Methode Electronics Inc (MEI) 2014 Q4 法說會逐字稿

Welcome to the Methode Electronics FY14 fourth-quarter earnings conference call.

(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 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; investment in programs prior to the recognition of revenue; timing, quality and cost of new program launches; ability to withstand price pressure; dependence on our supply chain; dependence on the availability and price of raw materials; customary risks related to conducting global operations; currency fluctuations; income tax rate fluctuations; fluctuations in our gross margins; the recognition of goodwill impairment charges; ability to keep pace with rapid technological changes; location of a significant amount of cash outside the US; ability to successfully benefit from acquisitions and divestitures; ability to avoid design or manufacturing defects; ability to protect our intellectual property; ability to compete effectively; ability to withstand business interruptions; a breach of our information technology systems; and costs and expenses due to regulations regarding complex minerals.

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 FY14 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 take questions.

We were very pleased to report this morning that year over year fourth-quarter sales grew 52% to $225 million, and for the fifth year sales grew 49% to $773 million. Income from operations improved 450% to $20.4 million in the fourth quarter, and 88% to $74 million for the full year. FY14 sales and income from operations were the best ever since Methode became a public Company, a milestone every Methode employee can be very proud of.

Additionally, gross margin increased 40 basis points in the fourth quarter and 278 basis points this fiscal year over last. The largest contributor to this improvement was increased sales, but margins were also positively impacted by the vertical integration initiative and favorable raw material pricing, and product mix in the Power Products segment. Sequentially, our fourth-quarter Automotive gross margins were lower due to a higher percentage of sales in North America than in Europe and Asia, which typically produce higher margins than North America.

In Interconnect, overall sales and lower data solution sales, which, again, typically carry a higher margin impacted the fourth quarter over the third. Power Products margins improved in the fourth quarter over the third quarter due to higher [mellaro] revenues and our cost reduction efforts.

Of note, consolidated FY14 selling and administrative expenses as a percentage of revenue decreased to 9.2% from 13.4% in the fourth quarter, and for the year, dropped to 10.3% from 12.8% in 2013. We are very pleased with the considerable leverage realized given the substantial rise in sales.

Our FY14 operating margin was 9.5% compared to 2.5% for 2013, exceeding our goal to improve operating margin by 1% per year. GAAP fourth-quarter net income grew to $48.2 million, or $1.25 per share, and for the year to $96.1 million, or $2.51 per share.

As we detailed in our press release this morning, there were some significant factors that influenced the year over year comparisons. The main components which impacted net income in both the fourth quarter and full year were the US deferred tax valuation allowance release, the gain on the sale of our investment in Lumidigm, the multi-tax valuation allowance adjustment, and the intangible asset impairment charges related to Eetrex.

In addition, and strictly impacting the year over year comparison was the gain recorded in conjunction with a legal settlement in FY13. Excluding these items, Methode's FY14 fourth-quarter net income was $18.8 million, or $0.49 per share, compared to $6.9 million, or $0.18 per share, in FY13. FY14 net income was $66.7 million, or $1.75 per share in FY14, compared to $17.5 million, or $0.46 per share in 2013 excluding these items.

Of note is that our FY14 fourth-quarter non-GAAP income of $0.49 per share exceeded our full-year 2013 income of $0.46 per share. Doug will spend some time discussing the non-GAAP adjustments more in -- the effective tax rate -- in his comments. While higher sales were the largest contributor to year over year improvement to net income in both periods, increased manufacturing efficiencies due to the vertical integration initiative, favorable raw material pricing in the Power Products segment and substantially leveraged SG&A in all segments also contributed to significant growth in earnings.

The fourth-quarter earnings improvement was somewhat mitigated by higher bonus, development and legal expenses, and a non-GAAP effective tax rate of 10.6% which was higher than anticipated due to higher profits in Asia. The fiscal year was impacted by higher expenses related to bonus and wages, travel, performance-based LTI compensation, legal and development, as well as the absence of a one-time reversal of accruals related to a customer bankruptcy in FY13, and, again, a higher non-GAAP effective tax rate of 10.6%.

As I just mentioned, we incurred the increase compensation expense of $1.8 million for the fiscal year related to our long-term incentive program. The long-term incentive rewards, which are based on the Company's performance in this FY15, will become payable if performance on the plan meets or exceeds targeted performance. This adjustment reflects the Company's estimate of FY15 performance.

