Good morning, ladies and gentlemen, and welcome to Methode Electronics' Q3 Results. At this time, all participants have been placed on a listen-only mode, and we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Rob Cherry, Vice President of Investor Relations of Methode Electronics. Sir, the floor is yours.
Thank you, operator. Good morning, and welcome to Methode Electronics' fiscal 2022 Q3 quarter earnings conference call. For this call, we have prepared a presentation entitled Fiscal 2022 Q3 Financial Results, which can be viewed on the webcast of this call or found at methode.com on the Investors page. This conference call contains 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 statement 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 10-K and 10-Q reports. At this time, I'd like to turn the call over to Mr. Don Duda, President and Chief Executive Officer.
Thank you, Rob, and good morning, everyone. Thank you for joining us for our fiscal 2022 Q3 earnings conference call. I'm joined today by Ron Tsoumas, our Chief Financial Officer. Both Ron and I will have opening comments, and then we will take your questions. Let's begin with the highlights on slide 4. Our sales for the quarter were $292 million. Helping our sales by $9 million were successful premium freight cost recovery efforts. However, our Automotive segment encountered demand headwinds in Europe due to the ongoing supply chain disruptions, particularly the semiconductor shortage, leading to various European auto OEM production slowdowns. In our Industrial segment, we saw strength across all our product categories, but particularly in power and lighting products. In particular, the segment saw growth in electric vehicle busbars, commercial vehicle lighting, and radio remote controls.
These products continue to benefit from the macro growth trends in electrification, e-commerce, and automation. As such, our Industrial sales again outgrew our Automotive sales, a trend we expect to continue. As I mentioned, our team continued to face the ongoing supply chain challenges in the quarter. They have worked diligently to mitigate these challenges, which required remedial actions such as expedited shipping and premium component pricing. We have worked relentlessly with our customers to share in the absorption of these increased costs, particularly with the premium freight. In addition, we've taken the proactive step to consolidate an operation into another existing facility in response to these logistical challenges. We are confident this action will help reduce some supply chain risk, improve customer service, and ultimately drive margin expansion. Ron will provide more details on this restructuring later in the call.
On the order front, we had a very strong quarter with over $100 million in new program awards. Of these new awards, approximately 70% were for EV applications, and of the EV awards, a large majority were for power distribution products. I will provide more color on our new awards in a moment. Focusing on EV, last quarter, we reported that sales into EV applications were 16% of consolidated sales. This quarter, EV sales grew to 19% of consolidated sales, a record for Methode. Given our year-to-date performance with EV sales, we now expect that percentage will be in the high teens for the full fiscal year, up from our previous mid-teens guidance.
Our EV activity continues to be fueled by growth in power distribution, where we leverage over 40 years of expertise to supply power products to various EV OEMs. In the quarter, we further reduced debt and continued to return capital to our shareholders. While our debt was down to the lowest level since the Grakon acquisition, we did have an increase in net debt as we utilized a portion of our available cash to execute a $21 million share buyback in the quarter. We have now executed over $70 million of the $100 million stock buyback authorization since it was announced last March. Moving to slide 5. Methode had a very strong quarter of business awards. The awards identified here represent some of the key business wins in the quarter and represent over $100 million in annual sales at full production.
As a reminder, the full launch timing of some of these programs could be anywhere in the range of one to three years from now. As you can see, the list is dominated by EV programs representing three-quarters of the dollar value. Within those EV awards, power products were the main focus with several busbar programs and a battery disconnect unit program. One of those busbar programs was a significant first win for Methode with a large established German automotive OEM. These EV awards, which are part of the skateboard of the electric vehicle, are expected to have a longer program life than traditional ICE programs as the OEM will leverage their investment over multiple EV platforms and model or top-hat refreshes. In Non-EV Automotive, we were awarded programs for several user interface applications, including HVAC switch bars, overhead consoles, and parking brake switches.
We also won awards for a motorsport headlamp and a micro DPU for a telecommunications company. Overall, it was a very successful quarter for new programs that will drive organic growth in future years. To conclude, it was a well-executed quarter by a worldwide team, and despite some ongoing demand headwinds and supply chain challenges, we are still expecting to deliver strong organic growth for fiscal 2022. Looking beyond this fiscal year, our award pipeline continues to be strong, as evidenced by this past quarter, and puts Methode on a path to deliver long-term results. At this point, I'll turn the call over to Ron, who will provide more detail on our Q3 financials. Ron?
