Donald W. Duda - Chief Executive Officer, President and Director Douglas A. Koman - Chief Financial Officer, Principal Accounting Officer and Vice President of Corporate Finance.

Joseph D. Vruwink - Robert W. Baird & Co. Incorporated, Research Division Steven L. Dyer - Craig-Hallum Capital Group LLC, Research Division Jimmy Baker - B. Riley Caris, Research Division.

dependence on a small number of large customers, including 2 large automotive customers; dependence on the automotive, appliance, computer and communications industries; customary risks related to conducting global operations; timing, quality and cost of new program launches; ability to avoid design and manufacturing defects; ability to compete effectively; dependence on the availability and price of raw materials; dependence on our supply chain; further downturns in the automotive industry or the bankruptcy of certain automotive customers; ability to keep pace with rapid technological changes; ability to protect our intellectual property; ability to withstand price pressure; location of a significant amount of cash outside of the U.S.; the recognition of goodwill impairment and long-lived asset charges; currency fluctuations; ability to successfully benefit from acquisitions and divestitures; ability to withstand business interruptions; income tax rate fluctuations; a breach of our information technology systems; and the cost and implementation of SEC disclosure and reporting requirements regarding conflict minerals.

It is now my pleasure to introduce your host, Don Duda, President and Chief Executive Officer for Methode Electronics..

Thank you, Jesse, and good morning, everyone. Thank you for joining us today for our fiscal 2014 second quarter financial results conference call. I'm 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.

We were very pleased to report this morning that second quarter sales grew 47% to $190.9 million, and 6 months sales grew 44% to $358.2 million.

Second quarter and first half sales came in higher than we expected, due mainly to strong sales for the General Motors center console programs, as well as new product launches in our European Automotive and North American Power Products operations, along with strong appliance sales.

As a reminder, in the second quarter of last year, we recorded a $20 million litigation settlement, which substantially benefited our profitability last year. Excluding the impact of that settlement and its effect on income tax expense, second quarter net income grew nearly fourfold, to $19.8 million or $0.51 per share.

For the first half, net income also grew nearly fourfold to $33.4 million or $0.87 per share, again, excluding the settlement.

While higher sales were the largest driver to the year-over-year improvement in both periods, increased manufacturing efficiencies due to the vertical integration of the paint and laser etch process, favorable raw material pricing and a favorable product mix in the Power Products segment and lower income taxes also contributed to remarkable growth in earnings.

Second quarter and first half net income was negatively impacted by increased marketing, travel and legal expenses compared to last year, as well as the absence of a customer bankruptcy accrual reversal in the year-ago quarter.

Additionally, we incurred increased compensation expense of $2.7 million during the second quarter and $4.4 million in the first 6 months related to our long-term incentive program.

The long-term incentive awards, which are based on the company's performance in fiscal 2015 will become payable if performance under the plan meets or exceeds targeted performance. This adjustment reflects the company's estimates of fiscal 2015 performance. Second quarter consolidated gross margins improved to 21.7% compared to 17.2% last year.

For the 6 months consolidated gross margins improved to 21% from 17.6% in the same period of fiscal 2013.

Again, the largest contributor to improvement in margins was increased sales, but margins were also positively impacted by the vertical integration, favorable raw material pricing and sales mix in the Power Products segment, as well as lower scrap on the Ford center console and General Motors K2 programs.

However, gross margins were negatively impacted by increased sales of products with a higher material content in the Interconnect segment. Also of note, consolidated SG&A as a percentage of revenues decreased to 10.3% from 11.7% in last year's second quarter. And for the first half, it dropped to 10.8% from 13.1% in fiscal 2013.

We are pleased with the considerable leverage realized given our substantial rise in sales. As we announced this morning, we have increased fiscal 2014 guidance, now anticipating sales in the range of $720 million to $750 million and earnings per share in the range of $1.70 to $1.90.

This replaces our previous guidance of $670 million to $700 million in sales and $1.40 to $1.60 in EPS.

This increase in sales and earnings is based on higher second quarter sales in earnings than we originally anticipated, stronger than originally projected fiscal 2014 sales for the General Motors K2 program, offset by anticipated softer second half European sales.

