Methode Electronics Inc (MEI) 2017 Q2 法說會逐字稿

Welcome to Methode Electronics FY17 second-quarter earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. This conference call does contain forward-looking statements, which reflects 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 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 related to conducting global operations; ability to successfully market and sell Dabir surfaces; continued economic challenges in Europe, including the exit of the United Kingdom from the European Union; dependence on our supply chain; income tax rate fluctuations; ability to withstand business interruptions; 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 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; cost and expenses due to regulations regarding conflict minerals; and the effect of the Presidential election on NAFTA and other international trade agreements.

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

Thank you, Melissa, and good morning, everyone. Thank you for joining us today for our FY17 second-quarter financial results conference call. I'm joined today by John Hrudicka, our Chief Financial Officer, and Ron Tsoumas, our Controller and Treasurer. Both John and I have comments, and afterwards we'll take your questions.

Year over year, second-quarter FY17 sales increased slightly but decreased in the six months by 2.6%. Net income increased in both periods, affected mainly by favorable commodity pricing of raw materials, and a favorable currency impact on material and labor expenses, international government grant which I will talk more about in a bit, overhead cost reductions in our Power Products segment, and lower travel expenses.

Partially offsetting these factors in both periods were increased stock award amortization expense, and higher legal and other professional fees, particularly related to the Hetronic litigation. Second-quarter net income was also positively impacted by higher Automotive and Power Products sales, partially offset by unfavorable data solution sales.

In the first half, net income also benefited from lower income tax expense, commodity pricing adjustments, and the reversal of a customer commercial issue in the Automotive segment, as well as the absence of the cost associated with the move of manufacturing from the Philippines to Egypt we experienced last year. These first-half benefits were partially offset by lower sales and the absence of a tariff refund.

Compared to last year, second-quarter and first-half consolidated gross margins as a percentage of sales improved 220 basis points and 190 basis points, respectively, positively influenced by favorable commodity pricing and favorable currency impact on materials and labor, as well as overhead cost reductions in the Power Products segment. The first half was also positively impacted by the commodity pricing adjustments and the reversal of a customer commercial issue in the Automotive segment, and the absence of the costs associated with the move in manufacturing I just mentioned.

Year over year, FY17 second-quarter and first-half selling and administrative expenses increased, negatively affected by higher stock award amortization expense, as well as increased costs for legal and professional services, partially offset by lower travel expenses.

Year over year, FY17 second-quarter operating income was $29.1 million, compared to $26.4 million last year. In the FY17 six months, operating income was $55.6 million, compared to $56.9 million last year.

Second-quarter operating margin was13.9% this year, compared to 12.7% in the FY16 second quarter. For the first half, operating margin was 13.9% this year, compared to 13.8% in the previous year.

Of particular note during the quarter, we were awarded a $1.5 million international government grant for maintaining employment levels at one of our international manufacturing facilities. We have an opportunity to earn an additional $3 million in the second half of the fiscal year. As you might imagine, grants can be difficult to obtain and I congratulate our team on this very notable effort.

Moving on to a review of our segment results, compared to last year, second-quarter FY17 Automotive segment sales increased 2%, but declined slightly in the first half in North America where sales improved 6.2% in the second quarter and 3.3% in the first half. We experienced higher sales of the General Motors' center console and our transmission lead frame product, partially offset by lower Ford center console program volume and pricing concessions in both periods.

In Europe, sales declined about 9% in the second quarter and first half due to increased customer-funded -- excuse me, decreased customer-funded tooling, and design and development services, partly offset by higher integrated center panel, ignition, and steering wheel switch volumes. In Asia, sales improved 5.7% in the second quarter, but decreased 1.7% in the second half, positively impacted in both periods by switch assembly product volumes.

Automotive gross margins improved to 28.6% in the second quarter, from 26.9% last year, and to 29.4% in the first half, compared to 27.8%, positively affected in both periods by favorable commodity pricing, and a favorable currency impact on materials and labor, and commodity pricing adjustments, and in the first quarter, the one-time reversal of accruals. For FY17, we are still targeting Automotive gross margins in the high 20% range.

