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Text: I'm joined today by Ron Tsoumas our Chief Financial Officer.
Let's begin with the business highlights on Slide 4.
Our discussions of year-over-year comparative results should be viewed in this context.
For illustration, our sales on a weekly run rate basis and excluding favorable currency translation were up 8% from the prior year.
We share this to give investors insight on how we view the underlying strength of our business, which clearly improved year-over-year.
While the top line was strong, we do have some headwinds to gross margin in the quarter.
Supply chain disruptions led to additional costs such as premium freight as well as to factory inefficiencies.
Moving forward, these challenges will linger and be joined by demand disruptions caused by the ongoing semiconductor and potentially other material shortages, some of which are related to the recent extreme weather events in the US.
This is driving a level of near-term uncertainty that can be seen in our wide guidance range for the fourth quarter.
However, none of these issues are systemic and we expect most to be resolved by the middle of this calendar year.
Our confidence in the situation improving is evidenced by our decision to give an early indication of our anticipated sales for fiscal 2022 of over 10% organic growth.
In addition, as the commercial vehicle market continues to rebound, our sales mix is expected to further improve gross margin.
Turning to our Automotive business.
We continue to see strength in demand.
Our sales in EV grew and we had a strong Awards for Power, Lighting and User Interface programs in the quarter.
Last quarter we reported that sales into EV applications were over 9% of consolidated sales and were expected to be in the high single-digits for fiscal 2021.
This quarter, EV sales were over 12% of consolidated sales and we now expect that number to be over 10% for fiscal 2021.
Furthermore, our healthy pipeline of EV programs now gives us visibility to project that this percentage will be in the mid-teens in fiscal 2022.
Methode's combination of user interface, LED lighting and Power Distribution Solutions is a winning formula in EV and positions us well for continued growth in this exciting market.
Regarding our balance sheet.
We generated over $80 million in free cash flow and significantly reduced our net debt in the quarter.
The debt reduction was driven by the full repayment of our $100 million revolver draw from March of last year.
We continue to have ample liquidity and our net leverage ratio was now near zero.
The strength and flexibility of our balance sheet allows us to consider multiple paths to invest in the business in order to drive growth and ultimately shareholder return.
In addition to the COVID-19 pandemic, we faced a growing impact from a semiconductor shortage in the quarter.
While the COVID-19 situation is improving, the ongoing operating issues from it remain.
In regard to the chip shortage situation, the impact of Methode in the third quarter was minimal, however, we do anticipate a financial impact in our fourth quarter and beyond as a result of the aforementioned issues as well as other potential supply chain disruptions.
Moving to Slide 5.
Methode had its best quarter of this fiscal year for booked awards.
These awards continue to capitalize in key market trends like vehicle electrification, LED Lighting in Auto and Sensors in e-Bikes.
The awards identified here represent a cross-section of the business wins in the quarter and represent over $50 million in annual business.
In vehicle electrification, we won awards for busbar, power distribution and user interface programs.
We continue to win programs with OEMs globally in auto, commercial truck and even charging station applications.
In non-EV LED Lighting, we were awarded programs for several auto applications.
We also continue to participate in the growth of e-Bikes, which utilizes our proprietary Magneto-elastic technology.
Lastly, we won two sizable awards for User Interface programs with international automotive OEMs. For the first three quarters of the fiscal year, Methode has booked orders of over $150 million in potential annual sales.
We continue to build on our foundation for organic growth.
Regarding the anticipated roll off of our largest auto program, while we can't comment on our customers' timing, we are pleased that our strong new program bookings over the last several quarters has put us on a track in aggregate to replace the sales from that program.
We are also pleased to protect that our sales from any single customer is expected to drop below 25% from a high of approximately 50% four years ago, all while we continue to grow our top line.
We are definitely making progress on reducing both customer and program concentration.
Turning to Slide 6.
I would like to elaborate further on our footprint in EVs.
As I've shared with you before, Methode has become uniquely qualified three-pronged solution provider for EVs.
Those solutions includes, User Interface, LED Lighting and Power distribution.
The architecture of EV is generally divided into two parts.
