Methode Electronics Inc (MEI) 2009 Q4 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Methode Electronics Incorporated fiscal 2009 fourth-quarter earnings conference call.

At this time, all participants are in a listen-only mode and a brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded.

This conference call does contain 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 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 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 annual or quarterly reports. Such factors may include, without limitations, the following -- one, dependence on a small number of large consumers within the automotive industry; two, rising oil prices could affect our automotive consumer future results; three, the seasonal and cyclical nature of some of our businesses; four, dependence on the automotive industry; five, dependence on the appliance, computer and communications industry; six, intense pricing pressures in the automotive industry; seven, increase in raw material prices; and eight, consumer risks related to conducting global operations.

It is now my pleasure to introduce your host, Mr. Donald Duda, President and Chief Executive Officer of Methode Electronics Incorporated. Mr. Duda, you may begin.

Good morning, everyone. Thank you for joining us today for our fiscal 2009 fourth-quarter and year-end financial results conference call. I am joined today by Doug Koman, Chief Financial Officer, and Ron Tsoumas, Methode's Controller. Both Doug and I have comments today. Afterwards, we will be pleased to take your questions.

For fiscal 2009, Methode's overall sales declined 42% in the fourth quarter and 23% for the year compared to the same periods of fiscal 2008. The downward pressure in the worldwide automotive market, coupled with our decision to exit unprofitable legacy business, affected our sales results.

Specifically, fourth-quarter fiscal 2009 revenues excluded sales from Chrysler, while the fiscal 2008 fourth-quarter sales included revenue from this automaker. Additionally, as a result of our agreement with Ford Motor Company to transfer all production at Methode's Reynosa, Mexico facility to another supplier, sales to Ford were reduced in the quarter. The transfer of Chrysler product was substantially completed in the second quarter, while we expect to transfer the Ford product to be completed by the end of August.

In Europe, overall auto revenues were down 29% in the fourth quarter compared to the same quarter last year. Excluding the restructuring and impairment charges, Methode's net loss was $0.10 per share in the fourth quarter, compared to income of $0.42 in the fiscal 2008 fourth quarter. For the year, again excluding the restructuring and impairment charges, Methode's net income was $0.17 per share in fiscal 2009, compared to income of $1.14 in fiscal 2008.

Although accounting rules mandated that goodwill and intangible assets of certain Methode business units were impaired, we believe these are still strong and viable businesses that are well positioned to rebound when the economy improves.

While current economic conditions and their impact on our financial results in fiscal 2009 were significant, the aggressive restructuring and repositioning of our global manufacturing footprint undertaken during the last fiscal year has lowered our breakeven point. Additionally, these actions minimize the impact of sharply lower sales on our bottom line by significantly reducing the Company's cost structure.

It is important to note that Methode has generated over $43 million in operating cash during fiscal 2009.

As we announced on last quarter's conference call, we accelerated our strategy to substantially exit our legacy North American automotive business and to reduce our overall automotive revenues to approximately 40% of total revenues by fiscal 2011. Additionally, as indicated on last quarter's call, we've been in discussions with other customers worldwide regarding products which are no longer cost-effective for Methode to produce. We were able to negotiate moving the initial portion of a future product launch to another supplier and are in negotiations for moving the remaining business. Had Methode not been proactive with this situation, this business would have commenced production at a loss as a result of reduced volumes and other economic factors.

Concurrent with these actions, in the fall of 2008, we began taking measures, which will continue through the first and second quarters of fiscal 2010, to combat the current economic situation and as I said, position Methode for growth and improving results. A few examples are as follows. We consolidated network bus products VEP and cable Co. into one facility in Rolling Meadows, Illinois. All TouchSensor manufacturing will be moved to Monterey Mexico, by this August. Shanghai, China manufacturing has been consolidated into two facilities from three. Power products manufacturing will be launched in Malta to support our European customers at lower logistics costs. Regrettably, in excess of 850 positions were affected worldwide by these and other actions.