Comparing FY14 results to guidance, revenue exceeded our range by $23 million, however, sales of $773 million included $24 million of Automotive segment tooling sales at nearly break-even margins. For the year, non-GAAP earnings came in closer to the midpoint of our range, negatively impacted by $0.05 due to a higher overall effective tax rate, $0.04 due to sales mix, $0.03 due to higher legal costs, and $0.04 due to higher LTI compensation expense. These items negatively impacted EPS by about $0.16 in total.

Now turning to a review of our individual segments. Compared to last year, Automotive segment's net sales grew 93% in the fourth quarter and 68% for the year, due mainly to the production of the General Motors K2 program and new program launches in Europe. Fourth-quarter Automotive gross margins improved to 18.3% from 15.1% last year, and full year gross margins increased to 18.8% from 14% year over year.

In both periods, the increased manufacturing efficiencies driven by higher sales, again, as well as the benefit of the vertical integration produced higher margins. Selling and administrative costs as a percent of sales dropped significantly year over year to 4.1% from 7.6% in the fourth quarter, and to 5.1% from 8% for the year. During the fourth quarter, Methode was awarded additional business with Land Rover and Ford of Europe, as well as additional [epi] business for torque sensing product, which total $9 million in annual revenue in FY17 ramping to $15 million in FY18.

Moving to Interconnect, year over year sales decreased 8% in the fourth quarter driven mainly by lower North American data solution sales, but increased almost 20% for the year attributable mainly to improved appliance data solutions and radio remote control sales. Compared to last year, Interconnect's gross margins fell to 23.5% in the quarter, and 25% for the full year due to manufacturing inefficiencies from sales mix.

Additionally, increased [launder] sales which have a higher material content than other products in this segment and a lower percentage of data solution sales which carry higher margins had the biggest impact on reduced margins. For margins to improve in this segment, we would need to improve -- see improved sales in Methode's industrial business, which we are digitally working towards, as well as continued growth in our data solutions segment, both significant focuses for management.

Moving to Power Products, year over year sales improved nearly 22% in the fourth quarter, driven mainly by the launch of a significant program for a big data customer in the US. For the fiscal year, sales increased nearly 38%, again, mainly due to the big data program, but additionally, to the launch of bus bars for the Nissan Leaf battery pack and a high current bypass switch, both in Europe.

Year over year Power Products gross margins decreased in fourth-quarter to 19.4%, due mainly to sales mix and higher development costs. For the fiscal year, however, gross margins improved 410 basis points due to product mix and favorable raw material pricing.

Looking forward, as we announced earlier, FY15 sales guidance is in the range of $835 million to $860 million. Income from operations guidance is in the range of $93 million to $100 million, and earnings per share guidance in the range of $1.85 to $2.

This EPS range takes into account an increase in effective tax rate to the low 20%s and a higher share count. Based on this guidance range, our FY15 operating margin target is in the range of 11.1% to 11.6%, which would be in line with our goal to improve our operating margins by approximately 1% every year on average.

The expected operating margin increase over FY14 is an improvement in the range of 1.3% to 1.8%. In our release today, we detailed a number of factors that went into determining our guidance.

In particular, I'd like to note that our first and third quarters have historically had lower sales and earnings than in the second and fourth quarters. We remain cautious on the European economy, and sales mix, particularly in our non-automotive businesses, are important -- all are important factors.

As we detailed in our 10-K this morning, we filed legal proceedings in Germany and Oklahoma against our former Hetronic Germany partner due to material breaches of intellectual property and distribution agreements. The affected customers are now being covered by direct Hetronic sales personnel. We've also considered this issue when preparing the above -- the aforementioned guidance.

As a result, we anticipate higher legal expenses of approximately $1.7 million for FY15, which may be occurred more in the first half of the fiscal year than in the latter half, but as with most litigation it's difficult to predict. Further, these higher legal expenses combined with higher wage expense will likely lead to slightly increased SG&A as a percentage of revenues in FY15 than 2014.

On the gross margin front, we anticipate our Automotive gross margins will improve throughout the year, with the fourth-quarter approaching the midpoint of our FY15 target range of low- to mid-20%s as the vertical integration of capacitive touch screens and the 31Xx program commence. In Interconnect, we will likely not meet our gross margin target of high 20%s to low 30%s, as appliance sales, which carry lower margins than industrial or data solutions will represent a higher percentage of the segment's overall sales.