While we anticipate continued favorable currency exchange rate on raw materials and labor, we have factored into our projections an increase in the price of copper that would negatively impact gross margins in the second half. Of note, copper pricing has increased approximately 28% in the last six weeks.

Moving to Interface, year-over-year segment sales decreased 9.2% in the second quarter and 6.3% in the first half. In North America, we experienced lower data solutions and appliance product volumes in both periods, and also saw reduced Hetronic volume in the second quarter. However, in Europe, sales improved in the second quarter as a result of higher Hetronic volumes. In Asia, volumes of a legacy product decreased in second quarter, but increased in the six months.

We continued to see significant contraction in the data center industry, as call computing expands in importance, reducing demand for our data group's products. We will continue to review our data group's infrastructure against, as we said in the past, possibly a new norm, and will make adjustments accordingly.

On a brighter note, we have seen additional interest in our 10 gig product, with shipments to two new customers beginning last month. Additionally, Hewlett-Packard, which is our lead customer for 10 gig, just announced the launch of its new platform, one year later than expected. We do anticipate this launch will jumpstart our 10 gig sales once it gets fully implemented over the next six months. We remain confident in our 10 gig revenue projection of $2 million to $3 million this fiscal year.

Compared to last year, Interface gross margins as a percentage of sales declined 720 basis points in the second quarter and 250 basis points in the six months, due to lower sales and corresponding pricing pressures, most specifically in data solutions, partially offset by favorable commodity pricing, and currency impact on material and labor. For FY17, we are targeting Interface gross margins in the high teens to low 20%s.

Hetronic litigation costs were $2.7 million in the second quarter of FY17 versus $2.1 million last year. For the first half, these costs were $7 million this year versus $3.2 million last year. As a reminder, in the first quarter we were able to substantially end the litigation with Hetronic's former President. Litigation with a former distributor is still ongoing and we are now entering the discovery phase. To reiterate, 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.

Power Products second-quarter sales increased 5.9% year over year, due mainly to higher PowerRail and busbar volumes in Asia, as well as improved busbar sales in Europe, partially offset by lower bypass switch sales in Europe and lower busbar sales in North America. In the first half, sales decreased 13.4% year over year, attributable to lower bypass switch sales in Europe, as lower PowerRail and busbar volumes in North America. These declines were partially offset by improved busbar volumes in Europe, and increased PowerRail and busbar sales in Asia. We still anticipate approximately $9 million in PowerRail sales for FY17.

Year over year, segment gross margins improved to 14.7% in the second quarter and 7.7% in the first half, due to overhead cost reductions and favorable commodity pricing of raw materials, and a favorable currency impact on material and labor expenses in both periods. The second quarter also benefited from improved PowerRail volume.

For 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 above the mid-20% range.

As we announced in the release this morning, Methode maintained FY17 sales guidance in the range of $820 million to $845 million. However, we believe full-year sales will likely be at the low end of this range, with the potential to be slightly below, should weakness in our data solutions group extend further. We also maintained guidance for income from operations in the range of $102 million to $117 million, as the aforementioned grant is categorized as other income. We did increase earnings-per-share guidance from a range of $2.30 to $2.45, from $2.11 to $2.35 due to productivity improvements, the international government grant I just mentioned, and a lower projected tax rate than originally utilized when we initially announced FY17 guidance.

The guidance range for FY17 considers several factors which will affect our sales, income, and earnings. Additionally, they 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 the Form 10-Q.

Before moving to Dabir, I would like to mention that in the first half of FY17, Methode purchased $9.8 million or approximately 280,000 shares of its outstanding common stock at an average purchase price of $34.96 under its Board of Directors-authorized $100 million repurchase plan, which terminates September 1, 2017. Approximately $28 million remains under the repurchase plan, although the Company can suspend or terminate repurchase at any time.

