Methode Electronics Inc (MEI) 2017 Q1 法說會逐字稿

Welcome to Methode Electronics' fiscal year 2017 first-quarter earnings conference call. (Operator Instructions). As a reminder, this conferences 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 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 communication industries; investment in programs prior to the recognition of revenue; timing, quality, and cost of our new program launches; ability to withstand price pressure, including pricing concessions; currency fluctuations; continued economic challenges in Europe, including the exit of the United Kingdom from the European Union; customary risks related to conducting global operations; ability to successfully market and sell Dabir Surfaces; dependence on our supply chain; income tax rate fluctuations; dependence on the availability and price of raw materials; fluctuations in our gross margins; 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 manufacturing 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 costs and expenses due to regulations regarding conflict materials.

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

Thank you, Audrey, and good morning, everyone. Thank you for joining us today for our fiscal 2017 first-quarter financial results conference call. I am joined today by John Hrudicka, our Chief Financial Officer; and Doug Koman, our former Chief Financial Officer; and Ron Tsoumas, our Controller and Treasurer. Both John and I have comments, and afterwards we will take your questions.

First, I would like to welcome John to the team in his first quarterly call with our Company. He joins us from Titan International, another publicly held company, where he was CFO. Prior to that, he was CFO at Elkay Manufacturing. Also noteworthy, John held both operational and financial executive roles at Baxter. I look forward to working with him as we continue to create long-term value for our shareholders.

Additionally, I would like to thank Doug, who retired as Methode's CFO. Doug has agreed to remain with us through mid-September, and subsequently as a consultant to support the transition of responsibilities to John. I thank Doug for his consistently strong leadership of our financial, treasury, and accounting operations, and the many important contributions he has made to Methode over the years. It has been an honor to work with you, Doug.

Moving on to review the quarter, year-over-year first-quarter fiscal 2017 sales decreased 5.6% to $192 million, with lower sales in all segments. We have seen almost an across-the-board decrease in our European revenues, and most notably from the largest customer in our European automotive segment. As we've seen in the past, this could be a short-lived matter, as some of our automotive sales are take rate dependent, and we may see increased volumes in future periods. We are, however, closely monitoring the situation.

Net income decreased, affected mainly by lower sales, but also impacted by increased stock award amortization expense, higher legal and other professional fees, particularly related to the Hetronic litigation, and the absence of a tariff refund last year.

Partly offsetting these unfavorable factors were lower income tax and bonus expenses, commodity pricing adjustments, and the one-time reversal of accruals related to customer commercial issues in the automotive segment; lower travel, advertising, and payroll expenses; overhead cost reductions in the power products segment; and favorable commodity pricing and favorable currency impact on the purchase of raw materials, and labor costs.

Compared to last year first-quarter, consolidated gross margins as a percentage of sales improved 180 basis points, positively influenced by the commodity pricing adjustments and the one-time reversal of accruals in the automotive segment, favorable commodity pricing and favorable currency impact in foreign operations, as well as overhead cost reductions in the power products segment. The fiscal 2016 first quarter was favorably impacted by tariff refund.

Year-over-year fiscal 2017 first-quarter selling and administrative expenses increased, negatively affected by higher stock award automatization expense as well as increased costs for legal and professional services, partly offset by lower bonus, travel, and advertising and general expenses.

Fiscal 2017 first-quarter operating income was $26.7 million compared to $30.4 million last year. Operating margin was 13.9% this year compared to 15% in the fiscal 2016 first quarter. We have reaffirmed fiscal 2017 guidance of 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 fiscal 2017 operating margin target is in the 12.4% to 13.8% range.

The guidance range for fiscal 2017 considers several factors which will affect our sales, income, and earnings; additionally, are based upon management's expectations regarding a variety of factors, and involve a number of risks and uncertainties which have been detailed in this morning's release and our Form 10-Q.