Thank you, Don, and good morning, everyone. Please turn to slide seven. Q3 net sales were $291.6 million in fiscal year 2022 as compared to $295.3 million in fiscal year 2021, a decrease of $3.7 million or 1.3%. The year-over-year comparison includes $8.6 million of premium freight cost recovery, partially offset by an unfavorable currency exchange impact on sales of $2 million. Excluding the premium freight cost recovery and the foreign currency impact, sales decreased by $10 million or 3.5%. The decrease in Q3 sales was mainly due to the lower Automotive sales in Europe.
This sales decrease was partially offset by higher sales of electric and hybrid vehicle products, which amounted to 19% of sales in the quarter, which is higher than our previous communication that electric and hybrid vehicle sales would comprise a mid-teens percentage of our fiscal year 2022 consolidated sales. We now expect electric and hybrid electric vehicle sales to represent the high teens of our full- year fiscal 2022 consolidated sales. In addition, stronger commercial vehicle and power product sales contributed to the Industrial segment growth. Income from operations decreased by $5.6 million, mainly due to marginally lower gross margins and marginally higher selling and administrative expenses. Q3 net income decreased $2.5 million to $29.4 million or $0.78 per diluted share from $31.9 million or $0.83 per diluted share in the same period last year.
Please turn to slide 8. Q3 gross margins were lower in fiscal 2022 as compared to fiscal year 2021 due to lower sales volume, unfavorable product mix, and higher restructuring costs, partially offset by premium freight cost recovery. Fiscal year 2022 Q3 margins were 23.7% as compared to 24.6% in the Q3 of fiscal year 2021. In addition, we do anticipate a degree of cost inflation in the remainder of this current fiscal year and into our fiscal year 2023. Fiscal year 2022 Q3 selling and administrative expenses as a percentage of sales increased to 11.8% as compared to 11% in the fiscal year 2021 Q3 . The minor fiscal year 2022 Q3 percentage increase was mainly attributable to restructuring costs.
This quarter, the selling administrative expenses percentage was in line with our historical norm, which should yield an efficient flow-through from gross margin to operating income. Please turn to slide 9. Net income was negatively impacted from the decreased sales, higher restructuring costs, unfavorable product mix, and higher selling and administrative expenses, partially offset by premium freight cost recovery, higher other income, and lower tax expense. In addition to the gross margin and selling and administrative items previously mentioned, one other non-operational item significantly impacted net income in Q3 of fiscal year 2022. As mentioned, other net income was up by $2 million, mainly due to success in securing higher amounts of international government assistance between the comparable quarters and lower foreign exchange losses from remeasurements.
The effective tax rate in Q3 of fiscal year 2022 was 12.2% as compared to 12.6% in Q3 of fiscal year 2021. The fiscal year 2022 full-year estimate of between 16% and 17% includes the impact of the $2.2 million of discrete items recorded in Q3 and is lower than the previous range of 17%-18%. Shifting to EBITDA, a non-GAAP financial measure, fiscal year 2022 Q3 EBITDA was $47.9 million versus $51.3 million in the same period last year. EBITDA was negatively impacted by lower operating income, mainly due to increased restructuring costs and unfavorable product mix, partially offset by premium freight cost recoveries and higher other income. Please turn to slide 10.
In Q3 of fiscal year 2022, we reduced gross debt by $7.5 million and ended the quarter with $153.1 million in cash. During the first nine months of fiscal year 2022, net debt, a non-GAAP financial measure, increased by $55.6 million, mainly due to the share purchases of $63.9 million and unfavorable working capital changes, especially related to inventory, which increased by nearly $45 million due to the supply chain- related challenges. Regarding capital allocation, on March 31, 2021, we announced a $100 million share repurchase program, which we have executed $21.3 million of purchases during Q3 of fiscal year 2022. Since the authorization's approval, we have purchased $71.2 million worth of shares at an average price of $44.72. Please turn to slide 11.