The low-end of the guidance reflects our concern regarding stabilization in the European economy, as well as potential softening in our Interconnect and Power Products segments over those achieved in the first half and possible production delays of new products.

The high-end of the range anticipates stabilization in Europe and higher domestic automotive revenues, and as I mentioned on last quarter's conference call, current releases are indicating that second half European sales will be below the first half.

Based on the new guidance, ranges our fiscal 2014, operating margin target increases to an approximate range of 9.5% to 10.5% from the 9% to 10% we discussed last quarter. Now turning to review of our individual segments.

Compared to last year, Automotive segment net sales increased 57% in the second quarter and nearly 52% in the first half, due mainly to production of the General Motors K2 program. Additionally, new program launches in Europe and higher sales in Asia also contributed to the revenue growth.

The second quarter improvement was partially offset by lower sales at the Ford center console program year-over-year. At this point, we anticipate sales in the Ford center console program in the second half of this year to be approximately 10%, lower than the first half, which we have taken into consideration in our updated guidance.

Second quarter Automotive gross margins improved to 19.7% from 14.8% last year, and first half gross margins increased to 18.9% from 14.1% year-over-year. In both periods, increased manufacturing efficiency is driven by higher sales and the benefit of the vertical integration, produced improved margins.

Based on anticipated sales in this segment, we believe fiscal 2014 Automotive gross margins will vary quarter-to-quarter, but will likely be in the 19% range.

I am also are very pleased to announce that during the second quarter, Methode was awarded a new integrated center console program for North American OEM, with final product delivery to South America and Asia. Production is slated to begin in our fiscal 2017 with annual revenue in the $15 million range.

This award continues to show our capability and expertise in the center stack space. Moving to Interconnect. Sales increased nearly 31% in the second quarter and over 34% in the first 6 months compared to last year, attributable mainly to improved appliance sales from our 2 largest customers.

Volumes for the new laundry program came in near our expectations. Radio Remote Controls sales were flat in both the second quarter and first half year-over-year.

Compared to last year, Interconnect's gross margin grew slightly to 25.7% from 25.5% in the second quarter, due to manufacturing efficiencies, but fell slightly in the first half to 26.2% from 27.5%. Increased laundry sales, which have higher material content than other products in the segment had the biggest impact on margins.

For margins to improve in this segment, we would need improved sales in Hetronic's European industrial business. Additionally, we substantially leveraged selling and administrative costs, which contributed to a 68% increase in Interconnect's income from operations in the second quarter and a 57% improvement in the first 6 months.

Moving to Power Products. Year-over-year sales improved nearly 50% in the second quarter and almost 47% in the first half. The launch of a significant program for datacom customer in the U.S., along with bus bars for the Nissan Leaf battery pack and a high-current bypass switch, both in Europe, drove the growth over last year.

While we have limited visibility, we do anticipate this run rate will continue at least through the third quarter of fiscal 2014. Power Products gross margins increased in the second quarter to 26.2% from 12% last year and in the first half to 24.1% from 14.2% year-over-year.

The improvement was driven by a favorable product mix, as well as lower raw material and lower new product development costs. We anticipate this segment will meet its margin targets over the fiscal year.

Before turning the call over to Doug, I would like to briefly discuss the updated revenue chart we posted on our website and filed as a Form 8-K this morning. These sales projections are as of today, for fiscal years 2014 to 2017.

As new business awards -- our business opportunities are awarded, we will, as we have in the past, announce a significant awards on our quarterly conference calls. On the revenue chart, the opportunities in fiscal's 2016 and 2017 include pending automotive wins, sales from new products and current opportunities in non-Automotive business.

Of note, Methode's compounded annual growth rate from fiscal 2013 to fiscal 2017 is approximately 16% based on these projections. Now I will turn the call over to Doug, who'll give further details regarding our financial results..

Thank you, Don. Good morning, everyone. I have just a few brief comments on the quarter. In the second quarter, in SG&A, Don mentioned, the long-term incentive expense, the expense for the tandem cash awards was $1.7 million. This expense primarily reflects increase in our share price during the second quarter.

And that would continue as we -- the stack fluctuates until the end of our fiscal 2015. For the first 6 months, we spent $16.5 million for capital expenditures. For the full year, we continue to expect capital spending to be between $25 million and $30 million. This includes the additional capital needed to launch the SUV portion of the K2 program.