Moving on to a review of our segment results. Compared to last year, first-quarter fiscal 2017 automotive segment sales declined 3.9% as a result of lower ignition and steering wheel switch volumes in our European operations, decreased transmission lead frame and steering-angle sensor volumes, and unfavorable currency rate fluctuations in Asia, as well as lower Ford center console program volume.

These declines were partially offset by new, integrated center panel and entertainment module launches in Europe, higher General Motors center console volumes, and improved transmission lead frame volumes in North America.

Automotive gross margins improved to 30.2% in the first quarter from 28.4% last year, positively affected by commodity pricing adjustments and the one-time reversal of accruals, as well as favorable commodity pricing and a favorable currency impact. Absent the commodity pricing adjustment and one-time reversal of accruals, gross margins would have been 28.8%. For fiscal 2017, we are still targeting automotive gross margins in the high 20% range.

Moving to our interface segment, year-over-year first-quarter sales decreased 2.4%, due mainly to lower data solution product lines as well as decreased sales at Hetronic, partially offset by higher legacy product volumes in Asia. As we mentioned last quarter, we believe the data center industry will continue to contract in the near term as cloud computing expands in importance, reducing demand for our data group's products.

Additionally, we are beginning to see extraordinary price pressure on our 1-gig product because of the contraction of the overall market, as well as the acquisition of a longtime competitor by a contract manufacturer. While I remain confident in our 10-gig product, the factors I just mentioned and the slowing of adoption may cause us to reevaluate its revenue ramp.

Contributing to the slower adoption is a reduction of [requirements] from our flagship customer, a major networking equipment manufacturer. At this point, we are lowering our anticipated revenue from the 10-gig product for fiscal 2017 from $9 million to a range of $2 million to $3 million.

Additionally, we continue to review our data group's infrastructure against what possibly may be a new norm, and we will make adjustments accordingly.

Compared to last year, interface gross margins as a percent of sales improved 230 basis points, mainly as a result of a favorable currency impact on the purchase of raw materials and labor costs, and the absence of costs associated with the move of Hetronic manufacturing last year from the Philippines to Egypt.

For fiscal 2017, we are targeting interface gross margins in the low- to mid-20% range.

Hetronic litigation costs were $4.3 million in the first quarter of fiscal 2017 versus $1 million last year. First-quarter litigation costs were higher this fiscal year versus last year as we were able to substantially end litigation with Hetronic's former president. The court entered a favorable ruling on all our claims and set a hearing to determine damages.

Litigation with a former distributor is still ongoing, and we are in the discovery phase. Litigation costs were $9.9 million last fiscal year. At this point, we are anticipating similar costs for fiscal 2017, dependent on how litigation proceeds against the former distributor.

We believe it is critical that we protect the Hetronic brand, prevent unfair competition, and protect our path to market in the addressable space, which is a key component to our five-year growth plan.

Moving to power products, net sales decreased 27.3% in the fiscal 2017 first quarter compared to last year, driven by de minimis PowerRail sales in the first quarter, as well as reduced European bypass switch and Asian busbar and cabling product volumes. We still anticipate approximately $9 million of PowerRail sales for fiscal 2017, and expect to begin shipping products late in the second quarter. Supporting this, we are starting to receive purchase orders for production releases.

Year-over-year segment gross margins improved 350 basis points due to overhead cost reductions and favorable currency impact on the purchase of raw materials and labor costs, partially offset by lower sales. For fiscal 2017, we are targeting power products gross margins in the mid-20% range. We are still seeing enough fluctuations in the business that we are not ready to move the target about the mid-20% range. However, we may update the range in the second quarter.

Moving to new business, we were awarded an extension of our T76 lead frame business in North America through fiscal 2024. You may recall, we announced the extension of this business in our Asian operations last quarter. With Ford, we were awarded a six-year program for the overhead console for an SUV beginning late in our fiscal 2019, with average annual revenue of $9 million.

