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Methode Electronics, Inc. (NYSE:MEI)

F1Q2011 Earnings Call Transcript

September 2, 2010 11:00 am ET

Executives

Don Duda – President and CEO

Doug Koman – VP, Corporate Finance and CFO

Analysts

David Leiker – Robert W. Baird

Jeremy Hellman – Divine Capital Markets

Gregory Macosko – Lord Abbett

Josh Brown [ph]

Operator

Greetings and welcome to the Methode Electronics fiscal 2011 first quarter earnings presentation. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded. This conference call does contain certain 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 statement to actual results or changes in Methode’s expectations on a quarterly basis or otherwise. The forward-looking statements in this conference call involve the 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 and quarterly reports. Such factors may include, without limitations, the following, dependence on a small number of large customers, including two large automotive customers, dependence on the automotive appliance, computer and communications industries, seasonal and cyclical nature of some of our businesses, ability to compete effectively, customary risks related to conducting global operations, ability to keep pace with rapid technological changes, ability to avoid design or manufacturing defects, ability to protect our intellectual property, dependence on the availability and price of raw materials, ability to successfully benefit from acquisitions, currency fluctuations, unfavorable tax loss, the future trading price of our stock and the risks of owning real property.

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

Don Duda

Thank you, Edward and good morning, everyone. Thank you for joining us today for our fiscal 2011 first quarter financial results conference call. I’m joined today by Doug Koman, Chief Financial Officer and Ron Tsoumas, Methode’s Controller. Both Doug and I have comments today and afterwards, we will be pleased to take your questions.

This morning, we released our first quarter financial results for fiscal 2011. I’m pleased to report that net sales and our earnings in the first quarter improved year-over-year from the first quarter of last year. In fiscal 2009 and 2010, we’ve restructured our operations, which lowered our breakeven point and refocused all our business segments on solution selling. Thus far in the fiscal 2011, we are seeing evidence of the business structure we put in place, is starting to show positive results.

Total sales in the first quarter were up over 9% from the first quarter of last year, despite the loss of the Delphi business, which represented $7.5 million in sales in the first quarter of last year. Additionally, total sales were up 3% sequentially versus the fourth quarter of fiscal 2010.

The momentum from the fourth quarter continued into the first quarter with market demand, particularly in our European and Asian Automotive Businesses at the high end of our expectations. Earnings for the first quarter of fiscal 2011 were $0.11 per share, compared to breakeven for the same period of last year as a result of various factors, including the absence of restructuring expenses and other items in the current period, which Doug will expand upon in his discussion.

Consolidated gross margins were down, both year-over-year and sequentially for a few reasons, versus I mentioned earlier, there was an absence of sales to Delphi, which was a higher margin business volume for us. Secondly, we had higher design in overhead costs in the company’s U.S. based Automotive and Powered product’s businesses, which are necessary to book and launch new programs.

Although, we believe we have successfully repositioned our North American businesses for a sustained growth and profitability. We may continue to incur similar and normally a higher cost associated with these efforts, until additional programs launch and offset these expenses. And third, decreased other income in the current period compared to last year relating to lower engineering design fees received in our European Automotive business.

Automotive segment sales were down 3.7% year-over-year, due mainly to the absence of Delphi revenues, which totaled $7.5 million in the first quarter of last year. If we take the Delphi sales out of last year’s first quarter, automotive sales actually improved over $5 million. Sequentially, automotive sales were up more than 3% over the fourth quarter of last year, again with our European and Asian operations demonstrating particular strength.

As we have said in previous conference calls, we expect the MyFord Touch Center Console Program will ramp in the third quarter of this year and total about $12 million for the fiscal year. We also expect the least time in business to continue to do well.

Although, our European Automotive segments performed well in the first quarter, we remain cautious about this market. Overall, we still expect automotive segment sales to be down for the year, mostly due to loss of sales from Delphi.

Automotive gross margins were down to the loss of – due to the loss of higher margin sales from Delphi, but also from our continued investment in our automotive business. Again, as we launched more programs, margins would improve. For competitor purposes, we still see about a month and half of Delphi in the second quarter or we will see about a month and half.

The Interconnect sales increased 40% year-over-year but were down slightly from the fourth quarter of last year. In the first quarter, the segment had strong sales in interface and data solutions reflecting the improving macroeconomic conditions worldwide. However, the Interconnect sales maybe flat and slightly down sequentially in the second quarter, as we are seeing some softening in sales, particularly to Whirlpool and Cisco.

The Interconnect margins in the first quarter run empowered our target margins for this business. Power Product sales were up about 3% year-over-year and over 11% sequentially. The segments have higher demand for Power Products in Asia, flat lower demand in the North America.

The Power segment also had higher telecom business in the first quarter, which is typically lower margin business and less military and aerospace revenues, which is typically higher margin. The majority of Power business awarded in the last six to 12 months and launching in fiscal 2012 is in military and aerospace as such we expect these margins to improve overtime.

