Good day, everyone. Welcome to the Methode Electronics third quarter fiscal 2023 results. At this time, all participants have been placed on a listen-only mode. 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, Robert Cherry, Vice President of Investor Relations at Methode Electronics. Sir, the floor is yours.
Thank you, operator. Good morning, and welcome to Methode Electronics fiscal 2023 third quarter earnings conference call. For this call, we have prepared a presentation entitled Fiscal 2023 Third Quarter Financial Results, which can be viewed on the website 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. 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, Robert Cherry, good morning, everyone. Thank you for joining us for our fiscal 2023 third quarter 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 four. Our sales for the quarter were $280 million. They were down 4% compared to the prior year, but up 4% excluding a significant headwind from foreign exchange and a sharp drop in material spot buys and premium freight cost recovery. The increase was mainly due to higher sales in the industrial segment, driven by power distribution solutions for electric vehicles and data centers. Our power product sales continue to be the catalyst behind our strategic pivot to more industrial business and a reduced reliance on user interface solutions.
This also results in a better sales balance between our automotive and industrial reporting segments. In the quarter, we continued to face ongoing cost increases due to inflation in material and labor, which continues to be a drag on margins. We can, however, as I previously stated, report a significant reduction in spot buys and expedited shipping, and we continue to gain traction with price increases, which will lag as a matter of process. On the order front, we had a modest quarter with approximately $30 million in annual program awards. These programs were once again dominated by electric vehicle awards. After the end of the quarter, we announced a public tender offer for the shares of Nordic Lights, a very exciting opportunity for us to grow our LED lighting solutions franchise and gain more industrial and non-auto transportation market exposure. I will provide more detail on this shortly.
Turning back to EV activity, sales in the quarter reached a record 24% of our consolidated total. We increased our full-year percentage outlook to 21%. In regard to EV awards, we've now won over $120 million in annual program awards year to date and have a very strong pipeline in front of us. In the quarter, we continued to raise debt, which again at its lowest level since the Grakon acquisition in 2018. During the quarter, we purchased approximately $8 million of stock. Of the announced $200 million board authorization, we have purchased $111 million in total. This buyback program has been a key part of our capital allocation strategy. Lastly, just as important as anything on this slide, we generated $43 million in free cash flow in the quarter.
I would not view this as a run rate as complexity based on the dynamics of our working capital, but it is certainly an indication of our attention to operational performance and the importance of generating cash in our business model. Moving to slide five. The awards identified here represent some of the key wins in the quarter and represent $21 million in annual sales at full production. As a reminder, the launch timing of most of these programs could be anywhere in the range of one-three years from now. In the quarter, all of our major awards were for EV programs. The awards were mainly for power products associated with the EV skateboard architecture, but they also include programs for lighting and user interface solutions for the top hat. The awards were also heavily weighted towards Asia, where EV quoting activity has clearly picked up.
I'd like to take a step back and reflect on our EV activity over the last three years. As you can see from this chart, since the beginning of fiscal year 2021, we have won approximately $400 million in EV awards. This award stream acts like a backlog of potential future business. There is little doubt that EVs will be driving our organic growth. Moving to slide six. I'd like you to turn to the exciting opportunity that we have with the tender offer for Nordic Lights. They are a global supplier of mission-critical lighting solutions, including work and driving lights for heavy-duty equipment with a reoccurring and diversified OEM business and a considerable aftermarket. Our management team has been very impressed with Nordic Lights and its management team, its market position, and its customer base. Let me provide a few details.
Methode announced the public offer last week on February 28th. The board of directors of Nordic Lights has agreed to recommend that the shareholders of Nordic Lights accept the offer. Approximately 57% of Nordic Lights shareholders have already undertaken to accept the offer. Nordic Lights aligns well with Methode stated inorganic growth framework, given its focus on engineered solutions for OEMs, its industrial and non-auto transportation market exposure, and its customer and geographic diversity. Nordic Lights is highly complementary to Methode LED lighting solution, and there is very minimal overlap in our product offerings. Methode adds greater scale to Nordic Lights and reduces their reliance on the construction and mining markets. Lastly, leveraging the Methode brand, Nordic Lights will be able to cross-sell its products to the broader Methode customer base.
The completion of the offer is subject to certain conditions and achieving acceptance of more than 90% of the shares in Nordic Lights. The offer period is expected to commence on or about March 15th and to expire on or about April 14th. The offer is currently expected to be completed during the 2Q of this calendar year. In summary, we are very excited about this opportunity to grow our existing LED lighting solutions business while gaining more industrial and non-auto transportation market exposure. We look forward to working closely with the talented Nordic Lights team to grow and strengthen their business even further. Moving to slide seven and returning to the quarter. Methode delivered solid sales driven by our industrial segment and our efforts in power solutions. Furthermore, Methode had another record quarter for EV sales.