Additionally, we were awarded the extension to a global platform on the integrated tailgate module program we announced last quarter, for an additional $6 million in average annual revenue, also beginning in late fiscal 2019. The integrated tailgate module includes the camera assembly, a trunk release, and license plate illumination. In the last two quarters, we have received approximately $23 million in new business from Ford.

Now let's move onto developments with our Dabir overlays since our last call. While the introduction of Dabir technology to healthcare professionals have been and continues to be a lengthy process, we have made some important strides through the first quarter, most notably with more than 4,500 surgeries completed using Dabir technology.

Additionally, I'm very pleased to announce that we will be making initial disclosures to the medical community of the efficacy of Dabir at this October's Symposium on Advanced Wound Care, or SAWC, in Las Vegas. Abstracts on five different studies targeting specific customer and patient needs have been accepted for poster presentation. The studies being presented, as well as all the other clinical trials in process, are an integral part of being able to make future claims towards prevention and treatment of pressure ulcers. The presentations will be co-presented by medical professionals that have independently controlled the protocol creations, data collection, and analysis of each study.

First, a blood profusion study on 20 subjects of various ages and BMIs at a respected teaching hospital will be presented. This study aims to quantify enhanced skin blood flow, our profusion, using a Dabir overlay. As noted in our last call, enhanced blood profusion is considered by many experts to be linked to tissue preservation, and a key component to accelerating wound healing rates. The favorable data collected to date will be presented at the symposium, and a formal journal article submission is planned for later this year.

Second is a midpoint report on over 50 neurosurgeries using Dabir overlay technology for procedures lasting three hours or more at a Midwest hospital. The abstract presented at the symposium will indicate no pressure ulcers have been reported to date. Plans are to continue the study in the next year before formal data presentation.

Third, an abstract will be presented on a pilot study on 10 very high-risk patients placed on a Dabir overlay for 100 days at a New York nursing home. The abstract will indicate no reported pressure ulcers. This study represents our first substantial inroad in the post-acute care bed segment, where a large potential for Dabir has been identified.

Fourth, findings from a gurney study and an emergency department of a large New York hospital system will be presenting. These findings will be -- will demonstrate improved patient comfort during long admissions stays.

And, fifth, lab-collected pressure mapping data using Dabir in conjunction with several complementary or even competing products, such as warming blankets and sacral dressings, will be presented to address routinely asked customer questions on product compatibility.

Beyond SAWC, a major Midwest academic medical center is evaluating in a pilot study of the use of Dabir overlays in certain key cardiovascular operating rooms, including the pre-op area. In this particular study alone, over 3,000 surgeries have been completed with no reported pressure ulcers. We believe the center will likely extend the trial for enhanced data, with analysis of outcomes anticipated early next year at the March National Pressure Ulcer Advisory panel show.

In addition to all of the studies and trials I just mentioned, we have nine other study and trial opportunities, varying from in-home care to spinal cord injuries throughout the country, which we believe will get underway this fiscal year.

Moreover, attainment of Medicaid treatment and prevention codes remains a primary objective for post-acute commercial activities. The Dabir team has engaged in this process, and we will provide updates on milestones as we can.

In conjunction with this, we've begun design and engineering activities to develop a post-acute specific Dabir surface and controller designed to meet the demands of this high-volume market segment.

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

Thank you, Don, and good morning, everyone. First let me say what a privilege it is to join the Methode team during this very important time in its rich history. I also want to thank the management team for being so welcoming during my first few weeks here. I'm extremely excited to be here, and I look forward to working with both our analysts and shareholders in discussing our Company's results and strategic initiatives as we move forward.

I have just a few brief comments this morning. Let's begin with the effective tax rate. For the quarter it was 20.6%. This was down slightly from fiscal year 2016, primarily due to Malta tax credits associated with the estimated qualified investment for fiscal year 2017. While at the low end, this remains within our guidance range of low- to mid-20s.

