Methode Electronics Inc (MEI) 2008 Q4 法說會逐字稿

This press release 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 protections provided under the securities laws. Methode undertakes no duty to update any forward-looking statements 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 press release involve a number of risks and uncertainties. The factors that could cause actual results to this press release to differ materially from our expectations are detailed in Methode's filings with the Securities and Exchange Commission, such as our annual and quarterly reports. Such factors may include without limitation the following - dependence on a small number of large customers within the automotive industry-- rising oil prices could affect our automotive customers' future results; the seasonal and cyclical nature of some of our businesses; dependence on the automotive industry; dependence on the appliance, computer, and communications industries; intense pricing pressures in the automotive industry; increases in raw material prices; and customary risks related to conducting global operations.

Greetings, ladies and gentlemen, and welcome to the Methode Electronics Fourth Quarter 2008 Earnings Conference Call. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Don Duda, President and Chief Executive Officer. Thank you, Mr. Duda. You may begin.

Thank you, Melissa. Good morning, everyone. Thank you for joining us today for our fourth quarter and 2008 fiscal yearend financial results conference call. Doug Koman, Chief Financial Officer, and Ron Tsoumas, Methode's Controller, join me today. Also with us is Joey Iske, Director of Investor Relations. Both Doug and I have comments today, and, afterwards, we will be pleased to take your questions.

Methode completed its fourth quarter with sales of $154.4 million and net income of $12.9 million, or $0.35 per share. This compares to last year's fourth quarter results of $130.9 million in sales and net income of $12.1 million, or $0.34 per share.

For the full year, Methode passed a significant milestone. For the first time in the Company's 62-year history, sales topped the $0.5-billion mark. We congratulate all of Methode's employees on this accomplishment. Methode completed fiscal 2008 with sales of $551.1 million and net income of $39.8 million, or $1.07 per share. This compares to fiscal 2007 results of $448.4 million in sales and net income of $26.1 million, or $0.72 per share.

Doug will provide a more detailed discussion of the quarter and full-year financials later in this call. At this point, I'd like to move forward to discuss our business.

First, let me discuss the Automotive segment. Methode has spent the past few years repositioning itself in the automotive world. Only a few years ago, Methode was almost exclusively doing business with Chrysler and Ford, primarily shipping product from U.S. factories. Even our European automotive group was shipping a good portion of their product back to the U.S. As it became evident that Methode's traditional customers were facing turbulent times, we began to focus our efforts on cost reductions via lean initiatives, global expansion, and new product development in conjunction with new technologies while, at the same time, developing plans to exit unprofitable or low-profit products.

Today, Methode is a best-in-class global manufacturer, supplying the U.S., European, and Asian automotive markets from plants in Mexico, Europe, and China while having taken significant steps to exit certain customers and garner others. In recent years, Methode has added several new OEMs to our customer base, including GM China, Fiat, Honda, Volkswagen, and Peugeot, to name a few.

During fiscal 2008, Methode was awarded several new switch and sensor business opportunities that, for the most part, will begin production in 2010. This business includes substantial launches for GM, which I will discuss further in a moment, but also includes Chinese OEMs, such as Chery Automotive, Luzhou Auto, and Southeast Motors.

Additionally, we were awarded new business to produce an infotainment panel that will utilize our temp-sensor technology. We are very excited in making headway with this technology in the automotive industry.

One significant win is for Methode's column electronic assembly to be used on GM's global small vehicle program launching in 2011. I should emphasize that this is a small vehicle platform, not a truck or SUV program. This program is an excellent example of Methode's global capabilities with a multi-component product being assembled into one subsystem shipped worldwide. The base components will be produced in Methode's China facility but may be assembled at another Methode facility, which makes the most logistical sense, since vehicles will be sold in multiple markets in Asia, Europe, North and South America, the Middle East, Thailand, and India. We expect this program to produce noteworthy volume and to contribute roughly $18 million in sales during its first year, ramping to an estimated $30 million per year over the life of the program.

A few years ago, Methode would not have had the capability to design, produce, or even support this product on a global basis. It is a solid validation that our multi-part, multiyear strategic agenda is working.

It is important to note that, even as Methode's Detroit-based automotive customers struggled with lower sales and the need to transition to more fuel-efficient vehicles, the automotive industry will remain an important part of our global business mix. We are not exiting the automotive market but, rather, are adjusting our customer base and product offering. New offerings based on patented technologies, such as our position in steering angle sensors, MDI's Torque Sensing and TouchSensor solid-state switching, along with Power Product solutions to the hybrid and electric vehicle market, will help advance this initiative.

For example, in Europe alone, our position in steering angle sensors are expected to grow from 12% of European sales in fiscal 2009 to 30% in fiscal 2012. Approximately half of our current business opportunities in Europe are for sensor-based products, a sharp contrast from a few years ago, when the majority of the products were switch-based.

