Methode Electronics Inc (MEI) 2012 Q4 法說會逐字稿

Welcome to the Methode Electronics fiscal 2012 fourth-quarter earnings conference call. 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 reflect management's expectations regarding future events and operating performances 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 to statements 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 and quarterly reports.

Such factors may conclude, without limitations, the following -- dependence on a small number of large customers, including two large automotive customers; dependence on the automotive, appliance, computer and communications industries; further downturns in the automotive industry or the bankruptcy of certain automotive customers; ability to compete effectively, customary risks related to conducting global operations; dependence on the availability and price of raw materials; dependence on our supply chain; ability to keep pace with rapid technological changes; ability to avoid design or manufacturing defects; ability to protect our intellectual property; ability to withstand price pressure; the usage of a significant amount of our cash and resources to launch new North American automotive programs; location of a significant amount of cash outside of the US; currency fluctuations; ability to successfully benefit from acquisitions and divestitures; ability to withstand business interruptions; unfavorable tax laws; ability to implement and profit from newly acquired technology; and the future trading price of our stock.

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

Thank you, Manny, and good morning, everyone; thank you for joining us today for our fiscal 2012 fourth-quarter financial results conference call. I'm joined today by Doug Koman, Chief Financial Officer, and Ron Tsoumas, Controller. Both Doug and I have comments and afterwards we will be pleased to take your questions.

For fiscal 2012, sales of $465 million and earnings per share of $0.22 met our financial guidance. We are pleased with our year-over-year consolidated sales growth of 8.6% driven primarily by our Automotive segment which was offset by declines in our interconnect segment, a direct result of continued softness in the appliance market, and the sale of our optical business in the fourth quarter of last fiscal year.

In the quarter-over-quarter comparison consolidated sales grew 5.9%. Again strength in our Automotive segment offset challenges in our Interconnect and Power segments. We posted full-year net income of $8.4 million or $0.22 per share compared to $19.5 million or $0.52 per share in fiscal 2011.

For the fourth quarter of fiscal 2012 net income was $5.8 million, or $0.15 per share, compared to $10.2 million, or $0.27 per share, in the same period of fiscal 2011. For both periods of fiscal 2012 net income was negatively impacted by higher foreign income taxes.

For the full year of fiscal 2012 income taxes decreased net income by approximately $0.09 per share compared to fiscal 2011 where the tax benefit contributed $0.11 per share, which resulted in a $0.20 EPS swing year over year. Additionally, there were other events which skewed the year-over-year net income comparison in the full-year period which are detailed in our release this morning.

As we have discussed over the last several quarters, design, development and launch costs in both our Automotive and Power Products segments continue to impact net income and gross margin. Additionally, vendor production and delivery issues and increased sales of products with a higher prime cost further affected our North American automotive income.

In total the development and launch costs and vendor charges lowered our fourth-quarter net income by approximately $1.7 million, or $0.05 per share, and lowered our gross margins by 1.3 percentage points. In the full-year these costs and charges lowered net income by $7.9 million, or $0.21 per share, and lowered our gross margins by 1.7 percentage points.

While vendor production and the delivery issues with the Ford center console program impacted fiscal 2012 by $3.3 million, we made significant progress throughout the year to vertically integrate Advanced Molding and Decoration, or AMD. The integration of this intricate paint process for automotive center consoles is successfully producing decorative components for approximately 40% of the Ford products we supply with the balance expected to be produced by the second quarter of this fiscal year.

The team is now focused on installing the fourth paint line to be used for the General Motors center console components. Once the integration is complete the charges associated with the vendor production and delivery issues should be eliminated and gross margins should improve.

Additionally, our Ford center console program currently carries a higher prime cost due to the high purchase content which reduces the program's overall gross margins. In fiscal 2012 our production of Ford center consoles doubled over fiscal 2011. Therefore, even though sales increased, our margins decreased due to the increased sale of products with a high prime cost. This should also be mitigated by the vertical integration.

We also incurred costs related to the design, development and launch of the General Motors center console program for the next generation of truck platform. In fiscal 2012 we incurred $4.6 million for the launch of automotive programs and anticipate approximately $4.5 million during this fiscal year in total launch costs for the General Motors program, the majority of those costs occurring in the first two quarters of fiscal 2013.