Turning to our attention to SG&A, you will note that in the first quarter SG&A as a percent of sales was 14.3% compared to 11.4% the prior year. This was driven primarily by higher legal fees of $2.9 million, and RSA and RSU amortization of $3.2 million, compared to minimal amortization in the first quarter of last year due to the grant of 2015 awards not occurring until the second quarter. These increases were partially offset by lower bonus expense and other general expense reductions.

Moving to capital expenditures, in the first quarter we spent $4.2 million. For the fiscal year 2017, we expect capital spending to be between $18 million and $22 million. Expense for depreciation and amortization in the quarter was $5.8 million. For fiscal year 2017, we expect depreciation and amortization to be between $23 million and $25 million.

Shifting to EBITDA, this was $32.5 million for the quarter or 16.9% of sales. Based on our fiscal 2017 guidance, we expect EBITDA to be in the 15% to 16% range or between $126 million and $141 million.

Lastly, free cash flow for the quarter was $22.8 million. Based on our guidance and capital spending estimate, we expect fiscal 2017 free cash flow to be between $83 million and $92 million.

Don, that concludes my comments.

John, thank you very much. Audrey, we are ready to take questions.

(Operator Instructions). Chris Van Horn, FBR.

Welcome, John.

Thank you.

Just a quick question on the -- congrats on the Ford win, or multiple wins here. Could you just comment? Were those competitive bids? Were you the incumbent, or is this a new business win? And then are there any other opportunities with that customer that you are looking at, going forward?

They were new wins. Overhead console is a new area. We've been -- we have some programs on overhead consoles in Asia, but this is I believe the first one with Ford, and it was a competitive bid. We would anticipate, to answer your second part of your question, that we would have other opportunities with Ford and others in that area. And it's in very similar manufacturing to what we're doing with center consoles, so it makes sense for us to move there. The tailgate is really the [Ford or] a customer carrying it into other areas. So again, someone else is being displaced with that win.

Okay, got it. And it sounds like there's a lot going on with Dabir, and the abstracts and all the studies going on. But could you just update us on -- is there anything in your guidance for Dabir for the year? If so, if you could quantify that. And then how does the sales cycle really start to ramp up? What are some of the milestones or the things that need to happen for the ball to get rolling?

We've not specifically said what the number is for Dabir, but it is in our guidance range minimally; and again, really in the latter half of the year, maybe even in the fourth quarter. But what has to happen is happening now. The five papers that are poster presentations that are being presented, are key. That's independent verification -- or begin the independent verification of the efficacy of Dabir. So that's very, very important.

We mentioned the over 3,000 surgeries will be key there, as we want to press that hospital to adopt Dabir as a standard of care in the -- I think it was 13 operating rooms. Yes, 13. That would also be a key.

It's really just turning these trials into adoption. And we are very excited about -- SAWC, though, is a major accomplishment for the Dabir team and the Dabir technology.

Got it. And then just one more, if you don't mind. Could you just comment on what's going on in Europe in just a little more -- is it macro-driven in some of these categories? I know you mentioned the customer on the auto side, that it may just be a one-time order thing here. But is there a lot of macro headwinds that you're facing -- it was in Europe? Because it seems like it's across all segments. Could it be a Brexit thing, or what's going on there?

It's really too soon to tell. We know that, call it, southern Europe, we're seeing other customers -- theirs is down. But we mentioned our largest customer in Europe was somewhat across the board. We're going to monitor that closely.

I've said in the past that in our European revenues, we look at on a quarter-to-quarter basis, that they have not been as predictable, at least in recent years, as our US revenue. I don't know that it has anything to do with England and the UK, but it could be an issue of consumer confidence. Or, again, as I said in the prepared remarks, it just could be take rate. Unlike our GM business, we're not necessarily one-for-one on all the platforms. So we're going to monitor it, and will make adjustments accordingly.