The Top Hat and the Skateboard.
The Top Hat is essentially a body of the vehicle and varies from model to model.
The Skateboard is the chassis or framework of the vehicle.
As many of you know this type of vehicle architecture is a game changer with EVs, as it can be standardized and leveraged across multiple models and platforms.
On the Top Hat, Methode offers its traditional vehicle solutions of User Interface and LED Lighting, along with some EV specific solutions such as charging ports.
These charging ports are fairly complex and include features such as actuators and lighting, in addition to the power connection itself.
On Slide 7, we show Skateboard.
This is where Methode leverage its unique combination of auto grade manufacturing operations, our Auto pedigree and Power distribution expertise to supply various busbars, connectors and battery disconnect units to the EV OEMs. We are also gaining traction with sensor solutions for By-wire systems and battery monitoring.
However, it is in the Power distribution where the largest content growth opportunity lies.
Historically, our participation with Power products and internal combustion vehicles was minimal.
In EVs it is quickly growing as -- and has reached approximately half of our product sales for EV applications.
Consequently, Methode has a clear opportunity to incrementally grow our content per vehicle with the transition to EVs.
The additional content in EV could range from 20% to over 100% of our current content on an internal combustion vehicle.
As I've said in the past, EV is a definite organic growth tailwind for Methode.
To conclude, given the recent supply chain challenges and the ongoing pandemic situation, I am extremely pleased that our strategy and our team were able to deliver at the high end of our previous guidance, generate significant free cash flow and win substantial new program awards in the quarter.
Please note that the third quarter of fiscal year '21 contains 13 work weeks, whereas the third quarter of fiscal year '20 had 14 work weeks.
Third quarter sales were $295.3 million in fiscal year '21 compared to $285.9 million in fiscal year '20, an increase of $9.4 million or 3.3%.
The year-over-year quarterly comparisons included a favorable foreign currency impact on sales of $9.7 million in the current quarter.
On a weekly run rate basis and excluding the foreign currency impact, net sales were up a solid 7.6%, compared to the same quarter of fiscal year '20.
The increase was due in part to higher sales of Electric and Hybrid Vehicle Solutions.
Third quarter net income decreased $9.3 million to $31.9 million or $0.83 per diluted share from $41.2 million or $1.09 per diluted share in the same period last year.
In addition to one week less of production activity in the current fiscal quarter, the decrease was primarily due to premium freight and factory inefficiencies resulted from supply chain disruptions due to COVID-19 and to a lesser extent increased tariff expense and product sales mix.
Also contributing to the decline was lower other income of $2.5 million and higher income tax expense of $1.8 million.
Third quarter gross margins were lower in fiscal year '21 as compared to fiscal year '20, mainly due to premium freight and factory inefficiencies resulted from supply change disruptions due to COVID-19 and the mentioned tariff expense and product sales mix.
Fiscal year '21, third quarter margins were 24.6% as compared to 27.7% in the third quarter of fiscal year '20.
The premium freight and other expenses resulting from inefficiencies in the supply chain that were experienced in the third quarter are expected to continue in the fourth quarter.
However, we do not believe these issues are systemic and based on our knowledge at this time, it will gradually be resolved in the fourth quarter with lesser impact to the first quarter of fiscal year '22.
Third quarter selling and administrative expenses as a percentage of sales decreased 50 basis points year-over-year to 11% compared to 11.5% in the fiscal year '20 third quarter.
The fiscal year '21 third quarter percentage was attributable to lower compensation expense, lower travel expense and restructuring costs, partially offset by higher stock-based compensation expense.
The decrease in compensation expense was primarily related to the benefit of restructuring actions taken in the first quarter of fiscal year '21.
While we anticipate an increase in the SG&A percentage on a go-forward basis due to a full year of LTIP amortization on the restricted stock units and more normal travel expense, we expect the future SG&A expense percentage to be more in line with our historical norms, which is still yield and efficient flow-through from gross margins operating income.
Regarding our restructuring activities the third quarter expense was $700,000 and the year-to-date third quarter expense was $8.3 million.
