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Methode Electronics, Inc. (NYSE:MEI)

Q4 2009 Earnings Call

July 2, 2009 11:00 am ET

Executives

Donald Duda – President & CEO

Douglas Koman – CFO

Ronald Tsoumas – Controller

Analysts

David Leiker – Robert W. Baird

Unspecified Analyst – Legend Financial Advisors

Operator

Greetings ladies and gentlemen and welcome to the Methode Electronics, Inc. fiscal 2009 fourth quarter earnings conference call. (Operator Instructions)

This conference call does contain certain forward-looking statements which reflect management's expectations regarding future events and operating performance and speak only as of the date hereof.

These forward-looking statements are subject to the Safe Harbor Protection provided under the securities laws. Methode undertakes no duty to update any forward-looking statements to conform the statements to actual results or changes in Methode's expectations on a quarterly basis or otherwise.

The forward-looking statements in this conference call involve a number of risks and uncertainties. The factors that could cause actual results to differ materially from our expectations are detailed in Methode's filings with the Securities and Exchange Commission such as our Annual or Quarterly Reports.

Such factors may include without limitations the following: 1) dependence on a small number of large consumers within the automotive industry; 2) rising oil prices could affect our automotive consumer future results; 3) the seasonal and cyclical nature of some of our businesses; 4) dependence on the automotive industry; 5) dependence on the appliance, computer and communications industry; 6) intense pricing pressures in the automotive industry; 7) increase in raw material prices; and 8) customary risks related to conducting global operations.

It is now my pleasure to introduce your host, Mr. Donald Duda, President and Chief Executive Officer of Methode Electronics, Inc. Mr. Duda, you may begin.

Donald Duda

Good morning everyone. Thank you for joining us today for our fiscal 2009 fourth quarter and year-end financial results conference call. I am joined today by Douglas Koman, Chief Financial Officer, and Ronald Tsoumas, Methode’s Controller. Both Douglas and I have comments today and afterwards we will be pleased to take your questions.

For fiscal 2009, Methode’s overall sales declined 42% in the fourth quarter and 23% for the year compared to the same period of fiscal 2008. The downward pressure of the worldwide automotive market coupled with our decision to exit unprofitable legacy business effected our sales results.

Specifically, fourth quarter fiscal 2009 revenues excluded sales from Chrysler while the fiscal 2008 fourth quarter sales included revenue from this automaker. Additionally as a result of our agreement with Ford Motor Company to transfer all production at Methode’s Reynosa, Mexico facility, to another supplier sales to Ford were reduced in the quarter.

The transfer of Chrysler product was substantially completed in the second quarter while expect the transfer of the Ford product to be completed by the end of August. In Europe overall auto revenues were down 29% in the fourth quarter compared to the same quarter last year.

Excluding the restructuring and impairment charges Methode’s net loss was $0.10 per share in the fourth quarter compared to income of $0.42 in the fiscal 2008 fourth quarter. For the year, again excluding the restructuring and impairment charges Methode’s net income was $0.17 per share in fiscal 2009 compared to income of $1.14 in fiscal 2008.

Although accounting rules mandated that goodwill and intangible assets of certain Methode business units were impaired, we believe these are still strong and viable businesses that are well positioned to rebound when the economy improves.

While current economic conditions and their impact on our financial results in fiscal 2009 were significant the aggressive restructuring and repositioning of our global manufacturing footprint undertaken during the last fiscal year has lowered our break-even point.

Additionally these actions minimize the impact of sharply lower sales on our bottom line by significantly reducing the company’s cost structure. It is important to note that Methode has generated over $43 million in operating cash during fiscal 2009.

As we announced on last quarter’s conference call we accelerated our strategy to substantially exit our legacy North American automotive business and to reduce our overall automotive revenues to approximately 40% of total revenues by fiscal 2011.

Additionally as indicated on last quarter’s call, we have been in discussions with other customers worldwide regarding products which are no longer cost effective for Methode to produce. We were able to negotiate moving the initial portion of a future product launch to another supplier and are in negotiations for moving the remaining business.