Now let's move on to developments with our Dabir overlay since our last call. Over 6,000 surgical procedures have been completed to date with no known tissue injury. The cardiovascular operating room evaluation at a major midwestern teaching hospital continues to move forward, with zero pressure ulcers reported since deploying the Dabir surfaces.

Given the successful outcomes to date, the research and staff involved have decided to consolidate their findings into a clinical research document for journal publication. Data collection will extend into January of next year. Preliminary findings are planned to be presented in poster-board format at the March 2017 National Pressure Ulcer Advisory Panel show in New Orleans. Submission for peer-reviewed journal publication is planned to follow that conference. Our long-term goal is to become the standard of care for all long-duration surgical procedures, not only at this hospital's main campus, but at every satellite hospital within their network.

These positive clinical indicators are also leading us to invest more heavily than originally anticipated, in an effort to open up new markets. We now plan to spend $8 million this year, compared to $7 million originally budgeted, with the likelihood of an increase in our next fiscal year.

As I mentioned on last quarter's call, we participated in the Society of Advanced Wound Care, or SAWC, conference, which was held in Las Vegas in October. There were five poster-boards centered on Dabir technology presented by independent researchers at this conference. The Dabir team can now use the findings to better support our clinical and commercial field efforts.

Additionally, Dabir sponsored the first annual integrated healthcare symposium on reducing the risk of pressure ulcers at Northwell Health in New York City. The speakers ranged from acute care hospitals, long-term care facilities, wound care prevention and treatment personnel, as well as an insurance provider and defense counsel who discussed strategies to protect caregivers from litigation. Given the successful outcome of this symposium, the team plans to increase its educational messaging to bring additional awareness to the problem, and the solution of using Dabir technology. Both John and I attended this conference, and we walked away confident that the Dabir surface could become the standard of care, as it has the potential to address a number of issues for the medical community, their insurance companies, and associated litigation, while ultimately providing improved patient care.

On the product development front, the next-generation controller and overlay design to support non-surgical market expansion is progressing well, focusing on three primary bed segments of acute, post-acute, and home health. This differentiated platform includes functional features that can be de-contented to better meet specific needs and respective price sensitivities. Examples include a battery option to support emergency department mobility requirements, microclimate function with a touch sensor user interface panel, and color LCD for intensive care unit applications, and then a de-contented version for more price-sensitive customers, such as skilled nursing facilities, where these features can be removed. Model variance will be kept to a minimum to avoid operational complexity, but will include enough to remain flexible in differentiating price points between the different commercial segments.

Our focus this year and next will continue to be geared towards long-duration surgical procedures in the operating room, followed by market introduction of the next-generation product I just described in late FY18. To achieve this, the team must first educate healthcare communities on the Dabir technology and the scientifically based clinical evidence we are gathering, proving the surface's efficacy and a solution to preventing pressure ulcers.

Finally, while sales to date have been de minimis, if all the current trial hospitals were to migrate to paying customers, the revenue effect would approach $3 million annually, and we have just scratched the surface. To this point, we have had three new requests for formal evaluations in the past few weeks that we are currently scheduling. Now I will turn the call over to John who will give further details regarding our financial results.

Thank you, Don. I have just a few brief comments on the quarter and six-month period. Good morning, everyone.

The effective tax rate for the six-month period was 20.2%, nearly flat to our Q1 rate of 20.6%. While at the low end, this remains within our guidance range of low- to mid-20%s.

As Don mentioned earlier, we purchased slightly more than 280,000 shares of stock this quarter at an average price of $34.96. Inception to date, we've purchased 2.3 million shares for a total of $71.8 million.

Turning our attention to SG&A, you will note that in the second quarter, SG&A as a percent of sales was 12.7%, compared to 11.8% the prior year, or $2 million higher. This is primarily due to an increase in stock award amortization of $1.5 million. This increase is due to minimal amortization in the second quarter of last year, due to the grant of 2015 awards not occurring until the second quarter, resulting in only one month of amortization. For the first half, SG&A as a percent of sales was 13.5%, compared to 11.6% the prior year, or $6.4 million higher. This was primarily due to $4.8 million in higher stock award amortization just mentioned, and $3.1 million increase in legal fees, offset in part by lower travel.