Before we leave automotive, I want to mention one other significant initiative, which is our newly formed company in India, Methode Electronics India Limited. The Company will not only focus on developing business in India for Methode but also provide engineering support to Methode companies worldwide in both auto and non-auto segments. The Company has been formed, a managing director has been appointed who's a long-term Methode employee who was relocated to India, and we are in the process of recruiting engineers in the electronic, mechanical, and software disciplines.

Moving next to our Interconnect segment, sales increased 66% compared to fiscal 2007. Growth was mainly driven by our TouchSensor acquisition. Excluding TouchSensor, the Interconnect segment organically grew 10% over last year but had disappointing profits from its Duel PC card business.

TouchSensor spent a good portion of the fiscal year launching several new programs for Electrolux's new kitchen suite, which includes products on cook tops, ranges, ovens, refrigerators, and dishwashers. These new Electrolux appliances debuted in April, featuring Kelly Ripa as the spokesperson. Several prime-time commercials featured the TouchSensor technology using the Electrolux trademark name of Wave-Touch Controls.

Focusing on global expansion, TouchSensor has recruited a European business development manager to expedite their entrance to this important market in the coming year. In addition to its geographic expansion plans, TouchSensor has been active in targeting new markets with its field-effect user-interface panels in the industrial and automotive markets. Also, TouchSensor's engineers have developed several products using field-effect technology for liquid-level sensing.

Sales for our 1-gigabit copper transceiver from dataMate remained strong during fiscal 2008, both in the U.S. and Asia. Customer interest for our 10-gigabit copper transceiver prototypes is high, but launching this new product is dependent upon supply of a custom semiconductor, which we are in the process of sourcing.

Methode's Power Products segment expanded its offering during the 2008 fiscal year by acquiring Value Engineered Products, or VEP, and the assets and patents of Tribotek. These acquisitions provide our Power segment with thermal management and power connector capabilities.

In the coming months, we will begin manufacturing power products in a new plant located in northern Africa. These geographic and product expansions are expected to enable the Power Products segment to more effectively serve the needs of its growing multinational customer base.

The Power Products business in the telecommunication markets increased towards the end of fiscal 2008 and should carry forward. In addition, steady growth has come from military and aerospace industries. Recently, we were awarded orders for products to be included on two new Virginia-class submarines being commissioned.

Internationally, we continue to make considerable progress in the global railway market, which uses laminated bus bars in the converters of electrically powered passenger and freight trains. Several new customers were added, including Siemens, Bombardier, and ABB. We are also gaining new business in the growing wind power market for laminated bus bars used in the power conversion modules offered by customers, such as Vestas. We anticipate our expansion into northern Africa will be welcomed by these European customers.

As the interest for green technology expands, Methode is positioning its power products to target opportunities in these growing markets. In addition to electric-power trains and wind power, interest was generated for Methode's Power Products solutions in the hybrid and electric vehicle markets. We intend to enthusiastically target these new opportunities in the coming year.

In Methode's Other segment, our Magna-Lastic Devices business, or MDI, launched the steering torque sensor in fiscal 2008 on the new Spyder three-wheel motorcycle offered by Bombardier. To minimize costs and produce at high quality, MDI takes advantage of Methode's automotive manufacturing facilities for its production requirements. During the year, MDI was also awarded the steering torque sensor on an ATV program. Indications are that the total volume of the two programs may increase to nearly 100,000 units by fiscal year 2010. These represent MDI's first major production wins.

As we continue to broaden our global footprint, Methode also remains focused on bringing new patented technologies into the marketplace. We have recently finalized a strategic and business alliance with Lumedyne, located in Albuquerque, New Mexico, to assist with their product development and to bring their patented biometric identification technology to new markets, such as transportation. Biometric identification can be used to support potential features in the auto, such as the identification of the driver to personalize the vehicle's ride, handling, comfort, and convenience characteristics, or to authorize a vehicle to start and for user authentication of in-vehicle transactions via telematics. With our technology incubators, such as magnetic torque sensing, carbon fiber heaters, acoustic wave sensors, as well as our strategic alliances with Sensor Dynamics, Immersion, and, now, Lumedyne, Methode remains focused on transitioning and strengthening its business by incorporating leading-edge technology into our markets or to our products.

In the coming years, our product focus will continue to evolve from a component format to one that highlights our direction into higher value-added systems, with focus on user controls and interfaces, sensors, and power products. We believe this shift will strengthen our value to our current customer base as well as aid in our focus to further penetrate into other markets, such as medical, consumer, defense, security, and industrial.

Because of the difficult economic market and, in particular, the unpredictable sales of the Company's largest automotive customers, Methode is discontinuing its practice of providing sales and earnings per share guidance.

Before I turn the call over to Doug, I want to comment on our acquisition program, which is Methode's executive staff's key initiative for fiscal 2009. Over the past few years, Methode's focus on balance sheet management has placed the Company in a strong cash position with over $100 million in cash, no debt, and a $75-million credit facility. We anticipate that, in the near term, the struggling economy and struggling financial markets will produce lower valuations for potential acquisition targets, which in the past have, in our opinion, been overpriced. With additional resources focused on acquisitions, our strong capital structure, and access to funds, plus our global reach, we have positioned the Company to move quickly to take advantage of potential opportunities to add both depth and breadth to Methode Electronics.