These costs will ultimately be absorbed as the product launches and revenue is realized which will begin in the fourth quarter of this fiscal year. While these costs are having an impact on our results now, the General Motors center console program has total anticipated revenue in excess of $500 million over the life of the program.

Finally, in our Power Products segment, product development costs for Eetrex were approximately $0.6 million in the fourth quarter and $2.4 million in the full year. We estimate similar development costs in fiscal 2013. This investment will result in a suite of products applicable to a wide variety of applications for not only [e-vans] but also stationary power systems.

Specific to stationary storage, we are developing a solution that will move battery backup from being -- not being just an insurance policy to an active battery solution that will reduce energy costs and improve data center performance.

Now turning to our view of our individual segments. In the fourth quarter Automotive net sales increased 12.7% and in the full-year improved over 20% due to higher sales from the Ford center console programs as well as from our transmission lead frame and steering angle sensor products.

The acquisition of AMD contributed almost 46% of the North American automotive sales increase in the fourth quarter and 40% in the full-year. It is important to note that AMD was breakeven at the gross margin level.

Automotive segment gross margins decreased in the fourth quarter and full-year comparison impacted by the vendor issue, the higher prime cost for the Ford center console, costs related to launch of the GM program and AMD sales at breakeven. Again, our targeted gross margins for Automotive are low to mid 20s which we anticipate reaching once the General Motors center console program is fully launched in the first quarter of fiscal 2014.

Of note, Methode was successful in negotiating a $1.2 million investment tax credit for fiscal 2012 from the Maltese government.

Interconnect sales decreased approximately 1% in the fourth quarter and 8% in the full-year comparisons attributable mainly to lower plant sales in North America as well as the sale of our optical business in April of last year. These lower sales were partially offset by increased sales of data and safety remote control products.

As we mentioned last quarter, we anticipate reduced appliance sales will continue through the first quarter of fiscal 2013. However, as we also announced last quarter, TouchSensor has been awarded the touch user interface for a large appliance OEM laundry platform. The platform which launches in the second quarter of this fiscal year will be used on multiple major brands and represents $38 million to $40 million in annual revenue at full run rate in fiscal 2014. We are anticipating sales of approximately $15 million to $20 million in this fiscal year. Interconnect gross margins fell in the fourth quarter and full year again due to lower sales.

Our Power Products segment saw approximately 11% lower sales in the fourth quarter due mainly to lower product demand from a key customer. In the full year sales improved just over 3%. We are cautiously optimistic that first-quarter sales will improve modestly over the fourth quarter.

Power Products' gross margins decreased in both reporting periods mainly due to product mix and the Eetrex product development costs. Additionally, gross margins were impacted by the loss of a customer who qualified a less costly alternative which Power Products did not offer. Without the new product development costs gross margins would have been 18.5% in the fourth quarter and 21.2% in the full year. Our target gross margin for the segment is in the high 20s which we anticipate achieving in fiscal 2014 as more products launch.

Now moving to what we see for the next several quarters. Although we ended fiscal 2012 with strong sales performance in the fourth quarter, we anticipate the first quarter fiscal 2013 to bring lower sequential sales as the first quarter is typically our weakest sales quarter. These lower sales, in conjunction with the costs associated with numerous new product launches, is expected to result in modestly above or below breakeven earnings per share this first quarter of fiscal year 2013.

However, in the second and third quarters we anticipate the launch of TouchSensor's laundry platform, along with the launch of multiple automotive products in Europe, will boost second- and third-quarter sales and earnings. Products launching in Europe include bus bars for Nissan and Renault electric vehicles, steering wheel and hidden switches for Ford and ergonomic switches for Volkswagen, Jaguar and Fiat.

In the fourth quarter the launch of the General Motors center console program combined with the second- and third-quarter launches of the laundry program and automotive programs in Europe is anticipated to make that quarter our strongest in sales and earnings for fiscal 2013. This anticipated progression throughout fiscal 2013 is in line with our original projections.

As such we are reiterating our full-year fiscal 2013 guidance of $495 million to $525 million in sales and earnings per share of $0.52 to $0.67. We remain on track for record sales of $630 million in fiscal 2014 and over $700 million in fiscal 2015.