Had Methode not been proactive with this situation, this business would have commenced production at a loss as a result of reduced volumes and other economic factors. Concurrent with these actions in the fall of 2008 we began taking measures which will continue through the first and second quarters of fiscal 2010 to combat the current economic situation, and as I said position Methode for growth and improving results.

A few examples are as follows. We consolidated network bus products, VEP and Cableco into one facility in Rolling Meadows, Illinois. All TouchSensor manufacturing will be moved to Monterey, Mexico by this August. Shanghai, China manufacturing has been consolidated to two facilities from three. Power products manufacturing will be launched in Malta to support our European customers at lower logistics costs. And regrettably in excess of 850 positions were effected worldwide by these and other actions.

We expect to have our restructuring initiatives completed by the end of 2010 fiscal year, if not sooner. I am confident that these actions along with the additional restructuring measures taken throughout fiscal years 2008 and 2009 will see us through these difficult times and will allow us to come out of this downturn a much leaner and stronger company.

I firmly believe Methode’s margin and profit potential should benefit considerably from these initiatives when the economy returns to normalized levels. Moreover Methode’s balance sheet remains strong and we have good liquidity. We ended the year with $54 million in cash, a $75 million revolving credit facility, no debt, and as I said earlier, over $43 million in operating cash flow, which assisted in our ability to repurchase approximately 670,000 shares of our common stock while paying in aggregate of $0.26 per share in dividends for the fiscal year.

Our strategy remains unchanged; focus on user interfaces, sensors, and power solutions while accelerating the introduction of new products, utilizing our advanced global manufacturing capabilities.

Moving forward I believe fiscal 2010 is going to be a pivotal year in the development of Methode but also a challenging year due to the continuing global economic environment. In fiscal 2010 we will continue to solidify our user interface, sensor and power market positions and increase our prominence in new programs in a way that’s going to drive our results for many years.

When I think of the future of Methode, I am excited about the prospects that we find in the market and in particular the prospects that are existing in new customers are now affording us. On the business development front, as many of you have heard me say before, we are not exiting the automotive market, but rather focusing on bringing technologies and [inaudible] products to our OEM customers.

These products are being developed with Methode’s feel effect, biometrics, and Magneto-elastic sensing technologies as a backbone. Currently we have been able to employ TouchSensor feel effect technology to a [center stack] application for a major automotive OEM.

This program launches in model year 2011 and could represent approximately $20 million in annual sales. Additionally Methode has been making investments for the past several years in Magneto-elastic technology via our MDI business unit. I am pleased to report that we are working with a number of automotive OEMs to integrate torque-sensing technology on transmissions.

We have supplied prototypes and test data and have received favorable feedback from our customers. Methode may be uniquely qualified to provide this innovative technology as we have not only invested in the technology, but also the manufacturing techniques needed to mass-produce the sensor to automotive standards.

We view MDI’s Magneto-elastic technology as a significant advancement in power train controls as it may deliver the most vital component of control strategy data, that is torque. Torque sensor information provided by the sensor may significantly improve shift quality and potentially fuel economy.

Also in MDI we continue to become involved in the expanding electric hybrid vehicle market in particular with MDI’s state of charge sensor. Up to now, electric and hybrid vehicles could only estimate through extensive algorithms the state of the charge of lithium-ion cells. Or in other words the ability of a battery to absorb and hold a charge.

Automotive and battery manufacturers would prefer a more exact measurement rather then an estimate of the actual remaining capacity of the battery and its life. With the new Magneto-elastic technology it may be possible to provide a non-contract sensor which generates a magnetic field that permeates the lithium-ion cell. The result in [inaudible] change the proportion of the cell’s data charge and health. By leveraging MDI’s core competency of advanced magnetics to measure this phenomenon, the state of charge in electric hybrid vehicle is now potentially achievable on a commercial basis.

Also in the expanding electric hybrid vehicle market, we are producing the bus bar for the inverter of a hybrid vehicle to ship mid 2010 for an Asian customer. We are producing the bus bar for the inverter of an electric hybrid vehicle in forestry which began shipping this last March. Our Cableco and Tribotek product lines are being designed into products for a manufacturer of electric vehicle controller and charging systems.