On to new business wins, in the first quarter, we’re up over $29 million in new annual revenue. First, I’m very excited to announce that our MDI Group was awarded a contract to provide a top-tier Automotive OEM, with a custom sensor for the measurement of clutch plate position in the new, fuel-efficient, dual clutch, six-speed transmissions. Initially, the award represents approximately $6 million in average annual revenue over five years and is likely to gain additional volume.

Based on Methode’s patented magneto-elastic technology, MDI developed this new sensor, which measures linear position, with resolution as nearly 10 times that of current commercially viable technology. The sensor has been designed to withstand a harsh environment of transmission and operates at temperatures in excess of a 180 degree Celsius.

We will begin producing these sensors for multiple platforms in the second half of fiscal 2014. This award represents the first major deployment of this technology in the automobile and as a combination of over five year’s development efforts. We congratulate the MDI team on this very significant award.

We were also awarded additional lead frame business that will begin production in the first quarter of fiscal 2012 and represents more than $20 million in average annual revenue for five years. As a reminder, the lead frame is an integrative power and signal distribution backbone for our transmission controller.

Due to the highly complex insert mode of assembly that reduces the number of electrical connections that will be required with the traditional design. This improves system reliability and reduces cost.

This lead frame is currently being produced for vehicles in the Asian market and with this new award we’ll expand production in North American manufactured vehicles. This additional award will bring our lead frame business to $40 million in average annual revenue at full launch, which we expect will be in fiscal 2012.

Lastly, we’re awarded an integrated center console program with our major Asian Automotive OEM, utilizing our TouchSensor technology. This business represents up, up $2 million annual revenues and will begin production in the second quarter of fiscal 2012. This award for market evaluation purposes could result in the expansion of TouchSensor technology across multiple platforms for this major OEM.

As you can see, our investments in new technology and product development are beginning to generate design wins and incremental sales. In summary, the first quarter gives us a good start to fiscal 2011; however, while much has been accomplished, there is still work to do and we remain clearly focused on improving our results.

Now, I’ll turn the call over to Doug, who’ll provide further details regarding our financial results. Doug?

Doug Koman

Thank you, Don. Good morning, everyone. Don mentioned earlier that we reported $0.11 of EPS for the quarter compared to breakeven last year that was $4.1 million net income. Just to give you a little color on that primarily, this is due to the fact that we – last year’s number included $3.6 million of restructuring charges. This year we had none. This quarter, we did benefit from a gain on – of $1.2 million on life insurance policies related to a deferred compensation plan.

We also saw a slight benefit in selling and administrative on a consolidated basis. Offsetting these items, we had lower design fees in our European operations. And we saw consolidated higher tax expense of about $300,000. So those are the – those are the big items that make up the $4.1 million of net income in the quarter.

I’d like to give you a little color now on the segments to obviously, those items I just went over are the – are the large items, but there are a lot of ins and outs, pluses and minuses, so. In Automotive, we had first quarter sales of $49.3 million that’s down about 4%, compared to $51.2 million last year. Obviously, as Don mentioned, last year, we had $7.5 million of Delphi business and partially, offsetting this Delphi business, we saw a stronger sales in Europe and Asia. Additionally, currency translation decreased foreign sales by $1.7 million in the quarter.

Looking at gross margins for Automotive that was at $10.1 million compared to $11.5 million last year, as a percentage of sales gross margins decreased to 20.5% this quarter, compared to 22.5 last year. Gross margins were negatively impacted by the loss of the Delphi business, lower design fees and increased cost related to new product development.

Pre-tax income in the Automotive segment was $2.8 million in the quarter, which is the same as we have last year. Last year’s results included a $1.5 million of Delphi related – or this year’s quarter end included a $1.5 million. Last year’s quarter, we had about $400,000 related to the Delphi litigation. Last year’s results also included restructuring charges of $2.6 million in the Automotive segment.

Looking at sequential quarters, Q1 over Q4 while automotive cost of goods sold as a percentage of sales decreased to 79.5% from 81.1%. Selling and administrative expense increased to 14.6%, compared to 9.9% our last quarter, fourth quarter. This is caused by a reallocation of resources in fiscal 2011 to the Automotive segment. If you look at consolidated selling and administrative expense, you’ll see that we are down slightly but we again – reallocation from resources that formally or and either the unallocated corporate or the Interconnect just to align those assets, to help grow Automotive going forward.

Additionally, in the fourth quarter, selling and administrative expense benefit is from some accrual adjustments. And again as I mentioned, as Don mentioned, the higher selling and administrative is needed to support the awards that John – Don just discussed in his comments.

In the Interconnect segment, we had sales of $34.6 million in the first quarter. This is up over 40% from $24.7 million last year. The sales increase is primarily from our interface solutions and data solutions groups. There was no currency translation effect on the Interconnect segment sales in the quarter.