At this point, I'll turn the call over to Doug for his financial review.

Thank you, Don, and good morning, everyone. Let me start with the quarterly and full-year sales and gross margin review for our reporting segments.

The Automotive segment had fourth quarter net sales of $100.8 million compared to $93.3 million last year. Included in the current quarter were price increases of $10.4 million on Chrysler business that they have not yet transferred out of our facility. Including the price increase, Automotive sales were up 8%. Excluding the price increase, quarterly Automotive sales were down 3.1%. This drop in the quarter is primarily due to the impact of the American Axle strike on our North American Automotive business.

For the fiscal year, the Automotive segment had net sales of $362.1 million compared to $315.7 million last year. Included in the fiscal year were price increases of $20.7 million. Again, including the price increase, Automotive sales were up 14.7%. Excluding the price increase, Automotive sales for the year were up 8.1%. The increase in sales was from growth at our European and Asian operations, better-than-expected volumes from our North American OEMs, and translating foreign sales using a weaker U.S. dollar. The weaker U.S. dollar positively affected Automotive sales from our foreign operations by $3.5 million, or 3.5%, in the fourth quarter and by $9.2 million, or 2.5%, for the fiscal year.

In the fourth quarter, gross margins in Automotive were $26.5 million compared to $18.5 million last year. Again, included in the current quarter were price increases of $10.4 million. Excluding the price increases, gross margins as a percentage of sales were 26.3%. Excluding the price increases, gross margins were 17.8% of sales. This compares to 19.8% last year. The lower gross margin contribution was the result of the lower production volumes in the quarter; again, primarily due to the North American-- or the American Axle strike and higher material costs.

For the fiscal year, gross margins for the Automotive segment were $80.1 million compared to $56.6 million last year. Included in the current year were price increases of $20.7 million. Including the price increases, gross margins as a percent of sales were 22.1%. Excluding the price increases, gross margins were 17.4% of sales. This compares to 16% last year. The higher gross margin contribution is primarily the result of the successful integration of Scotland Manufacturing into our Malta facility last year.

The Interconnect segment had net sales of $39 million in the fourth quarter, which is up 49% from $26.1 million last year. For the fiscal year, the Interconnect segment had net sales of $136.3 million compared to $82.1 million last year, a 66% increase in net sales. The increase is substantially due to sales from TouchSensor, which was acquired during last year's fourth quarter. The remaining businesses in this segment had slightly higher sales overall in both the quarter and the fiscal year.

Currency translation increased foreign sales by about $0.5 million in the quarter and by $1.3 million in the fiscal year.

Gross margins for the Interconnect segment were $9.5 million, or 24.4% of sales, compared to $7.1 million, or 27.2%, last year. For the fiscal year, gross margins for the Interconnect segment were $31.6 million, or 23.2%, compared to $24.1 million, or 29.4% of sales, last year. The decrease in gross margin as a percentage of sales is primarily the result of the TouchSensor acquisition, which currently has a higher cost of products sold than other businesses in this segment due to the value-added nature of its business model. Additionally, cost of products sold for our PC Card and ExpressCard business also increased due to difficulty launching PC and ExpressCard adaptor products.

The Power Products segment sales were up in the quarter, with $12.6 million this year compared to $9.6 million last year. For the fiscal year, sales were $45.8 million, up from $43 million last year. The quarter and fiscal year benefited from sales from VEP, which was acquired on August 31 of last year. This was partially offset by a reduction in bus bar sales on certain projects for a customer for whom we are no longer the sole supplier and certain other bus bar products that reached end of life.

Gross margins in the Power Products segment increased to $3.3 million in the quarter from $2.8 million last year. As a percentage of sales, however, margins decreased to $26.2 million from 29.2% last year. The percentage decrease is primarily due to higher material costs and some price erosion at our North American operation. This was offset by cost savings in lean activities at our China operation. For the fiscal year, gross margins were $12.6 million, or 27.5% of sales, compared to $12.2 million, or 28.4% of sales, last year.

The Other segment had fourth quarter sales of $1.8 million, down slightly from $1.9 million last year. For the fiscal year, the Other segment had lower sales at $6.9 million compared to $7.6 million last year.

Gross margins were breakeven in the fourth quarter compared to $0.5 million last year. For the fiscal year, gross margins were $0.2 million compared to $1.8 million last year. The reduction in gross margin in both the quarter and fiscal year is primarily the result of increased initiatives at our Torque Sensing business.

Some of the highlights on the consolidated income statement for the year. In January, we announced a restructuring of our legacy North American automotive and Interconnect businesses. The restructuring charge in the fourth quarter was $4.1 million compared to $100,000 in last year's fourth quarter. For the year, the restructuring charge was $5.2 million this year compared to $2 million last year. In the fiscal year 2007, we had restructured our European Automotive business and transferred Scotland Manufacturing to Malta.

