Methode Electronics Inc (MEI) 2016 Q4 法說會逐字稿

Welcome to Methode Electronics FY16 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.

Forward-looking statements in this conference call and 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 limitation, the following: Dependence on a small number of large customers, including two large automotive customers; dependence on the automotive, appliance, computer, and communications industries; investment in programs prior to the recognition of revenue; timing, quality, and cost of new program launches; ability to withstand price pressure, including pricing concessions; currency fluctuations; customary risks relating to conducting global operations; ability to successfully market and sell Dabir services; dependence on our supply chain; income tax rate fluctuations; dependence on the availability and price of raw materials; fluctuations in our gross margin; location of a significant amount of cash outside of the US; ability to withstand business interruptions; ability to keep pace with rapid technological changes; a breach of our information technology systems; ability to avoid design or manufacture defects; ability to compete effectively; ability to protect our intellectual property; ability to successfully benefit from acquisitions and divestitures; the recognition of goodwill impairment charges and cost expenses due to regulations regarding conflict materials.

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

Thanks, Michelle, and good morning, everyone.

Thank you for joining us today for our FY16 financial results conference call. I am joined today by Doug Koman, our Chief Financial Officer; and Ron Tsoumas, our Controller and Treasurer. Both Doug and I have comments, and afterwards we will take your questions.

Year over year, FY16 sales decreased 8.2% to $809 million, with lower sales in all segments. Net income decreased, affected mainly by lower sales in the corresponding manufacturing inefficiencies, but was also impacted by higher pricing concessions in the automotive segments; increased legal and other professional fees, particularly related to the Hetronic litigation; the absence of the gain on the sale of Trace Laboratories last year; higher income tax expense, increased expenses for wages, benefits, and stock award compensation; costs related to the transfer of Hetronic manufacturing from the Philippines to Egypt in the first quarter; and higher intangible assets amortization expense.

Partly offsetting these unfavorable factors were the absence of the impairment of a good will charge last year; lower tandem cash expense; the one-time reversal of accruals related to a customer commercial issue in automotive; Intraxcell adjustments for minimum purchases in the gain on the sale of a building; favorable commodity pricing and a favorable currency impact on the purchase of raw materials and labor costs.

Compared to last year, FY16 consolidated gross margins as a percentage of sales increased 150 basis points, but declined on a dollar basis. Gross margins were positively influenced by a favorable currency impact on the purchase of raw materials and labor costs in foreign operations; customer contractual adjustments for minimum purchases; and the gain on the sale of a building. However, increased pricing concessions, manufacturing inefficiencies related to decreased sales in the interface and power segments, and costs due to the transfer of manufacturing from the Philippines to Egypt in the interface segment negatively impacted gross margins.

Year-over-year, FY16 selling and administrative expenses increased, negatively affected by higher costs for legal and professional services, wages, benefits, and stock award compensation, partly offset by lower bonus expense. FY16 operating income was $109.7 million, compared to $112.2 million last year. Operating margin was 13.6% this year, compared to 12.7% in FY15.

FY16 revenues came in higher than our revised guidance we issued last quarter, due to higher than anticipated fourth-quarter automotive sales. Operating income and EPS came in higher than guidance, primarily due to the one-time reversal of accruals related to customer commercial issues in the automotive segment, as well as contractual adjustments for minimum purchases and the gain on the sale of a building, both in the power products segment. Without these items, which occurred in the fourth quarter and totaled $4.6 million, operating income would have been $105.1 million, and EPS would have been $2.11.

For FY17, Methode anticipates sales in the range of $820 million to $845 million; income from operations in the range of $102 million to $117 million; and earnings per share in the range of $2.11 to $2.35. Based on this guidance range, our FY17 operating margin target is in the 12.4% to 13.8% range.

Our guidance considers several factors which will affect our top-line results, including pricing concessions in the automotive segment; price reductions on purchase displays negotiated by a customer of approximately $13 million in the automotive segment; improved PowerRail sales in the power products segment of approximately $9 million, ramping in the second quarter; increased 10-gig copper transceiver and uninterrupted power supply product sales in the interface segment, weighted toward the latter half of FY17.