Gross margins for the Interconnect segment were $9.2 million compared to $6.2 million last year. As a percentage of sales, this is an improvement to 26.6% compared to 25.1% last year.

The increase in gross margin as a percentage of sales is primarily due to the higher sales level and a favorable change in the mix to higher margin product. Pre-tax income in the Interconnect segment was $3.7 million in the current quarter, compared to $200,000 last year. This again is due to the increase in sales and gross profit and also that we had no restructuring charges this year, compared to $800,000 last year.

Sequentially, our Q1 gross margin was 26.6%, compared to fourth quarter of 35.4%. This was due to the inventory reserve – reversals in the fourth quarter, additionally in the first quarter, we saw changes in the mix at our TouchSensor business to slightly lower gross margin business.

Power Product segment sales were just about flat with $11.5 million this year, compared to $11.2 million last year. We did see an increase in demand for bus bar products in Asia for telecommunication products. This was partially offset by a decrease in demand in North America, which is predominantly industrial and military aerospace.

Gross margins in the Power Products segment were $2.3 million in the current quarter that’s the same as last year’s quarter. As a percentage of sales, our gross margins decreased to 20%, compared to 20.5% last year. This percentage decrease is due to the reduced business in North America.

Pre-tax income in the Power Products segment was $0.5 million in the quarter compared to $600,000 last year. This is primarily due to higher selling and professional fees offset by no restructuring charge this quarter compared to $200,000 last year. Sequentially, Q1 over Q4, gross margin decreased to 28% compared to 33% in the fourth quarter.

As with the Interconnect, the fourth quarter benefited from some accrual adjustments but our first quarter saw change in sales mix to more Telecom business and less industrial, military, aerospace. And as Don mentioned, we would expect that would return to a more normal mix in the future.

The Other segment had first quarter sales of $2.8 million, up slightly from $2.7 million last year. Primarily, the sales increased at our MDI business while sales at our test labs were down slightly. Our gross margins were $100,000 in the quarter compared to $200,000 last year, increase is primarily due to prototype builds in our – in the MDI business, that accounted for the drop in the margin and pre-tax income in the Other segment was a loss of 600,000 in both quarters. And again, the increase in the prototype expense was offset by a decrease in selling and administrative.

Before I turn it back to Don, I’d like to comment on the $7.4 million cash premium in the quarter, specifically the change in operating assets and liabilities of $10.5 million which you see on the cash flow statement. AR [ph] itself was use of cash $6.9 million. This was due to the timing of sales. We didn’t have a strong July, which is unusual for us.

We had billing for preproduction tooling that went out. And additionally, we just had some slower collections from some specific customers, which are not credit risk but did change the timing of the receivable. We also had bonus payments in the quarter that was $2.7 million.

Last year, we changed from a practice of paying more bonuses on a quarterly basis to a fourth quarter or full-year bonus payment, so that resulted in a slightly higher bonus payout in the first quarter of this year. Foreign and state tax payments were $1.9 million in the quarter, primarily for China and some other foreign and state entities and we also had a balance of – our inventory increased about a $1 million but this was offset by a change in accounts payable and accrued expenses. Don, that concludes my remarks.

Don Duda

Thanks, Doug. Edward, we’re ready to take questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) Our first question today comes from the line of David Leiker with Robert W. Baird. Please, proceed with your question.

David Leiker – Robert W. Baird

Can you hear me?

Don Duda

Yeah.

David Leiker – Robert W. Baird

Okay. And as we have, Don, I think you said that the new business, you had $20.9 million annually. Did I hear that correctly?

Don Duda

That’s correct.

David Leiker – Robert W. Baird

Do you happen to have, I mean, we can go through other costs, but do you happen to have what are cumulative numbers of that, since you guys have started and talking about that kind of that number. Get us those through cumulative net off?

Don Duda

I’m not sure I understand the question cumulative of...

David Leiker – Robert W. Baird

Yeah. You know, previous calls, you’ve talked about your new business somewhere as in the annual revenue, do you have that cumulated across to all those announcements that you’ve made or what the annual incremental revenue as from the new business?

Don Duda

We will have that, yes.

Doug Koman

Yeah. We don’t have it with us, but...

Don Duda

Yeah.

David Leiker – Robert W. Baird

Okay.

Don Duda

We don’t track that.

David Leiker – Robert W. Baird

Yeah. It’s okay. I was just wondering if you had it handy and then we can go back to other calls and to have that number. And then, from what I understand you have quite something about $3 or $4 million with Delphi revenue, that was in last year’s numbers yet. Is that’s correct?

Don Duda

$7.5 – $7.5 million was in the last year’s Q1?

David Leiker – Robert W. Baird

Going forward in Q2, there is 3 or 4 million less than last year’s comps in Q2?

Don Duda

Yeah. That about, yeah, above that level.