Selling and administrative expense in the fourth quarter was $16 million, up from $13.4 million last year. As a percentage of net sales, selling and administrative increased slightly to 10.4% compared to 10.2% last year. For the fiscal year, selling and administrative was $61.5 million compared to $50.2 million last year. As a percentage of sales, however, selling and administrative was 11.2%, both this year and last year. The increase in spending is primarily due to the TouchSensor and VEP acquisitions. The remainder of the increase is primarily due to additional global staff support, increased long-term incentive compensation due to higher amortizable stock prices, and higher professional fees, such as the increase in M&A activity as we do focus on that part of our business.

In the fourth quarter, we impaired assets totaling $1.5 million. This includes $700,000 for machinery and equipment as a result of the lower-than-expected sales over the life of the product that it was using-- being used to produce. We also impaired $1.8 million for a patent which was deemed to be commercially impractical.

Amortization of intangibles was $1.8 million for the fourth quarter compared to $1.6 million last year. For the fiscal year, intangible asset amortization was $6 million compared to $4.7 million last year. The increase is primarily due to the acquisition of TouchSensor and Value Engineered Products.

Interest income, net, was $600,000 for the fourth quarter compared to $700,000 last year. For the fiscal year, interest income was $2.3 million compared to $3.4 million last year. The reduction is primarily due to lower nominal interest rates this year versus last year, lower average cash balances this year compared to last year - again, due to the TST acquisition - and the average yield on our investments is lower, since we have been more heavily invested in tax-exempt municipals this year compared to last year.

Other net was an expense of $1.2 million in the fourth quarter compared to an expense of $0.5 million last year. For the fiscal year, other net was an expense of $3.2 million compared to $400,000 last year. The increase in expense is substantially due to the impact of the weaker U.S. dollar on the activities of some of our foreign operations and a loss recorded for the reduction in the net asset value on a short-term investment.

The effective tax rate in the quarter was 17.5% compared to 18.2% last year. The tax rate for the fiscal year was 19.7% compared to 27.4% last year. The effective tax rate in the current year benefited from the expiration of the statute of limitations during the third quarter on certain tax positions that were previously reserved and a favorable tax return to tax provision adjustment in the third quarter when we filed our 2007 tax returns. Both years reflect utilization of investment tax credits and the effective lower tax rates of the Company's foreign operations.

Looking at the balance sheet, cash is at $104.7 million compared to $60.1 million at yearend. I'll talk more about this when we move to the cash flow statement. Accounts receivable balance is $85.8 million, up from $79.2 million at the end of fiscal 2007. Receivables are up primarily due to higher sales. Inventory is $55.9 million, up from $54.5 million at the end of last year. The increase is primarily due to increased customer-funded tooling balances, primarily related to increased automotive business in Europe; and, also, it's up because of inventory from the VEP acquisition.

Other current assets are $14.8 million, down from $15.7 million last year. This is due primarily to amortization of prepaid expenses. Property plant and equipment, net, is at $90.3 million. That's up from $86.9 million last year. The increase primarily reflects our investment in paint- and laser-etch capabilities and additional printed circuit board assembly lines.

Goodwill is at $54.5 million. This is up from $51.5 million at the end of last year. This is primarily related to the VEP acquisition and the purchase price adjustments related to the TouchSensor acquisition and also an earn-out payment on the Cableco acquisition. Even though we acquired intangibles with the VEP acquisition, this was offset by normal amortization expense. Therefore, intangible assets at the end of the year were $41.3 million compared to $43.7 million last year.

Other assets at $23.4 million are up from $20.2 million, primarily due to the balance sheet reclassification of tax accounts relating to the adoption of FIN-48 at the beginning of the fiscal year and then, also, adjustments between current and noncurrent deferred tax items.

Accounts payable is at $42.8 million. This is up slightly from $41 million at the end of the year. Other current liabilities are at $34.3 million. Those are up slightly compared to last year, which was at $31.4 million. This is due primarily to adjustments between current and noncurrent deferred tax items. Other noncurrent liabilities are at $20.7 million. This is up from $15.1 million at the end of the year; again, primarily due to balance sheet account reclassification due to the adoption of FIN-48 at the beginning of the fiscal year. This was offset by deferred compensation payments related to the TouchSensor acquisition.

On the cash flow statement, the increase in cash and cash equivalents was $44.6 million for fiscal 2008. Year-over-year cash provided by operating activities increased $24.4 million. This is primarily due to the increase in net income, including the customer price increases and other working capital account changes. While capital spending was $4.9 million higher this year than compared to last year, primarily for the new paint- and laser-etching capabilities, we used less cash in investing activities this year compared to last because our acquisition activity was much lower this year than last year.

The increase in cash used in financing activities of $4.6 million is primarily due to fewer stock options being exercised this year. And, this year, we purchased $1.2 million in common stock, where, last year, we purchased $3.6 million.

Don, that concludes my remarks.

Thank you, Doug. Melissa, we are ready to take questions.

Thank you. (OPERATOR INSTRUCTIONS). Our first question comes from Jeremy Hellman from Singular Research. Please proceed with your question.