Our guidance also considers several factors that will affect our income and earnings, including a full year of long-term incentive amortization, compared to only eight months in 2016; an effective tax rate in the low to mid-20% range; and no significant changes in tax valuation allowances or enacted tax laws. It is important to point out that the $13 million in price reductions on purchase displays will be neutral to the bottom line, since cost of goods sold is reduced in conjunction with the sales decrease.

While we do not provide quarterly guidance, we expect the first quarter of FY17 to be lower in revenue and earnings than the fourth quarter of 2016. As I just mentioned, the fourth quarter included about $0.09 in one-time benefits to the quarter's earnings, and the fourth quarter's typically our strongest in terms of sales and earnings. The guidance ranges for FY17 are based on Management's expectations regarding a variety of other factors, and involves a number of risks and uncertainties as well, which have been detailed in this morning's release and the Form 10-K.

Moving on to a review of our segment results, compared to last year, FY16 automotive sales declined 2.2%, as a result of lower volume in the Ford center console program, lower steering angle sensor product, and transmission lead frame assembly volumes, as well as pricing concessions. These declines were partially offset by higher General Motors center console program volumes, improved tooling sales, and increased hidden switch product volume in our European operations, as well as higher linear position and interior lighting product volumes in our Asian operations.

Exchange rates negatively impacted automotive sales by 1.2% in the fiscal year. Automotive gross margins improved to 27.8% in FY16, from 25% last year, as favorable commodity pricing and a favorable currency impact on the purchase of raw materials and labor costs was partially offset by increased pricing concessions. For FY17, we are targeting automotive gross margins in the high 20% range.

We are very pleased to report we were awarded the General Motors supplier Quality Excellence Award. It was presented to our Monterrey, Mexico, facility during a plant-wide ceremony held in April. General Motors recognized the effort of the entire team to achieve this honor. This prestigious award is issued to only a small percentage of their suppliers who have met stringent criteria throughout the year.

To earn the award, we had to achieve zero new product launch issues and pass their quality assessments, while providing over 2 million defect-free parts, with 100% on-time delivery to five assembly plants. We congratulate the North American automotive team on this very significant accomplishment and award.

Moving to our interface segment, year-over-year sales decreased 12.9%, mainly due to lower appliance and data solution product volumes, partially offset by increased sales at Teutronic. Looking ahead, we believe the data center industry will continue contracting in the near term, as cloud computing expands in importance, reducing demand for our data groups products. We are reviewing our data group's infrastructure, against what possibly may be a new norm. As we have done in the past, we will make adjustments accordingly.

Compared to last year, interface gross margins as a percent of sales decreased 50 basis points, negatively impacted by costs associated with the transfer of manufacturing from the Philippines to Egypt. Without the costs associated with the relocation of manufacturing, interface's gross margin would have been 24%, consistent with last year. For FY17, we are targeting interface gross margins in the low to mid-20% range.

I wanted to take a moment to discuss our ongoing Hetronic litigation. These costs were $9.9 million in FY16, and at this point we are anticipating similar costs for FY17, dependent on how litigation proceeds. We are engaged in litigation with one of Hetronic's former distributors who copied and sold Hetronic label products with non-Hetronic components embedded in them, and now are selling knock-offs of Hetronic systems and components. We are seeking to stop this competitor from selling knock-off parts, and collect damages for their bad acts.

In conjunction, it was discovered that two former senior Hetronic employees took thousands of documents, which they have used in their efforts to unfairly compete against Hetronic. We are seeking the return of those documents, and damages for the use of those documents, and other bad acts. We believe it is critical that we protect the Hetronic brand, prevent unfair competition, and protect our path to market in the industrial space, which is a key component to our five-year growth plan.

Moving to Power Products, net sales decreased 37.6% in FY16 compared to last year. As we have been discussing all year, we experienced significantly lower PowerRail product sales, as well as reduced Asian bus-bar and cabling products. Favorable to FY16, Power Products sales were $1.5 million in contractual adjustments for minimum purchases, and $1 million on the sale of a building.