I would like to talk to you about our credit facility just for a moment. You may already be aware, but on November 18 we executed a new credit agreement. This agreement contains a maximum principal amount of $150 million, with an option to increase the principal amount by up to an additional $100 million, subject to customary conditions and approvals. This represents an increase of $50 million to both principal and the option, respectively, when comparing to the previous agreement. Our base variable interest rate is 25 basis points lower than the previous agreement. This new agreement expands our liquidity and provides additional flexibility to support our future strategic initiatives.

Moving to capital expenditures, in the first half of FY17 we invested $9.5 million. For the FY17 we expect capital investment to be between $18 million and $22 million. Expense for depreciation and amortization for the first six months was $11.7 million. For FY17 we expect depreciation and amortization to be between $23 million and $25 million.

Shifting to EBITDA for the six-month period was $69.4 million or 17.3% of sales. We expect EBITDA to be in the 16% to 17% range, or between $126 million and $141 million for the full year. Lastly, free cash flow for the six-month period was $48.1 million. Based on our guidance and capital spending estimate, we expect FY17 free cash flow to be between $83 million and $92 million. Don, that concludes my comments.

Thank you, John. Melissa, we are ready to take questions.

(Operator Instructions)

Christopher Van Horn, FBR Company.

This is Dan Drawbaugh on the line for Chris. Hi, guys, and congrats on the quarter.

I'd like to start on Automotive. So I was wondering if there's any sort, any new business that's been wandering the quarter? I apologize if I missed anything on the call, or if you could update us on any of the recent wins you announced last quarter, how those are progressing?

Okay. There was nothing significant during the quarter. We always have smaller programs that come in, but we generally just mention the larger ones, and we didn't have anything this particular quarter.

The awards from last quarter, those will progress their normal launch routine. We're just getting started on those, and they'll launch over the next 18 to 24 months. There has been talk about some of those expanding into other platforms, but nothing that we could announce now.

F-150, we generally don't comment too much because it's going to be a competitive bid, but that's progressing the way we would expect it to, nothing to really talk about there, but that it is on the horizon for next year.

Okay. Thank you for that. And on Dabir, I was curious when you say that you guys are going to be spending a little more, perhaps $8 million rather than $7 million, could you give us a sense of how each dollar of incremental spend can impact your capacity? How quickly can you ramp volume in the future to meet demand?

Sure, a good question. Because we are manufacturers, one of the things that we learned a long time ago is you build enough capacity for any potential upside. So our manufacturing system, I would hope we would max it out, but we have enough capacity built in to the system for any short term increase in volume. So I'm comfortable.

The spend really is in sales and marketing, more medical sales personnel. But also, and I think what we took away from the symposium, I talked about, and I have to congratulate the Dabir team. That was extremely impressive in the number of people that were there, and the quality of the people that presented were just fantastic. But we'll spend additional money, maybe as a result of that, on personnel, but also to educate.

What we're finding, once hospitals come to grips that they have a pressure ulcer issue, it takes a while for them to say, well where does this start? It can't be in OR because we haven't seen any. Well, in one of the recent surgeries, you may not see it right after surgery, but it may happen maybe in the hospital or at home. So there is an education process that has to go out.

Some hospitals such as this teaching hospital is well aware of where the pressure ulcers occur. So we're finding ourselves having to do more education, and that takes I think a little bit of a different salesperson, it takes more nursing personnel. So that's where we're spending the additional moneys and those certainly will result in higher sales, and then we have the capacity for that.

And then also, as I talked about, our gen-2 product which is geared to more the skilled nursing facilities where there's actually a bigger market there than there is in the hospital. So that's where we're spending the money. We'll spend more money next year as needed, but we also want to see sales materialize.

And as I mentioned, if all the trials turn into product sales, that's a little under $3 million, and we continue to get requests for evaluations, so things are starting to move, just slower than we'd like.