I know you're not in the business of offering guidance, but I just wanted to speak maybe in general terms about the next couple of years, just to make sure I'm kind of following things, particularly in the Auto segment. One of the comments I believe you made when you were talking about [being] on a worldwide GM platform beginning in 2011 that was expected to land $18 million or so in that year and also some new switch and sensor businesses in 2010. Am I right in looking at the Auto revenues in that, this year, you had-- I believe it was $20.7 million in, I guess, nonrecurring-type revenue, so to speak, related to the Chrysler repricing. That will disappear next year, right?

Yes. We expect that to be out of that Chrysler business at the end of fiscal '09.

Okay. And another comment you made was talking about Auto. I think it was in the quarter being down 3.1% without that Chrysler effect. And you cited the American Axle strike. If you were to take the Axle strike effect out of that, would that have left you in the neighborhood of flat?

Potentially.

What I'm getting at is - Are you, overall, seeing the overseas positive kind of counterbalancing the North American negative right now in the grander scheme of things?

You're probably not going to like my answer, but that is the very reason that we're not giving guidance, because of the turmoil we're seeing with the Detroit Three. It's becoming somewhat difficult to predict what their volumes are going to be. But, I can tell you, in the past, we've often felt that our growth in Asia and in Europe would offset that. But, going forward, it's difficult to predict whether it will or it won't. We've had-- In past years, we've had positive swings, but it is very difficult to predict what we're going to see, particularly this year.

Auto sales used to be relatively predictable, give or take 0.5 million units in a year. And it's not that way anymore.

Sure. Yes. I can certainly empathize with where you are with that and how it affects your ability to give guidance.

Looking at Interconnect and Power, kind of moving through 2009 and 2010, what are your kind of general, directional expectations for those businesses in terms of revenues?

Well, we've been pleased with our Power segment. They've grown organically. They did have one program go end-of-life this year. Their technology wasn't used on the replacement business. And that was a major reduction for them, but they also garnered other business to replace that. They had another customer second source them. We chose not to try to maintain the business by reducing the margins. That didn't make sense to us. So they've gone through that.

They've garnered new business. Their entry into Europe has been excellent. They're garnering customers that, I think, generally are difficult to get, the Siemens and the ABBs-- enough that we can feel comfortable opening a plant in northern Africa, which, I should point out, will give Power Products very much a global footprint, much like Auto, in that they can produce in the U.S. for mil/aero and more sensitive security programs, they can produce in Europe, and they can produce in China. So the expectations are that the needle is moving in the right direction there.

Interconnect-- TouchSensor is-- Even though we purchased TouchSensor from a European company, they were actually doing very little business in Europe - something around $1 million in sales, if that. So that's really untapped territory for them. They've recruited a strong German-based manager from the appliance industry. They're well positioned to penetrate that. So, I guess-- With the caveat that the new housing starts are down and the appliance industry is also under a lot of pressure, that needle, we think, would be in the correct direction. But, again, you really have to see what happens in appliance. And it depends on how quickly they can make inroads into Europe.

It's also probably important to point out that their products can be manufactured in our automotive facilities so that, if necessary in Europe, we can ramp production quite quickly.

Okay. And, looking at appliance, I saw Electrolux reported this morning, and there was, geographically, some disparity in what they had to say. What's the general feedback that you got from Electrolux on the Wave-Touch technology in their latest line of products?

They had a good launch. And they're, at least to our knowledge, the first company that really launched a whole suite of products at once. And I think that's helping them. But they are feeling, no doubt, the effect of the downturn in the appliance industry. They're off, I guess, in our projections slightly but not wildly off. But they're feeling the effect of that.

I don't know if this is kind of asking for something that you really aren't at liberty to discuss, but, over the next year or two, what goals, if you will, do you have in terms of getting on other platforms for higher-end appliances, such as Bosch or companies of that sort?

That's exactly the reason we're expanding into Europe. If you look at the European appliances, they're all fairly compact because of the size of the European kitchens. And it's an ideal technology for those companies. So we will very much focus on that market. Now, that's somewhat like auto; it takes you probably 18 months to get on a platform. It's probably less than auto, but it's not a-- You don't book it this month and ship it next month.

Right. So it would sound to me that, if you were to get on two or three platforms this year, that would probably be viewed as very good?

Oh, yes. I'd be quite pleased. It depends on the customer too. Bosch would be a very nice win for us.

Okay. One last one, and then I'll jump out. On Methode India, is that going to be within the Auto segment? And, just to make sure I followed you correctly-- You guys are giving a lot of information. I was just trying to keep pace on notes. That's basically an engineering business, as I understood it, so I would suspect that's a higher-margin labor billing, hour-type business. Am I right about that?

Our intent is twofold. The Indian automotive market is something we feel that we want to make inroads to. We certainly have desirable products for the marketplace so that that is one initiative there. But the prime initiative is to provide Methode companies worldwide with low-cost-- let's call it affordable engineering services as we pursue additional customers and additional programs.