Now let me summarize some of the product development and new business awards and opportunities that occurred in the fourth quarter. Our European automotive operation booked $7.8 million during the fourth quarter in new business closing fiscal year 2012 with over $40 million in new annual business, peaking in fiscal year 2015. This business includes expansion of programs of Ford and Fiat as well as new awards for Renault's electric vehicles.

In Interconnect, TouchSensor has made significant progress on cost reducing one of the key elements of their products. Specifically through its work with another Methode division, TouchSensor is developing the capability to digitally print circuits directly to decorative glass substrates.

This approach, while still at the concept stage, could potentially replace the printed circuit board TouchSensor normally uses to carry the touch technology and reduce or eliminate one of the most expensive elements of its build materials.

Also in Interconnect [Hetronic] recently demonstrated its new ruggedized touchscreen at a recent trade show which was well received by multiple customers. E-tronic also received prototype orders for radio remote controls for a welding system and a bridge crane as well as receiving its first production order for an explosion proof control system for oil wells cement heads from a large energy-related company.

In our Power segment we have received new awards for a variety of products including heatsinks and bus bars that will launch in fiscal 2014. The Group also had several wins for new liquid cooled chill plate designs which demonstrates the Group's move in developing highly engineered solutions.

In summary, with all this -- all the activity this year in launching new programs we also continue to focus on developing new technologies and processes which is a key element of our long-term strategy of providing our customers technology that enhances their products and our competitive position and ultimately results in improved margins for Methode. Now I will turn the call over to Doug who will provide further details regarding our financials.

Thank you, Don; good morning, everyone. Since we provided sufficiently detailed information about items affecting our consolidated segment results in both the earnings release and the 10-K I'll keep my comments very brief today.

Let me talk about taxes a little bit. Don mentioned that that resulted in about a $0.20 EPS swing from last year to this year. In fiscal '12 we recorded a tax provision of $3.2 million, that's an effective tax rate of about 28%. And that was primarily comprised of $3.1 million foreign taxes on foreign profits primarily in China and the Philippines.

We also had $2 million of withholding tax expense on dividends paid or going to be paid from our subsidiary in China to our Singapore subsidiary. Those two items were offset by a $1.2 million benefit from negotiating the monetization of the tax credits related to our Malta operation; Don mentioned that in his comments. And also we had an additional $700,000 tax benefit due to the change in the valuation allowance for unused investment tax credits in Malta.

Last year in fiscal 2011 we recorded a tax benefit of $4.1 million and that was primarily comprised of $2.1 million foreign taxes on foreign profits. We also had a $2.7 million benefit primarily related to the expiration of a statute of limitations on certain tax reserves and also a $3.5 million benefit related to the sale of our 75% ownership in Optokon.

Looking forward to 2013 we would expect our effective tax rate to be in the low- to mid-teams. This assumes no significant change in the valuation allowances for unused investment tax credits in Malta or for the net operating losses in the US.

Even though the tax rate in China increased to 25% from 12.5% effective January 1 of this calendar year, we still see the fiscal 2013 consolidated effective tax rate to be reduced as we see increased profits in Europe that are sheltered by investment tax credits or lower tax rates and we continue to benefit from lower -- from the net operating loss carry forwards in the US.

Looking at cash flow, we generated $24.8 million cash from operating activities this year compared to $17 million last year.

Looking at CapEx, in fiscal 2012 we spent $32.1 million for capital expenditures and acquisitions. Of this amount $6.4 million was for the acquisition of AMD. Looking at fiscal 2013 we expect to spend somewhere between $25 million to $28 million for capital expenditures in the year and with most of that front-end loaded in the first half of the fiscal year.

For fiscal 2012 our depreciation and amortization expense was $16.2 million. Looking at fiscal 2013 we expect appreciation and amortization to increase to -- somewhere between $18 million and $20 million for the year.

Looking at debt, at the end of fiscal '12 we had $48 million borrowed against our line of credit. Currently most of our cash is located outside the US. While we eventually expect to generate cash in the US primarily through future domestic operations, it will be necessary to continue to borrow from our foreign affiliates or under the credit facility for the near term. Management continues to work with its consultants to review efficient opportunities to repatriate cash back to the US.