And we have also designed multiple bus bars for use on hybrid equipment for one of the world’s largest makers of construction and mining equipment. In our interconnect segment, we are continuing our efforts in the Asia Pacific region with TouchSensor technology. In Japan we are working to establish the TouchSensor brand in the non-automotive sector with a focus on vending machines and home appliances.

We are working with one of the leading vending machine manufacturers to replace the mechanical keypad with TouchSensor technology. Additionally we are working closely with a leading Japanese in-mold, decorative film manufacture for the integration of feel effect touch cells in future appliance applications.

New business wins utilizing TouchSensor’s new touch screen technology include the display in control panels on cooking and laundry applications for a major US appliance manufacturer. We will also begin producing a solid-state liquid level sensor for a manufacturer of sump pumps. This represents significant diversification of the TouchSensor feel effect technology originally launched in the appliance market.

We expect these opportunities to have a positive impact on TouchSensor sales and earnings over the next 18 months. As we have increased our ability to advance, develop and produce new products, that meet or exceed customers’ product needs and more importantly help them to differentiate their products, we’re finding that our customers are coming to us more proactively with opportunities.

For instance, we are working with the parent company of one of Hetronic’s key customers to develop a user interface device that will provide a standard look and feel throughout one of their major brands. This customer would prefer a multinational supplier for the design, development, and manufacturing of these complex controls.

Through our marketing and sales activities the customer became aware that Methode is full service, engineered solution provider with complex supply chain management experience, and could manage such a large project, while providing them with technology and brand synergies.

Further our customers can employ multiple Methode products across their product lines as a result of the synergies between our greatest technologies. One example of this is a large multinational customer [employing] both our power solution products and Hetronic technologies. Having already shipped initial orders, we believe our power solution team can become a chief supplier to this customer.

Additionally this customer has formed a strategic alliance with Hetronic to development a suite of standard handheld radio remote controls to be private labeled for use on their products. To further current and potential customers’ understanding of the breadth of Methode’s technology and product offerings, we recently initiated a complete overhaul of Methode’s website.

With one central site we will be able to demonstrate our position as a developer of engineered solutions with worldwide manufacturing capabilities. We expect to launch the new site during this fiscal year.

The breadth of our market coverage, our growing library of proprietary engineered solutions, and our positions in key market niches, are the strategic drivers to Methode’s future growth. One important element of our long-term strategy is our ability to seek out and acquire complementary businesses that expand our technological competency, our market reach, and essentially elevate our competitive strengths.

We will continue to seek out these types of acquisitions and we believe the current economic situation may present attractive opportunities. As I said in the beginning, these are difficult times for the world economy and for our business. But as I look forward I am very optimistic for the future of Methode.

We will continue to grow our market share and diversify our customers and product portfolio, striving to avoid sales concentrations with any one customer, or any one industry. We have innovative and patented technology and a global footprint which makes us, we believe very well positioned to take advantage of the economic upswing that will certainly come and the accelerated growth that we will experience in developing markets.

With that, I would like to turn the call over to Douglas for his review of the financials.

Douglas Koman

Thanks Donald, good morning everyone. Let me start with just a few comments on the impairment charge, the accounting rules require that we review our goodwill and other assets for impairment at least annually, usually in the fourth quarter, or whenever events or changes in circumstances indicate that the carrying amount of these assets may be impaired.

In the fourth quarter we recorded additional goodwill and intangible asset impairment charges of $61.7 million. The value of the sign to goodwill and intangible assets are based on estimates and judgments for the underlying businesses and technologies. These estimates and judgments are effected by the significant downturn in the global economic activity in the last half of our fiscal year.

And also considered in our market capitalization remained below our book value during the latter half of fiscal year 2009. That also is an indicator of impairment. Therefore in the fourth quarter we undertook the impairment analysis described by FAS 142 and 144, and recorded a goodwill impairment charge of $45.1 million.

