as a percentage of sales is primarily due to restructuring efforts taken in previous periods. This was offset by the effect of lower sales volumes.

Pretax income in the interconnect segment was $900,000 in the current quarter, compared to a loss of $2.5 million last year. The six month period pretax income was $1.2 million this year compared to a loss of $2.2 million last year. This is due to the lower intangible asset amortization this year and lower restructuring charges. This also was offset by the effect of lower sales volumes in this segment.

The Power Products segment sales were down 19% in the quarter with $9.4 million this year compared to $11.6 million last year. Six month sales were $20.6 million, down nearly 13% from $23.6 million last year. As with the other segments, this was due to the general economic slowdown resulting in lower demand for our bus bar, cabling and heat sink products. Gross margins in the Power Products segment were $2.1 million in the current quarter, the same as last year's quarter. For the six month period, gross margins were up slightly at $4.5 million, compared to $4.4 million last year. Gross margins as a percentage of sales increased to 22.3% in the current quarter, compared to 18.1% last year. For the six month period, gross margins were 21.8% this year, compared to 18.6% last year. The percentage increase is primarily due to the restructuring initiatives and consolidation efforts in our US Power Products businesses. Pretax income in the Power Products segment was $0.5 million in the quarter. That's the same as last year. For the six month period, pretax income was $1.1 million, compared to $1.3 million last year. This was due to the lower sales volumes and higher restructuring expenses, partially offset by lower cost of products sold due to the impact of the restructuring and consolidation initiatives.

The other segment had second quarter sales of $2.4 million, down slightly from $2.5 million last year. For the six months, sales were up slightly to $5.1 million from $4.7 million last year. Gross margins were about $100,000 this quarter compared to a negative gross margins of $100,000 last year. For the six month period, gross margins were $200,000 this year, compared to $100,000 last year. Pretax income in the other segment was a loss of $700,000 in the current quarter, compared to a loss of $800,000 last year. For the six month period, the pretax loss was $1.3 million, both this year and last year.

Some of the highlights on the consolidated income statement. Selling and administrative expense in the second quarter was $16.4 million, down from $18.5 million last year. In the six month period selling and administrative was $32.3 million compared to $35 million last year. The decrease is due to lower expense for intangible asset amortization and lower stock award amortization, partially offset by selling and administrative expenses from and litigation expense related to the Delphi supply arrangement dispute which was $1.5 million in the quarter and $1.9 million for the six month period. As a percentage of sales, selling and administrative expense increased to 16.6% compared to 15.3% in last year's quarter. And increased to 17.2% in the current six month period compared to 13.7% last year. The increase in selling and administrative as a percentage of sales reflects the significant drop in sales in the last half of fiscal 2009 and the Delphi litigation costs.

Interest income expense net was about breakeven for the second quarter, compared to income of $400,000 last year. For the six month period, we had interest expense of about $100,000 compared to interest income of a million last year. The reduction is primarily due to significantly lower nominal interest rates this year versus last year. Lower average cash balances this year compared to last year, and we also had fees related to the amendment of our bank facility during the first quarter of fiscal 2010. Other income expense, net, was income of $100,000 in the second quarter, compared to an expense of $600,000 last year. For the six month period, we had an expense of $300,000 this year, compared to expense of $900,000 last year. The decrease is primarily due to the weakening of the US dollar compared to the Euro and the Czech koruna, which resulted in a loss of approximately $900,000 in the current six month period, but was a gain of approximately $2.1 million in last year's six month period. Last year's second quarter included an unrealized currency exchange loss of $2.5 million on an intercompany loan in connection with the Hetronic acquisition. In the current six month period we reported a $600,000 gain on an enhanced cash fund where last year we had reported a loss of $0.5 million, and in this year's quarter we have a $400,000 life insurance gain on policies owned by the Company in connection with an employee deferred compensation plan.

For the second quarter of fiscal 2010, the effective income tax rate was 9.7%, compared with a benefit of 168.3% last year. For the six month period the effective tax rate was 19.8% this year, compared to 12.5% last year. The income tax expense in the second quarter of fiscal 2010 was $200,000 compared to a benefit of $900,000 in the second quarter of last year. And was an expense of $0.5 million dollars in the current six month period compared to $1 million last year. Normally, a tax benefit would be recorded relating to the loss before income taxes for our US based businesses. However, due to the uncertainty of the future utilization of the tax benefit, a valuation allowance was recorded offsetting this benefit. Both the quarter and the six month period reflect utilization of foreign investment tax credits and the effect of lower tax rates on the income of our foreign operations.

Briefly looking at the balance sheet, cash increased to $60.3 million at the end of the second quarter, compared to $54 million at year end. Accounts receivable balance is $71.8 million, up from $60.4 million at year end. Receivables are up primarily due to the higher sales in the second quarter versus the first quarter. Inventory is $41.3 million, up from $40.4 million at year end. The increase is due primarily to higher customer funded tooling inventory for an insert molded transmission lead frame assembly being launched in Shanghai and this was offset by a decrease in product inventory due to aggressive inventory management. Other current assets are $20.4 million, down from $26.4 million at the end of last year. This is primarily due to a $4 million refund of fiscal 2009 estimated taxes, also a reclassification of tax assets from current to noncurrent, and amortization of prepaid insurance.