In line with the review of those opportunities to repatriate cash, we did look at our accounting assertion with respect to foreign earnings. Methode considers all of its foreign earnings to be permanently reinvested in those foreign operations. In the fourth quarter of fiscal '12, however, we identified $38 million of undistributed foreign earnings for repatriation to the US.

We therefore recorded a deferred tax expense of $9 million, this expense was offset by reducing our net operating loss valuation allowance by the same $9 million, therefore there was no income statement impact in the quarter. The ability to bring this cash back to the US will help pay for capital and other expenditures anticipated to be spent to design, develop, engineer and launch the General Motors center console program and will reduce the amount of additional borrowing under our credit facility. Don, that concludes my remarks.

Doug, thank you; thank you very much. Manny, we are ready for questions.

(Operator Instructions). David Leiker, Robert W. Baird.

Let's start just a discussion here on the launches and how they're going with Ford. Are you at the point now from a Ford product perspective that most of those are behind you and that you're running at a pretty normal rate there today?

That is correct. Both [U-car] and [D-car] are launched. So now we're at full launch and really the only issue that's left is to complete the vertical integration of the painting.

Okay. And then the GM launches, when do you start incurring costs on that? Can you [say if] that's going to be Q1 and Q2 predominately or Q2 and Q3?

Well, we've been incurring them for the last year, but it will ramp here in Q1 and Q2 and then ultimately we'll launch in the fourth quarter.

And then how much of what you learned in the Ford launch can you leverage into the GM launch to sort of de-risk that launch for you?

Well, I think the lessons learned on the Ford launches, which were much more complicated from a painting standpoint, will pay I think immense dividends as we launch GM. Essentially Methode has learned how to paint laser etch on a volume basis of very intricate -- several pass painting.

Okay. And then in terms of what you're launching with GM, is there any new technology or manufacturing process there that could be a potential concern or what you learned from Ford gets you over the hump on all those?

I would say I don't think there is anything new there but higher volume, but we're used to that. I can't go into the product too much, but I would say there's nothing -- there's no new technology being launched on -- well, let me stop there because GM has not announced all the product configurations.

Okay. And then just on a real near-term thing. As you look out across, some of your businesses have relatively short cycles, automotive side you'd look out more a couple of months or so. But in terms of changes in production schedules, incoming orders -- what are you seeing there? Are things any better? Are they getting worse? You've stabilized?

In the US I would say that things have stabilized. In Europe that tends to vary month to month on just what -- Malta, if you recall, has a number of smaller -- smaller relative to GM and Ford, smaller product launches and so those tend to be a little more volatile and a little less predictable. But in the aggregate Europe we're seeing is a little soft.

Okay. And then the last item here, as we look -- I don't know if you've put this number together, presented it this way at all. But if we look at your new business launches, your incremental revenue here the next couple of years, have you gone through and presented those at all in any annual basis of what hits '13, '14, '15?

Yes, we have. I mean we've outlined I think what the Ford launches have done and what GM -- I believe we discussed laundry.

Yes, I'm thinking more in -- that you put those together in aggregate with the new -- 6 months ago or so you put the numbers out there what you expect your revenues to be from new business and you've announced new things since then. I'm just curious whether you've updated that.

We've not updated it since last November.

Okay. That was more my question specifically. Okay, great. I'll come back with a couple of other ones. Thank you.

(Operator Instructions). Jeremy Hellman, Divine Capital Markets.

First one for me, just kind of thinking about business that you're pursuing for over the course of the next year that would come in a few years hence. Do you have -- can you give us any sense of GM's scale either in auto or even on the appliance side? Do you have anything that you're working on that might layer in as we think a few years out beyond what's already in the plan?

Being in the auto business we're looking at model years '15, '16 and '17 now, both in auto -- and appliance is probably a little more near-term, but we're probably looking for -- well, I'd say '15 in appliance as well -- continuation of our business with Ford and GM moving center consoles into other OEMs, we're pursuing that.

But I really can't give you the details on that, but that's really -- our strategy is to continue in auto in the center console area and also in the transmission area which represents from our torque sensing technology that should -- we're launching our first sensor in '15. That will reach full ramp in '16 and if that gets carried over that goes into '17 and '18, those tend to be six, seven year programs.