Year-over-year, segment gross margins decreased to 24.3% from 32.4%, due to lower sales and the corresponding manufacturing inefficiencies. Again, FY16 margins concluded the contractual adjustments for minimum purchases and the sale of a building. Without the benefit of the contractual adjustments for minimum purchases and the sale of a building, gross margins would have been 20.6%. For FY17, we are targeting Power Products gross margins in the mid-20% range.

I am pleased to announce that during FY16, Methode purchased $62 million, or nearly 2 million shares, of its outstanding common stock, at an average purchase price of $31.03, under its Board of Directors authorized $100 million repurchase plan. There is $38 million of remaining availability under the plan, although the plan can be terminated or suspended at any time.

Moving to new business, we were awarded an extension of our T-76 lead frame business through FY22. Average annual revenue from this program has been approximately $20 million. With Ford, we were awarded a six-year program for the audio control panel of the integrated center stack for an SUV beginning late in our FY19, as well as a five-year program for an integrated tailgate module for a passenger car, which includes the camera assembly, trunk release, and license plate illumination.

This product is an excellent example of Methode's ability to think outside the box, and provide the OE cost-reduction ideas, while improving Methode's margins. Both programs have average annual revenue of $5 million each. We expect the innovative tailgate concept to expand to other platforms and OEs.

In our European operations, we were awarded a new shift-by-wire module for a major European OEM. Shift-by-wire is a premium car feature; however, the solution is moving into mainstream vehicles, since it simplifies controls by using electronics for shifting, thereby eliminating mechanical linkages. The shift lever can also be located in optimal positions within the cabin, resulting in improved styling, while freeing up important space. This award represents approximately $3 million in average annual revenue for five years, beginning in our FY18. We anticipate additional awards as the concept further migrates to mid-range vehicles.

Additionally, we were awarded two new torque sensor e-bike programs. As of now, that's eight e-bike customers, which makes us one of the leading global e-bike torque sensor providers. For FY17, annual revenue from our e-bike sensor business will be approximately $3 million, growing to approximately $11 million in FY18, and $23 million in 2019.

Finally, we have had our first significant order for our lithium-ion-based uninterruptible power supply, or UPS system, from the federal government for 40 units, with the likelihood of an additional 200 units later this fiscal year. While not significant from a revenue standpoint, it is important in that it is being deployed by a government agency at remote locations, and may lead to use by other government agencies, and represents first major deployment of the system.

Now let's move on to developments with our Dabir overlay since our last call. There have now been over 3,000 surgeries using the Dabir technology, and there are several important clinical trials and pilot studies under way.

First let me review the three laboratory-based studies. The first study confirmed the Dabir overlay's compatibility with various operating table pads, warming blankets, and dressings on patients. The favorable results were represented at the symposium on advanced wound care conference in Atlanta in April. A journal article is also in preparation, with a white paper anticipated later this year. This study confirms that the Dabir overlay will work well with items commonly used on the operating table.

Second, an emergent study to assess the maximum weight limit for Dabir overlays is now complete. The study was conducted by an independent test laboratory, and found that our overlays can now be used for a med-surg patient weighing up to 600 pounds, and for a patient undergoing surgery weighing up to 400 pounds. We anticipate findings from this study to be presented in a journal article this fall. Additionally, another study of 15 bariatric subjects is under consideration, with data potentially being collected later this summer.

Third, a blood perfusion study to qualify the effects of using a Dabir overlay to enhance skin blood flow is currently in progress. Enhanced blood perfusion is considered by many experts to be linked to tissue preservation, and a key component to accelerating wound healing rates. In the Dabir study, 20 subjects of various ages and BMIs are participating. The data collection phase is expected to be completed later this summer, with early outcomes showing very favorable results. An abstract is also under development to present result at the Symposium on Advanced Wound Care in Las Vegas in October. A journal article will also be submitted later this year.

On the clinical and pilot trial front, we currently have four trials under way. At one, Midwest Hospital, over 50 neurosurgery patients have used the overlay for surgeries lasting three hours or greater, with no pressure ulcers having been reported. This health system will also present their mid-study finding at the Symposium on Advanced Wound Care.