Got it. Thank you. Then 6,000 surgeries, a bit over that, can you talk a bit about how maybe unit volumes are? I think last quarter on the call you mentioned that it was somewhere over 100 units. Can you clarify how that may have changed since you last talked about it?

We can get you that data. I don't have it in front of me. The number has obviously has gone up because there's more evaluations going on, and the 100 number would likely be the number of controllers out there, because the Surfaces would be a larger number. But we can get you that number, we just don't have it in front of us and I don't want to guess.

Okay, no problem. I'll go ahead and jump back in queue. Thank you guys for the color.

Steve Dyer, Craig-Hallum.

It's actually Greg Palm on for Steve. Good morning.

I was hoping you could start by addressing the weakness in Interface a little bit more, and then longer term, in the past you've talked about letting that appliance business kind of run off. But you've got this persistent weakness in Hetronic, obviously some longer term headwinds within data, so just kind of curious what the strategy is with this segment.

Sure, very good question. Data is a little bit of a double edged sword. What we lose on the data solutions or apparatus business, we tend to gain in power because of the PowerRail product, and that's starting to ramp and that's on our projections for the year. And that does carry higher margins. So if I had to have, I like both, but if I had to have one down, I would take the apparatus business.

What we are going through now is, and I've said this a couple times, there's probably a new norm in data centers as people move to cloud computing. Methode's evaluating, do we need to buy a new box, or can we move to the cloud? And so we're evaluating and everyone else is, so that is causing our big customers systems or [x-base] (inaudible) data systems to be way down in their business.

I think that's going to continue, that's one of the reasons we made the comment on revenue guidance in our release and in our prepared remarks. So we're coming to terms on how do we deal with that business. We are still very excited about 10 gig and that's also part of that group, but that materialized slower and I mentioned that HP finally launched their platform but a year later.

So there is some good news on the horizon there, but I think the apparatus side is likely to remain down. And we'll have to review that business and that's what we do as a management team.

On the Hetronic side, of late, while we haven't seen it necessarily in significantly increased revenues, but we see more opportunities. That group now is fully integrated in the Methode and the Methode manufacturing, so that will improve. It's a difficult business to forecast, it is driven by the industrial market which has been down, but that I'm optimistic on.

Appliance, we've mentioned a couple of times that we're going to deemphasize that. We're not going to get out of the business because we couldn't get the margins that we expect for the amount of engineering time and dollars that go into it.

But what has happened, and we have no appreciable business and increased business to show for it, but we have increased quoting, the customers for the most part, and most notably Whirlpool, seem to have shifted back to outsourcing their design concepts to people like Methode. And again, while I can't point to a new laundry program that we have, the quoting activity has picked up. I don't think that changes our direction.

I think we'll continue to pursue commercial food service and vending. We've made some good headway into that. That is very good margin. We don't have huge competition from internal engineering groups as we see in appliance.

So if I look long term on Interface, I'm concerned about our data infrastructure business, and we'll take the appropriate actions there. But appliance and Hetronic products, I'm optimistic. We've got good teams there and there's good activity.

That's interesting color. Just in terms of the data solutions, would there ever be an opportunity for some sort of divestment? Or would a potential future review be more along the lines of a restructuring or something like that?

We always take actions to try to get our expenses in line with our sales, and so those are ongoing. Any dramatic action is something you take very carefully after a lot of thought, and you can't rule those out. We've done it in the past.

But I think that first what we're doing here is just taking stock of where the business is. Data centers aren't going away, and we've seen before where an upheaval in the market has caused our customers to stop spending. It is capital spending, it can go to zero. We saw that with PowerRail a year ago.

In auto, there can be a downturn in auto, but you're still going to ship a certain amount of product. Capital spending can go to zero and we've seen that upheaval in the past, so I don't want to react too dramatically, but we do think we're at a point where we have to make certain adjustments, and those are ongoing.

But to answer your question, I don't rule any of that out. That always comes into our thinking.

