Methode Electronics Inc (MEI) 2014 Q3 法說會逐字稿

Welcome to the Methode Electronics FY14 third quarter earnings conference call.

(Operator Instructions)

As a reminder, this conference call 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 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 these 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 include, 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; customary risks related to conducting global operations; timing, quality and cost of new program launches; ability to avoid design or manufacturing defects; ability to compete effectively; dependence on the availability and price of raw materials; dependence on our supply chain; downturns in the Automotive industry or the bankruptcy of certain Automotive customers ability to keep pace with rapid technological changes; ability to protect our intellectual property; ability to withstand price pressure; location of a significant amount of cash outside of the US; the recognition of goodwill impairment and long lived asset charges; currency fluctuations; ability to successfully benefit from acquisitions and divestitures; ability to withstand business interruptions; income tax rate fluctuations; a breach of our information technology systems; and the cost of implementation of SEC disclosure and reporting requirements regarding conflict materials.

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

Thank you, Stacey, and good morning everyone. Thank you for joining us today for our FY14 third-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.

We were very pleased this morning to report that third-quarter sales grew 54% to nearly $190 million, and nine-month sales grew 48% to approximately $548 million over last year. Sales in both periods were driven by the General Motor center council program, as well as new product launches in our European, Automotive and North American Power Products operations, as well as strong appliance sales.

Also of note, consolidated SG&A as a percentage of revenues decreased to 11.6% from 12.9% in last year's third quarter, and for the nine months dropped to 11.1% from 13% in FY13. We were pleased with the considerable leverage realized, given the substantial rise in sales.

Third-quarter net income grew over fourfold to $14.6 million, or $0.38 per share. As a reminder, in the second quarter of last year, we recorded a $20 million litigation settlement, which substantially benefited our profitability. Excluding the impact of that settlement, and its effect on income tax expense, nine-month net income also grew greater than fourfold to $48 million, or $1.26 per share.

While higher sales were the largest contributor to year over year improvements in both periods, increased manufacturing efficiencies due to the vertical integration of the paint and laser etch process, and favorable raw material pricing, and a favorable product mix in the power product segment, also contributed to the growth in earnings. Third-quarter and nine-month net income was negatively impacted by increased bonus, legal, travel and product development expenses. The nine-month period was also affected by the absence of a customer bankruptcy accrual reversal in the year-ago second quarter.

Additionally, we incurred increased compensation expense of $1.6 million, or $0.04 per share, during the third quarter, and $4.6 million in the first nine months, related to our long-term incentive program. The long term incentive awards, which are based on the Company's performance in FY15, will become payable if requirements under the plan meets or exceeds targeted performance. This adjustment reflects the Company's estimate of FY15 performance.

Third-quarter consolidated gross margins improved to 20.3% compared to 16.3% last year. For the nine months, consolidated gross margins improved to 20.8% from 17.2% in the same period of FY13. Again, the largest contributor to the improvement in margins was increased sales, but margins were also positively impacted by the vertical integration, operational improvements in the Power Products segment, as well as lower scrap on the Ford center console and General Motors' K2 programs.

I'd like to spend a minute now discussing our results in the third quarter in comparison to the second quarter. While third-quarter sales were only about $1 million lower than in the second quarter, profitability was $0.13 lower in the third quarter.

As we've discussed in the past, our third quarter typically includes about one week without sales due to the holidays. However, we still incur operational and overhead expenses during that week, which reduces our margins and impacts profitability. In other words, the second quarter consists of 13 weeks, and the third quarter was 14 weeks in length, that extra week having no sales due to the holidays.

On a consolidated basis, one week of expenses without sales represents about 0.7% of gross margin. Adding that back to the third-quarter reported margin, the consolidated gross margin would have been 21% in the third quarter, on par with our second-quarter gross margins.

The holiday shutdown also impacted SG&A, increasing that measure as a percentage of sales. Combined, the holiday shutdown affected EPS on a sequential basis approximately $0.05 per share.

Additionally, the Interconnect and Power Products segments experienced both lower sales of $3.7 million combined, as well as an unfavorable product mix. That together costs about $0.05 per share in EPS in the third quarter.