With all due respect to American and European engineers, at $100,000 plus, that limits your ability to pursue certain programs. So, by tapping into India, which is an excellent source of talent, and let's call it affordable, that allows us to expand products and develop new products probably at a quicker pace than we've been able to do in the past. Methode has done an excellent job of leaning out its factories and really looking at the cost of manufacturing. But, when we look at the cost to launch either a GM program or a non-auto program, the engineering expenses are quite hefty. And you have to put all that engineering expense in up front. So you're in the red from the beginning until you're launching the product.

So the focus on India is twofold. We are very excited about having that expertise available to our companies. And the gentleman that is going there knows Methode extremely well. He's been with Methode quite some time. And Neal will do, I think, a fine job of servicing his Methode customers quite well. It's a major initiative for us, and it's kind of the last leg of what we've done to try to be able to be more competitive and garner more business.

Okay. Thanks. I'll jump out.

Thank you. Our next question comes from Mr. David Leiker with Robert W. Baird. Please proceed with your question.

Hi. This is [David Cerion] for David. I want to jump back on this pricing thing a little bit. It seems like you had a pretty substantial uptick here sequentially. Is there anything--? Did you get another pricing increase on top of your initial one, or what was going on there?

Yes, David. What happened is, initially, when we started this process, we thought that Chrysler was going to be out by the end of the fiscal year. When they missed their deadlines, we negotiated new pricing with them, and so that is covered by purchase orders. So the pricing in that fourth quarter was higher because of the fact that they'd been delayed in getting their product out of our facilities.

Okay. And you said in the past you think that continues through the second quarter next year. Is that still the thinking?

No. I don't know that we've necessarily commented on that. But they are giving us new deadlines. But they've missed deadlines before, so we expect them to be gone-- What we're saying now is by the end of our fiscal year. Might they be out quicker? They might. But that's up to them.

Okay. And you're still going to see these pricing increases, then, next year?

To what level we can't tell you.

Are they still going to (inaudible)?

They have through this last quarter-- They have made progress on their move. So we anticipate that they'll conclude their exit-- The schedule shows by the end of the calendar year, but, again, as Doug said, they've missed before. And I don't think we would go back. I shouldn't say we wouldn't. But I don't know that there's additional price increases; it's just volume that we didn't anticipate as they transfer the business. And they've got other issues that they're dealing with besides moving product out of Methode.

Right. Okay. On your Asia auto business, how much of that is coming back to North America versus staying in Asia?

I don't want to give you exact percentages because I don't recall, but it is a significant portion that comes back to the U.S.

Are we talking like more than half?

Yes. Yes.

Okay. On these restructuring actions, it sounds like you're going to be done with that third quarter of 2009. When do you think that starts to show up in your results? When do you start seeing benefits from that?

When we complete that restructuring, some of that depends on when Chrysler finally removes their product, because that slows down that process. But I think we're starting to see the benefit of some of that currently.

Okay. That's coming through already?

Yes. But it will increase as we're able to get product out of our facilities.

Okay. On commodities, what kind of hit are you guys thinking about for next year in terms of earnings?

I'm sorry. I didn't hear the question.

On higher commodity prices. You mentioned that as one of the things that you expect to reduce margins next year. Can you kind of put any kind of number there on that?

No. Then we're getting a little bit into guidance. I think we've said it is something that we anticipate being an issue.

Right. Okay. Do you have any hedging programs at all for those?

We're looking at hedging opportunities, but, again, it's nothing that we have currently in place.

Okay. Looking at the Interconnect business, it's been running pretty close to breakeven here for a while. Do you think your restructuring--? Do you think the restructuring actions you're taking there are going to bring that back to the 10% margin range it used to be running at? Is that--?

That is really our intent. Interconnect, as you said, has been running flat. It's been generating revenues but not a lot to the bottom line. The PC Card business was a good-running business or product line. But the PC Cards that go into laptops now-- You're seeing that significantly reduced in favor of the USB-based product. So it's time to exit that business. And we had some growth from that last year, but we didn't have anything fall to the bottom line. So we're making the necessary adjustments there. Along with our Auto restructuring, we talked about an Interconnect restructuring. And that's geared to solving that issue.

We said we want to diversify Methode. I think we've been successful in the Power Products group. The TouchSensor acquisition was a good acquisition in Interconnect, but we struggled with some other areas there. And we're making those adjustments, and we will see the benefit of that as we move forward.

How much of this margin decline we see in that segment has been the PC Cards versus the legacy connector business?

I don't know if we can quantify that for you, David, but it was a-- They were about breakeven at the gross margin level. And then--

Which one was breakeven?

Pardon me?

Which was breakeven?

At gross margins, the Duel products.

Okay.

Yes. And so then they had their overhead and selling and administrative on top of that. So that was-- They were just very disappointing this year. So they make up a good portion of that.

That's a good way of saying it. A good portion of that is the issue there.

Okay. You talked about acquisitions being a big focus here in '09. Any particular areas you're focusing on?

I don't know that I want to comment on that.

Profitable and accretive (LAUGHTER).

And probably not something out of Detroit.

I don't think it would be appropriate to go any further than that. As I said, it's a key focus for us, and we think there's going to be some good opportunities out there.