The company currently expects an additional restructuring expense of $200,000 in the remainder of the fiscal year, resulting from the previous quarters actions.
The vast majority of the restructuring took place in the first half of the fiscal year.
In addition to the gross margin and SG&A items mentioned above, two other non-operational items significantly impacted net income in the third quarter of fiscal year '21 as compared to the comparable quarter last fiscal year.
First, other income net was lower by $2.5 million, mainly due to lower government assistance between the comparable quarters.
Second, income tax expense in the third quarter of fiscal year '21 was $4.6 million or 12.6% as compared to a tax expense of $2.8 million or an effective tax rate of 6.4% in the third quarter of fiscal year '20.
The 12.6% effective tax rate for the quarter was less than the estimated tax rate due to the benefits of some tax planning enacted in the third quarter, which was retroactively applied to the first quarter of the current fiscal year.
We expect to benefit from the third quarter tax planning in the current fourth quarter, which will result in an estimated fourth quarter effective tax rate of 15%, down from the previously guided rate of 17%.
Shifting to EBITDA, a non-GAAP financial measure.
Fiscal year '21 third quarter EBITDA was $51.3 million versus $58.7 million in the same period last year.
EBITDA was negatively impacted by the higher costs I previously noted.
We reduced gross debt by $103 million in the third quarter, resulting from the full repayment of the $100 million precautionary draw we initiated in March 2020.
Since our acquisition of Grakon in September 2018, we have reduced gross debt by $113 million.
Net debt, a non-GAAP financial measure decreased by $108.9 million in the third quarter of the fiscal year '21 as compared to the fiscal year '20 year-end from $134.8 million to $25.9 million.
We ended the quarter with $218.7 million in cash.
Our debt to trailing 12 month EBITDA ratio, which is used for our bank covenants is approximately 1.3.
Our net debt to trailing 12 months EBITDA ratio was 0.1.
Free cash flow, a non-GAAP financial measure, which effective in fiscal year '21 is defined as cash provided from operating activities minus capex.
For the fiscal year '21 third quarter, free cash flow was $82.8 million as compared to $6.7 million in the third quarter of fiscal '20.
The strong free cash flow performance was driven by an approximately $40 million favorable change in working capital in the quarter.
While this level of working capital execution is not likely to be sustainable, especially as we navigate through supply chain challenges, we anticipate continuing our history of consistently generating predictable cash flows, which will allow for ample funding of future organic growth, inorganic growth and return of capital to the shareholders.
In the third quarter of fiscal year '21, we invested approximately $4.9 million in capex as compared to $8.1 million in the third quarter of fiscal year '20.
The lower third quarter capex was simply due to timing as opposed to any conscious effort to curtail capex.
We approved capex during the quarter that was not reflected in the cash flow statement as the actual outlay for these improved expenditures will occur in future reporting periods.
We have a strong balance sheet and we'll continue utilizing it by continued investment in our businesses to grow them organically in the future.
In addition, we continue to actively pursue opportunities for inorganic growth.
As Don mentioned in his remarks, we are providing revenue and earnings per share guidance for the fourth quarter which is subject to disruption at any time due to a variety of factors including direct and indirect impacts from the ongoing COVID-19 pandemic situation, the semiconductor supply shortage and potential challenges from supply disruption resulting from the severe weather experienced in the US in mid-February.
The revenue range for the fourth quarter is between $270 million and $300 million.
Diluted earnings per share range is between $0.60 and $0.82.
The wide range is due to the uncertainty from the supply chain disruption for semiconductors and other material on both Methode and its customers.
Factors that could result in us moving toward the higher end of the sales rate include higher sales due to lesser supply disruption to us and/or our customers, which would result in higher demand for all our products.
Lesser disruption would also minimize the cost of sales impact from premium freight, factory inefficiencies and to a lesser extent tariffs and other logistic factors such as port congestion.
Don that concludes my comments.
Catherine, we are ready to take questions.

user
compname reports q3 earnings per share $0.83.
q3 earnings per share $0.83.
q3 sales $295.3 million.
sees q4 earnings per share $0.60 to $0.82 including items.
sees q4 sales $270 million to $300 million.

assistant