Lead frames, we continue to pursue those. T76 transmission has been well received, so we're seeing -- we've got really two plants producing that now. In the appliance area, laundry is a new area for us, so we're anticipating that's well received by the consumer that we'll see their business there. And Malta continues to pursue not only its standard hidden and [ergonomic] switches but power as well.

So we're -- our attempts we've said will reach over $700 million and our intent is to keep that going. We have the -- we certainly have the opportunities to do that. Of course we need to book them, but -- and obviously launching all these programs successfully goes a long way to giving confidence to our customers that we can take on more business

Okay. And you mentioned the investments you're making in Eetrex. Once you've gotten to where you've got the technology where you want it, what about the scale of business that you're going to be pursuing therein? Are we talking $20 million give or take type stuff or more nine figure type potential business?

I mean, there's two areas that we're -- two main areas we're pursuing that I mentioned in my prepared remarks, the e-vans, that's developing slower than we anticipated, but we also see that that is commercially viable and there you could have one program that's $10 million or $20 million depending on how the customer's product is received.

Stationary storage, which is perhaps a more near-term market, that -- as data centers and others transition away from lead acid batteries, that's -- that can be a $100 million opportunity market if that becomes a wholesale chain within the marketplace.

So we're not looking for Eetrex to -- a better way of answering it is we're not looking for Eetrex to be a $10 million to $20 million subsidiary of Methode, we're looking for it to breach power in general to become a significant segment.

Okay, very good. And then one more for Doug, just in terms of drawing down on your revolver and then the cash overseas, what -- I'm trying to think about it in terms of the either positive or negative carry that you kind of net-net have with the situation. And then the $38 million of repatriation funds, was that subsequent to year-end or was that prior to year-end close and already in the balance sheet?

No, that will be prospective on the $38 million. So -- and I think what -- we've talked about cash in the past, Jeremy, and the fact that we've -- the last couple of years especially with our restructuring and the downturn of the market here in the US -- that we saw a lot of our profits building up offshore and also cash building up offshore.

With the launches that we had in North America both for GM and Ford, the TouchSensor opportunities, that put a demand on domestic cash which we decided to borrow cash under the revolver that was -- it's cheap debt. And we got to the point in the fourth quarter where we did identify just two discrete items that totaled the $38 million and we did change our -- the old [APP-23] assertion on those earnings.

So what that does is that allows us to bring that cash back in probably sometime in fiscal '13, use that cash then in the US and that will again limit the amount of additional borrowing we may need to do under the revolver. Until we get to the point where we do launch these programs and eventually we are going to be profitable and cash flow positive in the US.

So it's more of a timing thing and I think we look at this as a positive and the ability to bring back $38 million is I think a very -- it's very helpful in the big picture to repatriate some of that cash back to the US, but leave the rest of it out there for reinvestment.

Right. And your revolver is LIBOR plus 1.5, right?

At the -- you remember --? Currently at the current rate, it is 1.5 at the current --.

Okay. And then just one last one on that thread. The cash you do have overseas, what currency is that denominated in and where is it held right now?

Sure. Again, there's a -- most of it is either going to be in euros or in Asia we hold that in renminbi right now.

And is there -- have you gone through any kind of an analysis on whether you would need to and what the cost would be of moving that from euros to Swiss francs or non-euro currency?

Yes, we're looked at that -- we look at that all of the time and we try to use the fact that we do have foreign subsidiaries in Europe, some are US currency denominated and some are euro denominated. So we try to use that as a natural hedge to hedge the balance sheet. But we do watch that. And we do -- we are looking at the renminbi in particular and that may be a case where the use of a forward contract or some derivative of some sort might make some sense for us.

And with your euros are they held at multi (technical difficulty) one depository institution?

No, no, those are spread.

Okay, great. Thanks.

[Brandon Smith], Invemed Associates.

This question is for Doug. Where do you see your SG&A expenses moving across the next two years, like 2013 and 2014?

The SG&A as a percentage --

Yes.

-- next few years probably should be modestly improving. As we grow the top-line we should not significantly have to add to the SG&A.

Okay. And also, it seems like your gross margins are looking to improve and where do you see those? Like, do you have a number for that or --?

Well, we've just talked in general about the improvement we will get from the vertical integration. So once we get this AMD acquisition vertically integrated, and we probably expect to get -- I think we've said we're going to get 4% to 5% just on the vertical integration alone.