Our operations generated strong free cash flow, and we've embarked on an exciting acquisition opportunity with Nordic Lights. We again reaffirmed our three-year organic sales compound annual growth rate of 6%, demonstrating that we are on track to organically grow the business. Due to the expected weakness in data centers and commercial vehicles and the timing of an auto program roll-off, our path to this target will not be linear. Methode add multiple years of strong awards. These awards will enable us to not only replace the sunsetting center console business, but to grow the business at the 6% rate that we have targeted. To support these new and diverse set of customer programs, many of which are for EV applications, we will be making investments and launching over 20 new programs in fiscal 2024.
These investments include significant tooling and increased staffing. While this activity is expected to support our organic growth target for fiscal 2025, the timing will result in flat organic growth in fiscal 2024. As a reminder, none of this includes the acquisition of Nordic Lights. When we report full-year fiscal 2023 results in June, we will provide further details on our guidance for fiscal 2024. At this point, I'll turn the call over to Ron, who will provide more detail on our third quarter financial results and outlook for the full year.
Thank you, Don. Good morning, everyone. Please turn to slide nine. Third quarter net sales were $280.1 million, compared to $291.6 million in fiscal 2022, a decrease of $11.5 million or 3.9%. This quarter sales had $13 million unfavorable currency impact and a $1.4 million favorable spot buy and premium freight cost recovery impact. Impacting the quarter's prior year comparison was the roll-off of a large automotive program in North America. Excluding the foreign currency and the year-over-year cost recovery impacts, sales increased by 3.8%. The strength in the quarter was driven by power distribution solutions for EV and data center applications. EV product applications reached a record 24% of sales in the quarter.
We now expect EV to represent 21% of our full-year fiscal 23 consolidated sales. Third quarter impact from operations decreased 8.4% to $27.3 million from $29.8 million in fiscal 22, mainly due to unfavorable currency translation and material cost inflation. Partially offsetting those factors was lower selling and administrative expense. It is worth noting that absent the unfavorable foreign currency impact of $2.3 million, our operating income would have been flat year-over-year despite the $11 million in lower sales. Third quarter diluted earnings per share decreased 30.8% to $0.54 per diluted share from $0.78 per diluted share in the same period last fiscal year. In addition to the lower sales, the EPS was negatively impacted from the higher other expense, higher effective tax rate, and unfavorable foreign currency translation.
Of these, other expense was clearly the major driver, mainly due to an increase in foreign exchange remeasurement and the reduction of government assistance related to COVID-19. Other expense increased $7.9 million, going from an income of $4.4 million last year to an expense of $3.5 million this year. While the reduced government assistance was expected, by nature, the foreign exchange remeasurement impact was not forecasted. Please turn to slide 10. Third quarter gross margins were 23.2%, a decrease of 50 basis points as compared to 23.7% in fiscal year 2022. Material cost inflation and higher manufacturing costs in the quarter were the main contributing factors. Partially offsetting them was lower restructuring costs.
Third quarter selling and administrative expenses as a percentage of sales was 11.7% as compared to 11.8% in the fiscal year 2022, a 10-basis point decrease. This decrease was mainly a factor of lower annual incentive expense and lower restructuring expense. Note that some restructuring costs are captured in cost of goods sold and some in selling and administrative. Higher salary expense partially offset those lower expenses. Third quarter operating income margin was 9.7% as compared to 10.2% in fiscal 2022, a 50 basis points decrease. Material cost inflation and unfavorable foreign currency translation more than offset the lower selling and administrative expense. Please turn to slide 11.
Shifting to EBITDA, a non-GAAP financial measure, third quarter EBITDA was $36.1 million versus $47.9 million in the same period last fiscal year, a 24.6% decrease. EBITDA was negatively impacted by the higher other expense, the lower sales volume, the higher manufacturing costs, and the unfavorable foreign currency translation. Third quarter EBITDA margin was 12.9% versus 16.4% in the same period last fiscal year, a 350 basis points decrease. As previously described, the year-over-year change in other expense was the major driver of the decrease. Please turn to slide 12. Year to date, we have reduced gross debt by $9.2 million to the lowest level since our acquisition of Grakon in September 2018. We ended the third quarter with $164.7 million in cash.
During the quarter, we bought back shares for $8 million, bringing the year-to-date total to $39.6 million. Net debt, a non-GAAP financial measure, decreased by $1.9 million- $36.6 million from $38.5 million at the end of fiscal 2022. Our debt to trailing 12-month EBITDA ratio was approximately 1.3. Our net debt to trailing 12-month EBITDA ratio was approximately 0.2. We continue to have solid debt capacity, which offers the company flexibility from a capital allocation perspective, especially for inorganic growth initiatives. As announced last week, Methode expects to fund the purchase of Nordic Lights with a combination of cash on hand and debt financing under our existing credit facility. The transaction is not subject to a financing condition. Please turn to slide 13.