David Leiker – Robert W. Baird

And then on the Ford legacy business running off, which, I mean it, and we clearly have that mix model. But I think the magnitude of that much larger than what we’ve thought. Is there some context you can give us of what kind of an impact that’s we had on the numbers?

Don Duda

In first quarter of 2010, there were some Ford in there but we’ll have to get you that number, and I don’t know that your model is of there, I just think that you’re anticipating a higher revenue rate from Ford than we are, on current business.

David Leiker – Robert W. Baird

But if we take a look at and I just, if we exclude Delphi in that China transfer business you’re saying your North American volumes are down 50% year-over-year right?

Doug Koman

That’s right.

Don Duda

That’s probably correct.

David Leiker – Robert W. Baird

The production in North America was up 70% and it seems to me and we don’t have MyFord Touch really rolling to that number in Q1....

Don Duda

Right.

David Leiker – Robert W. Baird

And so trying to reconcile there is such a big difference between your declined in revenue versus a pretty significant increase in production? And the variable that seems it standout process of run out from the Ford Legacy business and that’s we’re missing something?

Don Duda

We can study that. But I know we shift 100% on time everything our customer want us in the first quarter. And those are – that’s Ford and others, so and the quarter came in pretty much, so we anticipated it was. After thinking a K last year, we said that – we thought that the first quarter would be, but first of all, the first quarter would not merely the fourth quarter and we thought that automotive revenues would be down.

So from our projections were pretty much where we, not where we are going to be and little disappointed in power margin, but I understand there is more mix. So I’m – we’ll go back and study the Ford transition, but I’m still struggling with whether disconnect is there between our models.

David Leiker – Robert W. Baird

Well, I’m not great in talking about our model. You’re saying that your revenue tax, Delphi in China transfer is down 60% in North America and I’m saying North American production was up 70%. So you’ve pretty significantly underperformed in the North American automotive markets and I’m just trying to reconcile that?

Doug Koman

We’re going to have to try to model that result, I’m not sure I agree with you there.

David Leiker – Robert W. Baird

So last year, we built 1.7 million vehicles in North America, this year we built almost 3 million.

Don Duda

No. I’m not going to argue with you on that. What I’m saying is that the business performed what we expected it to perform based on the business booked and our own internal forecasting.

David Leiker – Robert W. Baird

I understand that’s – names on the something else. How much of the vehicle that have MyFord Touch in it? What portion of, what percentage of those you think you’re going to have content.

As I saw, what are the comments out of Ford is that the Explorer, which is launching now. That they expect that 80% of Explorer’s with MyFord Touch in it? And I don’t know that you’re expecting to have 80% of the Explorer is having your touch points in it?

Don Duda

No. We are not. Definitely I can, I know we’ve given you the vehicles in the past, but separately we can give you that again, the only number I have is, what we’ve said in the prepared comments is 12 million for this fiscal.

David Leiker – Robert W. Baird

Right.

Don Duda

We can backtrack and give you the specific platforms.

David Leiker – Robert W. Baird

Right. We – the investors can’t assume that just because MyFord is in the vehicle that you have said, you have content on that vehicle, correct?

Don Duda

Okay. MyFord Touch is a topology or network on the vehicle. Some of them employ TouchSensor, some of them employ traditional switches. So My – the fact that MyFord Touch is on a vehicle does not automatically equate that any type of touch product is on the vehicle.

David Leiker – Robert W. Baird

Okay. And I just wanted to verify that because I think there is – but thank you. That’s all I have. Thanks.

Don Duda

Okay. And that’s why we stressed and on previous calls, that it is around $12 million and at least in this fiscal year $40 million in total.

David Leiker – Robert W. Baird

Yeah. And I just sense towards I’ll drive out that number. I just wanted to make sure people are aware you are not on 80% of the exports?

Don Duda

Right, right.

David Leiker – Robert W. Baird

Thank you. That is all I have. Thanks

Don Duda

All right. Thank you, David. I will get you the other information.

Operator

Thank you, ladies and gentlemen. (Operator Instructions) Our next question comes from the line of Jeremy Hellman with Divine Capital Markets. Please proceed with your question.

Jeremy Hellman – Divine Capital Markets

Hi. Good morning.

Don Duda

Good morning, Jeremy.

Jeremy Hellman – Divine Capital Markets

So what I want to do and you guys have kind of touched it on little bit with David’s question there. Because I fold out your commentary from last quarter, earlier and you see I haven’t in my notes that you’ve said Q1 will be down sequentially due to seasonality, the July model changeover auto and also just on a global economic conditions.

So you basically came in better than you would advertise, which from where we stand was good. So wondering was it mainly just Europe and Asia in auto that led you to come up with the results better than you had thought or was there something else?

Don Duda

No. That’s right. Europe was up a little higher than we expected. We and depending how you view the automotive market in Europe, we were expecting it to start to trend down a bit. I think we’re still cautious going forward that remained actually fairly robust through the summer, through the July third month of our quarter.