Okay. Shifting gears to auto, looking forward, I think GM's going to be changing over from K2 to T1 at some point, either next year or early 2018. So can you just remind us the timing there, and how we should be thinking about the impact as it relates to your FY18?

That's one I can't answer because it's when the customer announces it. We certainly are privy to that because we have to prepare for it, but our agreements with our customers, we can't discuss it. There is data out there on it. There's LMC data and IHS data, but we really can't comment on when that transition would take place.

Okay, fair enough. On Dabir, congrats on the continued momentum there.

First question, can you talk a little bit more about the revenue ramp? You mentioned the $3 million, but maybe when that could inflect to a material amount? And then in terms of building out sales and distribution for that product, where are we?

Yes, let me answer that one first. We still believe that ultimately Dabir gets to the hospitals through some sort of association with a distributor. But we need to have that momentum going before that really makes sense to us and to the distributor. And I think ultimately the hospital will dictate who they want to buy it from.

So we continue to have discussions with potential resellers, but we're still in the mode of kickstarting Dabir, which requires our own sales efforts. And from that, we learn quite a bit, and we'll continue to add support staff as necessary, that's part of the spend, and also really in educating the customers.

One of the points I didn't make in my prepared remarks, but it's only been a little better than a year that the government has said they're not paying for medical never events. That was 2015, I think, was when they announced that, and pressure ulcers were included in that. So the hospitals now are just starting to say, okay, this is costing us money and causing litigation and probably more importantly insurance companies are starting to get involved. So the education process, I think, is something that we need to concentrate more on.

At what point does it become meaningful revenue? I've said in the past I believe that's a FY18 event. We've got enough, we got almost $3 million worth of evaluations going on now. I would expect a majority of those to convert, but we're going to have to wait and see how the next several months develop.

We have three paying customers now, we have a major Midwest hospital that we would believe would convert probably mid next year after their very extensive trials are concluded. So it'll be next year. It's very difficult to give the timing of that.

Okay. Just lastly, housekeeping item, on the EPS, does the revised guidance take into account any additional potential benefit from government grants? I think you mentioned $3 million, or would that be upside?

No, that is included in that, because it is for maintaining headcount. And so we can project that we are able to maintain it and there should be no reason that we won't get that.

So to be clear, there's an additional $3 million included in the revised EPS guidance?

Correct.

Okay. All right. Thanks.

David Leiker, Robert W. Baird.

Hello, guys, this is Joe Vruwink for David. I wanted to get your thoughts on a few topics and they kind of relate to the environment since the election.

One is going to have to do with maybe better industrial spending. You've certainly seen some strong PMIs of late, so if you think about manufacturing managers just having more confidence in their business, that's an environment that Hetronic hasn't seen in years. And so I'm just wondering if there's any thought on the industrial side of your business, whether the next 12 months or (technical difficulties) demand inflection? That would be part A.

Part B of my question is just on cash repatriation. You have a substantial amount of cash overseas. If you could bring that back in an effective way, would you? And are there things you're maybe contemplating spending on that overseas balance could be helpful with?

Let me answer part B first. Absolutely. If it made sense for us to bring that back, we would -- we wouldn't bring it all back, obviously, but we would, we'd take advantage of that. That happened in 2006?

Yes. And it depends on what the criteria is. In 2006, if I remember correctly, you just had to use it to pay American wages. So it depends on what the guidelines are on that, but if it's feasible, we would definitely do that.

As far as industrial spending and Hetronic, that thought has crossed our mind that this could be very beneficial. But I liken it back to the shovel ready projects that in 2008 that were supposed to help. That takes a long time. So is it going to have an effect six months from now? Maybe I'm being glass-half-empty here, but I don't think so.

But can it have an effect in the next 12 to 18 months? Yes, I think it can. If they follow through on that, it's a sector that's been down for, you probably go back to 2008. And some of that is just that it was just overspending, and if you look at the machinery that was purchased back prior to that, some of that stuff is still within its useful life, so it's not going to recover until that really happens.

But increased spending, increased military spending, not industrial, but that's something we've looked at too. That could help Power Products, and we have seen an increase in, a slight increase in military spending, and in particular [decoding] activity.

