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Text: I'm joined today by Ron Tsoumas, our Chief Financial Officer.
Let's begin on Slide 4 with a brief summary of our financial results for our fiscal second quarter, which ended on October 31.
Methode's second quarter sales increased 17% to nearly $301 million.
Our net income increased 62%, and our diluted earnings per share increased 60%.
Ron will provide more detail on financial results a bit later.
Turning to the business highlights on Slide 5.
The $301 million in net sales, as well as our $45 million in income from operations, were both records for Methode.
The resulting operating income margin was 15%.
These record results -- these record results are validation of our strategy and the product of the relentless efforts and commitment of our global team.
In the quarter, we saw significant rebound in automotive demand as compared to the first quarter, which has been impacted by the pandemic and created uncertainty in OEM production schedules.
The Automotive segment sales for the quarter were also a record at $216 million.
It was another strong quarter for our EV businesses, as well.
Sales for EV applications were over 9% of our total consolidated sales.
We also saw continued strength for EV bookings during the quarter with the annual expected sales from those awards totaling over $28 million.
As many of you know, much of Methode's historical growth came from our user interface products.
With our move into vehicle LED lighting and with our long-standing reputation and capabilities in power distribution, in conjunction with user interface, Methode is uniquely qualified as a three-pronged solution provider for electric vehicles.
We are globally well positioned and anticipate continued growth in this market.
Regarding our balance sheet, we continued to generate strong free cash flow and reduced our net debt in the quarter.
We have ample liquidity and our net leverage ratio continues to be low.
The strength and flexibility to our balance sheet allows us to consider multiple paths to invest in the business in order to drive growth and shareholder return.
On COVID-19, I continue to take pride in our employees' incredible commitment to Methode and supporting our efforts to provide a safe work environment.
All of our facilities are currently open and we are making prudent use of work-from-home where possible.
We do anticipate seeing some level of uncertainty from COVID-19 throughout the remaining fiscal year.
However, as I stressed since the beginning of this pandemic, we will continue to invest in our businesses for long-term growth.
Moving to Slide 6.
During the second quarter, Methode booked a number of awards capitalizing on the strategic trends in vehicle electrification, LED lighting and data centers.
The awards identified here represent a cross-section of the business wins in the quarter and represent over $40 million in the annual business.
In vehicle electrification, we won awards for ambient and functional lighting, overhead console and busbar programs totaling over $28 million annually.
As I highlighted last quarter, we continued to win programs with OEMs in the US, Europe and Asia.
EV is a global growth driver for Methode.
In non-EV LED lighting, we were awarded programs for several auto applications.
We also continued to participate in the growth of the data centers driven by cloud computing with programs for busbars and pluggable modules.
Lastly, we experienced a bounce in aerospace with defense program award.
Of note, in the first half of the fiscal year, Methode booked awards approximately $100 million in annual sales.
Looking forward, we are providing sales and earnings per share guidance for only the fiscal 2021 third quarter due to the market risk and uncertainty from the ongoing pandemic.
Turning to Slide 7.
We recently presented at an investor conference, and I would like to share our key messaging from it.
Our strategic focus is on diversification, growth and financial improvement.
Given the progress that we've made, diversifying our product portfolio into power, lighting and sensors, we are now actively capitalizing on key market trends like EVs, commercial vehicles and cloud computing.
With our technology solutions portfolio, we are able to address customer needs while increasing content per vehicle, penetrating non-auto markets and cross-selling into existing customers.
This will allow us to drive organic growth, something we were clearly demonstrating in fiscal 2020 until forwarded by the UAW strike at General Motors and COVID-19.
At the same time, we expect to continue to augment our technology and product portfolios through acquisitions that build on our strategy.
We believe these actions will further improve our product mix, and combined with operational efficiencies, will help to drive margin expansion.
Lastly, through our lean manufacturing capabilities, we are targeting further improvement in working capital.
Moving to Slide 8.
As I mentioned earlier, much of Methode's historical growth came from our user interface products.