But then Asian sales were particularly in lead frame business was up and that’s mainly because of the transmission that goes into as a more the six-speed transmission more fuel-efficient being rolled out across more platforms. So we’ve benefited from that. I guess my caution going forward is we still anticipate a bit of a slowdown and we’re still indicating that we think our total auto business will be down for the year mainly because of Delphi.

Jeremy Hellman – Divine Capital Markets

Right.

Don Duda

If the vehicle builds remain a little bit higher then we’ll track with that. As I said to David, we shift to 100% of everything as customers want it. So as from auto we’re clearly at the mercy of the market. We can’t do anything tomorrow, that’s going to affect auto revenues other than the ship product is required.

Jeremy Hellman – Divine Capital Markets

Right. So, if I’m kind of looking in terms of that the remaining three quarters of the year segment-by-segment kind of the seasonality pattern is my and if it’s okay for you guys, I just kind of run down how I see things and if there is an adverse and that just let me know, I mean, it sounds like auto should be flat plus or minus with some legal room back half of the years when you see the $12 million from MyFord Touch start coming in Q3, Q4 is that a fair enough way of looking at things?

Don Duda

Yeah.

Doug Koman

Yeah.

Don Duda

Yeah. I mean, the only other comment I would make is, I mean, we keep talking about Delphi, what I found particularly exciting about the first quarter here is that, we have successfully replaced that revenue and under the greater profits and that’s not insignificant in the whole scheme of things.

Jeremy Hellman – Divine Capital Markets

Yeah. Absolutely. Then just moving down to Interconnect, you made some comments there, you said, we flatted maybe some down-ish variance there, I still trying to keep up with you guys as you went through your comments. Power products, I don’t think you made a comment in terms of directionality there. Did I miss that or did you not comment on that?

Doug Koman

Tom, I don’t think we commented on it. That it’s likely to be flat quarter-over-quarter. We have less visibility in that business, if we get a Millard order business, we’re shipping in the quarter, that will certainly affect the numbers and we only when have made there as we had more Telecom business at lower margin than Millard were at higher margin.

So less visibility there, probably flat to plus or minus a little bit sequentially. Most of the business we have booked in the last six, 12 months we’ll launch in – in the next fiscal year throughout the year. And that’s mainly Millard, so those margins should improve.

Jeremy Hellman – Divine Capital Markets

Okay. In fiscal ‘12, okay. And so, if I look again, speaking a margin then auto margins back half of the year given what you know currently we’ll seem to have an upward bias as with power products, correct?

Don Duda

I would on auto, yes, as we...

Jeremy Hellman – Divine Capital Markets

You know, where I’m looking at is that, you got pre-production cost here and production is going to start coming in, so you...

Don Duda

Yeah, yeah, yeah, and you’re right. As we get in the full launch on MyFord Touch that – that’s correct.

Jeremy Hellman – Divine Capital Markets

Okay.

Don Duda

And then power, that really is just a mix, I don’t think it’s pretty hard to predict.

Jeremy Hellman – Divine Capital Markets

Okay. And then one last thing on Power and then I’ll jump back out is, how significant if at all are your sales to the Renewable Energy markets and particular, wind or solar?

Don Duda

Quarter-to-quarter, they can’t be a factor. There was not a lot of sales in the first quarter. I will say, we are tracking a number of opportunities in that area. It’s primary focus for us and then, the opportunities depending on how you view the market can be sizable. But in the next couple of months, I don’t, that’s not going to influence results that much it can over a period of the next 12 to 18 months have an effect, I mean, that’s a clearly a focus for us.

Jeremy Hellman – Divine Capital Markets

Right.

Don Duda

I think it’s one of the reasons. I’m sorry, I interrupt you, but one of the reasons we invested in Eetrex to give us access to additional technology.

Jeremy Hellman – Divine Capital Markets

Right. Well, maybe more broad question and I was kind of looking at this as a multi-year question, is your strategy or target customer in that space going to be the Chinese OEMs, the Europeans or North American manufacturers?

Don Duda

I don’t...

Jeremy Hellman – Divine Capital Markets

Maybe above.

Don Duda

… just look knowing what opportunity we’re pursuing, we would definitely be the European and the U.S. OEMs and then also due to greater stationary market for that type of products. The large OEs are going to do a quite a bit on their own and we have the opportunity to sell them subsystems.

But when you look at the stationary markets just data centers and wind power and so on. There is also a fair amount of business there to be had. And then probably a slightly higher margins than you might see from OEs.

Jeremy Hellman – Divine Capital Markets

Okay. One last one from me sorry. MDI and I think that you know correct, you said that production starts second half of 2014?

Don Duda

Yes. That’s correct.

Jeremy Hellman – Divine Capital Markets

Okay. And will that – at that point is obviously thinking a few is down the road. Are you going to take that other segment and it’s just, I know it’s more important, but it’s actually put a better name on it in other, at that point?