Based on current projections, we anticipate that fourth-quarter revenues and margins in these segments will be similar to the third quarter, down sequentially from the second quarter, basically flat with the third quarter. The balance of the difference in earnings between second and third quarters is the higher legal and professional services expense of about $0.03 per share.

Moving to guidance, as we announced this morning, we've reiterated FY14 sales guidance in the range of $720 million to $750 million, and earnings per share guidance in the range of $1.70 to $1.90. As we've said in the past, the low end of the guidance reflects our concern regarding stabilization of the European economy, as well as softening in our Interconnect and Power Products segments, and possible production delays of new products.

The high end of the range anticipates stabilization in Europe and higher domestic Automotive revenues. Based on this guidance range, our FY14 operating margin target is in the range of 9.5% to 10.5%, which would be substantial improvement over the 3.7% achieved in FY13, excluding the litigation settlement.

Now turning to our view of our individual segments. Compared to last year, Automotive segment net sales increased nearly 74% in the third quarter, and 59% in the nine-month period, due mainly to production of the General Motors K2 program. Additionally, new program launches in Europe and higher sales in Asia also contributed to the revenue growth.

Third-quarter Automotive gross margins improved to 19.3% from 12.5% last year, and nine-month gross margins increased to 19% from 13.6% year over year. In both periods, increased manufacturing efficiencies, driven by higher sales, as well as benefit of the vertical integration, produced improved margins. Selling and administration cost as a percent of sales dropped year over year to 5.4% from 8.1% in the third quarter, and in the nine months, dropped to 5.6% from 8.1%.

I'm pleased to report that we began production on the GM K2 SUV center console in late January. Initial production has gone well, and feedback from the auto maker is very positive.

This unit was somewhat more of a challenge, as it involves a moveable touch screen. This is accomplished by a new articulation mechanism, which once activated, provides a customer with a hidden lock-able storage unit, which includes a USB port for charging a phone or other electronic devices.

I'm also pleased to announce that Methode was awarded production of a battery pack busbar for Tesla Motors, their Model S vehicle. Production has begun, and we anticipate annual revenue in FY15 in the $4 million range, and a program life of approximately four years.

Additionally, we were awarded the sensor as part of an active role stabilization system to be implemented on certain BMW automobiles. This system utilizes Methode's patented magnetoelastic technology, and is essentially an active roll bar with an integrated sensor and electric drive mechanism. Methode is Tier 2 to Shuffler or SAG in Germany. This electro-mechanical system is more responsive and energy efficient than the current hydraulic systems on the market.

While revenues are approximately $2 million per year, SAG plans to introduce the system to additional OEMs. And it is anticipated this system will find its way into mid-class vehicle platforms, which typically carry higher volumes, as well as SUVs, which are generally susceptible to roll. The first system will launch in our FY16. Finally in Automotive, we were awarded additional hidden switch programs in our European operations for average annual revenue of $8 million, beginning in our FY15.

Moving to Interconnect, sales increased to 28% in the third quarter, and over 32% in the first nine months, compared to last year, attributable mainly to improved appliance sales from our two largest customers. Additionally, radio remote control sales were higher in both the third quarter and nine months year over year. Compared to last year, Interconnect's gross margins fell to 24.1% from 25% in the third quarter, and 25.5% from 26.6% in the nine-month period, due to manufacturing inefficiencies from sales mix.

Increased laundry sales, which have a higher material content than other products in the segment, had the biggest impact on the reduced margins. For margins to improve in this segment, we would need improved sales in Hetronic's European industrial business, which we are diligently working towards. We did, however, substantially leverage selling and administration costs, which contributed to nearly a 38% increase in Interconnect's income from operations in the third quarter, and a 53% improvement in the first nine months.

Moving to Power Products, year over year sales improved nearly 41% in the third quarter and 44% in the first nine months. The launch of a significant program for data-com customer in the US, along with busbars for the Nissan LEAF battery pack, and a high current bypass, which both in Europe drove the growth over last year.

Year over year, Power Products gross margins increased in the third quarter to 18.9%, from 16.4% last year, and in the first nine months to 22.1% from 15%. This improvement was driven by higher sales, a favorable product mix, as well as lower raw material and lower new product development costs in both periods.