With our move into vehicle interior and exterior LED lighting, and with our long-standing experience and capabilities in power distribution, Methode has become uniquely qualified as a three-pronged solution provider for electric vehicles.
In addition to our user interface offerings such as overhead consoles, integrated center consoles and switches, for our second prong, we are leveraging the powerful combination of our auto grade manufacturing operations, our auto pedigree, and our distribution expertise to supply various busbars, connectors and battery disconnect units to the EV OEMs. Our third prong in our approach to the EV market is lighting.
We are able to supply our Pacific Insight ambient lighting technology and our Grakon LED technology to provide both interior and exterior lighting solutions.
Our energy-efficient led is an ideal fit for EVs and their need to minimize power consumption.
Turning to Slide 9.
With the growing shift from internal combustion engines to electric vehicles, method has a clear opportunity to grow our content per vehicle.
Additional content in an EV could range from 20% to over 100% above our current content on internal combustion vehicle.
We expect EV applications to be a high-single-digit percentage of our current fiscal year total sales, and we have an order pipeline that should easily drive that to low-double-digit percentage in our next fiscal year.
EV is a clear tailwind for Methode.
Next, I'd like to comment on our new five-year long-term incentive plan, as described in our September 8-K filing, which includes time based and performance-based awards.
The performance-based awards may be earned based on fiscal 2025 EBITDA with threshold target and maximum performance goals.
On Slide 10, you can find the EBITDA target performance.
As some of you know, the Methode team concluded two such plans, when ending in fiscal year 2015 and the other in fiscal year 2020.
The more recent plan resulted in over 7% annual EBITDA growth, and our new plan targets just under 8% annual growth.
While we always have to contend with programs going end of life, and we may exit businesses for strategic reasons, we are confident that we have a path via organic growth, operational improvements and acquisitions to achieve the target of $300 million in EBITDA in fiscal year 2025.
To conclude, given the recent macroeconomic and pandemic situations, I am extremely pleased that our strategy and team were able to deliver record results, generate significant free cash flow and win additional EV awards in the quarter.
Second quarter sales increased 17% or $43.6 to $300.8 million in fiscal '21 from $257.2 million in fiscal '20.
The sales in the second quarter were positively impacted by the increased demand in all of our reporting segments as we recover from the lower first quarter production levels due to the COVID-19 pandemics.
The year-over-year quarterly comparisons benefited from the $32 million impact of the UAW strike on General Motors in the second quarter of fiscal '20.
In addition, the favorable impact of foreign currency on sales was $6.5 million in the current quarter.
The company generated year-over-year organic growth.
Second quarter net income increased $14.8 million to $38.6 million, or $1.01 per diluted share, from $23.8 million or $0.63 per diluted share in the same period last year.
In addition to the flow-through from higher sales and leveraging of SG&A expenses, second quarter net income also benefited from other income from foreign governmental COVID-19 assistance of $3.3 million, partially offset by $4.2 million of restructuring costs.
Second quarter gross margins were slightly higher in fiscal '21 as compared to fiscal '20, mainly due to higher sales volumes.
Fiscal '21 second quarter margins were 26.9% as compared to 26.7% in the second quarter of fiscal '20.
From a sales growth perspective, segment growth mix was unfavorable as a 4% increase in sales in the highest margin industrial segment was partially muted by the 19.8% and 37.8% increases in the automotive and interface segments, respectively.
These segments have a lower gross margin profile as compared to the industrial segment.
The fiscal '21 second quarter gross margins included $2.7 million of restructuring expense and the second quarter of fiscal '20 gross margins included $200,000 of restructuring costs.
Second quarter selling and administrative expenses as a percentage of sales decreased 270 basis points year-over-year or 10.2% compared to 12.9% in the fiscal '20 second quarter.
The fiscal '21 second quarter figure was attributable to leverage gained from increased sales, lower stock-based compensation expense, lower wages and associated benefits due to the COVID-related salary reduction and shorter work weeks, and much lower travel expense, partially offset by restructuring expense of $1.5 million.
There was $300,000 of restructuring expense in the second quarter of fiscal '20.