We expect to have our structuring initiatives completed by the end of 2010 fiscal year, if not sooner. I am confident that these actions, along with the additional restructuring measures taken through out fiscal years 2008 and 2009, will see us through these difficult times and will allow us to come out of this downturn a much leaner and stronger company. I firmly believe Methode's margin and profit potential should benefit considerably from these initiatives when the economy returns to normalized levels.

Moreover, Methode's balance sheet remains strong, and we have good liquidity. We ended the year with $54 million of cash, a $75 million revolving credit facility, no debt, and as I said earlier, over $43 million in operating cash flow which assisted in our ability to repurchase approximately 670,000 shares of our common stock while paying an aggregate of $0.26 per share in dividends for the fiscal year.

Our strategy remains unchanged -- focus on user interfaces, sensors, and power solutions while accelerating the introduction of new products utilizing our advanced global manufacturing capabilities.

Moving forward, I believe fiscal 2010 is going to be a pivotal year in the development of Methode, but also a challenging year due to the continuing global economic environment. In fiscal 2010, we will continue to solidify our user interface, sensor and power market positions, and increase our [Prominence, a] new program in a way that is going to drive our results for many years.

When I think of the future of Methode, I am excited about the prospects that we find in the market, and in particular the prospects that are existing in new customers (inaudible) affording us.

On the business development front, as many of you have heard me say before, we are not exiting the automotive market but rather focusing on bringing technologies and higher-value products to our OEM customers. These products are being developed with Methode's Field-Effect, biometrics and magneto elastic sensing technologies as a backbone.

Currently, we have been able to employ TouchSensor's Field-Effect technology to a center-stack application for a major automotive OEM. This program launches in model year 2011 and could represent approximately $20 million in annual sales.

Additionally, Methode has been making investments for the past several years in magneto elastic technology via our MDI business unit. I am pleased to report that we are working with a number of automotive OEMs to integrate torque-sensing technology on transmissions. We have supplied prototypes and test data and have received favorable feedback from our customers. Methode may be uniquely qualified to provide this innovative technology, as we have not only invested in the technology but also the manufacturing techniques needed to mass-produce the sensor to automotive standards.

We view MDI's magneto elastic technology as a significant investment in powertrain controls, as it may deliver the most vital component of control strategy data, and that is torque. Torque sensor information provided by the sensor may significantly improve shift quality and potentially fuel economy.

Also in MDI, we continue to become involved in the expanding electric hybrid vehicle market, in particular with MDI's data charge sensor. Up to now, electric and hybrid vehicles could only estimate, through extensive algorithms, the state of a charge of lithium ion cells -- or in other words, the ability of a battery to absorb and hold a charge. Automotive and battery manufacturers would prefer a more exact measurement rather than an estimate of the actual remaining capacity of the battery and its life.

Using magneto elastic technology, it may be possible to provide a non-contact sensor which generates a magnetic field that permeates a lithium ion cell. The resultant field change is proportional to the cell's state of charge and health. By leveraging MDI's core competency of advanced magnetics to measure this phenomenon, the state of charge in an electric hybrid vehicle is now potentially achievable on a commercial basis.

Also in the expanding electric hybrid vehicle market, we are producing the bus bar for the inverter of a hybrid vehicle to ship mid-2010 for an Asian customer. We are producing the bus bar for the inverter of an electric hybrid vehicle for forestry which began shipping this last March.

Our Cable Co. and Tribotek product lines are being designed into products for a manufacturer of electric vehicle controllers and charging systems. We have also designed multiple bus bars for use in hybrid equipment for one of the world's largest makers of construction and mining equipment.

In our Interconnect segment, we are doing our efforts in the Asian Pacific region with TouchSensor's technology. In Japan, we are working to establish the TouchSensor brand in the non-automotive sector with a focus on vending machines and home appliances. We are working with one of the leading vending machine manufacturers to replace their mechanical keypad with TouchSensor technology. Additionally, we are working closely with the leading Japanese in-mold decorative film manufacturer toward the integration of Field-Effect touch cells in future appliance applications.