Sequentially, however, third-quarter gross margins fell compared to the second quarter. This was mainly due to lower sales to our big data customer, which carries a higher gross margin, and also increased sales of lower-margin products in the quarter. Now I will turn the call over to Doug, who will give further details on our financial results.

As Don mentioned, in the third quarter, we had an expense for the tandem cash award of our portion of our long-term incentive program of about $1.6 million. And again, this is a variable accounting treatment that we get, and that was the result of the increase in our stock from -- at the end of the third quarter compared to the end of the second quarter. So that needs to be recognized going forward as a variable expense on our quarterly results.

In the nine-month period, we spent $23.5 million for capital expenditures. This included the additional capital needed to launch the SUV portion of K2. For the full year, we still expect capital spending to be between $25 million and $30 million.

Depreciation and amortization expense in the nine-month period was $17.3 million. For the fiscal year, we expect that to be in the $23 million to $25 million range, as we begin to depreciate the SUV capital assets that are now placed in service.

The full-year effective tax rate is 7.9%. This is in line with our previous projections, and reflects the benefit of the net operating loss carry-forward in the US, investment tax credit utilization in Malta, and a 25% tax rate on China income. The tax rate does not include any adjustments to valuation allowances, which may result from changes in effects and circumstances.

Lastly, through nine months, free cash flow was about $41.7 million. For the full year, we still expect free cash flow to be between $65 million and $75 million.

Through nine months, EBITDA was $69.8 million. And for the full year, we expect EBITDA to be between $93 million and $103 million. And again, I think we just want to mention that the Board did increase the quarterly dividend, that will be payable on May 2. The record date is April 18. The increase there was from $0.07 to $0.09. That's about a 29% increase.

Don, that's my comments.

Thank you. Stacey, we are ready for questions.

(Operator Instructions)

First question comes from Steve Dyer with Craig-Hallum.

Good morning, gentlemen.

Good morning, Steve.

I guess I'll start with the gross margins. You had talked about that, and there was a variety of things that you attributed that to. The torque sensor platform -- or the torque sensor production in the quarter was one of the things that you attributed it to.

My understanding was that we weren't going to see any real material revenue on that for awhile. Is that just the R&D cost, like you had to front-load with the K2 platform? Or is there something else there?

Okay, you're referring to the Other segment?

Yes. I'm trying to get a sense for if those were development costs? Or is that involved with torque sensor production, which might have --

We moved all of the torque sensor production, because it was mainly Automotive, to Europe, our plant in Malta. We felt that they we were more suited to handle that production. So the revenues are recorded there, and under European Automotive.

The expense you see under Other is the R&D group that we have here at Corporate, so that -- you're correct. It is our development. But the revenue generation would now be seen in our European operations under Automotive, because the products are Automotive-based.

And what is --

The new program that went out, that was in the works. Just was, because of customer confidentiality, we couldn't announce anything about it until our customer had announced it. Both SAG and BMW have talked about it.

And I missed the run rate on that, Don, from a revenue perspective?

It's low. It's $2 million a year, but it's a smaller platforms than what we expect to happen, that it will become, really, the standard versus the hydraulic units that are out there now. There's information out on the web on that. Not on our site, but under the two -- the Tier 1 and the OEM.

Okay. Going back to gross margins, and how we should think about those going forward. My understanding has always been, when you start shipping capacitive touch into the K2 program, that, that boosts your gross margins by quite a bit.

Is that what you're shipping on the SUV portion. If so or if not, frankly, when will that -- would you anticipate that will start shipping on the truck version?

We are not shipping any capacitive touch yet, so we've not seen that effect. I can't really say exactly when the customer will start, but we anticipate that it is mid-2015.

Mid-fiscal 2015 or calendar?

Yes. I'm sorry.

Okay.

Again, that's an approximation, because we really can't say as to when the customer will do the change.

Okay. So the gross margin overall is still pretty substantially below where you guys have the target for each of your three areas in your slide presentation. Do you view fiscal Q3 and Q4 as a bit of an anomaly due to mix? Or should we see that resumption of gross margin expansion into FY15? Or has something changed there?