Regarding our restructuring activities, the company continues to monitor market factors and trends and will continue to evaluate possible additional actions to reduce overall costs and improve future operational profitability, especially in the current COVID-19 environment, which has seen an alarming increase in cases globally.
The company currently expects an additional restructuring expense of $700,000 in fiscal '21 resulting from the second quarter actions.
The company may take additional actions in the future based on conditions as required.
Net income was $38.6 million in the second quarter of fiscal '21 as opposed to $23.8 million in the second quarter of fiscal '20.
The main drivers between the fiscal periods were higher sales, receipt of $3.3 million of foreign government assistance due to COVID, lower selling and administrative expenses, partially offset by higher restructuring costs.
Shifting to EBITDA, a non-GAAP financial measure.
Fiscal '21 second quarter EBITDA was $60.2 million versus $43.6 million in the same period last year.
EBITDA was positively impacted by increased sales, foreign governmental COVID assistance and the benefit from restructuring actions taken in prior fiscal years.
A few other financial items to review.
In the second quarter of fiscal '21, we invested approximately $3.6 million in capex as compared to $13.6 million in the second quarter of fiscal '20.
The fiscal '21 year-to-date second quarter investment represents an approximately $30 million run rate for the current fiscal year.
The lower second quarter capex was simply due to timing as opposed to a conscious effort to curtail capex.
We have a strong balance sheet and intend to utilize it during this COVID-impacted fiscal year to make continued investments in our businesses to grow them organically in the future.
In addition, we continue to pursue opportunities for inorganic growth.
Our intent is to emerge from the COVID pandemic stronger than we went into this crisis by judiciously using our strong balance sheet to our long-term advantage.
Income tax expense in the second quarter of fiscal '21 was $7.6 million as compared to a tax expense of $5.2 million in the second quarter of fiscal '20.
The fiscal '21 second quarter tax rate was 16.5% as compared to 17.9% in the same period last fiscal year.
This relatively minor difference in effective tax rate was due to jurisdictional earnings and not discrete income tax activity.
We deleveraged gross debt by $2.2 million in the second quarter.
Since our acquisition of Grakon in September of 2018, when adjusting for the $100 million precautionary credit facility draw in March of 2020, we have reduced gross debt by $110 million.
Net debt decreased by $29.5 million in the second quarter of fiscal '21 as compared to the fiscal '20 year-end from $134.8 million, to $105.3 million.
We ended the second quarter with $242.3 million in cash, which includes the $100 million precautionary draw on the credit facility in March.
In November, we repaid $50 million of the March precautionary draw, and we'll continue to evaluate the landscape in the third quarter and may pay down the precautionary draw even further.
Our debt to trailing 12 months EBITDA ratio, which is used for our bank covenants, is approximately 1.7.
This figure includes the impact of the precautionary $100 million draw we initiated in March.
Without the draw, the ratio would have been approximately 1.2.
Our net debt to trailing 12 months EBITDA ratio was a strong 0.5.
Free cash flow, a non-GAAP financial measure, which effective in fiscal '21 is defined as cash provided from operating activities minus capex.
Prior to fiscal '21, it was defined as net income plus depreciation and amortization less capex.
For the fiscal '21 second quarter, free cash flow was $36.7 million as compared to $35.1 million in the second quarter of fiscal '20.
As Don mentioned in his remarks, we are providing revenue and earnings per share guidance for the third quarter, which is subject to disruption at any time due to a variety of factors including the ongoing COVID-19 pandemic situation.
Please note that the third quarter of fiscal '21 contains 13 work weeks, whereas the third quarter of fiscal '20 had 14 work weeks.
The revenue range for the third quarter is between $265 million and $285 million.
Diluted earnings per share range is between $0.69 and $0.85 per share.
Don, that concludes my comments.
Operator, we are ready to take questions.

user
compname posts q2 earnings per share $1.01.
q2 earnings per share $1.01.
q2 sales $300.8 million.
sees q3 earnings per share $0.69 to $0.85 including items.
sees q3 sales $265 million to $285 million.

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