So post election, both of those could benefit from the president-elect's policy. But we'll have to take a wait-and-see approach. And I've not read anything of late, maybe you have, Joe, but on repatriation, it was talked about, but I've not seen anything since the election specifically on it.

Yes, I think there's a few proposals out there, and it's a matter right now of which one wins out, but that's helpful.

Any idea how much Hetronic is off from its peak, in thinking about how far revenues have declined? I know there's the Europe distributor phenomenon that's probably diluting the revenue base a little bit, but any way to help us think about what that might contribute in potential revenue and earnings recovery?

We're looking that up right now, so I'll let Ron do his math. Do you have another question while they're doing that?

I do. Switching over to the 10 gig transceiver, so the $2 million to $3 million in revenue when you think about just getting that launched, and then HP is just getting launched, so $2 million to $3 million, it seems to me almost a normal quarter's worth of revenue, if everything was launched and you were generating at full speed. So is $2 million to $3 million, maybe I can annualize that and it's $10 million worth of annualized business that I can model into next year? Is that maybe too aggressive, or is that the right thought process?

No, that's the right thought process. We're just about to go into budgeting for next year. We'll have to look at that. Normally I would say, yes, that's a good way of looking at it.

I just want to see, once we get through the labs on all these customers, what their take rate is before I get real positive about the $8 million, $9 million, $10 million of business from them. I mentioned it because it is a new product, we were expecting higher volume this year from it, it was slow to materialize. But those sales are to me are notable for a new product. So that's why we mention it.

And then to answer your question, Hetronic from its peak is down about 20%, and it is a very profitable business once it gets past a certain inflection point. So I don't know if it was in my prepared remarks, I think it was in response to a question, we are optimistic about that business, so we expect -- well, one, we expect we should succeed in our litigation and, two, we should see -- let me put it this way, Joe. I think we've seen the bottom in Hetronic and we've got efforts and new products that should get us back on track.

Okay. And then my last question, in thinking about the five year forecast and to be doing 9% to 10% EBITDA growth, how do you feel about those targets today? Obviously you gotta be in the low- to mid-teens hereafter to still execute on it. There's a lot of puts and takes. The end market environment hasn't helped you. This data solutions phenomenon hasn't helped. Just wondering if you're in position to maybe give an update?

Sure, yes, data solutions doesn't help, but I think we're probably underestimated where Dabir can get to. So like you said, there's always puts and takes there, but data is not necessarily helpful.

But if you look at our last five year plan, it was back end loaded. You have to launch products, and those products have to come up to speed. I don't look at Dabir any differently than K2, and once that got going, you saw a dramatic improvement not only in the revenues, obviously in our bottom line, I don't think it's going to be any different.

You know, T1, we've booked that, we're in launch on that, so that was a big -- whether we necessarily create upside, it could have created a large hole, and so T1 was a major milestone. So we're optimistic, and our incentive plans are based on that as well. So we're optimistic that we'll get to target on that.

And yes, we have some headwinds, but we've had that in the past, and we'll make the appropriate adjustments. But we've got a number of things going for us. Dabir. Hetronic will improve. I like what we're doing in Interface from the vending and commercial food service, those are not as high revenue, but those are very good margins.

I am concerned a little bit about Europe, but I think that once everything settles down from Brexit and the US election, I think we'll see Europe stabilize. And there's some -- I think you guys had a report that the auto sales were -- there's just enough, still enough fluctuation there that we're still kind of going quarter to quarter. But five year plan, John, do you have any more comments on that? But I think we're where we want to be.

No, I think you captured it well. Dabir is obviously the wildcard, and as we talked earlier, we have a great deal of confidence in the product and coming out of the symposium, even more so. So we're very optimistic.

Okay, great, thanks, guys.

(Operator Instructions)

Jimmy Baker, B. Riley and Company.

Great, good morning, thanks for taking my questions. Most have actually been answered at this point, but I do have a couple of follow-ups I'll start with.