No. We wanted to comment in our prepared remarks about Interconnect and Power. The -- first of all, Auto pretty much was where we expected it to be, though, actually higher in Europe than we originally thought. K2 came in where we thought it would, and even Asia was up a bit.

So Auto, I -- we were -- for a heavy holiday quarter, Auto did slightly better than we expected. We did have a mix change, and then lower sales, in Interconnect and Power, and very unpredictable business.

We have about a quarter's visibility in that. As I mentioned, our big data customer, sales to them were down and that was at higher margin. I'm not exaggerating when I say that, that customer could very well call tomorrow and say, I need product, and they would expect us to ship it.

We don't have the visibility that we would have in the Automotive. So less sales of higher-margin business in those two segments, really, is what contributed to the margin.

That's why these non-automotive businesses are very important to us. As we introduce new products at higher margins, our margins will improve in that area.

When we do have a mix of higher volume/low margin, that does have an effect on us. That's what we saw in the third quarter. And some of that is also the holiday effect as well. So that's not a -- the third quarter for those segments is generally not a strong quarter.

But you anticipate that will continue through the April quarter, is how I read that?

Yes, with what we are saying today, we would anticipate that will continue into the fourth quarter. I don't think that changes our view of next year. We have seen it happen before. We saw it benefit us in the earlier quarters this year.

Sure, okay. Lastly, as it relates to auto, you put a new risk section in -- or a new risk bullet point at the bottom that just suggests that obviously, one of the risks is finished inventory at a large customer. Should we read anything into that, as it relates to the GM business? Or is that just a blanket bullet?

I would say it's a blanket bullet. Then -- talk about that, and Automotive news, it just really occurred to us, as we go through our risk, that, that is something that an automaker, if they want to bring down their inventory, they certainly can do that. Whether they do it through incentives, or they just reduce their purchases. So it's a risk. It's occurred -- we've seen it occur in the past.

Is your sense that your finished inventory is elevated there? Or is that still pretty just in time?

We're pretty much just in time.

Okay. Last question, and I'll hop back in the queue. Doug, overall SG&A -- or selling and administrative, I think, was a little bit elevated in the quarter due to some compensation et cetera. How should we think about that number, either on an absolute basis or a percentage of sales going forward?

Again, I think in my comments, Steve, I talked about the variable accounting we get on the tandem cash. So for next quarter and through next year, depending on our stock price, we're going to be [even getting], get a benefit or a hit on that piece.

The other items we talked about in SG&A, I think, were, we saw increased legal and professional services. I think we probably were a little behind this quarter. But generally, not that much above the run rate for those items. Then otherwise, as a percentage of sales, we still benefit from the higher sales as driving that percentage down.

Got it. Okay, I'll hop back in the queue. Thanks, guys.

Thanks, Steve.

Sure.

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

Hello, guys, it's Joe on the line for David.

Hi, Joe.

Wanted to pick back up with gross margin questions. If the apples-to-apple margin in the quarter was 21%, if I just consider it equal production days, and let's say product mix was theoretically the exact same sequentially, would your gross margins have actually been higher this quarter versus last quarter?

I'm digesting that question. Let me just play that back to you. You're saying, if revenues were equal quarter to quarter, which they essentially were, and we did not have a mix issue in the non-automotive segments, would our margins have been higher?

I guess it depends on -- no. It was -- no. I would say no, they would have been on par. It depends on what -- if it was more Hetronic business in Europe that carries higher margins than our big data. Potentially it could have been. But we compared third quarter -- or second quarter revenues in auto to third quarter, and that's where we calculated our -- the margin difference.

So I would -- it could have been, but it would have been dependent upon mix. But had it been the same sales, it would have been 21%.

Okay. I guess what we're trying to figure out is, figure out what the base should be as a starting point? Because you're about to layer on a lot more incremental revenue, particularly beginning next quarter, with the GM SUV. So the right base number to use.

Then layer on the extra leverage, and ultimately the vertical integration. It sounds like, if this is the mix you're going to have going forward, that 21% is probably the right base number to use. It wouldn't be the all-in 20% that you reported during the quarter.