There was $25.8 million in the automotive segment and $19.3 million in the interconnect segment. Additionally in the fourth quarter we also recorded an intangible asset impairment charge of $16.6 million; $11.6 million of this was in the interconnect segment, $4.6 million in the automotive segment, and $400,000 in the other segment.

On the restructuring front, back in January of 2008 we announced the restructuring of our legacy North American automotive and interconnect businesses. Then in March, 2009 we announced several additional restructuring actions to further reduce our exposure to the North American automotive industry and to reduce other costs, consolidating facilities and migrating manufacturing to lower cost regions.

The restructuring charge in the fourth quarter was $8.9 million in the automotive segment, $900,000 in the interconnect segment, and $0.50 million in the power products segment for a total of $10.3 million this quarter compared to $4.7 million last year.

For the year the restructuring charge was $19.3 million in the automotive segment, $5.5 million in the interconnect segment, and $0.50 million in the power products segment for a total of $25.3 million in restructuring charges in fiscal 2009 compared to $5.2 million last year.

As Donald mentioned earlier excluding the impairment and restructuring charges our fourth quarter pre-tax would have been a loss of $6.6 million or about $0.10 per share after tax. For the full year, pre-tax would have been income of about $8.8 million or $0.17 per share after tax.

Moving to our reporting segments, the automotive segment had fourth quarter net sales of $47 million compared to $100.8 million last year. Automotive sales were down nearly 53% in the quarter. For the fiscal year automotive segment sales were $243.6 million compared to $362.1 million last year. Automotive sales for the year were down almost 33%.

The decrease is due to the [stocking] of the global economic environment, especially the effect on North American automotive industry. A large portion of the drop in sales is due to North American OEM’s extending plant shutdowns during the third and fourth quarters. Additionally sales to Chrysler were down 75% for the year due to our decision to exit that business.

We substantially completed the transfer of Chrysler product by the end of our second quarter of fiscal 2009. Currency translation decreased foreign sales by about $1.8 million in the fourth quarter but increased foreign sales by about $1.3 million for the full fiscal year.

In the fourth quarter gross margins for the automotive segment were $6 million compared to $26.5 million last year. For the fiscal year gross margins for the automotive segment were $40.1 million compared to $80.1 million last year. Gross margins were negatively impacted by manufacturing inefficiencies resulting from the significant drop in sales during the last half of fiscal 2009.

Margins were also negatively impacted by the planned reduction in Chrysler sales due to our decision to exit that business. Also last year’s margins benefited significantly from the price increases that we received from Chrysler.

Pre-tax income in the automotive segment was a loss of $37.7 million in the quarter and a loss of $24 million for the full year. However excluding the restructuring and the impairment charges, pre-tax would have been income of $1.6 million in the fourth quarter and income of $25.8 million for the full year.

The interconnect segment had net sales of $30.2 million in the fourth quarter which is down nearly 23% from $39 million last year. For the fiscal year the interconnect segment had net sales of $131 million compared to $136.3 million last year; about a 4% decrease in net sales.

Net sales were favorably impacted by seven months of sales from Hetronic which was acquired on September 30, 2008. Excluding sales from Hetronic the remaining businesses in this segment were down about 34% in the fourth quarter and about 14.5% for the full year. The declines there reflects the general economic slowdown in the markets served by this segment.

Currency translation decreased foreign sales by about $300,000 in the fourth quarter but increased foreign sales by about $300,000 for the full fiscal year. Fourth quarter gross margins for the interconnect segment were $6.7 million or about 22% of sales compared to $9.4 million or about 24% of sales last year.

The decrease in gross margin is primarily due to the general economic slowdown. For the fiscal year gross margins for the interconnect segment were $31.5 million or 24% of sales compared to $31.6 million or 23% of sales last year. The increase in gross margin as a percentage of sales primarily relates to product mix related to the Hetronic acquisition, the positive impact of the interconnect restructuring.

This was offset by the effect of the economic slowdown. Pre-tax income in the interconnect segment was a loss of $32.1 million in the quarter and a loss of $60.7 million for the fiscal year. Again excluding the restructuring and the impairment charges pre-tax would have been a loss of about $300,000 for the fourth quarter. For the full year we would have had pre-tax income of $1.7 million.