In Power, FY15 gross margins also will not likely meet their goal of mid-20s% due to anticipated continued reduced revenues in the [mellaro] market, as well as anticipated lower year over year sales to our big data customer. We took remedial actions in the fourth quarter to reduce our cost in these segments, so at this point, as I said earlier, higher sales will be necessary to improve margins. However, I want to point out these margin goals remain viable targets beyond FY15.

As I mentioned a moment ago, based on guidance, we anticipate improving Methode's operating margins approximately 170 to 230 basis points in FY15. In 2014, we booked over $68 million in additional average annual revenue commencing in Methode's FY17, and we successfully launched multiple programs during FY14, including one of the largest center console programs ever awarded.

Looking forward to FY15, we intend to invest approximately $4 million in additional development costs compared to 2014 as we bring several new solutions to market. Each of these innovations is key to our long-term strategy of providing our customers technology that enhances their products and competitive position and ultimately result in improved sales opportunities and better margins for Methode.

In our Automotive segment, our highly patented magnetoelastic technology continues to be prototyped and tested by multiple OEMs for transmission torque measurement. We remain very optimistic on this technology and sales opportunities it can afford Methode.

Additionally, as personal electronic devices continue to set the pace of consumer technology adoption and center console evolve to be more of an integrated system, Methode continues to invest in the next generation integrated center stack.

Our SmartCenter stack is designed to incorporate modular building blocks that integrate our own organic technology offerings, as well as those in our license portfolio. The intent is to allow each OEM to determine their needs for their various models and price ranges, and only build the functionality required, which minimizes engineering and tooling costs.

We believe our SmartCenter stack will enhance the ultimate driver experienced by emulating the smartphone experience. We will have an initial units ready for OEM evaluations later this year.

Additionally, we will continue to develop our lean touch digital printing on glass HyperTouch transceiver solutions and Dabir Surfaces. To recap these technologies, lean touch involves digital printing of graphics and circuits via Methode nano particle conductive inks. It replaces conventional printed circuit boards and provides a distinct competitive advantage including reduced inventory, lead time, and tooling.

We believe that with additional development work this process will be deployed in the production of user interface devices such as those we currently supply to the appliance industry providing Methode a very distinct advantage. Digital printing on glass replaces conventional screen printing on decorative tempered glass for user interface panels and utilizes ultraviolet curable organic inks to dispense via large-scale digital printers. This process currently in production will then become our standard product offering going forward.

HyperTouch addresses common challenges associated with various touch technologies, such as sensing touch through a thicker substrate, activating the TouchCell through a glove, providing water immunity, and it will allow greater variances in the manufacturing processes. Additionally, we are very pleased that the Dabir project team completed the registration of both our manufacturing facility and product offering with the FDA earlier than planned.

We can now proceed with commercialization once final manufacturing and quality system elements are fully in place and validated, which we expect to occur later this summer. Sales people have been hired, representatives are being contracted in select markets, and we anticipate our first sales, albeit minimal, this fall.

Further on Dabir, clinical studies geared to dialysis patient comfort, plus MRI deep tissue scanning tests are wrapping up in July. Planned research over the coming months includes an extension of the MRI study with more complex parameters, a long-term surgical procedures outcome study, and a long-term care study. Our initial product launch will focus on operating room procedures in excess of two hours in duration where our current product offering is optimally designed.

I, again, congratulate the Dabir team, as well as all of our product development teams, on their accomplishments and look forward to the sales and income these unique innovations will generate. The aforementioned are, I think, are fine examples of Methode's innovation and creativity which are the driving forces behind our product development, design manufacturing and testing capabilities. Further, we believe these organically developed solutions not only leverage our competencies and technologies to provide sophisticated solutions to multiple end markets, but will take Methode to the next level of growth and improve shareholder value.

So to sum up this year, we are very excited about Methode's future, to all Methode employees a job very well done. Doug, I will turn the call over to you.

Thank you, Don. Good morning, everyone. Just a few comments on the quarter. The reported EPS for FY14 was $2.51 per share. When adjusted for discrete items, all of which occurred in the fourth quarter, the non-GAAP EPS was $1.75 per share.

We eliminated the following items to develop our non-GAAP EPS: $3.2 million, or $0.08, benefit from the sales of our investment in Lumidigm; $2 million, or $0.05 per share, charge for impairment of fixed and intangible assets related to Eetrex, $300,000 of that was in cost of goods sold that�s fixed asset portion. The balance is intangible asset that was $1.7 million.