Doug Koman

Yeah. Right. At some point we have to look at where the MDI technology is being deployed, if it’s in Auto, we’ll roll it up into Auto at some point but....

Don Duda

Jeremy, a good example is the lead frame that we’ve talked about. That’s started in the Interconnect segment, but the application is on a transmission. So now that is reported by...

Doug Koman

Right.

Don Duda

Through automotive. So again that’s, that’s the customer we are selling since....

Doug Koman

And TouchSensor, we want to implement it appliances so on it’s an Interconnect and if it’s in Auto as the case in MyFord Touch since reported in Auto.

Jeremy Hellman – Divine Capital Markets

All right.

Doug Koman

More than likely, we – other would become the stage two Auto, it will come in into the three Auto business.

Jeremy Hellman – Divine Capital Markets

Right. That’s what I was asking. Okay. Great. Thanks.

Doug Koman

To better name than other.

Jeremy Hellman – Divine Capital Markets

Yeah. I know and just wanted to say nice quarter guys. It’s, stock guys have responded too well but hopefully the Street will get handle on thing.

Don Duda

Yeah. We appreciate that. Thank you very much.

Operator

Thank you. (Operator Instructions) Our next question comes from the line of Gregory Macosko with Lord Abbett. Please proceed with your question.

Gregory Macosko – Lord Abbett

Yes. Thank you. Just follow up on the Ford – MyFord Touch in the – in MyFord penetration. I believe in the last call you talked about 80% of all Ford’s by 24.15 [ph] should have that program involved. Did I give that right last quarter, is that the idea?

Don Duda

Ford set that.

Gregory Macosko – Lord Abbett

Okay. Ford set that. Got you. Okay. That’s fine and I understand.

Don Duda

And we are just as if I look at further, Methode is on the center console of MyFord Touch.

Gregory Macosko – Lord Abbett

All right.

Don Duda

But MyFord Touch also includes the steering wheel, switches as well as the some of the instrumentation that can be modified. So there’s more to MyFord Touch than what Methode is providing. It’s quite a bit more actually.

Gregory Macosko – Lord Abbett

Right. And just a follow-up on David’s question. Does that mean that, the idea of sensors versus switches, is the idea that by 2014 or 2015 there will be – it will all be sensor as opposed to switch or is connect, I mean, as far as you understand?

Don Duda

That is a design issue and probably a consumer issue. There certainly will be a mix, I think by our sight, in foreseeable future, it’s still going to be predominantly what I’ll call conventional switches and a migration of the TouchSensors will be – I know really as the consumer embraces it, the early returns on TouchSensor on the Ford vehicles were very, very good. But the deals we are just launching now, so let’s see what consumer, how they view that as the vehicle get in the fields.

Gregory Macosko – Lord Abbett

So as people see what they are doing et cetera, the idea the whole I guess would be that, we would see more sensors on in the MyFord Touch as opposed to switch.

Don Duda

Right. And field effect switches on the vehicle, but in the certain areas that they are very appropriate for overhead console is a good area for truck releases is a keyless entry they’re much more robust take up less space, so there are some very logical places for them up to go, whether they go onto – we replaced conventional wheel switches or semi-console switches. I think that that remains to be seen, but there is – it’s early it will be a force within the vehicle.

Gregory Macosko – Lord Abbett

So that overtime there will be more applications for that TouchSensor to be applied to as the vehicles stage, or get more sophisticated, or they get more comfortable with it?

Don Duda

All right. And I think it’s going to be designer preference. Well, an Aston Martin have a TouchSensor on it, so it’s the old argument over analog gauges versus digital gauges when the product came out with digital, or yeah digital gauges allow the long time prevent them or upset. So and one of my first one in switch or hey this is hi-tech. I want a slighter volume control that’s on of course the MyFord Touch I think, that really that might depend on age.

Gregory Macosko – Lord Abbett

Okay. And then with regard to Ford, the 12 million you expect in the second half of this fiscal year. Is the idea given similar volume that we would – it’s a 24 million run rate is that fair to say, or is there some seasonality in that?

Don Duda

Well, there is always seasonality to Auto although, as although July was particularly, a more robust this year than in the past. But I think we’ve said at full launch, it’s about 40 million but on an annual basis.

Gregory Macosko – Lord Abbett

Okay.

Don Duda

And I think, if you go back in some of our calls, we usually say that’s the summer month of July since that quarter tends to be a little bit less in the third quarter, which includes Christmas tends to be a little bit less for Auto. And then we – the 40 million comes from us looking at J.D. Power’s data and then applying some of our own logic to it. So if we don’t strictly rely on that data.

Doug Koman

Yeah. There is some platform lashes there about a year from now. It’s right.

Don Duda

Right.

Gregory Macosko – Lord Abbett

But again, that that is four, just four.

Don Duda

Correct.