At a major midwest academic medical center, Dabir technology is being evaluated in a pilot trial in 13 cardiovascular operating rooms, including the pre-op area. Over 1,000 surgeries have been completed to date, with no reported pressure ulcers using Dabir. Indications are that the center will likely extend the trail for enhanced data reporting purposes, with analysis of outcomes anticipated this fall.

Thirdly, at a New York nursing home, a pilot study on ten very high risk patients placed on the Dabir overlays for 100 days is complete, with no reported pressure ulcers. The nursing home staff and Dabir clinical team are actively working to summarize the data and complete a white paper. Similarly, at another site, outcome data from long-term care patients is being gathered for potential future claims on the prevention and treatment aspects of Dabir.

Additionally, we have eight other studies and trial opportunities, varying from in-home care to emergency departments to spinal cord injuries to robotic surgery. Alignment with Medicaid treatment and prevention codes remains a primary objective for post-acute activities. This is an important step in fully commercializing the product in this market. We will provide updates on this process as they become available.

Another interesting development is the potential need for Dabir in emergency departments, where long patient waiting times for admittance to a hospital room sometimes, as long as 48 to 72 hours, can negatively impact patient comfort, and therefore hospital quality metrics and subsequent marketing scores. Currently, six East Coast hospitals are evaluating Dabir overlays for patient comfort and pressure ulcer prevention, with positive site feedback received thus far.

Separately, a contract with QB Medical, a service disabled veteran-owned small business distributor for commercial entry into government VA accounts, has been successfully negotiated with several VA sites already engaged for product evaluation.

On the international front, we are introducing Dabir technology to hospitals in New Zealand, Australia, and Spain. We have also had a request for a hospital product evaluation in Singapore, through one of our regional Methode sales offices.

However, as we have explained in the past, the introduction of Dabir technology to health care professionals has been and continues to be a lengthy process. Product evaluations to conform -- to confirm product effectiveness, combined with the challenge of getting to the C-suite decision-makers who truly understand and recognize the commercial benefit of pressure ulcer prevention can be challenging.

To offset this, we have accelerated recruitment activity for personnel tied to commercial sales, customer support, and clinical service. These costs are reflected in our increased investment in Dabir, from $5 million in FY16 to a budgeted $7 million in FY17.

Now I will turn the call over to Doug, who will give further details regarding our financial results.

Thank you, Don.

I have a few brief comments on the quarter and the fiscal year. The effective tax rate for the fiscal year was 23.7%. This was within our guidance range of low to mid-20%s. As we stated in our guidance factors for FY17, we expect the effective tax rate to also be in the range of low to mid-20%s.

As Don mentioned earlier, year to date we have repurchased just under 2 million shares. The $62 million used for the repurchase primarily came from borrowings under our credit facility. At the end of the fiscal year, we had $57 million outstanding under that credit facility.

In the fourth quarter, the reduction in shares outstanding due to the buy-back program benefited EPS by about $0.03 per share. For the full year, the benefit was about $0.05 per share. If we were to not make any further share repurchases, the FY17 EPS impact of the buy-back program would be between $0.05 and $0.06 per share.

You'll note that in the fourth quarter, SG&A as a percentage of sales was 13.9%. Sequentially, this is in line with the 14% in the third quarter, but higher than the 11.8% in each of the first and second quarters. In addition to the higher legal and professional fees, a contributor to the SG&A percentage increase was the award of the performance-based RSAs and RSUs to key employees late in the second quarter of FY16.

The amortization expense for these long-term incentive awards during the first half of FY16 was only $800,000, all of which occurred in the second quarter. During the second half of the fiscal year, the expense related to these long-term incentive awards was $4.8 million, or about $2.4 million per quarter. In FY17, we expect the expense for these long-term incentive awards to be approximately $9.6 million.