Third quarter cash from operating activities was a healthy $55.7 million as compared to $20.1 million in the fiscal year 2022. The increase of $35.6 million was primarily due to working capital improvements in the quarter. Third quarter CapEx was $12.8 million as compared to $8.3 million in fiscal 2022, an increase of $4.5 million. The increase was mainly a function of the lower level of spending in the prior year quarter as the spending level this quarter was in keeping with our annual guidance. Third quarter free cash flow, another non-GAAP financial measure, was $42.9 million compared to $11.8 million in fiscal year 2022, an increase of $31.1 million. This notable increase, again, was primarily due to working capital improvements.
We continue to have a strong balance sheet and will continue to utilize it by investing in our businesses to grow organically and by pursuing opportunities for inorganic growth. Please turn to slide 14. Regarding fiscal 23 guidance, it is based on management's best estimates and is subject to change due to a variety of factors, as noted on this slide. While we have experienced some success in price increases to offset the ongoing material cost inflation, we expect this headwind will be with us for the remainder of fiscal year 23. The expected revenue range for fiscal 23 has been updated to $1.155 billion-$1.18 billion. The midpoint was lowered $17.5 million from the previous range.
The expected diluted earnings per share range has been updated to $2.50-$2.60, with the midpoint lower by $0.25 per diluted share. The main drivers for both the updates are the demand weakness in Asia to lower auto and data center activities and third quarter impact from the foreign exchange remeasurement. Our other guidance assumptions have been updated as follows. The guidance does not include any acquisition costs from Nordic Lights. Our estimated annual effective tax rate is now 16%-17%, lowered from 17%-18%. It does not include any potential discrete items. We anticipate CapEx of between $40 million and $45 million, which remains unchanged.
Estimated depreciation and amortization expense is $50 million-$55 million, also unchanged. As a reminder, we previously announced three-year organic sales compounded annual growth rate target of 6% with fiscal year 2022 as the base year. Due to the timing of a large auto program roll-off and the expected market weakness in data centers and commercial vehicles, the organic growth will mainly occur in fiscal year 2025. As Don Duda mentioned before, Methode has had a strong pipeline of awards. They will enable us not to only replace the center console programs but grow the business at the 6% rate we have targeted. We will be making investments in launching over 20 new programs in fiscal year 2024.
While this activity is expected to support our organic growth target for fiscal year 2025, the timing of the launches will result in flat organic growth in fiscal year 2024. As a reminder, none of these projections include the acquisition of Nordic Lights. We will provide further details on our guidance for fiscal 2024 when we report our full year fiscal 2023 results in June. Don, that concludes my comments.
Ron, thank you very much. We are ready to take questions.
Certainly. At this time, we'll be conducting a question-and-answer session. 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 John Franzreb from Sidoti & Company. Your line is live.
Good morning, guys, and thanks for taking the questions.
Good morning.
I'd like to start with the last comment about your expectations of organic growth being flat in 2024. Has anything materially changed about your expectations in the automotive or truck market as far as growth or cyclicality compared to three months ago?
We've seen slower growth in our data center market, mainly in power and slower sales in Asia. That is changing.
Yeah, I clearly, the Asian auto and data center, which the data center business tends to be lumpy. We've had a really good first quarters. We don't expect that to continue into next year at that rate. Some of our third-party market research on commercial vehicles has also changed in the last since we spoke last. The combination of all of those things would lead us to a more flat organic growth year-over-year.
Got it. Got it.
The projection for truck changed quite a bit for commercial vehicles. These are from a market forecaster, down 14% of what we're looking at in 2024. A recovery in 2025, but a significant drop in our planning for 2024.
I guess I'll just stick with that theme quickly. It seems like a lot of people are experiencing better than expected calendar 2023 truck business than they anticipated, say, January 1. That might make the comps more challenging in the year ahead. Are you seeing the same kind of scenario playing out?
Yes. Yeah. I mean, we, it was not a factor, much this year, but it, will be, will be next year. Yes, I hear that.
Okay. Just in regards to your EV wins, it seems like it's becoming increasingly important for us to maybe be aware of the geographic mix involved in your backlog, especially in the EV market. Do you have any sense of what that looks like, broken out between North America, China, and Europe?
It's really all three. At any given time on what we were doing user interface, it was heavily weighted towards North America. Now it's quite nice. Then some of the programs that we've won are crossing the continent. Some for some of the larger automakers are both North America and Europe, which is very nice.