Okay, great. Thanks for the detail.

David Leiker, Robert W. Baird.

John, a pleasure [finding]. And Doug, worked together a long time, so thanks for the opportunity to know you. I want to follow-up on Dabir here, initially. If we look at the number of procedures, the 4,500 surgeries, how many units are in the field? What does that work out to?

We know that number, but I don't know that we have it handy.

I'm guessing it's hundreds of units?

In round numbers, let's say over 100 units.

And then what are you seeing in terms of the performance of the -- not the efficacy -- but the performance of the unit, the operating structure, your cost of manufacturing. I know that it's small volumes, but -- and then the operating cost of it. How are those tracking versus what your expectations have been?

As far as -- let's talk about the quality of the product, and any issues. What -- very much like our automotive products, they have been performing without issues. We designed that in from the beginning. The auto crew designed the -- and produced the production line, and they managed the production line. So that has gone very well.

As far as our costs, those are all in line. We monitor that a very closely. And as we begin negotiations with customers on a (technical difficulty) Dabir, our costs -- our [accountants] are very integral to that process (technical difficulty) very much like we do in auto. So there's been no issues thus far. And, again, as I said in the call, very good performance on all these trials.

And the operating costs in the field, those are -- there is nothing unusual that's popping up there.

No, no. And, in fact, we're able to demonstrate -- operating costs from our standpoint are exactly what we anticipated them to be. And we're able to demonstrate to the hospitals, if they were to adopt it, that they would obtain the savings that we have forecasted for them.

Okay. And then the other piece of this is -- and I know you are doing a great job on documenting all of this, and that's great and exciting to see the outcomes here. Do you have any opportunity or any way you can give us some sense of the path to commercialization from here, and when you might be in a position on -- that you're monetizing this?

We said that we would anticipate that in our fiscal 2018, that at our $7 million spend on Dabir this year, we would then anticipate that we would have sufficient revenue to offset that in our fiscal 2018. And that's dependent upon the hospitals that we are working with adopting Dabir as their standard of care in their operating units. But we certainly have enough opportunity and visibility that we can talk about breaking even, in fiscal 2018. That doesn't say we don't invest a couple more million dollars into Dabir if things are going very well, but our long-range planning shows that we should be able to break even in 2018.

Okay, great. And on the data center, can you help quantify a little bit of what's happening on pricing there in the 1-gig product? How much that's come down? And the spread between that and the 10, and just kind of the economics there of the value proposition your customers are looking at?

I'm only hesitating because I don't want to necessarily give out competitive information here.

Okay, I understand.

From a gross margin standpoint, that was a very good gross margin product over the years, but we're seeing that down 15, maybe even 18 points. In the past where we've had price pressures, we were able to offset that with cost reductions, which again, we do routinely. But this has been a contract manufacturer coming in essentially made a play for increased volume. And in this instance, we have to make adjustments. And that's -- it's no more complicated than that -- that one of our competitors sold out the product line to a contract manufacturer. We have to respond.

Now, 10-gig, that's [that's as nim]. We're the first out with that. No one has that. It's slowing the adoption of it, but we don't see that price pressure there. And, in fact (multiple speakers) crossover to help us.

Yes, I guess I was more curious on the spread between the 1-gig and the 10-gig. That seems like it will push out that adoption curve for you.

It will. I think we'll -- we're still confident of the product. But we -- as I said, we're evaluating our whole data center businesses as things move forward. It helps on the power side, because of our big data customer and PowerRail, but it is having a negative effect on our data segment.

Okay, great. Thank you much.

Steve Dyer, Craig-Hallum Capital Group.

It's Greg Palm on for Steve today. I wanted to start with auto, specifically gross margins, if there were a few one-time benefits in the quarter, but overall still feel really strong. So the question is, even if you assume a flattish build environment going forward for the next few years, just wondering if there was any upside there. Or if you at least have the ability to maintain current levels in the face of continued pricedowns.