In FY16, we spent $23.2 million for capital expenditures. For FY17., we expect capital spending to be down slightly, and be between $18 million and $22 million. Depreciation and amortization expense in FY16 was $23.9 million. For the full year of 2017, we expect it to be between $23 million and $25 million.

EBITDA in 2016 was $134 million, or about 16.6% of sales. Based on our FY17 guidance, we expect EBITDA will remain in the 16% range, and be between $126 million and $141 million.

Finally, for FY16, free cash flow was $85.2 million. Again, based on our guidance, we expect FY17 free cash flow to be between $83 million and $92 million.

Don, that concludes my comments.

Doug, thank you. Michelle, we are ready to take questions.

Thank you. At this time, we will be conducting a question-and-answer session.

(Operator Instructions)

One moment please while we poll for questions. David Leiker, Robert W. Baird.

Hi, good morning, everyone.

Good morning, David.

Two topics here, in general. One, if we look at the segment numbers -- and you're during a nice job of pulling those margins up -- what do you think the longer-term targets across each of those segments are for margins, and what it takes to get there?

We've said, not so much from a gross margin standpoint but from an operating margin, that our target is to grow Methode's by 1% per year, on average. Some years it may be higher, some years it may be lower. But to achieve that, pretty much across the board our new products have to be successful. Particularly when we look at Interface, I think that's critical. Power is to improvement in the industrial segment; and [Millero] -- we've seen a little bit of that in Millero. We've talked about our big media customer returning, although not as brisk as they were in 2015. I think those are things that -- and our 10-gig product in Interface.

Some of the negative factors that are causing some head winds, the data center business -- as I said in my prepared remarks, we may be looking at a new norm there, as cloud computing is becoming a little bit -- or is becoming more prevalent, we have to make some adjustments there. Then in general, the industrial areas being down have impacted power.

Then can you touch on just the automotive side there in particular of how much room you have -- nice performance here in Q4 -- and how much room you have to push the margin in that particular part of your business?

That one's a little tougher. We're on some very good areas, or nice areas of the vehicle, but there is margin pressure. If you look at just the screens themselves, that was neutral to us, but that was a large reduction in sell price revenues, because of the reduction there. We'll continue to have price pressures in those areas -- a little bit less when you get into transmissions. We did benefit from favorable currency and exchange. How much higher we can go, I think that's going to be difficult.

It would also be dependent on new products. We talked about shift-by-wire. We're very excited about that. It's a small program, but that is the way the controls are going. That would carry higher margins than the other programs. But auto is a little bit more difficult to see that getting higher than what I said in our prepared remarks.

Okay, and just one last item on there as it relates to auto. Part of the keys of success, as you well know, is being able to take your costs down faster than the price-downs come down. What does -- how does that relationship look for you in terms of the current tone of the business, but as you look forward in terms of the ability to maintain that gap in performance?

That's always our goal. I've said before, as you get towards the tail end of a program it gets harder and harder. But if you look through the life of really the K2 program, our team has being able to do that, and actually improve our margins.

It's hard to forecast exactly what that will be in the future. It's how many changes will the automaker allow that benefits both them and us, how quickly we can implement those. Those are always factors. Commodity pricing has been helpful to us. That could turn around. It could also help us. That's a hard one to answer on a go-forward basis.

Just one last clean-up question. If we look at the run off of the Ford center stack business, where are you on that? How much is left?

We are trying to look that up. We may -- it's less than $10 million.

Okay, that's fine. That's okay. Great, thank you.

Thank you.

Steve Dyer, Craig-Hallum.

Thanks, and morning.

Good morning, Steve.

Touching on David's last question, I think over the last couple years you guys have announced a decent amount of new business that was supposed to start rolling out in FY17 -- by my math, maybe close to $100 million. Can you break out, as you look at guidance, maybe how much overall business rolls off? Did some of that new business that was announced -- did some of it slide? Help walk through the puts and takes of the guidance?

$100 million is not the number we have, let's put it that way. We have two programs that are in launch now, which are -- that utilize the K2 platform. One has annual revenue of around $20 million. The other one around $16 million, $17 million. Those are the two large ones for this year. They do increase next year. We've got a variety of smaller programs, which I don't have in front of me, but those are an additional -- let's say around $10 million of new launches, offset by a decline in the Ford business. That nets for a gain in auto of about $30 million, but it's nowhere near $100 million.