Depreciation and amortization expense for the 6-month period was $11.5 million. For the fiscal year, we expect full year depreciation and amortization to be between $23 million and $25 million. For the full year, the effective tax rate is $7.6 million.

This is lower than our previous estimates due primarily to increased domestic income, which is sheltered by net operating loss carryforwards. The effective tax rate does not include any adjustments to valuation allowances, which may result from charges -- changes in events and circumstances. Looking at free cash flow for the full year.

Given our guidance that we put out this morning, we would expect that to be between $65 million and $75 million. Don, that's all I have..

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

[Operator Instructions] Our first question is common from the line of David Leiker with Robert W. Baird..

This is Joe online for David. Just on the updated revenue targets today on the pathway to $925 million down the road.

Can you maybe talk more about what meaningful products contribute to reaching that target? And are there technologies or product lines that are maybe smaller today but could be more meaningful 3 to 4 year to now thinking along the same veins what the center console business has done?.

Sure. First off, we continue to book for '16 and '17 automotive products, although '16 will be tapering off here shortly. But I can tell you that we're in negotiation on probably $14 million of $15 million of business for '16 that contributes to that $77 million we're showing there.

That's hidden switches and various products of ignition switches is one various products are like that. And then in '17, we continue to book center console business that we announced a little bit ago.

And then on top of that, as we've detailed in your conference a month or so ago, transmission lead frames that we have today and employ of business with, we will continue to book that. 10 gigabit transceivers for datacom, that would be a new product, that would be introduced next year, we talked about that in our presentation.

I think that presentation is on our website, new Power Products, those are not launched. Those will be introduced at a tradeshow early next year for datacom customers.

And then to the last part of your question, the De Beer [ph] therapeutic [ph] support, which I think we have 2 pages of information on that on the presentation, that will launch next year, and that could certainly be a major contributor along the lines of center stacks..

You think It could be on the same magnitude as center consoles?.

If you do the research on press real sources, there's a very, very large market. Yes, it does have that potential, but we've not launched the product yet, so I'm not willing to say exactly what. But if you do the math, it's a very large opportunity..

Okay, interesting. Maybe just looking at the free cash this year, $65 million to $75 million. It seems like you're just scratching the surface of opportunities in the Datacom markets.

Would you maybe consider an acquisition to grow further? Or do you think the same as you have in-house and the portfolio right now are enough to grow quite comfortably?.

Well, acquisitions clearly are part of our strategy. And so we would certainly consider that. We've commented before, that we look for tuck-in acquisitions as well as major acquisitions, so something that would further the technology look after market and data would be a welcome opportunity for us..

And then maybe shifting over to the margin side. Right now, your earnings are running at basically $2 annualized, and thinking about the margin targets, the automotive business is basically running at your fiscal 2015 gross margin targets.

So would it be fair to say that you've been executing above the original plan and maybe some of these margins targets moved higher so Automotive is now 25%, a mid-20% gross margin type business?.

No, I don't think I would go that far as far. There's a lot of pressure in automotive. I think we'll stick with our target of low-20s. And we are -- we came out-of-the-box better than we thought because really a lower scrap of vertical integration went very well, but I don't know how much more above that we're going to get.

So I think we'll stick with where we are there..

And then my last one, if I just look at SG&A and strip out the incentive comp program, it basically looks like you're still running at 2008 to 2011 levels, but your revenues are about 2/3 higher than that time period.

So is this level sustainable or would you expect maybe a slow creep?.

Well, SG&A absolute dollars will grow, but we would expect to continue to get the leverage from a percentage standpoint. We, back in '08 and '09, we said we purposely maintained a very high SG&A level why we sought the new business and then launch that new business. So going forward, we should continue to get the leverage from that.

That's an integral part of our business plan going forward..

Our next question is coming from the line of Steve Dyer with Craig-Hallum..

A couple of questions.

Have you begun shipping the SUV portion of the GM program yet?.

I can't answer that..

I'm asking in a way that -- I'm trying to ask in a delicate way.

Would you anticipate that you will have shipped in this quarter?.

Let me answer it this way. We have performed our run add rate for our customer, and passed with flying colors so that is the final step towards production and we are filling our pipeline now..