The power products segment sales were down almost 21% in the quarter with $9.9 million this year compared to $12.6 million last year. As with the other segment this was due to the general economic slowdown. For the fiscal year sales were down nearly 7% with $42.7 million this year compared to $45.8 million last year.

The fiscal year 2009 benefited from 12 months of sales from DEP while fiscal year 2008 only had eight months of DEP sales. Gross margins in the power products segment were break-even in the quarter compared to $3.4 million last year. For the fiscal year gross margins were $5.5 million or 13% of sales compared to $12.7 million or 28% of sales last year.

For both the quarter and the full year the decrease is due to a product that reached end of life at the end of fiscal 2008 which had higher gross margin then the remaining products. Additionally in fiscal 2009 we experienced and unfavorable product mix and increases in labor costs as well as shipping and distribution costs.

Pre-tax income in the power products segment was a loss of $1.6 million in the quarter and a loss of $5.7 million for the fiscal year. Excluding restructuring and impairment charges pre-tax would have been a loss of $1.1 million in the fourth quarter and a slight income of $200,000 for the full year.

The other segment had fourth quarter sales of $1.7 million, down slightly from $1.9 million last year. For the fiscal year the other segment had higher sales at $8.2 million compared to $6.9 million last year. Sales at both our Magneto-elastic sensing business and test laboratories were up year over year.

Gross margin was a loss of $600,000 in the fourth quarter compared to income of $200,000 last year. For the fiscal year gross margin was a loss of $700,000 compared to income of $200,000 last year. The reduction in gross margin in both the quarter and the fiscal year is primarily the result of increased research and development initiatives in our Magneto-elastic sensing business.

Pre-tax income in the other segment was a loss of $1.7 million in the quarter and a loss of $5.1 million for the full year. Excluding impairment charges pre-tax would have been a loss of $1.2 million in the fourth quarter and a loss of $3.5 million for the full fiscal year.

Some of the highlights on the consolidated income statement, selling and administrative expense in the fourth quarter was $13 million. That’s down from $16 million last year. However as a percentage of net sales selling and administrative expense increased to 14.6% compared to 10.4% last year. For the fiscal year selling and administrative expense was $57.5 million compared to $61.6 million last year.

Again as a percentage of net sales, selling, and administrative expense was 13.5% fiscal 2009 compared to 11.2% last year. Selling and administrative expense was lower due to reduced performance based compensation in the current year and the reversal of previously accrued compensation expense. The increase in selling and administrative as a percent of sales reflects the significant drop in sales in the second half of fiscal 2009.

Interest income net was $200,000 for the fourth quarter compared to $600,000 in last year’s quarter and for the fiscal year interest income was $1.4 million compared to $2.3 million last year. The reduction is primarily due to lower nominal interest rates this year versus last year and lower average cash balances this year compared to last year.

Other net was income of $700,000 for the fourth quarter compared to expense of $1.2 million last year. For the fiscal year other net was an expense of $0.50 million compared to expense of $3.3 million last year. The improvement is substantially due to the impact of the stronger US dollar on the activities of our foreign operations.

For the full fiscal year 2009, the income tax provision was an expense of $1.7 million compared to an expense of $9.7 million last year. In fiscal year 2009 the impairment of assets, restructuring charges, and slowing of business resulted in a loss before income taxes generating a tax benefit. However offsetting this tax benefit in accordance with FAS 109, we recorded a valuation allowance due to the uncertainty of the future utilization of the tax benefit generated.

While the IRS allows a 20-year loss carry forward, the accounting rules prescribe that you look forward only a few years. Therefore a valuation allowance was recorded in the fourth quarter of fiscal 2009 resulting in an income tax expense of $14 million in the fourth quarter of 2009 compared to $2.7 million in last year’s fourth quarter.

Moving to the balance sheet, cash is at $54 million compared to $104.8 million at the end of last year. This primarily reflects the Hetronic acquisition. Compared to last quarter however, cash is almost flat, down only $400,000.