Included in that is our contractual price reductions, which -- as we were talking about with David, the team does a good job taking off the -- offsetting the reductions with cost reductions, but it still comes off the top line. I can't stress that enough, that even if you offset -- let's just pick a number, if you offset $5 million in a price reduction, it still comes off of sales. That's where we end up with our guidance range; but again, it's nowhere near $100 million.

In my notes in looking back, and I thought a Renault program started this year and a couple small ones -- Subaru, Alpha Romeo, Aston Martin, things that had just been announced, maybe --

Right, and then those are -- when I mentioned a variety of other programs in that $10 million -- I do not have the launch list in front of me, but the two GM platforms are Arcadia, Trailblazer. Renault actually launched in 2016, so did Aston. The BMW 7 Series, that was a small program that launched in 2016, as well. We probably have -- you may have a combination of 2016, 2017, and some 2018 launches there. There is more of a ramp in 2018 and there is in 2017.

Got it, okay. You've spoken publicly about the fact that you supply bus-bars for Tesla's model S and X. Any indication of what the opportunity for content on the Model 3 might be?

We would anticipate that would be used, but we do not have an award for that.

Okay. Then a couple quick one. Hopping over to Dabir, it sounds like that's getting closer to a sales ramp. Any sense for maybe A, how you would go to market with that; and B, a little more granularity as to what that sales ramp looks like -- maybe how much you're thinking about for this year, and then what kind of jump you may see next year?

We haven't said anything specific on Dabir revenues for this year. It is -- small revenues are contemplated in our guidance towards the end of the fiscal year; but the way we view the ramp for Dabir, it is a FY18 event. We get the clinicals behind us here. As you heard in my prepared remarks, there's tremendous amount of activity going on. Knock on wood, it's hard to point to something negative. We're getting very good results from all of the trials that are going on. It's just a lengthy process. While we've got some revenues in, let's leave it at that. It's really a 2018 event for Methode.

Got it. Okay, and then last one for me. When you put those pieces together, you stuck by your 9% to 10% EBITDA growth CAGR. That, if I remember, started in FY15. You were down in FY16. Your guidance implies flattish in 2017, which means the remaining three years would indicate a pretty good pick-up. A, am I thinking about that correctly; and B, where does that come from? I think -- is that largely Dabir driven, or are there some good indications on some more center stack business? Any help there? Thank you.

Sure, Dabir is in our five-year plan. That's a factor. The other new products that I talked about earlier are in there. We are anticipating some improvement in our industrial businesses, and also our -- more auto programs, and auto programs that are launching now that will be fully ramped.

The other one that's very interesting is our e-bike torque sensor business, which is our magneto-elastic technology. It's a combination of events that will get us there. If you look at our prior five-year plan, it was the last really two years -- I think really started maybe in the third year, but it was really the fourth and fifth year that it ramped. You're right, the CAGR will have to be -- for the latter years it will have to be greater, but the stage is set for that.

I also can't stress enough that I can't say 100%, but we booked our renewal business on most of our automotive programs. In auto, as you know, you can take a giant step forward, and then have it offset by not being able to renew business. We've been able to do that. We just announced the T-76; that was also critical.

The stage is set. It is new-product dependent, and of course you have to decide what the [SAR] is going to be. But we're confident in that, and that's why we reiterated in our release this morning.

Okay, thank you.

Thank you.

Christopher Van Horn, FBR.

Good morning, guys. Thanks for taking my call.

Good morning.

Can you comment on the pricing concessions that you saw, both during the quarter and during the year? Were they in line with expectations, or were they a little bit more aggressive than you originally thought?

No, they were in line. We made mention of them, because as I said, they do take from the top line. But no, they were in line.

Then you talked about being able to combat that on the operating line. Can you give us any more clarity specifically on is it head-count reduction, is it better sourcing of materials? What are some of the things you were able to enjoy specifically?