Property, plant and equipment is at $68.4 million. This is down slightly from $69.9 million at the end of fiscal 2009. This is because depreciation slightly exceeded capital expenditures in the first six months. There was no change in goodwill from year end. Net intangible assets are $19.6 million, down from $20.5 million at the end of last year. This is just due to normal amortization. Other assets at $22.7 million are up from $21.9 million, primarily due to adjustments between current and non current deferred tax items, offset by the decrease in cash surrender value on policies because of the payout of -- on two policies. Accounts payable at $31.1 million was up from $24.5 million at year end, primarily due to the higher sales in the second quarter versus the first quarter.

Other current liabilities at $27.9 million are down $1.1 million compared to $29 million at the end of the year due to the payout and or adjustment of various reserves, such as Workers' Compensation, medical, environmental, VAT et cetera. Other noncurrent liabilities at $16.5 million are down slightly from $16.9 million at the end of the year. Primarily due to deferred compensation payments. On a cash flow statement, the increasing cash and cash equivalents was $6.2 million in the first half of fiscal 2010. Cash provided by operating activities was $15.6 million. This is $13.8 million less than was provided in the first half of fiscal 2009. It's primarily due to the decrease in business levels. Cash used in investing activities was $6 million this year, compared to $66.8 million last year. Last year's activities included the acquisition of and also we saw higher capital spending last year than this year. Cash used in financing activities was $5.2 million. This compares to $9.5 million last year. Last year's amount included $5.1 million for the repurchase of Company stock. This year's dividend payout is $700,000 higher due to the increase in the quarterly dividend. Finally, we also had a $1.9 million increase in cash due to the effect of foreign currency exchange rates on cash balances.

Don, that concludes my remarks.

Doug, thank you very much. Chris, we are prepared to take questions

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) One moment, please, while I poll for questions. Our first question comes from the line of David Leiker with Robert W. Baird and Company. Please proceed with your question. Your mic is now live.

Good morning.

Good morning, David.

A handful of items here. If we look at -- I may have missed it as you've gone through this, but if we look at the revenue overall, you're up sequentially, and if you adjust for the restructuring and the legal issues, your profitability is generally flat. Is there anything in particular there that I'm missing as I look at it from that perspective?

You're looking at the sequential change?

Yes. Your revenues are up $10 million, roughly, and if you pull out the pricing issues at the gross profit line, your gross profit looks like it's flat. Just up a few hundred thousand dollars.

Yes, I think, David, we've been I guess focusing on the gross margin improvement and below the line we've had, again, the $1.5 million of litigation expense related to Delphi.

Right. That's in the SG&A line, though, isn't it?

Yes.

I thought you were pointing to the pretax number. No, gross profit number, it's roughly $15 million in both quarters. 15, $16 million, if you pull out the pricing with Delphi and -- we could follow up with this later if you want. Just trying to get an understanding why sequentially the gross profit number wasn't higher on the $10 million increase in revenue.

Yes. Let's follow up on that.

Okay. As we look at the Delphi, how much of an impact on revenue did that have? You ended up having one month worth of Delphi in the numbers; is that right?

Yes. They cancelled it just about mid-September, so that would have been about a month and-a-half but they were probably building some banks a little bit so if you look at the Q, what we indicate there is that the number is down 6.8 in the quarter. And compared to last year. And resulting in $6.6 million in sales in the quarter to Delphi.

That's what your -- you had $6.8 million of revenue in the quarter?

Right, that's in our Q.

And then any sense -- I know it's a little touchy subject but I mean, the litigation costs, the magnitude and the timetable of that, I know it's a little bit uncertain, but is there any thoughts you can give us as relates to that.

We've said what our six months or --

Yes. Right. One point -- we disclosed that, the litigation fees related to Delphi were $1.9 million.

Was that in the quarter or was that a total amount?

That's six month period. The quarter was $1.5 million.

Okay. Looking forward, can you give us any insight as to what those numbers would be?

It is hard to say because litigation, when you're in court and depositions, it's quite high and then things go into a lull a bit and it drops down. You can look at the six month average. That's one way of looking at it. There's two pieces of litigation here. There's one in state courts, one federal court. One's on the agreement, one's on the patents. I don't know how much more I can say there. I would look at the run rate.

Okay. That's all I need. Thank you.

Thank you. (Operator Instructions). Mr. Duda and Mr. Koman, there are no further questions at this time. I would like to turn the floor back over to you for any closing comments or remarks you may have.

Thank you, Chris. We'll just thank everyone for listening today and wish everyone a pleasant day.

Ladies and gentlemen, this does conclude our conference. You may disconnect your lines at this time, and we thank you all for your participation. May you have a wonderful day.