In the automotive area.

In the automotive, yes. And then beyond that we'll get additional gross margin improvement as we start leveraging the overhead on the higher sales.

Okay, all right, thanks.

David Leiker, Robert W. Baird.

Yes, just a couple of other items here. Don, as you've through the launches now, as Ford people, other auto makers have seen what you've done there, I'm sure people are aware of what you may be doing with General Motors. What's the activity been with other automakers in terms of expanding this product offering into other parts of the industry?

It's been I would say brisk. The ability to successfully launch fairly complicated programs -- the other OEMs have taken note around the world. So I think we've successfully -- very successfully moved into a new area of the vehicle where there's significant room for growth with others and to add technology, that's an area -- if you look at -- if you go back 10 years ago where the wheel was kind of the place to be. And of course has gotten a little more or much more competitive, the center console is really the next avenue where there's all sorts of technology that can be brought to bear.

And that's really -- our strategy is to work with the OEMs, bring them technology that they might not have -- TouchSensor is an excellent example of that. We're working on biometrics, on different screens for the center console. So, yes, no, I think Methode has successfully made that transition and that's definitely been noted.

Was there any sense of timing you might have of when you could talk about some new contracts or new programs that you're working on now?

No, I -- you know Automotive, up until a point we get an award, things are usually pretty under NDA and fairly confidential. So it would be very difficult for me to comment on that.

But during this current fiscal year you would expect to be able to announce something?

You know, David, I'm not going to go there. I just --.

And then any characterization in terms of the customers you're looking at -- North American, European, Asian, or any characterization there you can do at all?

Asia is clearly a focus for us. There's as much opportunity there as we've seen in the US with Detroit, so that's certainly a focus. Europe a bit less, not that there's not programs to be had, but we have a definite focus on Asia.

And I have a couple -- a number questions. Your royalty number, if I did my math right, it looks like it was about $5 million for the year. Any sense on where that number can run next year and then the following years after that on a trend basis?

I think it's been running relatively stable, so I wouldn't expect that to change much. That just really depends on the amount of business that we're doing primarily out of Europe because those are the design engineering fees that we get paid upfront for.

Okay. And then on taxes you had mentioned you expect to be lower. Can you give us some framework there of any particular detail in terms of where you think that's going to be and then quarterly I suspect are going to continue to be pretty volatile.

Yes, again -- I think I mentioned looking at next year we expect the tax rate -- the effective tax rate to be low- to mid-teens. And then that assumes there, David, that we don't have any changes in the valuation allowances for either our net operating loss in the US that we need to track and also for the investment tax credits that we have in Malta.

And those are -- those can change based on future projections. And so it's hard to say sitting here today -- if I could tell you it was going to change today then I should have booked it in the fourth quarter. So I guess the answer is, we don't know that there's going to be any change in those.

And then any additional repatriation of cash other than what you've already talked about -- that would be it?

No, nothing else anticipated at this time. These were two discrete items that we looked at.

Okay. And then on the capital spending, a pretty significant number here again. How much of that is going for equipment as opposed to -- I don't think you have any physical expansions going on, do you?

No -- yes, the vast majority is equipment.

And then lastly, thanks for the great clarity in terms of where you think the numbers are going and how they're going to flow quarterly. If we look at where -- within that characterization where the fourth-quarter earnings would be, it would imply that you're going to exit the fiscal year on a run rate right around $1 a share or so. Was that the right characterization of that?

The words "no comment" come to mind.

Yes, they do, but -- (laughter). All right, thank you.

David, I do want to add something. While we are very excited about what the center console programs have brought to Methode, I would be remiss if I didn't point out that also the automakers have noted what we have done in the transmissions with our lead frames.

And as transmissions become six speed, eight speed and beyond, our process technology, that I think you've seen on the 276 line, continues to generate interest and opportunities not just from the lead frame but also from our park sensing technology where we're about to launch in '15 the first Magneto-Elastic product.

So Methode has kind of entered two areas over the -- it's taken us three to four years to -- maybe even five years to get into those areas, but that's really two very growing areas of the auto that Methode is well-positioned in. So I would be remiss if I didn't mention transmissions.