New business wins utilizing TouchSensor's new touchscreen technology includes the display and control panels on cooking and laundry applications for a major US appliance manufacturer. We will also begin producing a solid-state liquid level sensor for a manufacturer of [some] pumps. This represents significant diversification of the TouchSensor Field-Effect technology originally launched in the appliance market. We expect these opportunities to have a positive impact on TouchSensor sales and earnings over the next 18 months.

As we have increased our ability to advance, develop and produce new products that meet or exceed customers' product needs and more importantly help them to differentiate their products, we are finding that our customers are coming to us more proactively with opportunities. For instance, we are working with the parent company of one of Hetronic; key customers to develop a user interface device that will provide a standard look and feel throughout one of their major brands. This customer would refer a multinational supplier for the design, development and manufacturing of these complex controls.

Through our marketing and sales activities, the customer became aware that Methode is a full-service, engineered solution provider with complex supply-chain management experience and could manage such a large product while providing them with technology and brand synergies.

Further, our customers can employ multiple Methode products across their product lines as a result of the synergies between our various technologies. One example of this is a large multinational customer employing both our power solutions products and Hetronic technologies. Having already shipped initial orders, we believe our power solutions team can become a key supplier to this customer. Additionally, this customer has formed a strategic alliance with Hetronic to develop a suite of standard handheld radio remote controls to be private-labeled for use in their products.

To further current and potential customers' understanding of the breadth of Methode's technology and product offerings, we recently initiated a complete overhaul of Methode's website. With one central site, we will be able to demonstrate our position as the developer of engineered solutions with worldwide manufacturing capabilities. We expect to launch the new site during this fiscal year.

The breadth of our market coverage, our growing library of proprietary engineered solutions, and our positions in key market niches are the strategic drivers to Methode's future growth. One important element of our long-term strategy is our ability to seek out and acquire complementary businesses that expand our technological competency, our market reach, and essentially elevate our competitive strengths. We will continue to seek out these type of acquisitions and we believe the current economic situation may present attractive opportunities.

As I stated in the beginning, these are difficult times for the world economy and for our business. But as I look forward, I am very optimistic for the future of Methode. We will continue to grow our market share and diversify our customers and product portfolio, striving to avoid sales concentrations with any one customer or any one industry. We have innovative and patented technology during a global footprint which makes us, we believe, very well-positioned to take advantage of the economic upswing that will certainly come and the accelerated growth that we will experience in developing markets.

With that, I would like to turn over the call to Doug for his review of the financials.

Thanks, Don. Good morning, everyone. Let me start with just a few comments on the impairment charge. The accounting rules require that we review our goodwill and other assets for impairment at least annually, usually in the fourth quarter or whenever events or changes in circumstances indicate that the carrying amount of these assets may be impaired.

In the fourth quarter, we recorded additional goodwill and intangible asset impairment charges of $61.7 million. The values assigned to goodwill and intangible assets are based on estimates and judgments for the underlying businesses and technologies. These estimates and judgments are affected by the significant downturn in the global economic activity in the last half of our fiscal year. It also considered that our market capitalization remained below our book value during the latter half of fiscal year 2009. That also is an indicator of impairment.

Therefore, in the fourth quarter, we undertook the impairment analysis prescribed by FAS 142 and 144, and recorded a goodwill impairment charge of $45.1 million. There was $25.8 million in the Automotive segment and $19.3 million in the Interconnect segment.

Additionally, in the fourth quarter, we also recorded an intangible asset impairment charge of $16.6 million. $11.6 million of this was in the Interconnect segment, $4.6 million in the Automotive segment, and $400,000 in the Other segment.

On the restructuring front, back in January of 2008, we announced the restructuring of our legacy North American Automotive and Interconnect businesses. Then in March 2009, we announced several additional restructuring actions to further reduce our exposure to the North American automotive industry and to reduce other costs by consolidating facilities and migrating manufacturing to lower-cost regions.

The restructuring charge in the fourth quarter was $8.9 million in the Automotive segment, $900,000 in the Interconnect segment, and $0.5 million in the power product segment for a total of $10.3 million this quarter compared to $4.7 million last year. For the year, the restructuring charge was $19.3 million in the Automotive segment, $5.5 million in the Interconnect segment, and $0.5 million in the Power Product segment for a total of $25.3 million in restructuring charges in fiscal 2009 compared to $5.2 million last year.

As Don mentioned earlier, excluding the impairment and restructuring charges, our fourth quarter, pretax, would have been a loss of $6.6 million or about $0.10 per share after tax. For the full year, pretax would have been income of about $8.8 million or $0.17 per share after tax.

Moving to our reporting segments, the Automotive segment had fourth-quarter net sales of $47 million, compared to $100.8 million last year. Automotive sales were down nearly 53% in the quarter. For the fiscal year, Automotive segment sales were $243.6 million compared to $362.1 million last year.

Automotive sales for the year were down almost 33%. The decrease is due to the softening of the global economic environment, especially the effect on North American automotive industry. A large portion of the drop in sales is due to North American OEMs extending plant shutdowns during the third and fourth quarters.

Additionally, sales to Chrysler were down 75% for the year due to our decision to exit that business. We substantially completed the transfer of Chrysler product by the end of our second quarter of fiscal 2009.

Currency translation decreased foreign sales by out $1.8 million in the fourth quarter but increased foreign sales by about $1.3 million for the full fiscal year.

In the fourth quarter, gross margins for the Automotive segment were $6 million compared to $26.5 million last year. For the fiscal year, gross margins for the Automotive segment where $40.1 million compared to $80.1 million last year.

Gross margins were negatively impacted by manufacturing inefficiencies resulting from the significant drop in sales during the last half of fiscal 2009. Margins were also negatively impacted by the planned reduction in Chrysler sales due to our decision to exit that business. Also, last year's margins benefited significantly from the price increases that we received from Chrysler.

Pretax income in the Automotive segment was a loss of $37.7 million in the quarter and a loss of $24 million for the full year. However, excluding the restructuring and the impairment charges, pretax would have been income of $1.6 million in the fourth quarter and income of $25.8 million for the full year.

The Interconnect segment had net sales of $30.2 million in the fourth quarter, which is down nearly 23% from $39 million last year. For the fiscal year, the Interconnect segment had net sales of $131 million, compared to $136.3 million last year, so about a 4% decrease in net sales.

Net sales were favorably impacted by seven months of sales from Hetronic which was acquired on September 30, 2008. Excluding sales from Hetronic, the remaining businesses in this segment were down about 34% in the fourth quarter and about 14.5% for the full year. The declines there reflect the general economic slowdown in the markets served by these segments -- by this segment.

Currency translation decreased foreign sales by about $300,000 in the fourth quarter, but increased foreign sales by about $300,000 for the full fiscal year.

Fourth-quarter gross margins for the Interconnect segment were $6.7 million, or about 22% of sales, compared to $9.4 million or about 24% of sales last year. The decrease in gross margin is primarily due to the general economic slowdown.

For the fiscal year, gross margins for the Interconnect segment were $31.5 million, or 24% of sales, compared to $31.6 million or 23% of sales last year. The increase in gross margin as a percentage of sales primarily relates to product mix related to the Hetronic acquisition, the positive impact of the Interconnect restructuring. This was offset by the effect of the economic slowdown.

Pretax income in the Interconnect segment was a loss of $32.1 million in the quarter, and a loss of $60.7 million for the fiscal year. Again, excluding the restructuring and the impairment charges, pretax would have been a loss of about $300,000 for the fourth quarter. For the full year, we would have had pretax income of $1.7 million.

In the Power Product segment, sales were down almost 21% in the quarter with $9.9 million this year compared to $12.6 million last year. As with the other segments, this is due to the general economic slowdown.

For the fiscal year, sales were down nearly 7% with $42.7 million this year compared to $45.8 million last year. The fiscal year 2009 benefited from 12 months of sales from VEP, while fiscal year 2008 only had eight months of VEP sales.

Gross margins in the Power Products segment where break-even in the quarter, compared to $3.4 million last year. For the fiscal year, gross margins were $5.5 million, or 13% of sales, compared to $12.7 million or 28% of sales last year. For both the quarter and the full year, the decrease is due to a product that reached end-of-life at the end of fiscal 2008, which had higher gross margin than the remaining products. Additionally, in fiscal 2009, we experienced an unfavorable product mix and increases in labor costs as well as shipping and distribution costs.

Pretax income in the Power Products segment was a loss of $1.6 million in the quarter and a loss of $5.7 million for the fiscal year. Excluding restructuring and impairment charges, pretax would have been a loss of $1.1 million in the fourth quarter and a slight income of $200,000 for the full year.

The Other segment had fourth-quarter sales of $1.7 million, down slightly from $1.9 million last year. For the fiscal year, the Other segment had higher sales at $8.2 million, compared to $6.9 million last year. Sales at both our magneto elastic sensing business and test laboratories were up year-over-year.

Gross margin was a loss of $600,000 in the fourth quarter, compared to income of $200,000 last year. For the fiscal year, gross margin was a loss of $700,000 compared to income of $200,000 last year. The reduction in gross margin in both the quarter and fiscal year is primarily the result of increased research and development initiatives in our magneto elastic sensing business.

Pretax income in the Other segment was a loss of $1.7 million in the quarter and a loss of $5.1 million for the full year. Excluding impairment charges, pretax would have been a loss of $1.2 million in the fourth quarter and a loss of $3.5 million for the full fiscal year.

Some of the highlights on the consolidated income statement -- selling and administrative expense in the fourth quarter was $13 million. That's down from $16 million last year. However, as a percentage of net sales, selling and administrative expense increased to 14.6% compared to 10.4% last year.

For the fiscal year, selling and administrative expense was $57.5 million compared to $61.6 million last year. Again, as a percentage of net sales, selling and administrative expense was 13.5% in fiscal 2009 compared to 11.2% last year.

Selling and administrative expense was lower due to reduced performance-based compensation in the current year and the reversal of previously accrued compensation expense. The increase in selling and administrative as a percent of sales reflects the significant drop in sales in the second half of fiscal 2009.

Interest income, net, was $200,000 for the fourth quarter, compared to $600,000 in last year's quarter. For the fiscal year, interest income was $1.4 million compared to $2.3 million last year. The reduction is primarily due to lower nominal interest rates this year versus last year and lower average cash balances this year compared to last year.

Other net was income of $700,000 for the fourth quarter, compared to expense of $1.2 million last year. For the fiscal year, Other net was an expense of $0.5 million compared to expense of $3.3 million last year. The improvement is substantially due to the impact of the stronger US dollar on the activities of our foreign operations.

For the full fiscal year 2009, the income tax provision was an expense of $1.7 million compared to an expense of $9.7 million last year. In fiscal year 2009, the impairment of assets, restructuring charges and slowing of business resulted in a loss before income taxes generating a tax benefit. However, offsetting this tax benefit, in accordance with FAS 109, we recorded a valuation allowance due to the uncertainty of the future utilization of the tax benefit generated. While the IRS allows a 20-year loss carry forward, the accounting rules proscribe that you look for it only a few years. Therefore, a valuation allowance was recorded in the fourth quarter of fiscal 2009, resulting in an income tax expense of $14 million in the fourth quarter of 2009, compared to $2.7 million in last year's fourth quarter.

Moving to the balance sheet, cash is at $54 million, compared to $104.8 million at the end of last year. This primarily reflects the Hetronic acquisition. Compared to last quarter, however, cash is almost flat, down only $400,000.

The Accounts Receivable balance is $60.4 million, down from $85.8 million at end of fiscal 2008. Receivables are down primarily due to the lower sales in fiscal 2009 compared to 2008. This was offset by receivables acquired with Hetronic the acquisition.

Inventory is down to $40.4 million from $55.9 million at the end of fiscal 2008. As with Accounts Receivable, the decrease is primarily due to lower sales in fiscal 2009 versus 2008, also less customer-funded tooling inventory because of our decision to exit legacy automotive business. These were offset by inventories acquired with the Hetronic acquisition.

Other current assets are $26.4 million. This is up from $14.8 million last year. This primarily reflects the anticipated tax refund for the fiscal year 2009 loss carryback to fiscal years 2007 and 2008.

Property, plant and equipment, net, is $69.9 million. This is down from $90.3 million at the end of fiscal 2008. The decrease primarily reflects our restructuring initiatives, lower capital spending, and the impact of the US dollar, which strengthened during the fiscal year.

The reduction in both goodwill and intangible assets is related to the impairment charges taken in the third and fourth quarters this year. Goodwill is at $11.8 million, down from $54.5 million at the end of 2008. Net intangible assets are at $20.5 million, down from a $41.3 million at the end of last year. Other assets at $21.9 million are down from $23.4 million at the end of last year, primarily due to adjustments between current and noncurrent deferred tax items, offset by our $2 million investment in Lumedyne.

Accounts Payable is $24.5 million. This is down from $42.8 million at year-end, reflecting lower material purchases due to the drop in sales for the end of this fiscal year compared to last year. Other current liabilities at $29 million is down compared to $33.9 million at the end of last year, primarily due to the payout of accrued severance reduction in performance-based compensation accruals and decrease in accrued vacation due to the reduction in employment levels.

Other non-current liabilities is at $20 million. This is down slightly from $20.7 million at the end of last year, which primarily reflects different compensation payments related to the TouchSensor acquisition.

On the cash flow statement, the decrease in cash and cash equivalents for the year was $50.3 million, as I said primarily reflecting the Hetronic acquisition. Cash provided by operating activities was $43.2 million. This is $33.9 million less than was provided in fiscal 2008, primarily due to the decrease in business levels and our restructuring initiatives.

Cash used in investing activities was $76.1 million. This is $47.1 million more than last year, which is primarily reflecting the Hetronic acquisition, offset by slightly lower capital spending in 2009.

Cash used in financing activities is $15.1 million, which is $8 million more than we had last year, reflecting the purchase of approximately 670,000 shares and a higher dividend payout at $0.26 per share this year compared to $0.20 per share last year. This was offset by fewer stock options being exercised this year compared to last year.

Don, that concludes my remarks.

Thank you very much, Doug. Ashley, we are ready to take questions.

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions). David Leiker, Robert W. Baird.

Good morning. It is Keith Schicker on the line for David.

Just for starters here, there was a restatement and amendment to the credit agreement earlier in the week. Could you just provide a quick overview of what happened there and walk me through some of the details?

Sure, Keith. Because of the significant impairment charges that we incurred this year, the bank facility is set up to be a function of EBITDA. Under the agreement, the impairment of goodwill and intangible assets, even though it is non-cash and it's the equivalent of amortization, under the agreement we weren't allowed to necessarily add that back to determine EBITDA. So we had to amend the bank agreement to reflect those changes. So the genesis for the amendment basically is the significant impairment charges that we took this year.

Okay. If we look at the restructuring, it's $7 million in 2009. It looks like there is about $9 million to $18 million that is going to occur in fiscal 2010. Is there any other actions that you plan to take on top of that, or any other actions that you are considering first? Then secondly, can you just provide a little bit of color on how you expect that $9 million to $18 million to flow through the year?

Okay, let me take the first half of that question, and then I'll let Doug answer the second part.

We have no other actions planned. We feel we have gone through most of our actions in the (technical difficulty) be going on for the next couple of quarters and would hope to have them done by the calendar year/ Some of the actions could go into the third quarter or perhaps the fourth. But again, most of it is in the first half of the year here.

We know of no other actions we would be taking. We have taken some significant actions, that we rearranged our footprint, but I think we are pretty much where we need to be or at least we have announced everything.

Yes and I think, Keith, Don mentioned the timing. While the expectation is that -- I think we said in the K that we will complete it sometime during the fiscal year, the hope is that we get it done by the end of the calendar year.

Some of the initiatives obviously depend on -- we are still working with our customers and accommodating those issues for them. So we may see more of it in the first half of the fiscal year, but there may be some that bleeds into the second half of 2010.

Okay. If we look at the year-over-year decline in Ford revenue relative to exiting some legacy product lines, is there any way to quantify that in dollars or just sort of put some parameters around that?

Your question again, Keith? I guess --

You exited some Ford business during the quarter.

Yes.

Is there any way to just put some parameters and how many, the size of that in millions of dollars?

Let me try to answer it this way. In normal times, that business was maybe $60 million to $80 million. It had dropped to probably half that. These are approximations. When we looked at that business, oh, probably last fall, we were thinking maybe $35 million or $40 million. Again, that's an approximation but that probably puts some parameters around it. It is really the drop in volume that caused us the issue there.

Okay. As we look towards the first quarter here, and we are couple of months in, are you guys seeing anything in terms of your business performance that really differs from trends that we have seen in some of your key end markets thus far in the quarter?

I wouldn't -- I don't think so. Our quoting activity is up slightly, but that isn't orders yet. We've seen some of our industrial customers. Some have stabilized. Others have posted things out.

You asked me I think that question last call. I would say I am slightly more optimistic than I was three months ago, but again, I think we are still in the middle of all of this.

Okay, perfect. Then, you've obviously taken a lot of action to pull ahead sort of the business model transformation that you guys are putting in place right now. It is a pretty qualitative question, but can you just talk about how much you've accelerated that versus your previous plans, and where you previously thought you would be? Given your liquidity position, it seems like you would be able to take additional action if needed. I mean, is there a chance to accelerate things further?

Let me talk about what we did in accelerating. It was really our legacy auto, and necessity is the mother of invention. We were losing quite heavily in our legacy business, so we did accelerate that. We would hope to exit legacy auto probably a little more gently and just let programs unwind, but that's really what we brought forward. We need to move product faster than we had intended to, or we needed to, versus letting it unwind. So I mean that was really our acceleration. Then, once we did that, then it made sense to do some plant consolidations.

But in terms of doing anything more, as I said earlier, I think we have repositioned ourselves. I am pleased with our global footprint. I am very pleased with the messages we are able to give to our customers.

The liquidity that we have I would hope we would be able to put to acquisitions and new product development. We continue -- I think we generate -- or a we pretty much from a cash flow standpoint in the fourth quarter, we were pleased with where we end up. Our projections look good. So again, I think we are well positioned and the acceleration was really out of necessity.

Perfect. Then you mentioned acquisitions. What sort of -- just talk qualitatively. What sort of opportunities are there in the marketplace? Is there distressed sellers or distressed competitors that might have a small part of the business that you guys would be interested in? How willing are you to make a move in fiscal 2010 versus sort of conserving your liquidity position during the course of the year?

That would depend on the opportunity. We have seen some interesting opportunities that I thought were -- well, they clearly would have been distressed-type sales. We have passed on those in that they didn't quite fit our model, but I was I guess pleased -- maybe that's not the word but -- that we are starting to see some of those opportunities. We originally thought we might see them a little sooner.

But it really depends on what it is. If it is in auto, I think we would be much more cautious. I'm not even sure we would do an acquisition there. But if it is in power or in our interface or interconnect segment and it fits the model, we would act on it.

I think what Methode can do today as the exit our restructuring, we are -- one of Methode's strengths is our ability to go in and restructure companies and move product lines, and so we would take on a project like that.

I've said before we wouldn't bet the farm on anything. It would be opportunistic and where it would enhance our portfolio. But it is certainly something that we continue to pursue. It is not anything being that we have put on the back burner.

Okay, that's great. Thanks a lot, guys. Have a great holiday.

Kevin Sarsany, Legend Financial Advisors.

I might have missed this. Doug did a good job on the balance sheet. What was the reason for the decline in inventories?

Well, again, just the lower sales towards the end of the year compared to where we were last year's fourth quarter. So that's the one benefit. If a business is in decline, it does result in lower inventories.

Again, as I mentioned, the other contributor there other than the sales slowdown is the fact that, since we are exiting automotive, we are not seeing that we need to carry as much customer-funded tooling inventory for automotive customers.

We also think that inventory reduction represents a good opportunity for us, too -- in case any of our managers might be listening! [laughter]

Okay. (inaudible) numbers are at least directionally correct. In the auto business, you had a $10 million increase in revenue sequentially, which I think was better than expected, but the profitability went up by about $1 million, incremental margin of about 10%. I would have expected it to be higher, given the history of profitability in that business. What was going on there, or am I just reading it wrong?

No, that's essentially correct. As we move products out of the Reynosa facility, we need to build banks. So we are building banks on product that is not particularly profitable.

Okay. Does that go away as soon as the move is over?

Yes, essentially yes.

When is that move going to be completed?

We've said the end of August. But again, that is not completely in our control. It is customer-dependent and the receiver company-dependent.

Okay. You have spent a lot of time talking about legacy auto and trying to get out of it. What is the split in auto, legacy versus new?

Going forward?

Right now, or going forward? I just --.

In the US, we will have essentially exited that. I'm trying to think if there is anything. No, with the move out of Chrysler and our agreement with Ford to move out of Reynosa, that will essentially be the end of it. We still ship our AST product, the seat sensor product. And then in Europe --

But legacy isn't a bad word in Europe, right?

No, no. But I just want to make sure -- and I think we've mentioned this to you before, that some of the Malta product comes back into the US.

But I don't think we necessarily consider that necessarily legacy.

No, that's hidden switches and --

I mean, the way you guys term "legacy" is kind of a bad thing. I am just trying to drill down on the legacy.

It is a polite way of saying "unprofitable business."

Right, okay. My last question is you again mentioned 40% auto in 2011.

Yes.

Help me out, understanding how you're going to get there; refresh me. I know you do a good job at the analyst day. And also, some of your Hetronic and TouchSensor are going into auto. Do you categorize that as auto?

Yes, yes. When we talk about center stacks, even though that is TouchSensor technology, the backbone of that, that is classified as auto. I don't think we've got any Hetronic going into automotive.

Okay, potentially but that's kind of what you're trying to do in auto with some of your new technologies, sell-in. I was just wondering, does that 40% exclude that just because you are about, as of this quarter, about 57% auto, and looking forward, it doesn't sound like that is that much pruning besides Ford. You do have new programs growing. It sounds like you really expect to grow the rest of the businesses to bring that down and I would hope not just bring the whole auto down.

That's correct.

Okay, so with your current stable of products, I mean I know acquisitions are going to be a part of it. I mean, how far could your current stable of products get you there, or is it really dependent on acquisitions that are going to fill that gap?

No, no, we feel very strongly -- the way we've repositioned Methode, not just from a manufacturing footprint and from a product standpoint, we've got more than sufficient room to grow. It clearly is not acquisition-dependent.

All right, that's it. I will take the rest off-line.

All right, Kevin, thank you very much.

(Operator Instructions). There appear to be no further questions at this time. I will now turn the floor back over to management for any closing remarks.

Thank you. With that, we will wish everyone a safe and pleasant holiday weekend.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.