Below the line in taxes, we eliminated $31.7 million, or $0.83 per share, benefit from releasing US tax valuation allowance related to federal and state NOL carry forwards -- foreign tax credit carry forwards -- and other booked tax temporary differences. We also had $1.5 million, or $0.04 per share, charge for adjusting the valuation allowance related to Malta's investment tax carry forwards.

We had $1.3 million, or $0.04 per share, charge related to our assertion on foreign earnings and 1. -- sorry, $0.7 million or $0.02 per share charge for federal withholding tax related to release of the US valuation allowances. For FY14, the effective tax rate was a benefit of 26.7%. When adjusted for the tax items just discussed the non-GAAP effective tax rate flips to 10.6% for the year.

This is higher than the expected full-year effective rate of 7.9% that we had at the end of the third quarter, primarily due to higher than expected earnings in Asia. As Don mentioned earlier, this increase in effective tax rate cost us about $0.05 per share.

For FY15, we expect the effective tax rate to be in the low 20%s because we no longer have the net operating loss valuation allowance to shelter domestic booked income. The good news, however, is that we still have the tax net operating loss available, which we expect will keep cash taxes to a minimum throughout FY15.

As we mentioned in the earnings release, the shares used to calculate diluted EPS will increase between 700,000 and 800,000 in FY15. This is due to the performance-based restricted stock awards issued in FY11 which vest at the end of FY15. The accounting rules require that the shares be recognized when the performance threshold is achieved, which we expect will be in the latter part of the FY15.

In FY14, we expect -- we spent $29 million for capital expenditures. This includes additional capital needed to launch the SUV portion of the K2 program. For FY15, we expect capital spending to be between $25 million and $30 million.

Depreciation and amortization expense in FY14 was $23.9 million. For FY15, we expect the depreciation and amortization to be between $25 million and $29 million.

EBITDA was $98.8 million when adjusted for the non-GAAP items based on -- that was 2014. Based on our FY15 guidance, we expect EBITDA to be between $114 million and $124 million. Finally, for FY14, free cash flow was $61.6 million when adjusted for the non-GAAP items, and based on our guidance, we expect 2015 free cash flow to be between 20 -- or $73 million and $76 million.

Don, that concludes my remarks.

Doug, thank you very much. Manny, we are ready to take questions.

Thank you.

(Operator Instructions)

Steve Dyer of Craig-Hallum.

Good morning, guys; nice quarter.

Thank you, Steve, good morning.

A couple of things: As you look at the upside to your guidance -- your revenue guidance for FY15 specifically -- I'm kind of thinking back to the chart that you guys have done. And I don't think you've updated it real recently, but the difference between the $800 million in revenue and, call it, $840 million or $850 million, somewhere in there. I'm guessing that that is not really driven by new program wins as much as it is just overall anticipated strength in the underlying business?

Correct; driven mainly by automotive, really, worldwide. Mostly in the US, but we are seeing growth in Asia and Europe, albeit, not as robust as we would like to have seen it. But, yes, it's driven primarily by automotive.

Okay. (multiple speakers)

Current automotive programs, not the [progress].

Okay. And then, along the lines, and I don't think you have an updated chart there, but as you kind of think out FY16 and FY17, I'm guessing that that sort of moves in a similar fashion, or your anticipation there?

It does. I think more and more we will give a growth number -- or a compound growth year over year -- and I think we're saying in the single digits for going forward. The only caution I would give on using 2015 as a basis is we do have product going end-of-life every year. The Ford programs start to run off at the tail end of this year, and then, again, a year later. And all told, that is $40 million. Of course, that is made up by other program wins.

Okay. That's helpful.

Can you talk a little bit about the auto tooling sales? I guess I had always thought of tooling more in terms of your cost of goods to ramp a program. Can you talk a little bit about those, and did you have a disproportionate amount of those in Q4 which maybe led to the automotive gross margins that were, I think, a touch light of expectations?

Right. We did have considerable tooling in the fourth quarter, and that is tooling that is paid for by the customer; not tooling that we would have to invest. So, it's injection molds -- you would think of it of tooling that touches the product. The customer might own the injection mold itself, but we would have to buy the injection mold machine.

There's a very elaborate process for collecting those funds from the automaker. It takes quite an effort and a lot of paperwork. We have our teams [error on] collecting all of the tooling monies versus not so much the timing. You can always get the tooling monies quicker if you want to accept a discount, and we don't.

We provide all the paperwork, sometimes several times, to the automaker, and we expect to be paid completely for their portion of the tooling. That's an unpredictable process. We were anticipating earlier that some of the tooling reimbursement would come actually in our first quarter, and the teams did a very good job of collecting what was due us, and that influenced the fourth-quarter number. And you would think we would have high tooling because of the amount of programs that we launched in the last couple of years.

Okay. A couple of GM-related questions: Can you give any sort of further color on when the 31Xx -- when you would anticipate beginning to ship into that program?

And then, separately, any further color on when you'd anticipate the capacitive touch screen shipments to commence?

We do know that timing, but we have to let our customers announce that. That's not -- because we're in the launch now; that's up to GM. I really can't answer that.

The other thing I should point out on tooling sales is: That's virtually at no profit. When you factor that in, that certainly has an effect on gross margins.

But going back to capacitive, presumably that launch is captured within your margin guidance for that segment that you talked about?

Yes, it is. Yes, it is.

Okay. Last question: It doesn't sound like you have a lot in revenue sort of built into expectations for the [bed] product in FY15. Any more granular about sort of the anticipated costs, as well as the revenues for that product in 2015 and 2016?

The costs -- we're increasing our R&D spend, really, our development spend; and a portion of that -- probably the largest portion of that spend is for Dabir Surfaces. We're expecting some minimal sales, but nothing that would move our needle at all. In fact, it won't offset the dollars that we are spending. That's more of a FY16 impact.

What is your sense on 2016, or just too early to say?

Too early to say. (laughter)

All right, sounds good. Thank you, guys.

All right, Steve, thank you.

Jimmy Baker of B. Riley.

Hi, good morning, and nice quarter; great year.

Good morning, Jimmy, thank you very much.

Just wanted to ask a couple follow-ups on the tooling sales. So, it looks like that's going to be cut in half here in FY15. Can you just kind of walk us through that dynamic a little bit? Is that just a function of fewer, or, I suppose, less significant launches this year versus FY14? And then, are those tooling sales in FY15 weighted towards any specific quarter where we should kind of be aware of the margin impact there?

The tooling -- the lion's share of the tooling from last year was K2 pickup, and then really a number of programs in Europe -- smaller programs -- but they all add up. We will still collect tooling -- we have to PPAP before we can even submit the tooling packet. We still have SUV and 31X, of course, and then a few programs in Europe.

I'm reluctant to try to predict what quarter that comes in because, as I said to Steve, we want the teams to collect all the money that are due us, and if that takes them another quarter to do it, I'm fine with that. It's not a very predictable process from that standpoint. But it also is considerably reduced from the prior year, so it should have less of an impact.

Okay. Fair enough.

And then, if I were to, let's say, back out the tooling sales out of both years, it looks like you're expecting about $85 million -- at the midpoint of your guidance -- $85 million in revenue growth year over year. Can you just give us a little color on how you see that spread between segments and quarters, and obviously, a majority of your growth in dollars coming out of automotive, but maybe be more helpful to see things on a percentage basis?

It is driven by automotive. We will have -- as we approach the end of this year, we'll have all three GM programs fully launched; capacitive touch screens will be online. We've got several launches in Europe; and Asia has been -- sales there have been very good.

From a quarter standpoint, I would point out that Q1 and Q3, as I said in my prepared remarks, tend to be weaker because you've got the summer shutdowns and tooling changeovers, and then you've got the holiday months in the third quarter.

As far as the segments, the majority of growth is coming from auto. Appliance will be -- likely be flat. That depends on housing starts.

And in our industrial business, we are still facing a headwind in Europe. I would say the industrial business is getting a tremendous amount of interest from (inaudible) as we see that as a business we can grow, and it certainly has probably the best margins in the Company when we do have a sales growth.

Right. Okay. So, the Land Rover win that you mentioned -- and I think there was a second OEM in there that I just missed, for torque sensing -- what was the application there for those wins? Still something outside of the transmission?

The Land Rover and Ford of Europe were ergonomic switches, and hidden switches in Europe. And then the eBike is a torque sensor, and it's just utilizing the same technology that we use for the Bosch eBike with a different customer.