It is certainly that. Labor is -- taking labor out is a key component to even if it's in a low-labor area. Price reductions -- favorable PPV is always key. The other aspect which continues to help us is our quality. To ship 2 million parts with no defects, there is a definite benefit to the bottom line. That goes really without saying. Also, when you do have a quality problem, even if it's a minor one, you're scrambling and you're spending a lot of time and money to resolve it. The teams around the world, their ability to keep our BPM single digit is paying off dividends on the margin line. Again, that also helps offset our price reductions.

It's a myriad of things that get planned, really, a year in advance; because you have to have not so much the reduction in quality expenses, but anything else has to have the automaker's approval. There's a lot of planning that goes into these offsets. Again, I always congratulate the team on these calls, because to have the margins we have on these programs is -- compared to our peers -- is very good.

Got it. Could you give a little more detail on the shift-by-wire award? Is that -- how that was born, and was it an existing customer that you rolled into this new product line? What does the market look like that for going forward? Is there a lot of competition, or are you guys first to market with your specific technology offering?

It is with an existing customer. I can't say who the customer is, but it is an existing customer in both the US and Europe. We don't have a patented design on that, but with out -- first of all, with our relationship with the customer and our quality reputation, that got us really on to the bid list, where there were six, seven other people on that. I think there was actually more to start with. We wanted to move in that area, mainly because we could vertically integrate most of the components without really a large investment on our part. It's really a combination of knowing the customers.

The market is changing. I don't have market data in front of me on where shift-by-wire is going, but for the most part we feel that it's -- four, five years from now, that will be the norm. It's just an area of the vehicle that runs -- often runs cross-platform. We look for cross-platform, rather than be specific to an individual model. Now you have to change the A surfaces a bit, but the guts of it will be -- about 60% will be common, and then our vertical integration is about 80%. That's our first win. As there's opportunities with other -- not only just the premium vehicles, but other mid-range with BMW, Audi, Mercedes, PSA, and then potentially with the Japanese.

Got it, got it. Finally, cash seems to be getting pretty high here. Could you update us? Do you still have the same priority between acquisitive buy-backs, possible dividend raise? Can you just update us on our priorities for your use of cash?

We continue to pay a dividend. We think that's very important. We continue to invest in vertical integration where it makes sense, and new products. Those are always two high priorities for us. We have a stock buy-back plan in place. I wouldn't rule out increasing that, if we did not find an acquisition that made sense to us; but really an acquisition is a key focus.

I keep saying that, and we've come close; but we have some pretty strict criteria. I'm confident that we will make a correct, or the right acquisition. We're just being very patient. But if we don't do that, you could see us take some other actions with that cash. But I will also point out, as we have in the past, that most of that cash is overseas.

Got it. Thanks again for the time.

Thank you.

(Operator Instructions)

One moment please while we poll for questions. Jimmy Baker, B. Riley.

Good morning, Don, good morning, Jack.

Good morning, Jimmy.

I just wanted to follow-up on shift-by-wire. Could you talk a little bit more specifically about the content you're providing? Is that the UI or the underlying technology, or both? To the extent that you're providing the underlying tech, it seems like there's -- at least from our knowledge, there's a couple of very entrenched competitors there, with global scale, that serve customers including yours. Interested how, on what basis you were able to compete and win against them?

I think I said that about center consoles, as well. We're -- first of all, we're a multi-national Company that these OEs can have us produce product in any of their major areas, so we're a viable source for it. There are competitors, but there's competitors on center consoles, too. But we are providing the entire system, which like we do on the center consoles. There's electronics in it, which we are providing. The smarts for that is up to the OE, the software.

But everything else is no different than what we're doing on center consoles, and we're able to effectively compete. I can't -- like I said earlier, we don't have a patent on it. There are some big players in it, but there's big players in almost anything we do in automotive.

It's a good win for us. We think it will get carried over to other vehicles. It's another area -- it's centric to the center console area which we look to be in. Also on overhead consoles, where there's a whole bunch of competitors there, and we're able to compete.