Free cash flow, a non-GAAP financial measure, is defined as net cash provided from operating activities minus CapEx. For the fiscal year 2022 Q3 , free cash flow was $11.8 million as compared to $82.2 million in Q3 of fiscal year 2021. The decrease was mainly due to negative working capital changes, especially from inventory resulting from difficult logistics and accounts receivable, which had a significantly favorable impact in Q3 of fiscal year 2021 as compared to Q3 of fiscal year 2022. In addition, CapEx was $8.3 million in the current quarter as compared to $4.9 million in Q3 of fiscal year 2021.
We do anticipate continuing our proven history of consistently generating reliable cash flows, which allow for ample funding of future organic growth, inorganic growth, and return of capital to the shareholders. The higher CapEx is in line with our expectation that CapEx in fiscal year 2022 would be higher than the investment in the prior fiscal year. We estimate fiscal year 2022 CapEx now to be in the $35 million-$45 million range, which is lower than our prior guidance of $45 million-$50 million. The decrease is simply the result of timing of cash outflows of approved projects as opposed to any concerted effort to slow or reduce the cadence of our capital investment. Investing for future organic growth and vertical integration remains a key priority from a net capital allocation strategy perspective.
We have a strong balance sheet, and we'll utilize it by continuing investments in our businesses to grow them organically. In addition, we assertively continue to pursue opportunities for inorganic growth and measured return of capital to shareholders. Please turn to slide 12. Regarding guidance, it is based on management's best estimate. External events such as the headwinds from the ongoing negative impact from the chip shortage, logistic challenges, and other related items can impact potentially our future results, and these headwinds remain an ongoing challenge. While we have experienced increased success in recouping some incurred costs, we expect these headwinds will likely be with us for the remaining three months of the current fiscal year. We increased our previously issued annual revenue guidance mainly due to the revenue from cost recoveries, which are non-product sales.
The revenue range for the full fiscal year 2022 is now between $1.16 billion and $1.17 billion, up from a range of $1.14 billion-$1.16 billion, largely due to the previously mentioned premium freight recovery cost recoveries, which amounted to $8.6 million in Q3 . The diluted earnings per share range has been tightened to $3.05-$3.15 from the prior range of $3-$3.20. The midpoint of our EPS guidance remains unchanged. Higher costs for material, freight, and labor are a constant and dynamic battle, and we remain uncertain as to when things will fully stabilize. Don, that concludes my comments.
Ron, thank you very much. Matt, we're ready to take questions.
Certainly. Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star one on your phone at this time. We do ask that while posing your question, please pick up your handset if you're listening on speakerphone to provide optimum sound quality. Once again, if you have any questions or comments, please press star one on your phone. Please hold while we poll for questions. Your first question is coming from Chris Howe from Barrington Research. Your line is live.
Good morning, everyone.
Good morning.
Thank you for taking my questions. Starting first off, two questions here. With the new business wins, you mentioned approximately 70% of the applications going to the EV market. Can you talk about these new business wins in a little bit greater detail as far as how you anticipate the potential or maturation of these new business wins as we move further out into the future over the next several years? I would imagine that we're just at the kind of initial stages of this, and the potential for additional EV application wins should only increase from here.
Yes, I would agree with that. You know, as I said, the EV awards, they'll get the full launch as short as 12, 16 months from now. The major ones are at least 24 months out to maybe even 30 months until you get the full launch. Just because it launches doesn't mean you're running at the f ull rate. They run the usual launch cycle of our ICE awards. Really nothing unusual there. You're right. The potential, you know, as you launch these programs, you'll see that carried over onto other platforms. You know, maybe a $20 million annual win might turn into $30 million-$35 million as you go through the launch. We do anticipate some of that occurring. A little more color.
A lot of those are on the skateboard, which is exciting for us. It's hard to predict the length of the programs. You know, the contracts are four or five years, some even longer. We're all in uncharted territory on, you know, how long the awards will go. Will they be like a transmission program, where our lead frame program is 10+ years? I think we can anticipate that. We like the skateboard awards because there's not as much refresh that's going on there. I would also say the majority of the awards, particularly the larger ones, are with established OEMs, which we also like to see. There's more confidence in the volumes rather than nothing against the startups we deal with, it's a little easier to predict future revenues with an established automaker.