Okay, got it. And then maybe just one for Doug: With the full-year share count up 700,000 to 900,000 shares, could you just give us your expectation for the end-of-year share count? I assume that 700,000 to 900,000 is for the weighted average, so what would you be exiting the year if you hit your target?

I think we ended up at that 38.4 million for this year. So, add to that number, so that gets you close to maybe 39.2 million.

39.2 million was it?

Yes.

Okay. Thanks very much for the time.

Thanks, Jimmy.

Christopher Van Horn of FBR Capital Markets.

Good morning. Thanks for taking my call, and great quarter and great year.

Thank you.

Just a question about the cash balance and kind of your priorities around uses of those cash. Could you just give us some color there?

Sure. We pay a dividend, and we continue to invest in our businesses; as we said earlier, investing another $4 million in development this year over last. Where appropriate and justified, we continue to do vertical integration. So, some of the capital that Doug mentioned will be spent on vertical integration that our teams can justify.

And then, acquisitions are a key focus. We are coming off of a major launch with General Motors. We suspended our acquisition activities when we booked that business. We wanted the teams focused, of course, on the successful launch; and that has occurred.

I would say six months ago or so we started to turn our focus to looking at acquisitions. We hired -- re-hired a long-time Methode employee as our Vice President of Corporate Business Development. Mark is on board. He had been the CEO of Lumidigm; and Mark's main focus is in acquisitions. From a capital, or a cash standpoint, that would be our uses.

Great. And can you just comment -- give me a little more color on Lumidigm? Was that -- kind of the timing and how long you've been thinking about that decision? And then, as kind of a follow-up, are there any other assets in the portfolio that are under review, or is that kind of an ongoing thing that you guys do?

It is an ongoing thing. You always look at your portfolio, if you will, and make sure everything is core, and you are deploying your capital and your resources in the best area. Lumidigm -- we own about 10% of Lumidigm. Methode and Intel were the only strategic investors -- Motorola, I think, at one point was in there also. The rest were venture capital groups, but everyone agreed with the -- I guess, the uptick in the interest in biometrics, that it was the time to monetize Lumidigm. Mark and his team did a great job of getting a good number for it. We certainly benefit from it.

But I should point out that we maintained our exclusive license for the Lumidigm biometric technology for automotive -- actually transportation worldwide. From our standpoint, when the Lumidigm Board was discussing selling the company, we were in favor of it. The time was right, and we had our license. As for anything else, it really just depends where we're focusing and what is going on in a particular market.

Got it. Thank you very much, and, again, congrats.

Thank you.

(Operator Instructions)

David Leiker of Robert W. Baird.

Hi, good morning. This is Joe on the line for David.

Hi, Joe.

I wanted to start on revenue trends in interconnect. If I just look at some of the sales results from your customers in that segment, thinking a large appliance guy, a large data center guy, it would seem like their sales were a little stronger than what you had thought. Was there any sort of component inventory buildup in the channel that might have diluted your results a bit? And do you think it's a bit more balanced looking forward?

In our data main product or transceiver product, we did see that. The big customer there is Cisco, and that was -- we ship to a hub and we saw that increase considerably. And that has to be worked down, and we have seen some of that, but we haven't seen it go back to, say, mid-2014 levels. In particular, that would be one area.

Appliance -- it's been better, and we track Whirlpool's results, but it's not necessarily a one for one; it can be a bit spiky. And there is some seasonality to it, as well, because most of -- except in laundry, most of our products are in the kitchen suite. And there's a bit of seasonality to that.

Okay. If I just maybe take a step back, from a high-level perspective, you did $225 million in revenues in the quarter. If I just annualize that, you're already at $900 million. So, I'm wondering relative to the guide for next year, was there any sort of maybe pipeline fills at GM ahead of the SUV launch, or something that I should be adjusting out of an annualized number, outside of just normal seasonality due to auto production?

Seasonality is definitely there. There was pipeline fill -- as we said before, we can't tell what that is. It's not differentiated in the releases, but there is some of that in there.

And then you have to be careful with tooling; you've got to back that out. If you are run-rating it, you're multiplying that tooling number.

Ford business starts running out.

Yes, and also -- good point. The Ford business starts to run out -- not completely. We still have another year on one of the programs, but the third and fourth quarters of Ford is down. And, again, that's taking into account into our revenue number.