Yeah, John, we're investing for this organic growth in all three major locations on three major continents to support the OEMs in different locations. In a lot of ways, that's a really good thing for us, to have that geographic diversity.
One of the factors of why we're booking business.
Yeah.
Okay. One last question, I'll get back into queue. Looking at your queue this morning, it looks like recoveries were down about $9 million year-over-year. Why was that the case? How should we think about your ability to or when we reach maybe pricing equilibrium with the current cost environment?
That's a tough one to answer. I mean, the numbers show that it's improved, but in our ops reviews with the teams, they're still seeing, as we said in our prepared remarks, material price increases and labor certainly continues to go up. I'm very hesitant to say that that's behind us because we're looking at it going into our next fiscal year.
Yeah. John, maybe to differentiate a bit on the spot buys has to do more with the supply chain and all of that and, you know, getting premium paying on behalf of the customer procuring that product. We're seeing that, you know, start to come down. Remember that's at zero margin, right? As to differentiate that, the price increases that we're going after.
Yeah. Good point.
Because of inflation.
Yeah.
Right. Got it, guys. Thanks. I'll let somebody else have the floor.
Thank you.
Thank you. Your next question is coming from David Kelley from Jefferies. Your line is live.
Hi, team. This is Gavin Kennedy on for David Kelley. Thanks for taking my questions. Can you quantify the impact the legacy roll-off had this quarter? How should we think about the impact in fiscal year 2024? Any details on timing and the potential magnitude would be great.
Yeah. I think, for the full year, this fiscal year, legacy roll-off has been in the $70 million-$75 million range. Pretty much, you know, same, spread that over the three quarters. In a $25 million-$30 million range, you know, maybe for the quarter.
Sorry, that was this year and then expectations for next year.
The difficulty we have is our customer has not announced their vehicle change yet. There's very little that we can say on that. I can tell you that we've taken that into account in our planning, I really. I can't go into that because of our agreements with our customers.
All right. Fair enough. Switching gears, you reiterated your organic sales CAGR, even though you expect next quarter or next year to be flat. This implies a pretty meaningful step-up in fiscal year 25. I assume this is driven by robust launch rates, but was just hoping you could provide more details on what gives you confidence in that acceleration in fiscal year 25. If you have any visibility in these launches, the potential timing, either first half or second half, that would also be helpful. Thank you.
Okay. Well, there's always some downsides to being in the automotive business. One of the big upsides is you get firm contracts, which detail the timing of the launch and the volumes. Now, the volumes can vary. We've seen that before. That allows us to really put pen to paper and project what our increases are. This is ancient history, but if you go back to when we launched K2, I'm going from memory. From, I think it was from fiscal year 13- 14, we had a $250 million jump in sales when we were launching center console. We've had that happen before.
Again, we can go through and look at the programs that we've won. These aren't s ome of these are very large established automakers. It's not, it's not all, there are some startups, but the major ones are well established. We feel confident in that.
Per the third party research on commercial vehicles, while it expects to dip maybe in our next fiscal year, the following fiscal year, the forecast rebounds and goes up on that as well. That will certainly help us with our 6% growth.
Yeah. We've seen that before too, in commercial vehicles.
Yeah.
Thanks for taking my questions.
Thank you.
Thank you. Once again, everyone, if you have any questions or comments, please press star then one on your phone. Your next question is coming from Gary Prestopino from Barrington Research. Your line is live.
Hey, thank you. Good morning, everyone.
Good morning.
Could you give me what the tax rate is going to be for this, the change in the tax rate? I didn't quite get that down.
Yeah. It went down to 16%-17%. Yeah. Not... Modestly down, just, basically, 1%.
That's where it'll be for this year, right?
Without any additional discrete, you know, tax benefits or expenses. The run rate estimated tax rate based on jurisdictional income, yes.
Okay. I don't know how, are you at liberty to give us any idea of what the Nordic Lights revenue is like and how it has grown over the years?
I have to stick to what announced. It's, it's a public tender offer. No, I, no, I can't.
Okay.
No, no.
You said.
That may be.
I'm.
That may be out there. I just can't say.
Okay. That's fine.
You'll look it up.
Look, what are they basically dealing with OEMs on the European continent? Is it a more of a worldwide business?
Worldwide. I like their geography. There's mainly OEMs, but there's a very nice aftermarket business. Aftermarket generally is higher margins.
Okay. There's very little overlap with your current customer base on.
I don't wanna say zero, but very little. That's one of the first things we do on a potential acquisition. Once we've started due diligence, is to look at the product offering and so on. We're very happy with that.
Okay. Thank you.
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.
Thank you everyone for listening, and, have a pleasant day. Goodbye.
Thank you, everyone. That concludes today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation.