Methode Electronics Inc (MEI) 2010 Q4 法說會逐字稿

Greetings and welcome to the Methode Electronics fourth quarter 2010 earnings presentation. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded. This conference call does contain certain forward looking statements which reflected managements 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 expectation 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 and quarterly report. Such factors may include, without limitations, the following. Dependence on a small number of large customers. Dependence on the automotive, appliance, computer and communications industries and the consumer and industrial equipment markets.

Seasonal and cyclical nature of some of our businesses, including further downturns in the automotive industry, ability to compete effectively in our technology-based business, and the markets in which we operate. Customary risks related to conducting international operations, ability to keep pace with rapid technological changes, ability to avoid design or manufacturing defects, ability to protect our intellectual property or if we infringe or are alleged to infringe on another person's intellectual property, dependence on the availability and price of raw materials, effect of acquisition or divestiture of various business operations on our business, financial condition, and operating results, significant fluctuation between the US dollar and other currencies, unfavorable tax legislation, the future trading price of our common stock could be subject to wide price fluctuations and risks of owning real property.

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

Thank you, Claudia. And good morning, everyone. Thank you for joining us today for our fiscal 2010 fourth quarter and full year 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 and afterwards we will be pleased to take your questions.

Methode had many accomplishments in fiscal 2010. During the year, we returned to profitability, completing two major restructurings, which we believe have successfully repositioned our business for future growth and profitability. Also, we refocused all our business segments on solutions selling, completely redesigned Methode's website, and finished the year with a solid balance sheet.

Additionally, we concluded fiscal 2010 with strong financial results, while overcoming a number of obstacles. Fourth quarter net sales increased $6.7 million, or 7.5% over the fourth quarter of fiscal 2009, in spite of the planned exit of legacy products and no sales to Delphi in the current quarter, compared to $7.9 million in sales to Delphi last year.

In addition to the quarter over quarter improvement, we also realized a sequential improvement in fourth quarter sales in each of our key segments. For the year, net sales decreased 12.3%, mainly due to the exit of legacy products and the loss of the Delphi business. For the fourth quarter, excluding restructuring and impairment charges, Methode's net income improved $21.1 million to $16.4 million, or $0.45 per share, as compared to a net loss of $4.7 million, or $0.10 per share in fiscal 2009.

Improved sales and lower overall manufacturing costs due to the company's restructuring contributed a higher net income in the fourth quarter. This was accomplished even though we had higher selling and administrative expense due to the legal costs associated with the Delphi supply agreement and patent dispute of approximately $1.5 million.

Additionally, there were other items included in our fiscal 2010 numbers that benefited our fourth quarter results, which Doug will discuss in his financial summary. Fourth quarter and full year gross margins also improved year-over-year, in each of our key segments due to our significant restructuring efforts and new product initiatives. Consolidated gross margins were 23.5% in the current fourth quarter compared to 8.1% in the prior year's quarter, and 21.4% in fiscal 2010 compared to 17% in fiscal 2009.

For the year, excluding restructuring, impairment charges and one-time pricing contingencies, Methode's net income improved to $17.8 million, or $0.48 per share compared to net income of $6.3 million, or $0.17 per share in fiscal 2009. While I feel confident about our long-term ability to capitalize on our strategy, and believe that the fourth quarter reflects the rebuilding of Methode's revenue stream, we would like to caution everyone that despite the revenue gains we made in the fourth quarter, the first quarter of fiscal 2011 will likely look different than the fourth quarter for three main reasons.

First, our fiscal fourth quarter's typically a strong quarter. Secondly, traditionally, our North American automotive customers reduce operations for a period of time in July for model changeovers, making July our slowest automotive production month of the year, and the July results are included in our first quarter fiscal 2011 financials. And lastly, the global economic recovery remains tenuous, especially in light of the current debt crisis in Europe, its effect on the Euro and possible impact in global economic growth.

In fact, in Europe, new automotive registrations have declined sequentially for two consecutive months following the end of scrappage programs, which were incentive government paid to owners to trade in old cars to purchase new models. Specifically regarding my for touch, as previously announced, this business represents $12 million to $18 million in sales in fiscal 2011, ramping to approximately $40 million in fiscal 2013.

Although Ford has said publicly that my Ford driver connect technology may be included on approximately 80% of Ford's North American models by 2015, as of now, we have no more booked business than I just stated. For our interconnect and power product segment, as economic conditions stabilize and provided no significant deterioration in general economic condition occurs, we expect modest sales growth during fiscal 2011 as compared to 2010.

Turning now to new business awarded, the increase in quote activity, which we reported last quarter, continued in the fourth quarter, with a number of new business awards. In our power product segment, we were awarded a power distribution subsystem for an international leader in the production of power wind products. A custom power distribution assemblies for a major motor drive provider. In this instance, engineers from our customer toured our mobile showroom and learned of our power flex product line, which led to the development of a custom design flexible bus bar for this customer.

We also booked additional power products for current customers, which exemplifies our strategy to remain strong in our core businesses and our multinational customer base. These opportunities and other wins in our power product segment in the fourth quarter totaled over $5 million in annual sales. All together, the segment was awarded over $12 million in new business during fiscal 2010, which will launch in fiscal 2012 and beyond.

This perhaps is a good point to remind everyone that it typically takes our business segments and customers between 18 and 24 months from the date an award to launching products and to realize sales. Moving on, in our interconnect segment, we booked additional business from Whirlpool for TouchSensor user interface controls on washer and dryer platform. This opportunity and other wins in our interconnect segment in the fourth quarter totaled over $1.5 million in annual sales. In total, the segment was awarded over $10 million in new business during fiscal 2010.

In our automotive segment, Methode was awarded additional lead frame business for automotive transmissions, along with a number of other new programs worldwide. These opportunities and other wins in our automotive segment in the fourth quarter totaled over $15 million in annual sales. In total, this segment was awarded over $45 million in new business during fiscal 2010.

In summary, the strength of our balance sheet and our strang cash position will continue to support the execution of our business strategy. I believe that our portfolio of intellectual property, our operational excellence, and diversifying revenue base have given us a solid foundation that will not only help Methode emerge as a stronger company, but I also believe better suited to meet the unique demands of our multinational customer base. And with that, I would like to turn the call over to Doug for his financial comments.

Thanks, Don. Good morning, everyone. As Don mentioned earlier, in our fourth quarter, we benefited from changes in various reserve estimates, about $3 million. Just wanted to comment on that a little bit. These reserves include items such as bad debt, slow moving out and obsolete inventory, environmental reserves, product assurance, medical and workers' compensation. These reserves are reviewed and adjusted each quarter up and down, and that's based on changes in business levels, facts and circumstances, and updated experience.

We thought that it was important to point out that there was the benefit in this fourth quarter, because we didn't want there to be any confusion with the fact that we are also talking about completing our restructuring in the fourth quarter, this benefit from these changes and the estimates have nothing to do with the results of completing the restructuring. The, of the $3 million, as we stated in the press release, we think that the majority of that is related to cost of goods sold, and then additionally, when we look at it, we believe that the $3 million is primarily related to our interconnect and automotive segments, probably on equal basis.

Let me now recap our reporting segments. In the automotive segment, fourth quarter sales of $47.7 million is up 1.3% compared to $47.1 million last year. As we mentioned in the release, the stronger sales in Europe and Asia made up for the loss of the Delphi business and the exit of certain legacy products.

For the fiscal year, automotive segment sales were $199.3 million, and it's down 18.2% compared to $243.6 million last year. The decrease is due to lower sales to Delphi, the planned lower sales of legacy product, and the continued softening of the global economic environment. Currency translation increased foreign sales by about $700,000 in the fourth quarter, and about $1 million for the full year.

In the fourth quarter, gross margins for the automotive segment were $9 million compared to $4.7 million last year. This improvement on relatively flat sales is due primarily to the efforts of our restructuring and consolidation efforts, with some benefit from the reserve adjustments. For the fiscal year, gross margins for the automotive segment were $36.5 million compared to $40.1 million last year. As a percent of sales, however, gross margins increased to 18.3% compared to 16.5% last year. This improvement was due to the restructuring and consolidation efforts, but was offset by some manufacturing inefficiencies that we incurred during the extended OEM plant shutdowns in our first quarter of the fiscal year.

Pretax income for the automotive segment in the quarter, it was $4.7 million compared to a loss of $37.8 million in last year's quarter. Excluding the restructuring and the impairment charges, we would have had pretax income of $4.9 million in the current quarter compared to $1.6 million in the fourth quarter of last year. For the full year, tax income was $11.2 million in the auto segment compared to a loss of $24 million last year. Excluding the restructuring and impairment charges and the one-time pricing contingency adjustment, automotive would have had pretax income of $6.8 million this fiscal year compared to pretax income of $25.8 million last year.

Looking at the interconnect segment, fourth quarter sales were $35.6 million. That's up nearly 18% from $30.2 million last year. This increase is primarily due to the improved sales at TouchSensor and Hetronic business units. For the fiscal year, the interconnect segment had sales of $124.1 million compared to $131 million last year. It was a 5% decrease in net sales. The decline reflects the exit of certain legacy products and the general economic slowdown in the markets served by this segment, while sales in 2010 were favorably impacted by 12 months of operations from Hetronic compared to only seven months in fiscal 2009.

The remaining business in this segment were down about 15% for the full year. Currency translation increased foreign sales by about $100,000 in the fourth quarter, but was about a push for the full year. Gross margins in the fourth quarter for the interconnect segment were $12.6 million, or about 35% of sales compared to $6.5 million, or 22% of sales last year. This improvement is primarily due to restructuring and consolidation efforts previously undertaken with some benefit, again, for the reserve adjustments.

For the full year, gross margins for the interconnect segment were $35.6 million, or 29% of sales compared to $31.5 million last year, or 24% of sales. As with the quarter, the increase in gross margin as a percentage of sales primarily relates to the restructuring efforts. In the quarter, pretax income in the interconnect segment was $5.1 million compared to a loss of $32.1 million last year. Excluding restructuring and impairment charges, pretax would have been $5.2 million in the current quarter compared to a loss of about $400,000 in last year's quarter.

For the full year, pretax income was $10.3 million compared to a loss of $60.7 million last year. Again, excluding the restructuring and impairment charges, pretax would have been $11.9 million this year compared to $1.7 million last year. Moving to power products, sales here were up about 3% in the quarter, with about $10.3 million this year compared to $10 million last year.

For the fiscal year, sales were down about 5%, with $40.4 million this year compared to $42.7 million last year. The drop for the year was primarily due to less demand for flexible cabling and heat seal products. Gross margins in the power products segment were $3.4 million in the fourth quarter compared to about break-even last year. Last year's fourth quarter was impacted by inefficiencies realized during the consolidation of facilities in Shanghai, including higher shipping and distribution costs. We also had inventory write-downs last year and unfavorable product mix.

For the fiscal year, gross margins were $10.5 million, or 26% of sales compared to $5.5 million, or 13% of sales last year. For the full year, the increase was primarily due to the restructuring and consolidation efforts. Pretax income in the power products segment was $1.1 million in the current quarter compared to a loss of $1.6 million last year. If you exclude the restructuring and impairment charges, pretax would have been $1.2 million this year compared to a loss of $1.1 million last year. For the full year, pretax income was $3.4 million compared to $5.7 million last year, again, excluding the restructuring and impairment, we would have had $4 million this year compared to $200,000 last year.

Moving to the consolidated income statement, we look at selling and administrative expense, in the fourth quarter, selling and administrative was $15.3 million, and that's up from $14.6 million last year. As a percentage of sales, selling and administrative decreased to 16% compared to 16.4% last year. And that's -- that was impacted by legal fees in the quarter of about $1.5 million related to the Delphi litigation.

This was offset by lower intangible asset depreciation this quarter compared to last year's quarter. For the full year, selling and administrative was $64.7 million compared to $64.1 million. As a percentage of sales, it was 17.3% this year compared to 15% last year. Again, selling and administrative was higher due to the legal fees of about $5.8 million related to the Delphi litigation.

We had a swing of $1.4 million on stock-based compensation. This was offset by the reduced intangible asset amortization and the benefit of the restructuring and consolidation initiatives. Interest income net was flat in the fourth quarter compared to income of maybe $200,000 last year.

For the fiscal year, interest net was an expense of $100,000 compared to income of $1.4 million last year. The reduction is primarily due to lower average cash balances this year compared to last year, because of the Etronics acquisition. Also, we saw lower nominal interest rates this year versus last year.

Other income net, we had income of $0.5 million in the fourth quarter compared to an expense of $700,000 last year. For the full year, other net was income of $0.5 million compared to an expense of, again, $0.5 million last year. It's a swing of $1 million. This increase for both the quarter and the full year is primarily related to gain from insurance policies related to employee deferred compensation plan, and gains on short-term investments this year versus losses on those investments in 2009. This was offset by losses due to the impact of the stronger US dollar on the activities of our foreign operations.

The income tax provision for fiscal year 2010, we actually booked a benefit of $6 million compared to an expense of $1.7 million last year. The $6 million includes tax expense on foreign profits of about $0.5 million, booked income tax return expense adjustments of $2.9 million, and other adjustments of $1.7 million. These were offset by a benefit of $3.2 million due to settlement of certain FIN 48 uncertain tax positions from prior years, and since we had losses before income taxes at our business, US-based businesses, we were able to record a tax carry-back benefit of $7.9 million in 2010.

Looking at the balance sheet, cash is up $9.8 million to $63.8 million compared to $54 million at last year's year end. Compared to last quarter, cash is up $6.6 million in the quarter. Accounts receivable balance is $68.6 million. This is up from $60.4 million at the end of last year. This is primarily due to the higher sales in the fourth quarter of fiscal 2010 compared to the fourth quarter of fiscal 2009. It's especially due to the launch of the transmission lead frame product in Shanghai.

Inventory at $29.8 million is down from $37.2 million last year. The decrease is primarily due to much improved inventory management in 2010, and that last year's inventory balance included additional inventory produced in advance of transferring certain production lines to our Monterey, Mexico facility. Other current assets are $22.4 million, down from $26.4 million last year. This primarily reflects changes in deferred tax items, property, plant and equipment is $61.9 million. This is down from $69.9 million at the end of last year. The decrease primarily reflects our exit of certain legacy businesses, the termination of the Delphi production, and lower capital spending. This was offset by the effect of the strengthened US dollar that the strengthened US dollar had on our foreign denominated assets.

Goodwill is up $300,000. This is due to a deferred purchase price payment on the Cableco acquisition. Intangible assets are down $1.7 million. This is primarily due to amortization. Other assets are at $33.4 million. That's up from $25 million last year. This is primarily due to pre-production costs related to the Ford center stack program and the continental transmission lead frame program.

Accounts payable at $29.7 million was up from $24.5 million last year. As with the receivables, this is primarily due to the higher sales in the fourth quarter of this year compared to the fourth quarter of last year. We saw no change in other current liabilities. Other noncurrent liabilities are $12.1 million. That's down from $16.9 million last year. This is primarily due to adjustments of deferred tax items and also deferred compensation payments related to the TouchSensor acquisition.

On the cash flow statement, the increase in cash and cash equivalents was $9.8 million for the year. Cash provided by operating activities was $27.4 million. This is about $15.8 million less than was provided in fiscal 2009. This is due to the decrease in business levels, unfavorable changes in working capital, including the cash payments related to the restructuring initiatives, and the negative effect of currency exchange rates during the year. Cash used in investing activities was $7.8 million compared to $76.1 million last year.

Last year's use of cash included the Hetronic acquisition and higher capital spending. This year's activity bend from proceeds of about $2.4 million received on life insurance policies related to the deferred compensation plan. Cash used in financing activities is $10.3 million this year compared to $15.1 million last year. This primarily represents the dividend payment and also last year's spending included $5.3 million for the repurchase of approximately 670,000 shares of common stock. Don, that concludes my remarks.

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

Thank you. (Operator Instructions) Our first question is coming from David Leiker with Robert W. Baird. Please state your question.

Good morning, all.

Good morning, David.

It's nice to be on the other side of the curve here, isn't it?

Yes, it is.

Can you quantify for us, or directionally give us some ball park idea of the revenue impact of, you know, Delphi being gone and the runoff the balance of the legacy business here?

Just a moment.

Yes. Yes, we, I think we've got those--

Yes, Delphi accounted for about $14 million in fiscal 2010, and legacy auto of almost about the same, $13.8 million.

Okay. Do you happen to have a Q4 number there?

On the--

In my prepared remarks, we had 7.4.

Yes, I think we mentioned it was I think 7.4, $7.9 million.

7.9 million. Yes.

Okay, and then the legacy, was that 8 in Q4?

I don't think we quantified it last year, because it, it's just difficult to really measure that against last year, but there was -- there was no, no Ford business, there was no Chrysler business.

Yes, that's right.

6 to 8 probably isn't -- that's probably a ball park number.

Okay, and on the runoff, the legacy business that's behind, I think in your release, it's behind you now, right?

Yes.

And we have a few more months to deal with the Delphi on a comparison basis?

Right. That's in September.

Right. Okay, and then just kind of update in terms of the legal and if you have any sense on timing, where that stands, spending on that going forward here, if there's anything to say there.

Other than it's tough to predict what the legal costs are going to be.

Yes.

I guess for comparison purposes or budgeting purposes, we, I believe we've said about the same.

Right.

That could be considerably less or more, depending on how things go here.

Are there any things that -- you know, is there any, any source of timing in terms of the core process, any change in the next three months or something?

There's no trial date set that I know of. We're still going through motions and probably have trial dates known probably in the fall. Not trials, but the dates by fall and September.

Okay. On the new business -- great help for us. It doesn't look like the my Ford touch numbers are in there, or are they?

They are, but I should say half of them are, because the first half of my Ford touch was booked in 2009. I believe that's the case. So when I say $45 million, you would say about--

It was booked during the year.

Yes. I have that here actually. My Ford touch during the year was about $23 million.

And you're putting that in automotive?

Yes. Yes.

And from a -- have you moved that from interconnect into automotive, touch sensor?

No, no. The touch sensor number I gave you was not automotive.

So from a modeling perspective and how that shows up in your segment reporting, is that going to show up in interconnect with touch sensor, or are you going to split that?

No, it's an auto program. It will go -- it's using the touch sensor technology, but it's an auto program.

Okay, thanks. That makes that clearer for me.

Yes.

If I do my math and put that all together, what do you think that -- the timing of that? I know it's over several years, but if we took, you know, pull a number out of the air, let's say $50 million in 2011, is that more than half of that's skewed to the back end of the year? Not the $50 million, but just in aggregate, is that how we should look at that?

We've said for 2011 that it's a $12 million to $18 million number.

I'm talking about all of the new business award number in aggregate.

Well, the--

I just want to have a sense of how that might fall percent-wise over the course -- I know you don't want to talk about dollars, but percent-wise, it's not a fourth, a fourth, a fourth, in each of the quarters, I would imagine.

No, but the $45 million of new automotive business that I talked about has no impact on 2011. It can't. It's just been awarded. So you go out 12 to 18 months. Well you got to go out longer than that on auto. You got to go 18 to 24 months out on that. What is launching now is the first Ford award of, I don't have the programs in front of me. But that's what's contributing to the 12 to 18 months. We've announced probably a couple quarters ago a launch in 2013.

If we take all of your new business that you have launching in 2011, how would you say that falls percentage wise for between the quarters? Now I'm not talking specifically about my Ford touch or interconnect but when you look at what your new business programs are for your fiscal 2011, does it back end loaded for the year, or evenly spread?

You do have to talk about my Ford touch on that.

I understand.

Because that is back end loaded. The others I would say are fairly normal launches. You would look at the normal auto cycle where, you know, our fourth quarter is usually a very strong quarter in auto. Our first quarter generally is one of the softest. That's one of the reasons we cautioned in our prepared remarks that you really can't run rate the fourth quarter, because you've got the July changeover in there.

Right.

And then the fall, again, auto -- normally we have good auto sales in the second quarter is strong, the third quarter tends to be a little weaker because of the holidays and then, again, you're back to the fourth quarter. The launches will follow that with the exception of Ford, which is probably more back end loaded.

Okay, and then one last item here as we look at your touch sensor applications in appliance and automotive, is there -- are there any changes going on there in terms of relative competitiveness of your offering versus competitors or functions and ways to do that, just from a technology landscape? Are there any shifts in that landscape?

I don't -- I won't say that there's been shifts. Touch sensor tends to be more economical in the lower count switch points. So if you're a dozen points or less, touch sensor is more economical. As you get above that -- probably becomes on par. Technically, touch sensor, or field effect, is faster. So you get a much quicker response. The volume and fan slider, you could call it artificial slider on my Ford touch would be difficult to do with capacitors it wouldn't track as cleanly. And this really depends on the performance of individual designer wants. Certainly the touch sensor product is the most deployed because it's been an appliance for well over five years.

And is there any indication from Ford with what they are doing with my Ford touch and my Lincoln touch in terms of where they are in their thought process of how they are going to implement in the center console in these other programs and what technologies they may or may not use?

Really not that I can say. Perhaps the best way of answering that is, you know, my Ford connect technology is a -- lack of a better descriptor, a network in the vehicle that allows a driver to plug in various devices. The interface to the vehicle can be touch screen, it can be touch screen with discreet conventional switches, you know, membrane -- not membrane, but conventional -- switches or micro switches, or it can be a touch sensor. It really is up to the designer and how they want to offer the various options across their vehicle line.

And do you have any indications that you can share of likelihood of them using multiple approaches or which one might be more dominate or any thing along those lines?

No, I'd be speculating I would imagine like any car company, they want to have multiple sources, so it wouldn't surprise me if they employed capacitants on some vehicles. It also wouldn't surprise me if they used conventional switches. And, and the vehicles haven't been in the show rooms as of yet. They have been at shows and gotten a lot of good press, but I think a lot depends on how they are received by the consumer.

Okay.

The best thing that can happen is the consumer just loves the slider controls and their responsiveness of the touch points of Methode.

I have some others, but I'll get back in the queue. Thanks.

Thank you.

Our next question is coming from the line of Jeremy Hellman with Divine Capital Markets. Please state your question.

Hi, good morning, everybody.

Good morning, Jeremy.

Okay. So just following up on David's questions around auto, I just want to make sure I'm following some things correctly now. I think I've got that turned around. For fiscal 2010, automotive revenues were $203 million. Then if I back out the Delphi and legacy businesses, it's around $28 in aggregate. Just as I formulate my fiscal 2011 versus fiscal 2010 look on things, your base is then, you know, call it $175 million for 2010, correct? Am I, am I understanding that properly?

We're following your math. Yes.

Okay, and then in the K, you talk about expecting fiscal 2011 sales to be down versus 2010. You know, obviously that is off the 203 level on a like for like basis, we're still expecting growth, am I correct? Off the 175 base?

No, I--

Is that--

We're expecting that year-over-year, our automotive sales are down.

Right.

And in part because of legacy and Delphi, but it's an excellent question that you asked because last year around the world included government incentives. You got scrappage programs in Europe that we're seeing a decline in automotive sales in Europe. It was most notably in Germany, but it was elsewhere because those scrappage programs had come to an end and you had cash for clunkers here in the US. So I don't know how you factor that in, but it's certainly a factor, and there was just an article in automotive news that says light vehicle sales may stall and I don't -- at least the preliminary talk on the news today was that the second half of, in auto may not be as good as predicted. I don't have the numbers yet, though.

Right. You know, the way I look at it, on a bigger picture level is you've got the issues you just cited on the downside. On the upside, you've got the new business coming in, you know, my Ford touch is going to be, you know, something for the positive side of revenues this year. But, you know, at the end of the day, what I was trying to get to was if I sub out the Delphi and legacy stuff and back up to the $175 million number, whether the 2011 figure is going to be north or south of that ultimately, if you felt like being pigeon holed or pinned down. Any, any, any inclination to answer that?

I guess all things being equal, you might see some modest growth. But--

Certainly there's a lot that happens between now and this time next year.

Right. I mean, our comments in the K and the release in our prepared remarks is don't run rate the fourth quarter.

Yes, yeah, right, obviously. Okay. So switching up a little bit before we beat that dead horse too much, looking to gross margins, then, if I take out the reserve adjustments, which were I take out the reserve adjustments, which were add about 3% to gross margin, that backs up to about 20.5 or so percent. Do you anticipate being able to hold that margin level? You cited restructuring efforts, new products. Or, you know, is that going to be at risk of getting dragged down if sales soften and one would think that might be the case?

Well, I think we've said all things being equal, 20% is a good, a good number. Obviously if sales go down too far, your planned efficiencies and overhead coverage will weigh down and that has an effect on everything and everyone. But all things being equal, that's a good number.

Okay. One probably more simple question then, tax rate for fiscal 2011, what's a comfortable number to use? I go back to the 2006, 2007, and 2008 period, and when you are reporting that tax provision, you know, in the positive column, range from in the 40's down, last couple of years it's been a tax benefit, what's reasonable for 2011?

Yes, Jeremy, that's kind of an interesting question, because over the last two years, you know, you've seen -- I mean, we had losses last year, but we had tax, you know, tax expense. And this year we've got income and now we've got, you know, you know, started tax benefit. Yes, I think looking at next year, we're probably as provision, probably a single-digit tax rate, and that's going to be primarily because of the amount of foreign operations that we have will continue to pay taxes there. To the extent that we generate, you know, any US income, we're going to be able to, you know, carry those losses forward, and we've set up valuation reserves on that income for book purposes. So I would think that for the near term, the tax rate should be, again, single digits.

Okay. And then one last one for me, just more general getting away from the model for once, you know, if we back up and think about what is often written in the papers in terms of access to credit, big companies that, you know, have international operations or typically seeing a lot better access to credit than smaller businesses, seems to be a common thread. Given that, as you think about M&A, are you seeing potential targets out there that are becoming a little more price receptive, I guess I should say because of their access to credit, you know, if they are small, isn't what they would hope it to be?

I would say we're anticipating we're going to see some of that. We, we haven't looked at any, at least recently, any target, but particularly in Europe, we're anticipating we're going to see some of those type smaller companies that really have -- they have a good business. They just can't fund it. It may very well be in the auto sector, but it could be in other areas as well. We expected to see it about a year ago and I think maybe just a year off in our thinking. As businesses ramp, and have used up all of your -- as you ramp down, you generate cash. You use up that cash to sustain your business. Now you ramp back up, if you can't get lending, then you start to look at maybe being acquired by a company that has the cash. No target inside right now, but we do anticipate we're going to see some of that.

Okay, very good. Thanks.

(Operator Instructions) we do have a follow-up question coming from David Leiker with Robert W. Baird. Please state your question.

Just a couple of numbers questions and one bigger picture item. Doug, where do you expect depreciation capital spending to be in 2011?

Yes, I think we're probably a little bit north of $15 million on depreciation. Amortization is going to be $2.3 million, $2.4 million, and then capital spending, again, it probably depends on some of the opportunities that we see. But, you know, we're probably, you know, somewhere between -- somewhere between, you know, $10 million to $15 million. It's kind of a broad range. But I think it just depends on what opportunities are in front of us.

Yes, and we're not having to pay for as much tooling because of the change in our product focus. So -- well, $10 million to $15 million is probably a good number. Certainly not going to approach what we did in other years.

Okay, great. And then, yeah, I think in terms of the wording and the release, your restructuring actions and the cost involved, those are behind you now, correct?

Yes, we've got -- there's probably half a million on the balance sheet and so as that gets paid out, that does not the P&L, balance sheet. Otherwise, we're done with the restructuring. So anything, any tweaking that we do as far as that, it's not going to be part of those previously announced restructurings.

How much savings are there that's not in the P&L as we see it today? Or are we at a full run rate on the savings?

Well, it's always hard to answer. We -- you restructure the businesses for a lower revenue number. A midpoint, maybe below midpoint of what you expect in the next three to five years of revenue. And done right, and I think we're seeing some of the results of that, as you book business above that, that break-even line, if you will, you see a better throw to your bottom line than your standard margin. So I mean, we'll see that hopefully in our businesses, as revenues ramp. We saw a little bit of that in 2010, a little bit power, a little bit in -- so if we've seen the benefit, it's hard to quantify what it will be going forward, but assuming it's the labor mix is correct, you're not purchasing 80% contents, something around 50% or 40%, you should see a good throw to the bottom line.

Are there any costs that, you know, came out here in the downturn, temporary that we should look to come back in? Or is that not a factor at this point?

No, I don't think it's a factor. The only comment I would make is component costs could be a factor. We're seeing those component shortages -- I think every company is seeing that. So could that drive raw material up higher? It would happen for everybody, but that's a possibility.

Okay, and then the last item here, you know, you look at your -- you use the phrase in your release about your technology toolbox and you look at the different businesses that you have there. Is there any kind of update you can give us in terms of where you are with some of those technologies and whether any are closer to generating rampup in revenue like we're seeing out of touch sensor now?

That's a good question. We've had very positive test results, test track results on the MDI sensor performing in the vehicle, being compared to standard shift topology. Definitely shows an improvement. We've ridden in the vehicle, as has customers, executives, and so on. So that's very positive. I guess I would also say that a transmission program is a long launch from the point you get an award.

Right.

We're not there yet, but I think that's very positive. The MDI folks are just at a transmission symposium and, again, technology -- it was along with the customer, was also well received. So I think we're moving in that business from design and development to looking for programs to book at some point here. The technology has been refined. I find that -- again, no -- nothing -- no effect on this year or even next year, but moving in the right direction. We announced during the quarter investment in Etronics and some license arrangements there.

Right.

Being good -- it was a good combination of our auto pedigree and their engineering abilities and technologies. That's been I think well received by auto makers and others that need inverter technology. Nothing to talk about there yet in our fourth quarter. I would say things are moving along.

Touch sensor is coming out with a line of, I call it semi standard products that can be utilized by various product designers. That's trying to get them not just in the appliance business. I think they did a great job helping our auto guys get touch sensor on to a vehicle, but I like to see them diversify into other markets and they have got some standard products coming out to do that. Etronic has come out with a PLC, which if you think about their remotes, there has to be a controller some point in the system.

The big OEM's do that themselves, but Etronic has developed the PLC portion of it and the software that goes along with it, and that's starting to get some traction. They are thrust into the locomotive remote control markets, albeit slow ramp. They are getting good reception there. So across the board, the toolbox is doing what it's intended to do. Gets us into customers, helps differentiate them, and it does book business.

Couple years ago you talked about some of these businesses. I don't remember the number. I was thinking it was, you know, like $100 million or so in revenue for them. You know, is that still a target for some of these businesses out three, four, five years?

Yes. That's a fair -- I look at -- these are smaller businesses, they should be able to get to 50. And some of the touch sensor and -- are getting longer, yes.

Touch sensor is pretty much at a hundred--

If you add my Ford touch in there, yeah, absolutely.

Yes, okay. Great, thank you.

Thank you.

There are no further questions at this time. I would now like to turn the floor back over to Don Duda for closing comments.

Thank you, Claudia. I think with that, we'll thank everyone for listening and wish everyone a safe and enjoyable holiday weekend.

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