Is that in the non-auto side you're focused on, or it is possible--?

I wouldn't rule out an auto acquisition, but our focus has been in the non-auto area. But, again, the proper acquisition in auto, in maybe sensors or something like that, we certainly wouldn't rule that out.

Okay. What are you guys thinking about for taxes going forward? You've been running below 20% for a while. Is that something we can expect to continue?

We should probably be in the very low 20s; again, unless we do something with an acquisition that moves that number around. But, just where we are today, the low 20s is probably an expected tax rate.

Okay. And anything on CapEx or depreciation for '09?

I would expect that to be comparable to what we did this past year. And, again, that includes-- As Don mentioned, we're moving into northern Africa, so there will be some capital spending related to that.

Okay. Great. Thanks.

Thank you. Our next question comes from [Mr. Brian Crawford] with Perimeter Capital Management. Please proceed with your question.

Most of my questions got answered with the last volley. But could you talk maybe just a little bit more about the Interconnect business? I know it's been breakeven. I know the PC Card business has been challenging for you. What are you looking for towards, in the Interconnect business, to drive profits and such going forward?

Historically-- Let's take TouchSensor out of that for a moment. Interconnect has been a component-driven business. And, over the past several years, those components have received tremendous pricing pressures from China and every other market as well. And we have begun the process of transitioning that away from pure interconnect more into user interface, higher subsystem or systems such as what TouchSensor offers.

So you'll see our efforts in that area more along the lines of user interface, where we're putting maybe a complete user interface such as what TouchSensor does for its appliance customers that will have interconnects. It may even have power devices on it. But, essentially, going up the value pyramid. And it's not a matter of just simply restructuring the Interconnect. We're in the process of rebuilding that along those lines.

And so we are exiting, for the most part, the PC Card business. We're maintaining some of the business we have for set-top devices. There's pretty good volume there for the next couple of years. So we'll maintain that. But we'll-- The fix there really is a revised product offering not unlike what we've done in auto in that many of the legacy products in Auto were, essentially, commodities that could be bought from any number of people. And we've been very pleased, particularly in Europe, that a lot of those now are technical-based products that have-- Some of them have IP protection, and they command a higher price in the market.

You've mentioned in terms of user interface both in the automotive and in the appliance world. Are there other applications?

We believe there are. What TouchSensor brought to Methode is-- Even though they have a little higher SG&A than some of our other companies, they operate at a much different level dealing with the designers and not so much from a purchasing standpoint, although, obviously, purchasing is involved. But they're customizing the human machine interface, if you will, much like we're starting to do in auto in that we're doing center stacks. We've got an infotainment system that we're doing that's using the TouchSensor technology, where-- I won't say that we're the experts in it, but we're the people that are knowledgeable bringing that expertise to the customer.

How should this particular device interact with the passenger or with the consumer? We believe there's other opportunities not just in auto and appliances; there's certainly opportunities in medical for a company that has a good command of HMI and the manufacturing capabilities to produce it worldwide at competitive prices. So you'll see us move in that direction. We target acquisitions in that area.

So it brings together a lot of Methode technology. A lot of these interfaces have to have sensors. So the ability to provide not only the interface but also the sensing that the interface is controlling is also fairly strategic for us. You'll see the Interconnect group move in that direction.

At a very, very high level, it sounds like things have turned. In the Power segment, you guys feel pretty good about your position, some of the new customers, and some of the new things that you're doing there. It sounds like, automotive, you just don't know the next 12 months. Interconnect is trending more positive? You don't know? Negative? I'm just trying to get your high-level, gut feel.

As I said, the needle in Power is probably in the right direction. TouchSensor I think we feel the same way about - probably a little tougher in the U.S., but they're penetrating Europe. And Interconnect, if we didn't do anything, I would say the needle's in the wrong direction, but we're taking the right steps so that it should trend where we want it to be. Again, it's a key focus for us because, again, we see there is a market developing for interface-type products, but - where we can integrate a number of Methode components and technologies.

So the needle is probably a little further-- It's probably a little smaller needle; let's put it that way-- until we get a couple more things in Interconnect under our belt. I don't know if that answers your question. It's probably the best I can do at the moment.

It helps. It adds some color. The final question I had is just in automotive. How exposed are you to the SUV? I'm sure you get this question-- SUV/small truck. Obviously, those platforms and products are in trouble for at least a little while, anyway. Any sense for your exposure there?

Well, with our exit of Chrysler, our exposure was significantly reduced there, which is one of the reasons that we felt it appropriate that we exit that business. Ford is a bit of a mixed bag. Good pass-car business in Europe. More truck in the U.S., although I think we've made the correct adjustment by moving that to Mexico. The new programs for GM are more passenger cars, but we do have-- Our business in Asia for GM is on a GMT 900, at least a portion of it. So that's feeling the-- That's about $15 million or, maybe, $12 million in sales or something like that. So it's not a $100-million product.