I think -- as far as I know, what we were saying in our prepared remarks about the effect on margin for the Fourth Quarter is, we're going to see that same effect of mix in, I will say, the non-automotive. But primarily, it's Interconnect and Power. We're going to see that same, the -- I guess, decline in margins in those areas that we said was about $0.05. We're going to see that.

I don't anticipate that we're going to see that continuing into FY15. It is -- those businesses ebb and flow by the -- our customer demand. So if you're saying, will that return in the fourth quarter, my answer to that is no. That we've said that's -- we're going to see that -- we know what we're going to be shipping, to a large degree, for the next couple of months, so we anticipate that we'll see that effect.

Would you expect -- and I don't know how many production weeks you have scheduled for this Q4 versus Q3. Is that a benefit to you at all, thinking sequentially?

No, it's 13.

Okay.

Yes, Joe, every four or five years, we pick up an extra week, just because of our accounting convention. We're at 52/53 week accounting year.

So this year is a 53-week year. So that got plugged into our third quarter, and so we won't see that event for another five years or so.

Okay. Shifting over to the five or so expense items you called out on the press release. I just wanted to confirm that A, all those items are already in guidance, so they are not unusual. Then, is there any one of those items that was maybe larger than planned when you last gave your guidance update in December?

You're referring to the first page of the release?

Yes, the items impacting year over year income.

They're all contemplated within our guidance, just to confirm that. We did -- legal would have been the one area that originally, we didn't anticipate a higher legal expense due to a loss event that we initiated. We're the plaintiffs on a patent-related lawsuit. So it's not on a -- won't rise to the tell-type of event of years ago.

It is something we initiated to protect our IP. So that -- it is included in our guidance, but it wasn't anticipated when we initially set the guidance. Of course OTI, as Doug discussed earlier, and that goes up and down with the stock price.

Okay, and that $0.08 gain for Q4, that's also in the range?

Yes.

Okay. Then just a few on revenue. The Automotive awards that you won, first of all, congrats. Should we think about those as being helping you fill in the un-booked revenue that you kind of talk about on your future revenue slide? Or would those things be incremental to those targets?

Those -- absolutely. They fill in the un-booked revenue that we refer to in our multi-year revenue chart.

Okay, and then last one. Just an update on the therapeutic mattress product. You frame that -- it's a center console-like revenue opportunity. So if I just think of the market size, that $2 billion market size, and I put a center console-like share of market on that, do you frame that as $150 million to $200 million revenue opportunity? Is that internally what you are targeting?

If you look at that market, which is quite large. If the product is truly a game changer in that marketplace, then pick the percentage of what we're going to get out of that market, but it would be a substantial piece of business for Methode. Now having said that, it could also be a good product that gets accepted by a certain portion of the market, and we would anticipate we would more than recover our investment in that, but it's just too soon to say that.

We are setting up production. Production is really next door to corporate headquarters here in Chicago. It's being set up. FDA filings are being submitted.

We're actively marketing it. It's -- I can't answer your question yet. I hope your back of the napkin there is correct, but it -- but we will know that here in -- within the next year, for sure.

Can you maybe say -- I know you've licensed some IP and you're leveraging a lot of technology you already had in house. Can you say what that investment breakeven level of revenue might be?

We can. We would have to calculate it, but it's not a significant amount of money. We spent a couple million dollars last year on it, and we'll spend, not counting the production equipment, but even the production equipment is -- we'll maybe have spent $3 million this year.

Now we are going to increase our investment going forward, but that's going to be in the -- and that will be in our FY15. We will increase that to $5 million to $7 million. But this is not a -- we've got considerably more moneys in torque sensing than we have in this.

Okay.

And actually, kudos for our guys, because they did this on a shoe string. We embarked on this about the same time we embarked on launching K2. So the need for capital went to K2, and so these guys did a very good job with a lot of used equipment to get where they are.

Yes, I'm sure your engineers are not lacking things to do recently. I'll leave it there, guys, thank you very much.

All right. Thanks, Joe.

Thank you. Our next question comes from Jimmy Baker with B. Riley & Company. Please proceed.

Thanks, good morning Don. Good morning, Doug.

Good morning, Jimmy.