We do have contractual pricedowns that occur every year, so we have that headwind. Our ability to maintain that is going to be -- and let's assume that that [SAR] stays as it is. Our ability to continue to take cost out and to operate with very low PPM; in the case of some of our major products, zero PPM. So it's really dependent upon cost reductions and quality. And then we do get concurrently favorable effect on currency and on raw materials. If that were to flip, that would obviously have an effect. And that's very hard to predict.

Okay. Got you. In terms of awards, I know S series center console has been brought up a number of times in the past. But maybe -- wonder if you can give us an update there? And if there's anything else significant out there that you are tracking over the next few years.

On the matter of I guess general business, we don't comment on business we're going after for competitive reasons. And we said that is a target for us. There's really not much more we can say.

In terms of other opportunities like that, and I think we've said before, if you look at the GM truck line and the Ford truck line, those are mega-programs that are highly coveted. And we would expect that there will be a number of people competing for the 150.

As far as other wins, $20 million is a good win in center consoles, and we're very pleased that -- although it wasn't the center console program, we got $23 million of new business with Ford, going forward. But I don't really know of any other programs, other than the two auto ones that we would consider large, game-changer opportunities.

Okay. But fair to say you are still tracking some of these? Whether it's $20 million, $25 million, $30 million annual awards, you are still tracking?

Absolutely. We review our opportunities -- well, the team reviews them on a weekly basis. I review them at least once a quarter, if not more. And we're tracking opportunities now into 2022-2023. And we just announced the extension of T76 to 2024. I said in the past, transmission programs are quite long. This one is maybe a record. I think that launched in 2010.

Okay. And then just shifting gears over to data. Just curious, what's your view or take on that sort of group in general? It feels like cost competing continues to accelerate. That's not going away. So are there opportunities there that exist? Could you potentially walk away from some of the data group's products, or divest that group as a whole? Just would love to get your overall thoughts on (multiple speakers).

Yes, that's a good question. It is something that -- it's a double-edged sword. Our power group will benefit from it, because that's where their PowerRail is positioned. 10-gig, I think, while a slower adoption, I think is still a good product. 1-gig is still turning good gross margins, just not as much as it used to, but that will ultimately wind down and be replaced by 10-gig.

Our data center business causes me the most concern. And we have made adjustments and we will continue to make adjustments in that business. I'm not willing to predict what we're going to see. Data centers aren't going to go completely away, but cloud computing is having an impact.

Now, on the other hand, a derivative of our 10-gig -- we did a press release I think last week on G.fast. The G.fast transceiver -- Methode did not develop the topology; that came out of telcom. But that is essentially fiber feeds over a conventional twisted-pair. That will have an impact on near-term revenues. But with the same technology that we're using for our 10-gig transceivers, we may see that market develop. Because it does allow the telcoms to run 1 gigabit over the plain old twisted-pair that's coming into your home right now. So that's a major development. Again, it will take some time to turn into revenues.

So there are our opportunities, but we're clearly seeing a shift from the traditional data center to cloud computing. That is certainly having an effect on our business, and we'll have to adjust to it.

Okay. Good color, thanks. And welcome aboard, John; looking forward to working with you in the future.

Thank you.

(Operator Instructions). Jimmy Baker, B. Riley and Company.

First, just wanted to follow-up on a response to I think David's earlier question on commercialization of Dabir -- your comments about expecting revenues to offset costs in fiscal 2018. And I think you had previously set a threshold for a $20 million run rate exiting this fiscal year. But I believe all of that was first introduced when the target market was exclusively the OR.

So now that you are seeing this incremental opportunity in what's a larger TAM in non-acute care, wouldn't you be revising those revenue targets higher; and, hence, the economic justification for redesigning the controller?