Okay, fair enough. I noticed earlier this week the new Honda Civic is shipping with a capacitive touch screen, which strikes me as a little bit surprising given the price point and so forth of that vehicle.

Are you seeing more opportunities sort of downstream on the capacitive touch screen front?.

Yes, we are. Yes. Because it is a desirable feature in a vehicle, it provides for a more responsive touch for the customer, and it's not an easy -- not so an easy changeover, but it can be accomplished without having to redo your whole center console..

Sure, okay. And then I noticed on the torque sensor business, you exclude that here from your revenue waterfall. Is there any particular reason for that? Do you feel sort of less bullish than you have or you just don't have any wins yet? Or how do you....

Oh, no, not at all. We're still very bullish on the technology, but we had said in the past that we thought that those wins or revenues would come in the fiscal '18 timeframe, so we'd be a year out from '17 or from the chart that we just published. But no, we're still pursuing business there and providing funded prototypes to customers..

Sure, okay. And sort of speaking of that chart, I know sort of one of the pluses and the minuses, I guess, both is that you have great visibility, but there's not a lot of opportunity to influence that necessarily one way or the other.

But I noticed that, fiscal '15 has increased from $720 million, the last time you showed that chart, to $800 million now.

Sort of what accounts for that given that it's obviously not necessarily new revenue or new wins per se?.

We have more visibility into K2 and SUV, 31X, so that adjustment was made. Our Power Products have new products that have been successful, laundry program, so it's just we've got another years closer to '15 and adjusted the numbers accordingly. And then I think we've point out at the chart that we're using LMC Automotive data for our forecast..

Yes. Okay, makes sense. And the last question, just going back to the center console. I'm assuming you feel like you have enough sort of engineering time now that the K2 peg has move in through the pipeline so the speak, that you're aggressively bidding out sizable programs kind of in the '15, '17, '18 timeframe..

That's one of the things we point out to our customers on a regular basis and we've got several successful launches behind us and we have the engineering prowess and the capability to launch more programs for them..

Sure, okay. And then, I guess, one quick last one. Cash flow, as was mentioned, is starting to build pretty nicely, balance sheet is going to be already is impressive but it's only going to get better.

Other than acquisitions, any thoughts for management on that?.

We continue to invest in our businesses. We've detailed in our recent presentation some of the technologies we're working on. So first and foremost, we'll support our new business ventures with capital as needed. We continue to have a dividend that take a one quarter at a time, but we paid one for 35 years, and acquisitions are key to us.

And you talk about '15, we want to have a meaningful impact on '15 dual acquisition even if it's a tuck-in acquisition. That would be certainly support our growth in '15 beyond what we'll get from our current wins..

[Operator Instructions] Our next question is coming from the line of Jimmy Baker with B. Riley..

So Don, just a follow-up on the margin questions earlier. I think in your most recent presentation, it stated a 10% to 11% operating margin target for fiscal '15. But as you've mentioned today, the new fiscal '14 guidance suggests at least the low-end of that target is likely in play here in fiscal '14.

So I guess in light of that, how would you update your operating margin target for '15? And then even looking out a couple years, do you think you'd be running at maybe a mid-teens operating margin as you work towards the gross margin goals on higher volume? What kind of leverage are you expecting?.

Okay. Let me answer the first with the second half of your question first. We -- the new products that we've introduced or will be introducing are all geared to improving our margins. We've said publicly we target a 1% margin increase per year. We feel we'd be doing well if we could do that, I think that still holds.

I think we want to see how in the later years of '16 and '17, we want to see how these new products go on and what kind of margins we get from that. As to next year, I think I'll stick to my comment that 1% year-over-year increase is something we've targeted and we'll take a look at that as we get closer to '15 and the guidance.

I'm just very pleased that the number of initiatives we put in place aside from the sales increase but the number of initiatives that we put in place in our factories, in our business units are allowing us to get close to what we've set for next year..

Okay, that's helpful. And then if I remember correctly, I think on the last conference call when we were about halfway -- excuse me, a third of the way through the second quarter, you were looking for Q2 sales to be roughly flat sequentially and yet you ended up posting a 14% quarter-over-quarter gain.

I'm just trying to understand the drivers of the variance. Because it seems like the strength came from Automotive where you would typically have pretty good visibility 9 weeks forward.