The accounts receivable balance is $60.4 million, down from $85.8 million at the end of fiscal 2008. Receivables are down primarily due to the lower sales in fiscal 2009 compared to 2008. This was offset by receivables acquired with the Hetronic acquisition.

Inventory is down to $40.4 million from $55.9 million at the end of fiscal 2008. As with accounts receivable the decrease is primarily due to lower sales in fiscal 2009 versus 2008, also less customer funded tooling inventory because of our decision to exit legacy automotive business. These were offset by inventories acquired with the Hetronic acquisition.

Other current assets are $26.4 million. This is up from $14.8 million last year. This primarily reflects the anticipated tax refund for the fiscal year 2009 loss carry back to fiscal years 2007 and 2008. Property, plant, and equipment net is $69.9 million. This is down from $90.3 million at the end of fiscal 2008. The decrease primarily reflects our restructuring initiatives, lower capital spending, and the impact of the US dollar which strengthened during the fiscal year.

The reduction in both goodwill and intangible assets is related to the impairment charges taken in the third and fourth quarters this year. Goodwill is at $11.8 million, down from $54.5 million at the end of 2008. Net intangible assets are at $20.5 million, down from $41.3 million at the end of last year.

Other assets at $21.9 million are down from $23.4 million at the end of last year primarily due to adjustments between current and non-current deferred tax items offset by our $2 million investment in Lumidigm.

Accounts payable is $24.5 million. This is down from $42.8 million at year-end reflecting lower material purchases due to the drop in sales for the end of this fiscal year compared to last year. Other current liabilities at $29 million is down compared to $33.9 million at the end of last year primarily due to the payout of accrued severance, reduction in performance based compensation accruals, and decrease in accrued vacation due to the reduction in employment levels.

Other non-current liabilities is at $20 million. This is down slightly from $20.7 million at the end of last year. This primarily reflects deferred compensation payments related to the TouchSensor acquisition. On the cash flow statement the decrease in cash and cash equivalents for the year was $50.3 million, as I said primarily reflecting the Hetronic acquisition.

Cash provided by operating activities was $43.2 million. This is $33.9 million less than was provided in fiscal 2008 primarily due to the decrease in business levels and our restructuring initiatives. Cash used in investing activities was $76.1 million. This is $47.1 million more than last year which is primarily reflecting the Hetronic acquisition offset by slightly lower capital spending in 2009. Cash used in financing activities is $15.1 million which is $8 million more than we had last year reflecting the purchase of approximately 670,000 shares and a higher dividend payout at $0.26 per share this year compared to $0.20 per share last year. This was offset by fewer stock options being exercised this year compared to last year.

Donald, that concludes my remarks.

Donald Duda

Thank you very much Douglas. We are ready to take questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of David Leiker – Robert W. Baird

David Leiker – Robert W. Baird

Just for starters here, there was a restatement and amendment to the credit agreement earlier in the week, could you just provide a quick overview of what happened there and walk me through some of the details.

Douglas Koman

Because of the significant impairment charges that we incurred this year, the bank facility is set up to be a function of EBITDA and under the agreement the impairment of goodwill and intangible assets, even though its noncash and is the equivalent of amortization, under the agreement, we weren’t allowed to necessarily add that back to determine EBITDA.

So we had to amend the bank agreement to reflect those changes. So the genesis for the amendment basically is the significant impairment charges that we took this year.

David Leiker – Robert W. Baird

Okay, if we look at the restructuring, the $7 million in 2009, it looks like there’s about $9 to $18 million that’s going to occur in fiscal 2010. Is there any other actions that you would plan to take on top of that or any other actions that you’re considering first and then secondly can you just provide a little bit of color on how you expect that $9 to $18 million to flow through the year.

Donald Duda

We have no other action planned. We feel we’ve gone through most of our actions, they’ll be going on for the next couple of quarters and would hope to have them done by the calendar year. Some of those actions could go into the third quarter and perhaps fourth but again most of it in the first half of the year here.