That's perfect. Very helpful. Next, about the semiconductor situation, semis, we're still undergoing the situation. I think you hinted at it. It's going to go into fiscal year 2023. As we think about that challenge and perhaps also the challenges you're seeing in Europe, on a directional basis, how do you think that plays out in the first half of fiscal 2023 and the second half of fiscal 2023 when we kind of look at that versus how this past year is playing out?
You take the approach that it takes about two years to add capacity, and I might be a little light on the two years. We're about a year into it, maybe a little longer, depending on what was happening before the shortage in terms of capacity addition by the suppliers. Maybe a conservative way of looking at it is that the duration of this calendar year, I think that's gonna be an issue. Now, it may. Some people have predicted that it'll start to get better in the second half. We're kind of looking at it that this is until capacity has been added sufficiently. This is gonna be with us. That's really how we look at guidance, and that's really how we will look at our fiscal 2023 as well.
Yeah, no, I would say that it still provides a lot of uncertainty, not only to us in securing components so we can ship to our customers, but the OEMs that we serve. We're still dependent on how well they have navigated the shortage. We expect that to continue. You know, one thing we have done a better job, and we spoke about our success, is recovering costs and getting into more of a cost-sharing arrangement than we did in Q1 and Q2 of the year. We're certainly navigating the negative impact of that as best we can. Still, obviously, a lot of uncertainty on how it's gonna impact our customers ultimately and the demand for our product.
Okay. Yeah, a lot of industrial companies are going with the second half thesis, but in my opinion, that just means it's not going to be like the first half. We'll see how the second half plays out. A s I follow up on some of your comments there, Q4 is typically your strongest quarter. We know Q3 is typically weaker. Any puts and takes there that you can see at this point with how that plays out in fiscal year 2023 or too early to tell, and the typical seasonality of the business should run its course?
I agree with you. Generally, our Q4 is our strongest. As well, all of us mentioned here, the supply chain issues can impact that. As far as you know, as we look forward, I think we're like everybody else. There's so much uncertainty, it's hard to. You know, we can look at it on paper and say, organically, we're looking good. You really have to see what, you know, what starts to happen on the second half of the year. Our auto can be very tough. One thing that... Generally, it's fairly predictable in the past maybe two years, is running against that theory. It's very hard to say what June or July is going to bring. I'd like to answer that, but it's just like anyone else, we don't know.
All right. Well, thanks for taking my question. I'll hop back in the queue to give others a chance. Thanks.
Thank you. Your next question is coming from John Franzreb from Sidoti & Company. Your line is live.
Good morning, everyone, and thanks for taking the questions. I'd like to start with the Industrial business. It had a good quarter on a year-over-year basis and was up sequentially, despite the seasonality of having the days off in that Q3 . What do January and February tell you about the recovery in the Class 8 truck market and how it's kind of looking for the balance of calendar 2022?
The way we look at the commercial vehicles, that's a definite tailwind for us as we go into the second half of the year. Sales have been good. Last mile vehicles, I think ACT has the numbers up. We're very positive on that. It certainly helped the Q3 , no question about that. Now, to what degree, as I said to Chris, that's negatively affected by shortages and so on, we'll have to see. In general, we see that as a bright spot looking forward.
No, that's. We follow the ACT, and everything's, you know, looking pretty good. You know, unless something happens, we would expect, you know, the Q4 to improve.
One of the things that when we talk about restructuring, we did a logistics move out of Seattle and the port congestion there, and we consolidated in our Mexican logistics center. So that'll take a while to sort through, but we did that to one, to certainly reduce inventory and some of the volatility and be able to service our customers better than that. We did take that step in the quarter. Yeah. I would imagine to go through the system, it'll be Q1 of next year before we see the results of that. Yeah.
Got it. Just a little clarity on the freight recovery costs. It seems like in the press release, it's a zero impact on profitability. Then, when I was perusing the Q, it seemed like it did have an impact on the gross margin profile. Could you just help me understand how this mechanism is working so I can get a better grasp of the whole concept here?