Okay, understood. The $13 million concession that you called out, I think you talked about that as being in line with your expectations. Just to be clear, was that -- or is that incremental to the contractual annual price down? If so, was that essentially required to stay on the successor platform, or did you gain any incremental business as a function of that concession?

No, that is simply the customer. Let me back up. Generally, the OE will select the screen supplier. They'll negotiate their own contract with them that will have price reductions in it. Then often, Methode becomes the -- or that supplier or vendor becomes a directed sub to Methode. We actually take over the Management of the supplier. We get our margin on that, we're responsible for his quality, as well.

But the OE has the right to go in and renegotiate that contract -- again, not with us, with that supplier. What happened here, as you know, the price of screens has dropped dramatically since the launch. The customer took advantage of that, and we fully expected them to, and went in and negotiated a reduced amount. It was $13 million that we -- approximately $13 million, depending on the volume and take rate -- that gets written into that contract. We are buying those screens for essentially $13 million less.

Our cost of goods sold is $13 million less, so it is neutral to our bottom line. I think that's very important. It's not the normal price concessions where we work very hard to offset that. This we didn't have to offset, in that it was essentially a pass-through. That happens not often, but it does happen; but it was a large enough number that since it came off the top line, we needed to mention it. Slightly unusual, but it's happened before.

That clarification is really helpful. Just had two more here, one on Dabir. Hoping you could talk a little bit more about what you're seeing that gives you the confidence to time-stamp some expected financial performance here, commenting that you expect sales to ramp in the latter half of this fiscal year and then further into 2018. Then when you talk about a $7 million investment in Dabir this year, should we think about that as a net investment? In other words, you're going to invest $7 million in addition to whatever you can offset in incremental revenue so that it's a -- call it $7 million net loss business this year?

Pretty much. That's a good way of looking at it. Let me answer your first question. Some of the guideposts we look at, so let's say for the next 24 months, the clinical trials will certainly help us, as that just gives us independent verification and improves our credibility. We've got a number of those going on that I detailed, and we continue to detail.

The emergent study is also important, in that it could allow us to change our claim that it could help heal wounds. We can't do that now; we don't have a verification. That would also require us to have a different FDA certification. Medicare reimbursement code is another milestone. That's not easy to get, and you can get the -- if you do it wrong, you can get too low an amount. We've got consults working on that. That is a -- it's a process. That's key when we look at -- for nursing homes, hospice, and long-term care. The VA evaluations, also very critical.

I know you're looking for specific numbers. We're not far enough along in the clinicals and the -- not so much the clinicals, but really in the sales process that I want to project that. We know -- we've talked about what the market opportunity is. If you just take a small percentage of back, Dabir is a good product for us, or business for us. But I'm not quite ready to quantify where we think Dabir can go. We will as we have more data.

As I said on the call, everything has been going well. We are frustrated by the time it is taking. We're having good outcomes, but it's taking far longer than we thought. We are adding additional people, as we talked about, to accelerate that. I think long term it will go into some sort of distribution. We're just not there yet. Doug, is there anything you would add?

No, I think that covers all the major guideposts.

But again, we do know we have to provide some numbers on that, but we're just -- let us go a little further in our sales efforts here, and we'll be able to do that.

Sure, understood. Lastly on the Hetronic litigation, first are you able to quantify or maybe put some brackets around the size of damages you're pursuing? It seems like it's been -- the cost of litigation so far, it looks like the legal expense from disclosures in the 10-K was about a $0.19 head wind to earnings in FY16. What are you assuming in the FY17 earnings guidance in terms of legal spend?

Similar, depending on how litigation goes. Jimmy, I'd like to answer your question, but since we're engaged in litigation, I can't. I said what I can on the prepared remarks, and I really can't go any further than that. I hope you understand.

Okay, fair enough. Appreciate the time.

Thank you.

There are no further questions at this time. I would like to turn the call back over to you, Mr. Don Duda, for any closing comments.

Michelle, thank you very much. We'll thank everyone for listening and their questions today, and wish everyone a very safe and enjoyable July 4. Take care now.

This concludes today's conference, thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.