We know of no other actions we would be taking. We’ve taken some significant actions that, we rearranged our footprint but I think we’re pretty much where we need to be or at least we’ve announced everything.

Douglas Koman

I think Donald mentioned on the timing, while the expectation is that I think we said in the K that we’ll complete it sometime during the fiscal year. The hope is that we get it done by the end of calendar year. Some of the initiatives, obviously depending on, we’re still working with our customers and accommodating those issues for them for we may see more of it in the first half of the fiscal year but there may be some that bleeds into the second half of 2010.

David Leiker – Robert W. Baird

If we look at the year over year decline in Ford revenue relative to exiting some legacy product lines, is there any way to quantify that in dollars or just sort of put some parameters around that. You exited some core business during the quarter, is there any way to just put some parameters around how many, the size of that, millions of dollars.

Donald Duda

Let me try to answer it this way, in normal times that business was maybe $60 to $80 million. It had dropped to probably half that and these are approximations. And when we looked at that business probably last fall, we were thinking maybe $35 or $40 million and again that’s an approximation. But that will probably put some parameters around it.

And its really that drop in volume that caused us the issue there.

David Leiker – Robert W. Baird

As we look forward to the first quarter here, we’re a couple of months in, are you seeing anything in terms of your business performance that really differs from trends that we’ve seen, some of your key end markets thus far in the quarter.

Donald Duda

I don’t think so. Our quoting activity is up slightly but that’s, that isn’t orders yet. We’ve seen some of our industrial customers, some have stabilized, others have pushed things out so it, you asked me I think that question last call. I would say that I’m slightly more optimistic then I was three months ago but again I think we’re still in the middle of all this.

David Leiker – Robert W. Baird

You’ve obviously taken a lot of action to pull ahead, sort of the business model transformation that you are putting in place right now, it’s a pretty qualitative question but could you just talk about how you’ve accelerated that and versus you’re previous plans where you previously thought you would be and given your liquidity position, it seems like you would be able to take additional action if needed. Is there a chance that, accelerate things further.

Donald Duda

Let me talk about what we did in accelerating and it was really in our legacy auto and necessity is the mother of invention, we were losing quite heavily in our legacy business so we did accelerate that. We would hope to exit legacy probably a little more gently and let programs unwind but that’s really what we brought forward, that we need to move product faster then we had intended to or we needed to but first is letting it unwind.

So that was really our acceleration and then when we, once we did that then it makes sense to do some plant consolidations. But in terms of doing anything more, as I said earlier, I think we have repositioned ourselves. I’m pleased with our global footprint. I’m very pleased with the messages that we’re able to give to our customers.

The liquidity that we have I would hopefully we would be able to put to acquisitions and new product development. We continue to generate, we pretty much on the cash flow standpoint in the fourth quarter, we were pleased where we ended up. Our projections look good.

So again I think we’re well positioned and the acceleration was really out of necessity.

David Leiker – Robert W. Baird

And then you mentioned acquisitions, what sort of, could you just talk qualitatively, what sort of opportunities are there in the marketplace. Is there distressed sellers, stressed competitors, that might have a small part of their business that you would be interested in. How willing are you to make a move in fiscal 2010 versus conserving your liquidity position during the course of the year.

Donald Duda

That would depend on the opportunity. We have seen some interesting opportunities that I thought were, they were clearly would have been distressed type sales. We have passed on those and they didn’t quite fit our model. But I was I guess pleased, maybe that’s not the word but, that we are starting to see some of those opportunities. We had previously thought we might see them a little sooner.

But it really depends on what it is. If its in auto, I think we’d be much more cautious. I’m not even sure we would do an acquisition there. But if its in power or in our interconnect segment, then if it fits the model we would act on it and I think what Methode can do today as we exit our restructuring, we are, one of Methode’s strength is our ability to go in and restructure companies and move product lines and so we would take on a project like that.

I said before we wouldn’t bet the farm on anything. It would be opportunistic and where it would enhance our portfolio. But its certainly something that we continue to pursue. Not anything that we have put on the back burner.