First on the F-150, are you far enough along to talk about how that's being bid? In other words, if it will be a complete center stack less the screen, or it could be parsed out further to multiple vendors?

For a variety of reasons I can't comment on anything what the customer is doing, one, from our agreements with the customer, and also just from competitive in nature, so I really can't answer that one.

Okay, fair enough. The additional $100 million in borrowing capacity, again I'm sure you couldn't say specifically, but is there any catalyst you could point to for that increase? Are you seeing larger deals in the pipeline? Or anything specifically where you want that flexibility?

I think John said, it's increased flexibility. We've said a number of times we're in the hunt for acquisitions and so on. I wouldn't necessarily tie the two together.

It made sense, the board was in favor of it, the rate was less, so it just gives us increased flexibility. Whether we want to do an acquisition or increase the stock buyback or some other activity, that's really just, the flexibility is probably the best word.

Yes, the renewal was coming up next year in September, and so we decided to get ahead of it and be proactive. And I think on these calls as well as with investors, Don has talked openly about potential acquisition activity. And I think with Dabir, depending on the milestones and how they propel certain activity, whether it's pulling demand or such, we're going to want to act timely in terms of further investment into this business.

Okay. That color is very helpful. Don, I know we've talked about this in the past, but given the updated Dabir information, I want to revisit how you think about building awareness and distribution there. So your management team is highly incentivized based on EBITDA, and you just talked about getting to this five year EBITDA target. But it seems like you could actually be destroying value for Dabir by protecting your consolidated EBITDA, if you're holding back on growth investment that the Company might otherwise enjoy as a standalone.

When you look at these kind of fast-growing medical device companies that are being valued on revenue and revenue growth, how do you think about that conflict or navigating that conflict, if you deem the best course of action is to ramp investment to the detriment of your consolidated EBITDA?

That is an excellent question. Let me answer it with two statements.

One, it's only been of late, and I did start my career in healthcare, so I know the spending that goes on. It's only been in, I would say the last six months that, and you may think of Methode corporate as a VC in a way, in that we invested into Dabir, that we've said maybe we do need to increase our spend there for a longer term gain. I think all companies obviously look at their P&L and their EPS, so I don't think we've hurt Dabir's prospects by not maybe investing, you know, $15 million last year. I think that has gone well.

Going forward, and we talked about it in my prepared remarks. Now going forward we will take a look at what, and we've asked the team, okay, what is needed to do more education? What do we have to do to get this on a faster pace? And they have been charged with that.

And when John and I were talking before he came on board, and we did look for a CFO with a medical background because we will look at how much should we spend? Now, is that another $2 million? That's an easy decision. Is it another $15 million? I don't have the answer to that, but I will tell you we will as a management team invest what is necessary to make sure that we do not hamper their growth.

Now you realize I'm going to get a call from the Dabir people after this call, and we'll discuss that with the board, because it is at the point where as of, quasi VC here, that we may need to make an additional investment in it. So that's not lost on us.

Okay. I appreciate that thoughtfulness. And then just lastly, I wanted to get your take on the Harman-Samsung deal. You're just beginning Tier 2 relationship with Harman. Do you see any implications there, either in terms of risk that they might in-house more, or opportunity for you to potentially broaden that relationship inside of Samsung, maybe even outside of Automotive?

Yes, we had a lengthy discussion on that when that was announced. And that was kind of out there that might happen.

Our view is that it actually could be helpful to us. Now there's always a chance that somebody that large also sees why we do these things ourselves, but I don't see them going in that direction. I see them going more in the technology, and that will be helpful to us.

We position ourselves, and I've said this many, many times, we're the hardware supplier, and I just don't see them deciding that they're going to get into that business. It's always that possibility, but I see it as a neutral to a benefit.

Okay. Fair enough. Thanks very much for the color.

Thank you. Mr. Duda, there are no further questions at this time. I would like to turn the floor back to you for final remarks.

All right, thank you, Melissa. We will conclude and wish everybody a safe and pleasant holiday season. Thank you.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.