You know, it's interesting. I mean those are all things -- you're right, it was about four or five years ago that we talked about these embryonic technologies and bringing them to market and a lot of that has happened there today. Have you put any more irons in the fire to create additional embryonic technologies like that that five years from now we're going to be talking about?

You could look at Eetrex and power electronics and as -- and then you have to really decide where does the EV market go. We've certainly been making definite investment in that. And I think we've seen just the tip of the iceberg on torque sensing, so that continues to expand. So those would be the two areas I would point to.

I'm sure after I get off the call somebody is going to remind me that I forgot a technology or two. But biometrics in the vehicle, we believe that's coming. More sophisticated touchscreens, an area that we're working on. So I think those would be the key areas that come to mind.

Okay, great. Thank you.

Gregory Macosko, Lord, Abbett.

Just with regard to the discussion about the higher prime cost which affects the gross margin percent. Is that just generally a trend that we should expect kind of across a lot of these -- the programs that are being launched, is that a general expectation? Or is that -- as I understand that will fall back as you integrate some of the operations, but talk about that a little bit, if you would.

Sure. Go back in time, when we booked the initial Ford center console program, which if memory serves me right is in the '08 timeframe, automotive was in freefall and -- as was the economy for the most part. We elected at that time not to virtually integrate, which is very unusual for Methode because it's a key process. But as you've seen, we've had to expend significant monies to in-house that process.

So back then financially it didn't make sense. And when we booked the additional program with Ford at that point is when we started to look at vertically integrating. Because of one of our drivers and how we look at our business is what is the prime cost? How do you reduce, one, your exposure to outside suppliers, which in automotive, as we've seen, one problem can cost you millions of dollars.

So in general Methode's belief is where we can and where it makes economic sense we vertically integrate to ensure that we don't run into those types of issues. That was our first foray into a significant center console program. And again, hindsight is 20/20; maybe we should have integrated at the time.

But now as we move forward we're launching GM, there are certainly outside suppliers, there's a touch screen supplier. But at the directed sub from Ford, so that we have a little bit of cover there. But prime as we move forward should fall in line with what we've seen in the past because of the amount of energy and monies that have been spent.

So the point is as we look at the programs you currently have and are launching, that you have visibility on, there will be no additional in-sourcing going forward -- or once these are done I mean?

Well, in terms of -- we always look at that, but we are -- if I look at General Motors I suppose we could add more [SMT] board stuffing capabilities, some of that's still going to be done on the outside. We would do that if that made financial sense. There's always opportunities but in terms of the major opportunities I would say no. The painting is a significant portion of the bill of materials for those parts.

With regard to the new programs and new products that you're developing, clearly the center console and to some extent the transmission are areas that you have experience with, you're kind of on a ramp in terms of gaining new programs because of the experience you've had with the historic ones.

But are you comfortable that when you talk about biometrics, heatsinks, bus bars, stationary storage, e-vans, Eetrex, is this in terms of your R&D and research budgets and just general capabilities on the research side, are you comfortable with that number of programs across all three of your segments?

I would say that we are. But we don't talk about the number of either technologies or processes that we don't fund every year. We go through a fairly elaborate process. Generally when we say R&D I'd say we do the D in R&D, we do that development. We take a known technology and apply it to our product.

So in paint and laser etch, we didn't lead the way on that, that's a proven process that we assimilated in-house and we tend to ruggedize these processes and technology for the automotive market.

TouchSensor is a good example. That was known technology when we purchased TouchSensor from [SCHOTT Glass], but we needed to ruggedize that to make it applicable for the vehicle.

So when we look at -- whether it be a bus bar -- and now we are launching bus bars on [EV] vehicles in Europe. And why are we -- why did we invest in that in the first place? Because we had an entree or a path to market in auto from a power standpoint. So we always look at what synergies do we have and does that make sense.

I often say we're not going to go too far afield from what our base businesses are, which we've said is Interconnect, Auto and Power. And they do overlap. So I would say we're definitely comfortable with the investments we're making. And we're not afraid to drop back and say, okay, this one didn't work out.

Thank you.

(Operator Instructions). We have no further questions in queue at this time. I'd like to turn the floor back over to management for any closing remarks.

Manny, thank you very much. We will thank everyone for listening today and for their questions and wish everyone a safe July 4 holiday. Good day.

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