To be blunt, no, because we have to have our reimbursement codes. That can take every bit of a year. We just started on that. We can demonstrate to a hospital that even without insurance reimbursement, they can save money on the cost of treating pressure ulcers, litigation, and so on. That market we have been pursuing for quite some time. And as we said, it has taken us longer than we had anticipated. The non-acute is going to take us a while, as well, and that code is key.

Now, we did our studies. The Marwood study we talked about, that that does give us the financial justification to develop the -- it's not so much the surface; the surface hasn't been much of a leadtime as developing a controller that can be used in that environment. And that's really just making the controller simpler, less expensive, perhaps maybe even a battery-operated version.

But I don't -- at this juncture, unless there was some sort of a sea state change, I don't see that making a big contribution in our fiscal 2018. I hope I'm wrong. But I just think we've learned how long it takes to adopt a new medical device, and so we're being very careful about our expectations on non-acute.

Understood. So, the fiscal 2018 figures that you've talked about, or the run rate exiting fiscal 2017, that will still remain OR-only for now?

Yes. I wouldn't rule out that maybe there's some sales someplace; but no, that's our focus. That's what we're tracking in our opportunity, tracking discussions. That's the nearest-term -- or nearest market to revenue obtainment.

Okay, understood. And then just switching over to the auto business. Even absent the one-time gains in the quarter, a 28.8% gross margin, I think, is a new high, or at least a recent new high for the business. How should we think about the sustainability of those gross margins? And then can you remind us the timing of the next (inaudible) pricedown?

Let me ask [Evelyn] first. That's I want to say a calendar-year event, also -- or is it to a model -- excuse me, model year event. So when the model changes is when the price reduction would occur.

But as far as gross margins, as I said earlier, we are getting favorable currency and commodity pricing right now. Could that get better? Maybe, but it can also flip the other way. So we have that benefit in. And it is -- I'm repeating myself here, but it is dependent on our team ability to offset that -- those price reductions. They've done a very, very good job thus far.

In fact, we've seen gross margin gains from it, and their cost of quality has been at a record. I've said it on this call before. I'll say it again: we are very proud of the entire automotive group for their quality performance. That has a huge effect on our margins.

So, it's really dependent upon our ability to continue to do that, favorable commodity and labor. And that was -- the SAR staying where it's at with -- is critical, too. If we had a significant drop; that has an effect on overhead coverage.

Sure. And then you reduced the 10-gig assumptions, but left the consolidated revenue guidance unchanged. So are you seeing some offsets elsewhere in the business? Or does this mean you are tracking towards the middle or lower end of the range for the full year?

We'll take a look at that going forward. We had -- we were off our projections in Europe and we're concerned about 10-gig. But we had good pickup truck and SUV sales. GM had -- I think their overall numbers were down in August. But they had good sales again of -- in Silverado; and Colorado, I think, maybe hit a record. So that's really the offset. If that were to slow down, that would cause us to reevaluate.

Okay. Just lastly for me, I guess at least on the non-auto side, it sounds like more of your revenue ramp has been back-half-weighted in this fiscal year. Just remind us the timing of any significant auto programs that are rolling on. And as we think about the quarterly progression, would you expect your fiscal Q2 to still be down year-over-year in terms of sales and earnings?

Well, we don't give quarterly guidance, so I don't think I want to comment there -- reaffirmed our annual. As far as ramps, I don't have a list in front of me, but that generally starts in our fourth quarter, anything new; so that the fourth quarter is generally one of our strongest quarters. We talked about 10-gig, with that ramping slower, but we'll see sales from that in our third and fourth quarter. And then our power products, we're anticipating [a batch of ramping]. As I said in my prepared remarks, we've got purchase orders in-house, so that ramp is beginning.

Okay, perfect. Thanks very much for the color.

That does conclude our Q&A session.

At this time, I will turn it back to management for closing remarks.

Thank you, Audrey. We will conclude, and we'll wish everyone a very pleasant and safe Labor Day holiday. Thanks a lot.