Most of my questions have been addressed, but did want to dive a little bit deeper into the guidance and outlook. So with less than two months to go here in the year, your guidance range remains pretty wide on both the top and bottom line.

Is there any reason that we should expect that kind of variability in the remaining months? Or could you maybe give us a little bit more specific color on your expectations for Q4 profitability? Relative to, perhaps, Q2, when you did not have the inefficiencies associated with the holiday shutdown?

We face this dilemma every third quarter call, and that we don't give quarterly guidance. But when you get down to the fourth quarter, with a couple of months to go, and we maintain our range. So your question is very appropriate.

That is one of the reasons we gave as much color as we could. And what do we think is going to happen in Interconnect and Power? We said that's $0.05 for this quarter, and Doug made some additional comments in his remarks. We talked about gross margins, we talked about being on track for Auto in particular, a solid SUV start of production.

So I believe we've given enough color in the call and the release that you can look at our guidance and build a model that says okay, this is pretty much where Methode is going to end up. It's just that we don't -- we're going to operate the business on an annual basis, and we give annual guidance. I can't just -- we have this dilemma every year, and we knew this year would be particularly interesting because of SUV and K2.

Okay, fair enough. Then just a point of clarification. The Lumidigms being on sale, did I understand your response correctly, that the guidance now includes that benefit?

Yes.

Correct.

Okay.

Offset by some of the negative things like the legal expenses that we talked about.

Right, okay. Then lastly, just as a follow-up to some of the color you gave on recent Interconnect performance relative to your FY15 margin expectations there. Are you assuming a meaningful uptick in Hetronic to get into those high 20s, low 30s gross margin there in FY15?

Or is that more new product coming online in the mix benefit therein? What really gets you to the kind of improvement that's in your slide presentation?

It is an improvement in Hetronics business. New product launches, we've done a product for Halliburton that has shipped. We're anticipating additional business from them, increased business in Europe due to our sales activity, so some of that is built in.

Power, new products there, continuing with our big data customer. We've also done some product pruning in Power. We're into some last time buys.

We prune products when the volumes, either they don't materialize or they -- the products have gone end of life. We'll do a last time build, and usually, we've seen a margin improvement from that.

So it's a combination of management actions, sales actions, that gives us confidence that we'll see those numbers. In Auto, because while you carry a lot of volume, it doesn't carry the margins we see in some of these other businesses. So we don't need as much revenue to have that -- a very positive effect. Likewise, we saw this quarter, it doesn't take too much revenue reduction to have an effect as well.

Okay. So just to be clear, at this point, no reason to think that your conviction has diminished at all regarding those FY15 targets?

No.

Okay, great. Thanks very much for the time.

Thank you, Jimmy.

Thank you. Our next question comes from [David Khalif] with [Kalamos].

Good morning. I just wanted to get a clarification on the LTI comment. So what I first heard was that the expenses there were higher because of some performance goals being met or thought about in 2015.

Then I also heard that it was because of the stock price moving up. So could you clarify which of those are correct?

Sure. The increase in the quarter is primarily the increase in the stock price. It was in the fourth quarter of last fiscal year that we were confident enough to book the tandem cash portion of the long-term incentive plan. It was a 2010 plan, and the payout is at the end of our FY15.

So we recorded that in the fourth quarter of last year. Then not only does that get then amortized for the remaining quarters through 2015, it's subject to variable accounting. So it's going to increase or decrease based on the closing price of the stock at the end of the quarter.

Okay, so part of that, though, is FY15, which is five quarters out, if I'm understanding what you said. Correct?

We -- the assumption is that Management has made -- will perform, our projections indicate that Management will perform. That, again, is, if you looked at our proxy, it's the internal enterprise value of the Company at the end of 2015. So (multiple speakers) there's a cap on that upside, so we know what that amount is.

What gets adjusted, though, is the value of the stock. It will be paid out at the value at the end of 2015. The accounting rules say that every quarter up to that point, we revalue it at the stock price at the end of the quarter.

Okay. Could you remind me of those -- the enterprise value goal that's in the proxy?

Yes, it's 7.5 times our FY15 EBITDA, and then adjusted for cash and debt.

Okay. All right, thank you very much.

Sure.