I'd be move concerned if the businesses we have won going forward were SUV based. But, as I mentioned, the small vehicle platform with [GMA] is pass-car. So it's a bit of a mixed bag. But I think Methode realized that it needed to move away from those and took the appropriate steps, really, some years ago now.

Okay. Great. Thanks, gentlemen.

Thank you. Our next question comes from Mr. Tom Fogarty with Silverstone Capital Management. Please proceed with your question.

I just had a quick question about working capital. You guys did a very good job of constraining the growth in that this year. I'm just wondering whether there are opportunities to actually squeeze some cash out of it next year, particularly if sales will be down.

Usually, that's what happens when sales do indeed decline. We do expect to see an improvement in our working capital because of that.

In terms of days, do you think there's room to improve that further?

On DSO, it's interesting because, as we move more of our business outside the U.S., the terms generally are a little bit longer. We find out, when we were doing the due diligence on our TouchSensor acquisition, that, also, appliance is a little bit longer as far as DSO than auto. We kind of build that into the model. So I think we might see a lengthening of DSO going forward, just as that business shifts.

The other opportunity for us is inventory. To the degree that we can reduce our inventory, and that's really-- It goes back to our lean initiatives that-- Methode's done an okay job; it needs to do a better job. That's an opportunity for us. But that's not something new. We look at that every (inaudible) review, we discuss inventory. But it's an area-- That's just cash sitting there. So we can do that. That would give us (inaudible).

That's a little bit difficult, isn't it? Is your supply chain getting longer as you move around the world?

Yes. And Methode is learning logistics. Producing in Illinois and shipping to Detroit isn't too difficult. Now you're buying from multiple points in the world to something-- different locations. It's challenging.

I think the quick solution that people look at is we have to increase inventory. Well, that's not the best solution. You've got to figure out how you do both. I think Methode's on the right track to do that. It's got a ways to go, but it's an opportunity. We've done well in auto in some instances. Our ASP group in Mexico has six or seven days of inventory. So we know we can do it. It's doing it and, again, a good opportunity.

Great. Thanks.

Thank you. Our next question comes from Mr. Jeremy Hellman with Singular Research. Please proceed with your question.

Back to the discussion on medical devices, if I could. The medical device industry not being something I am super familiar with, if I look at the major companies, like the Siemens, GE, Philips, and companies like that, is the switch and sensor technology that's used in their devices, be it MRIs or CAT scans and things like that--? Are those in-house technologies they use, or are they typically licensed from other parties?

It's a bit of a mixed bag. Our inroads in the medical thus far have been through Power Products on MRI machines. The user interfaces-- I don't know that-- That's probably a mixed bag as well. I don't know what some of the big guys are doing. Our interest in medical for user interfaces is really more when you look at devices that may be in the ER, where some of the technology that we bring to market might help provide a logical interface. There are some FDA regulations on user interfaces becoming more-- I don't want to say more regulated but, more, the topic.

So those are the areas where you target a device manufacturer that really doesn't have the user interface. They have the technology. They have the scientists and so on. But those accounts that go outside for that is what we want to target. And we would think we would have to at least acquire some sort of path to market in medical. I don't think that's something that we get a small group together and go penetrate the medical market. I think it's-- One of our acquisition targets needs to be that path to market. Getting in front of the customer is difficult.

Does any particular path appear more easy or challenging than the next, be it robotic surgical or anesthesiology? You can kind of run down a whole number. Are there any that kind of seem to be the lowest-hanging fruit?

I don't know that I can answer that yet. It's an area that we're having studies done on as to-- I think the initial read from the studies is that there's a market there for Methode to play in. But then the next step is, okay, what's the best way to get into that market? We're literally looking at that now.

Okay. And back to auto - just a little reminder for me personally. What sort of presence, if any, do you guys have in South America? The reason I ask is, in recent news with Toyota looking to open a facility down there-- I think it was 2011-- I wanted to see if you have a presence down there and, if you don't, what the game plan, if any, is over the long term.

I'm sure I'm going to get a call from our marketing and sales team after you've said that. We do not have a venture down there. And, at the moment, we don't have plans for it. India was our focus, and I think we'll stay with that for a while. It's a market we monitor. But you can only fight on so many fronts. And I think we want to remain focused on what we're doing in India and Japan and Asia, our key areas for us. I wouldn't rule it out. Maybe there's an acquisition that comes up; maybe there's a joint venture opportunity. But that has not been part of our strategic discussions - at least, not of late.

And are you-- Remind me, also - Are you currently doing business with Toyota and to what extent?

Very little with Toyota.

Okay. It would seem the logical thing to be would be if you were to get designed into whatever platform they might be producing down there, and then you would get brought along. That would be one path.

That would certainly help. We went into China and developed a facility there, knowing that we had GM business. So that's always-- (Inaudible) one of the reasons that northern Africa for Power is you go in with at least some backlog that helps cover your overhead while you start off.

Absolutely. Okay. Great. Thanks, guys.

Ladies and gentlemen, there are no further questions at this time. I would like to turn the floor back over to management for closing comments.

All right, Melissa. Thank you very much. We will thank everyone for listening. And have a good day and a good weekend. Thank you.

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