Operator

Your next question comes from the line of Unspecified Analyst – Legend Financial Advisors

Unspecified Analyst – Legend Financial Advisors

I might have missed this, Douglas did a good job on the balance sheet, what was the reason for the decline in inventories.

Douglas Koman

Well again just the lower sales toward the end of the year compared to where we were last year’s fourth quarter. So that’s the one benefit of businesses in decline, it does result in lower inventories. And again as I mentioned, the other contributor there other than the sales slowdown is the fact that since we’re exiting our automotive, we are not saying that we need to have to carry as much customer funded tooling inventory for automotive customers.

Donald Duda

We also think that inventory reduction represents a good opportunity for us too in case any of our managers might be listening.

Unspecified Analyst – Legend Financial Advisors

And hope my numbers are at least directionally correct, in the auto business you had a $10 million increase in revenue sequentially which I think was better than expected but the profitability went up by about a million, incremental margin of about 10%, I would have expected it to be higher given the history of profitability in that business. What was going on there or am I just reading it wrong.

Douglas Koman

No, that’s essentially correct. As we move products out of the Reynosa facility, we need to build banks so we’re building banks on product that is not particularly profitable.

Unspecified Analyst – Legend Financial Advisors

Okay, does that go away as soon as the move is over.

Douglas Koman

Yes, essentially yes.

Unspecified Analyst – Legend Financial Advisors

When is that move going to be completed.

Donald Duda

We’ve said the end of August, but again that is, completely not in our control. Its customer dependent and the receiver company dependent.

Unspecified Analyst – Legend Financial Advisors

And you spent a lot of time talking about legacy auto and trying to get out of it, what is the split in auto legacy versus new.

Douglas Koman

Going forward?

Unspecified Analyst – Legend Financial Advisors

Right now or going forward.

Donald Duda

In the US, we will have essentially exited that. I can’t think if there’s anything, with the move from Chrysler and our agreement with Ford to move out of Reynosa, that will essentially be the end of it. We have, we still ship our ASC product, the seat sensor product and then in Europe—

Unspecified Analyst – Legend Financial Advisors

Legacy isn’t a bad word in Europe right.

Donald Duda

No, no but I just want to make sure and I think we’ve mentioned this to you before that we’re, some of the Malta product comes back into the US.

Unspecified Analyst – Legend Financial Advisors

The way you termed legacy is kind of a bad thing. I’m just trying to drill down on legacy.

Donald Duda

A polite way of saying unprofitable business.

Unspecified Analyst – Legend Financial Advisors

My last question is you again mentioned 40% auto in 2011, help me out understanding how you’re going to get there, refresh me, I know you do a good job at the Analyst Day and also some of your Hetronic and TouchSensor are going into auto. Do you categorize that as auto.

Donald Duda

Yes, when we talk about center stacks, that, even though its TouchSensor technology, the backbone of that, that’s classified as auto. I don’t think we’ve got any Hetronic going into automotive.

Unspecified Analyst – Legend Financial Advisors

Potentially, I mean that’s kind of what you’re trying to do in auto with some of your net technologies, sell into auto. I’m just wondering does that 40% exclude that just because you’re about as of this quarter about 57% auto and looking forward doesn’t sound like there’s that much [prudent] besides Ford. You do have new programs growing. It sounds like you really expect to grow the rest of the businesses to bring that down and I would hope not just bring the whole auto down.

Donald Duda

That’s correct.

Unspecified Analyst – Legend Financial Advisors

So with your current stable of products, I know acquisitions are going to be a part of it, how far can your current stable of products get you there or is it really dependant on acquisitions that are going to fill that gap.

Donald Duda

No, we feel very strongly with our, the way we position Methode, not just from a manufacturing footprint but from a product standpoint, we’ve got more than sufficient room to grow and it clearly is not acquisition dependant.

Operator

There are no additional questions at this time; I would like to turn it back over to management for any additional or closing comments.

Donald Duda

Thank you, with that we will wish everyone a safe and pleasant holiday weekend.

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Source: Methode Electronics, Inc. F4Q09 (Qtr End 05/02/09) Earnings Call Transcript
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