Were you just not trusting the release that you were seeing at that time? Or were you maybe -- in other words, I guess, you may be overly conservative in discounting those? Or did you see a real strong push late in the quarter from your customers? Just trying to understand the variance from the last guide..

Okay. Let's talk about sales first. Auto sales -- worldwide auto sales were higher than we forecasted when we provided the guidance. I think that we're into some degree outside of territory on K2. We can't look back a year ago and look at sales.

And that's a key contributor to our forecast, so at the time, we looked at what releases we have, what information we had and we roll up a worldwide forecast, and that's what we based our guidance on. And if I look at the non-Automotive, [indiscernible] TouchSensor Power Products, they're all pretty much where we anticipated them to be.

It was the worldwide auto sales that came in higher than what we had forecasted. And then earnings and margin, I agree, it really just falls through from the auto sales, or factory efficiencies were slightly better than we anticipated, wayward commodity prices. And we also had lower taxes..

Okay, that's helpful..

Please go ahead, go ahead..

Just digging into the K2 a little bit further And I think you alluded to this on the no response to why the favorable revision to fiscal '15 revenue.

I think heading into fiscal '14, you were looking for $139 million in sales this fiscal year from that program including $29 million for the SUV, and then you saw that ramping to $216 million by fiscal '16.

Can you update those projections given what you've experienced so far and what the updated volume projections are for the program?.

Well, at this point, we will direct you to the published data on GM, LMC and others. I can't, because we're in production, I really can't comment on what that customer releases are. But I can tell you that we've taken that into account in our increased guidance and our projections for '15 and beyond.

And '15 and beyond is based on LMC data and the $139 million, that would obviously increase if we were to redo that number. But again, since we are in production now, I'd refer to large amount of data that's put out on GM..

Okay. And if I can just maybe give Doug a chance to speak here. Can you just maybe give us a view on how the tax rate will evolve over the next -- well, not just through the balance of this year, but over the next couple of years and the cash tax variance as your profitability mix shifts by geography.

And then also, what's the share count assumption for the shares guide, just a housekeeping item..

Sure. The share count guidance, I think, 38.4 million is what we're using currently, Jimmy. On the tax side, yes, our tax rate currently is about 7.6%, the effective tax rate, which is lower than we had last quarter.

And again, that's driven by the upside in domestic revenue, domestic earnings, and we're still benefiting from the net operating loss carryforwards in the U.S. What will happen eventually when the NOL is consumed, we expect the tax rate to jump up probably to around a 20% tax rate.

And in our Q, we added some additional disclosure about the fact that we don't have the luxury of just letting the NOL be consumed until it's expired, but the accounting rules will require us to pick up a tax benefit when we get to the point where we can fully -- we feel very comfortable that we will benefit from the utilization of the NOL.

So what will happen is that would be an event that happens in some future quarter for us. But I think going forward with life after the NOL, we're looking at about a 20% tax rate..

The next question is coming from the line of Mason Jones [ph] with Emerald Advisers..

So I was just curious, it seems that there was some anticipation that the actual production issues for the K2XX platform was going to have somewhat of a negative impact on your results this quarter.

Can you kind of just talk a little bit about why didn't really seem to impact you in any way?.

Are you referring to the American axle?.

Yes..

Well, I don't know. I don't want to speak for American axle, I certainly don't want to speak for GM..

Well, I guess, better way to phrase that is, it seems that there were downward revisions across the board on what the production looked like coming into October. So, I guess, that you would have expected that would have been impacted the guidance that you had planned for..

We ship what the customer releases to us, and we had arranged and we were -- actually, we ended up outside that range on the high-end. And I'm trying to answer your question, but it's difficult. We're in -- as I said to Jimmy, we're in uncharted territory. I can't look back a year ....

Okay.

So it's mostly because you didn't have anything to go off from a year ago, is that correct?.

That's correct..

Thank you. There are no further questions at this time. I would like to turn the floor back over to Mr. Duda for concluding comments..

Jesse, thank you very much. We'll thank everyone for listening and wish everybody a safe and pleasant holiday season. Good day..

Thank you, ladies and gentlemen. This does conclude today's teleconference. You may disconnect your lines at this time, and thank you for your participation..