Thank you. We have a follow-up question from Steve Dyer with Craig-Hallum. Please proceed.

Okay, just a couple follow-ups. The Tesla business, that I think the busbar business, you said, was $4 million annual run rate initially. Does that have the potential to grow pretty significantly, as they start rolling out some bigger-volume products?

Yes, we're -- haven't been awarded additional platforms other than the S, but we did get the business on their star platform. So --

Yes.

Potential would be good for that. That's produced in our Shanghai facility.

Then so all of that would then theoretically be additive to the book and base business on the chart that you show? Or are you thinking some --

It would support the un-booked section of 2016 and 2017.

Okay, so you couldn't turn it around before then. That's the earliest that it would hit if you were to win, call it the X, or what have you?

It depends, depending on when that went into production. If it happened in 2015, yes. There's potential there.

Got it. So it sounds like you've got very little SUV -- jumping to the K2, sounds like you've got very little SUV contribution in the quarter. A week or so, is that right?

Yes, that's about right.

Are the numbers that GM is telling you there, are they consistent with what you've been expecting and IHS has been saying, and so forth?

Can't speak --

Yes, let me rephrase that. I remember that. I mean, have your expectations in terms of revenue changed at all relative to what you've been expecting, in terms of either the timing or the magnitude of the launch?

No, we're on track. The launch went very well, the volumes were as we anticipated. We don't -- at this point, we're in production and we'll proceed into the -- we're in our forth quarter, per plan.

Okay. A couple model questions, and I promise that's it. The 9.5% to 10.5% operating margin guidance, is that -- that's for FY14 right? Or that's not the quarter? That's for the overall year?

No, the overall year.

Okay. Then lastly, Doug, how should we think about tax rate, moving forward?

Sure. Like I said, the -- currently, we're below 8% for an effective tax rate. But we talked about the fact that we do have valuation allowances on our net operating loss and [more] tax credits. If we get to the point where the accounting rules say we need to pick those up and reverse those reserves, then what we've talked about, Steve, is that the tax rate will probably be in the mid to upper teens for an effective tax rate going forward. So like after the net operating losses.

When would you -- or are you currently projected for those to start rolling off?

Yes, we -- all I can tell you is that at the end of the third quarter, we were not there.

Okay, thank you.

Thank you.

Thank you. We have a follow-up question from David Leiker with Robert W. Baird. Please proceed.

Yes, my tax question got answered. But I had one more regarding the revenue opportunity, as you see Magna-Lastic brought into other, let's call it transmission application. You touched on what you're doing in role stability with [Shaeffler]. Any idea of what the addressable market is there, as you get the hydraulic into the magnetic conversion?

That's an (laughter) excellent question. In the transmission itself, where we have really been focused, we have to -- before I can really say how significant that market can be, we need to have the first win, where we're actually putting a torque sensor on a transmission. Really to see how that benefits the customer and the consumer.

It's -- if it becomes a standard, and I'm -- and know I'm going to give you a similar answer I gave you on the [DeBeer] surfaces. It depends on how it's accepted in the market. If you go anywhere from over the next 5 to 10 years, one on every transmission made, that's huge -- or automatic transmission. We don't anticipate that, but that's probably a couple hundred million dollars of revenue, maybe even more than that.

The adoption rate, and I think we pointed this out before, is as these transmissions are changed, there's no backwards compatibility. So it will roll out slow, and we need our first win.

If it becomes a standard for the higher-speed transmissions, where we think it will be beneficial, then we will see substantial revenue from it. It's too soon to say that -- to peg what that number is going to be.

Now from our standpoint, at a certain point, if we get on a small platform, we don't see a future for, then we will scale back with where we are. What I found very, I guess, the degree of confidence in that, we were able to get this on as a safety product on a vehicle. A substantial vehicle or customer, who is known for their safety and innovation.

So while there's transmission -- applications, again, are going to take awhile, I -- the active role is -- which we have been working on for awhile. Again, we can't announce it until the customers allow us to, is very exciting. Again, small revenue, but that could actually ramp faster than transmission.

Okay, great. Thanks.

Thank you.

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

Thank you very much, and we will wish everyone a pleasant day and upcoming weekend.