Okay. And then, just circling back on an earlier question: You've been giving a revenue outlook for 2015 -- this $800-million number, and now you are going to be well above that. It sounds like 2016 and 2017 move higher, as well. When you think of the inputs you tabulate to come up with a number -- so, there's end-market production, there's going to be take rates, there might be platform mix. Which of those things are moving the needle the most to drive the upside in the forecast, just relative to really the last six months when these revenue numbers have been put out there?

It's higher automotive sales, particularly in the US. We use our own historical data, which we don't have a lot on K2, but then we use LMC data and double check with some other sources. And we can also look at our releases, as well, on products that have launched. And those all combine to have a much higher number than we thought six months ago. And it is -- if you look at US car sales, they still remain, actually, very healthy, and it's really driven by that.

In Europe, I always caution on Europe, but we're growing in Europe; again, not as much as we had anticipated years ago, but we're clearly taking market share. So, that's been helpful. Again, it's a little bit sporadic, and it's a caution I would give on our guidance -- or did give.

And then Asian sales, which mainly come back to the US -- we were on the T76 transmission platform. That continues to be a good platform for us. That's through -- we're Tier 2 to [Conti]. Not quite as predictable perhaps as we would like, but that's also increasing. So, just really the combination of really pretty robust automotive sales.

I guess I'm trying to get a better sense of where the upside might have been. Because when GM launched the K2Xx, they were obviously capacitized for a certain volume level on those communicated to the suppliers; the suppliers that are selling in. The volumes that we see from a high level seem to be pretty much tracking to what GM originally communicated. But it seems like the revenue benefit for Methode has continued to ratchet higher as the year goes on.

Was there maybe just a little built-in conservatism in the Methode guidance at the beginning of the year, and you fully realized the full GM potential? Or is just the GM volumes running ahead of what GM communicated?

We build to a capacity level contractually that -- I think it was 15% or 20% over what they put in the contract. And so, from that standpoint, we have enough capacity to ship whatever GM would require.

Were we conservative at the beginning of the year? You're making the case for not giving guidance because it's very hard to predict.

Especially with K2.

Yes. We will get better as time goes on because we've been doing this for a while. We know how to track ongoing programs. But a program of that size -- plus you still have SUV and 31Xx-- it's hard to predict, and we look at releases, and releases have changed. They've gone up, which is great.

Are we conservative? I think we're, I guess, practical that -- because there is any number of things that can change six months from now. But I don't -- we've not had, I guess, major surprises in recent months on what's going on with the programs.

Doug, is there anything you can add to that?

I think last time we updated our guidance was probably six months ago -- at the end of the second quarter, yes, and I think we've just seen better numbers than we expected.

What was the [prior] six months ago.

Yes, no, it's hard enough predicting next month, let alone a full year.

And then, just the last one for me: The $4 million in incremental development costs -- is there a return or a pay-back period you typically think about when undertaking that incremental investment that might help us get a sense of how quickly you leverage those costs?

I'm hesitating on how to answer that. Because it is a bit of a mixed bag. I think Steve had the question about where the money is being spent. A good portion of it is being spent on Dabir Surfaces, and we would expect to start to see a return on our investment there starting in 2016. And I always have to give this caution: We still need to have the product accepted and proven, but we would have a payback on that if that takes off within two years. It's a medical product.

Some of the other investments, you might see three, four years before you would -- I guess, on paper, see a payback. But almost everything we do is geared to giving us an advantage to book more business. Digital printing on glass -- I think it would be difficult to nail down an exact time frame. We do that; but on the other hand, that is to really give us a competitive advantage. So, how much do you add to your payback the increased sales and the margin on that? That's where it gets difficult.

But to really -- to answer your question, the majority -- a good portion of the $4 million is geared towards Dabir, and that return should start in 2016. Doug, I don't know -- we have a hurdle rate, so we have all the --

We've determined that it's a good use of development funds. And if it happens sooner, the internal rate of return would be just that much greater. And if it happens later -- again, it's medical, so I think we're looking at good returns regardless.

And when a division comes to us with a project -- again, you do all the math, but we look at: Okay, will this project improve your gross margin? And that's what it's all geared to is how do we, for all our efforts, get more through to the bottom line. And as I said in the ending of my prepared remarks, it is our innovation that causes us to have better margins or increasing margins and better sales.

Okay. Great. Very helpful. Thanks very much.

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

Manny, thank you. We will thank everyone for listening today, and wish everyone a safe and pleasant summer.

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