Gregory Macosko – Lord Abbett

Okay. All right, just want to be sure on that but still I understand. And then with regard to the North American Auto growth, if we back out and just leave Delphi out of it on a year-over-year basis, I thought you said, you talked about that, the Auto growth ex-Delphi…

Don Duda

Yes.

Gregory Macosko – Lord Abbett

What was that?

Don Duda

If you...

Gregory Macosko – Lord Abbett

Back out Delphi...

Don Duda

Back out Delphi...

Gregory Macosko – Lord Abbett

Both years, both quarters, last year and this quarter.

Don Duda

And our model actually grew, let me give you the exact number here, I believe it’s – I think it was 5 million.

Gregory Macosko – Lord Abbett

5 million on...

Don Duda

That’s right.

Gregory Macosko – Lord Abbett

On what base?

Don Duda

On last year’s quarter, first quarter to this year’s first quarter.

Gregory Macosko – Lord Abbett

Yeah, but adjusted last year’s first quarter?

Doug Koman

Yeah, so. Yes, so we had 51.2 in back out, 7.5 approx from that growth.

Gregory Macosko – Lord Abbett

Okay. And that’s for the – that’s worldwide.

Don Duda

That’s yeah. That’s total automotive.

Doug Koman

Right. It is for, yeah.

Don Duda

Yes.

Gregory Macosko – Lord Abbett

That’s total automotive, okay.

Don Duda

And in comparison, just a little difficult, because last year we did a – when we launched the lead frame, we launched in the U.S. as the customer's request and then transferred it to China. So you got some domestic number in this too and that will be a hard comparison to do, because the business ramped, it also ramp between now and then.

Gregory Macosko – Lord Abbett

Okay. In the Power business, you mentioned that, clearly mix was up and then you had an impact on the profit margins. But are you suggesting that that business mix will return to something we’d seen like last year, was this onetime-ish whether Telecom was a bigger portion in Military back off? Or is that something you expect to return to some normal run rate?

Don Duda

That’s a good question. I think it’s much harder to predict that business.

Gregory Macosko – Lord Abbett

Right.

Don Duda

We know, there’s much visibility into – to the customers and the (inaudible), I think – they are pretty big hitters so here and they’re not, there is the mercy of what as many instances as the government is doing. Okay. Let me answer the question this way. Telecom is not our focus. We know that that’s it’s a little central product to produce in certain instances. It tends to be more competition. There is Chinese competition in that. And we’ve changed our focus probably 18 months ago, to do more collateral and as Doug said industrial.

Gregory Macosko – Lord Abbett

Right.

Don Duda

So the business that has been booked. The majority of that is the higher margin industrial (inaudible), that’s generally from the time we do a prototype to the time, we actually are seeing revenues, it’s about an 18-month cycle. I would say we’re six months in to that.

So I don’t, if we get an order in next quarter, if it earlier to somebody or that ships that for something and that will possibly impact the quarter. We’re not – we don’t have J.D. Power’s data on that power business. But we do know that the majority of the business that we booked will start to launch next fiscal year. So they may not affect the next quarter, but it should have a positive effect next year.

Gregory Macosko – Lord Abbett

So, you don’t see that the wind down in the Middle East is an issue relative to the military side of your business?

Don Duda

Yeah, that’s maybe a matter of opinion. But most of the programs that we are on deal with revamping or reusing certain platforms, energy efficiency on ships, that they’re gear to saving money also to protection, armored vehicles and the military is using a lot of products, it will now go across multiple platforms from an expense savings. So you can always see cancellations of programs we’ve seen that in the past.

Gregory Macosko – Lord Abbett

But the point is, I think what you’re saying is, you have some programs that have been booked and if while they don’t build the vehicles or they do something different those – that those sales wouldn’t show up. But given kind of expectations and the contract that you have, you’re expecting that mix to get better because there will be less telecom and more military?

Don Duda

Yes.

Gregory Macosko – Lord Abbett

Okay. And then on the Interconnect business and you said softening with Whirlpool and one other in terms of?

Don Duda

With Cisco, which both customers had been fairly, I won’t say robust but the pretty good shipment and we’ve seen some slowdown that might just be a little bit of the summer. But it was worth mentioning because those are pretty big customers for us.

Gregory Macosko – Lord Abbett

Okay. And then – are those contracts or are those just as they order?

Don Duda

Both I guess your – we have a design wins and then you’re on the drawing and then most instances where either single sourced or I think in the case of Cisco, probably there might be one other personal of those, one other company but that’s says as they, like Auto that if they need it, they order it.

Gregory Macosko – Lord Abbett

And then finally on the cash burn with regard to the accounts receivable up 6.9, do you expect that to come down sequentially, I mean you had a strong July, I understand that’s a good news, but some customers and the collections are coming or I mean, you expect the accounts receivable to come more in line sequentially?

Don Duda

Yeah, we would expect that to improve.

Gregory Macosko – Lord Abbett

All right. Thank you very much.

Don Duda

Thanks very much.