Sure. We're in a position now as compared to before, where before we do any premium freight, we either contract or cost share, and we're getting the improvement from previously incurred costs, and that was what that $28 million was, a recovery for costs in Q3 that occurred in Q1 and Q2 when we were significantly negatively impacted by that. We're going to continue to get straight up before we do things, and agree to cost sharing, so we don't have that negative impact. We're going to continue to try to recover any previously premium freight or any other cost for that matter.
We're gonna continue to do so, and the cadence of that success could happen in this quarter. It could happen in Q1 of next year. Those are the mechanisms that we did. We just felt it was pretty important to spike that out as "non-product sales," and that we are starting to see some significant success. You know, in the first two quarters, one was 240 basis points, you know, $7 million-$8 million in each of the first two quarters. In this quarter, it was negligible, right? We've made an impact, and that's how we should be, you know, kind of thinking about that on a go-forward basis.
Got it. That was helpful. I guess one last question. On the other income line, are there two items there or is there one? Is there a $2.2 million and a $1.1 million? One's a grant and one's a COVID recovery number. What were those numbers, and how should I think about that line going forward?
Yeah. You know, the other income line consists of any government assistance, whether it's COVID-related or whether it's related to some other opportunity that we have to secure funds. The other one is the foreign exchange from remeasurement and all of our financial assets and accounts payable, all those financial assets. Those are the two main parts, but we keep all government assistance in that other income line.
Are you still receiving government assistance in Q4 ? Is that part of your guidance?
In Q4 , we continue to try to secure all the... That's always an ongoing thing for the company, and any success in that has been contemplated in our guidance.
Got it. All right. Thanks for taking my question. Go ahead.
It's COVID. [crosstalk]
Okay. All right. I'll get back into the queue, guys. Thanks for taking the questions.
Thank you.
Thank you. Once again, ladies and gentlemen, if you have any questions or comments, please press star one on your phone at this time. Your next question is coming from Nick Stephan from Baird. Your line is live.
Hey, everyone. Thanks for taking my questions.
Hi, Nick.
My first one is insofar as your updated 2022 guidance is also de facto Q4 guidance, and considering we're already a month into the quarter, could you just walk us through the puts and takes assumed at the high and low ends of the guidance range, respectively? What do you see as the main swing factors for your fiscal Q4?
If rightfully so, it is de facto Q4 guidance. You know, some of the puts and takes are the recovery, the cadence, and the amount of recovery in European auto as compared to the $16 million decrease we had in Q3 . F rom a product standpoint, that would be that. Having a bit of, you know, recovery in some of our sensor products and things of that nature. The cadence and the amount of that would. You know, we narrowed the range to the $10 million, right? Those are the main puts and takes that we contemplated from a product standpoint in getting to that tightened- up range.
Yeah. We can say that sensors were somewhat affected in Q3 . Not by shortages on our part, but on our major customer's part. What was it? Magnesium.
Magnesium. Yeah.
Magnesium. We're anticipating that we'll see some recovery in Q4 and probably in our Q1 .
It wasn't a lack of demand.
It was a supply issue.
Perfect. That's super helpful. That leads into my last question on sensors, and a little bit bigger picture, but could you guys provide any update on kind of key sensor-related opportunities for Methode? How has that business performed this year versus your expectations? Thanks.
From expectations, it's at or slightly above. It was, and then Q3 was down a bit due to the aforementioned shortages. We'll have to see where we end the year, but that's definitely a bright spot for us. The main use is in e-bikes. E-bikes continue to be very popular in Europe, and they are definitely, if you pardon the pun, gaining momentum in the United States as well. Going forward, we see that as a bright spot for us in e-bikes. We continue to look for other applications. There's a medical application perhaps in electric wheelchairs that are lithium- powered. That won't be as probably large a market as we would see with e-bikes. We continue to look for applications for the sensors.
Perfect. Thanks.
Thank you.
Thank you. That concludes our Q&A session. I will now hand the conference back to Donald Duda, President and CEO of Methode Electronics, for closing remarks. Please go ahead.
Matt, thank you very much, and we'll thank everyone for listening, and have an enjoyable upcoming weekend. Thank you.