Operator

Thank you, ladies and gentlemen. Our next question comes from the line of Josh Brown [ph] with (inaudible). Please proceed with your question.

Josh Brown

Yeah, hi, guys. Thanks for taking may call.

Don Duda

Hi, Josh.

Josh Brown

Now, to beat a dead horse here on the MyFord Touch deal, but as I look at the forex [ph] floor available options, they list in MyFord Touch as a singular available option. Are you saying that, if a customer selects the MyFord Touch taking then further select to have TouchSensors and they can take break out your products or have the traditional switches, I guess, I’m just totally lost there, when it comes to where you guys relate to MyFord Touch.

Don Duda

Okay. No, the customer, I don’t believe it’s get the choice there.

Josh Brown

So if they select MyFord Touch, then you guys will be on that system.

Don Duda

I don’t want to say. I don’t have the platform list in front of me. I don’t want to mislead you. We will get back to you and tell you exactly what – on the Explorer.

Josh Brown

Okay. I appreciate that.

Don Duda

Yeah.

Josh Brown

That’s all I have. Thanks.

Don Duda

Okay. Let’s finish it after this.

Operator

Thank you ladies and gentlemen. (Operator Instructions) Our next question comes from the line Jeremy Hellman with Divine Capital Markets. Please proceed with your question.

Jeremy Hellman – Divine Capital Markets

Hi. One follow-up on the MDI business wins?

Don Duda

Yes.

Jeremy Hellman – Divine Capital Markets

Can you give us some sense of how significant this inroad is with the OEM, language and I think your commentary also was supportive to the language that this contract sounds like it can work larger, but can work larger by million or by double in size and also kind of coronary to that. Are you in any active discussions with other OEMs that you think have a reasonable likely hood of closing that would be of some more scope and scale?

Don Duda

Okay. The technology could very well much as always we’re seeing with lead frames, because there is a cost savings there and that particular transmission is more fuel-efficient. So as that transmission gets deployed on other platforms, we would expect – as we indicated that, that number should go up and it’s hard to quantify, but it’s not going to be just a million. If you get on a another platform you are going to see a significant increase in that number, does it double that’s hard to say, but it’s not – it wouldn’t be insignificant.

Jeremy Hellman – Divine Capital Markets

Is that maybe a better way of asking? Is that OEM or current customer or is this a new customer?

Don Duda

No, that is a current customer.

Jeremy Hellman – Divine Capital Markets

Okay. And does this customer in the past, in other products that they are sourcing from you guys shown pretty reasonable habit of stepping up purchasing from you like that?

Don Duda

If they are successful with their products and then yes, absolutely. That’s the benefit of one of those – of being an Auto platform is that – is that technology or that’s a product takeoff for the customer you go along for the ride that’s a good position to be in. A good way of looking at it is what we saw in 276, 276 was – I’m going from memory, but I want to say it was about a 10 million initial win. We have to go back and get the exact number. But now we’re up to about 40 million and that is also a transmission program. So, in contrast to say like a wheel switch where you are really specific to a particular vehicle transmission’s goal across platform often.

Jeremy Hellman – Divine Capital Markets

All right. And similarly, if you’re – you’re proven success with this current OEM and there’s better performance features. Then it’s certainly reasonable to expect at other OEMs would have an inclination, kind want to purchase this as well, right?

Don Duda

And that’s correct. That’s one of the reasons we said and this is the first major deployment of MDI on an Automobile and particularly on the Transmission. So if there is much like MyFord Touch is that, if that is successful we’ll see – we have seen and we announced. We have another OEM that’s putting on a small platform as an option, but it’s hard to see it, expand across other automakers of it. So I really do view this MDI win as very significant. And it’s a combination of at least five years of design efforts where we were $2.5 million a year in R&D expenses.

Jeremy Hellman – Divine Capital Markets

Is the three year time period from win to production going to be typical, or is that a typical to those on long side?

Don Duda

I think it’s a – launching on a transmission is a longer haul than on switches. I mean, it’s much more testing that goes on, I mean it’s a pretty harsh environment, a 350 degrees and an excess of 350 degrees Fahrenheit. So it’s a fair amount of test. In fact, I would say that’s going to be typical, that maybe slightly less but not by years, by months.

Jeremy Hellman – Divine Capital Markets

Okay. Thanks.

Operator

Thank you ladies and gentlemen. We have no further questions at this time. So I would like to turn the floor back to management for any closing comments.

Doug Koman

Okay. Back to you, Don.

Don Duda

Okay. Thank you, Edward. To answer the question on the Ford Explorer, there’s three different options on MyFord Touch and that’s what you really need to look at. I know there is this only option, we’ll provide more detail on that, but there are options that the consumer can choose.

So with that, Edward, I’ll thank everyone for listening and wish everyone a very pleasant and safe Labor Day weekend.

Operator

Ladies and gentlemen, this concludes today’s teleconference. And you may disconnect your lines at this time. Thank you for your participation.

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