Donald W. Duda - Chief Executive Officer, President and Director Douglas A. Koman - Chief Financial Officer, Principal Accounting Officer and Vice President of Corporate Finance

Jimmy Baker - B. Riley Caris, Research Division Steven L. Dyer - Craig-Hallum Capital Group LLC, Research Division David Leiker - Robert W. Baird & Co. Incorporated, Research Division

Welcome to the Methode Electronics Fiscal 2014 First Quarter Earnings Conference Call. [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 performances 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. Factors that could cause actual results to differ materially from our expectations are detailed in Methode's filings with the Securities and Exchange Commission, which is our annual and quarterly report. Such factors may include, without limitations, the following: dependence on a small number of large customers, including 2 large automotive customers; dependence on the automotive, appliance, computer and communications industries; customary risks relating to conducting global operations; timing, quality and cost of new program launches; availability to avoid design or manufacturing defects; ability to compete effectively; dependence on the availability and price of raw materials; dependence on our supply chain; further downturns in the automotive industry or a bankruptcy of certain automotive customers; ability to keep pace with rapid technological changes; ability to protect our intellectual property; ability to withstand price pressure; location of a significant amount of cash outside of the U.S.; the recognition of goodwill impairment and long-lived asset charges; currency fluctuations; ability to successfully benefit from acquisitions and divestitures; ability to withstand business interruptions; income tax rate fluctuations; a breach of our information technology system; and the cost and implementation of SEC disclosure and reporting requirements regarding conflict minerals. It is now my pleasure to introduce your host, Don Duda, President and Chief Executive Officer for Methode Electronics. Donald W. Duda: Thank you, Melissa, and good morning, everyone. Thank you for joining us today for our Fiscal 2014 First Quarter Financial Results Conference Call. I'm joined today by Doug Koman, Chief Financial Officer; and Ron Tsoumas, our Controller. Both Doug and I have comments. And afterwards, we will be pleased to take your questions. We were very pleased to report this morning that first quarter sales grew nearly 41% to $167.3 million. First quarter sales came in higher than we expected, due mainly to strong sales for the General Motors and Ford center console programs, as well as new product launches in our European Automotive and North American Power Products operations, along with strong base appliance sales. Additionally, net income grew over 249% to $13.6 million. First quarter net income from operations is a quarterly record for Methode in its 47 years of being a public company. First quarter EPS grew to $0.36 per share compared to $0.10 per share in the same quarter last year. While higher sales were the largest driver to the year-over-year improvement, increased manufacturing efficiencies due to the vertical integration of the paint and laser etch process, as well as favorable raw material pricing and a favorable product mix in the Power Products segment, also contributed to the remarkable growth in EPS. First quarter net income was negatively impacted by higher income tax expense, as well as increased marketing, depreciation and stock award amortization expense over the first quarter of last year. Additionally, during the quarter, we incurred increased compensation expense of $1.7 million related to our long-term incentive program. The long-term incentive awards, which are based on the company's performance in fiscal 2015, will become payable if performance under the plan meets or exceeds targeted performance. This adjustment reflects the company's estimate of fiscal 2015 performance. Consolidated gross margins improved to 20.3% compared to 18% in last year's first quarter. Again, the largest contributor to the improvement in margins was increased sales, but margins were also positively impacted by the vertical integration and favorable raw material pricing and sales mix in the Power Products segment. Additionally, we have been able to reduce our scrap on the Ford center console program, and initial scrap costs for the K2XX program have been considerably less than anticipated. However, gross margins were negatively impacted by increased sales of products with a higher material content in the Interconnect segment. Also of note, consolidated SG&A as a percentage of revenues decreased to 11.3% from 14.5% in last year's quarter. We are pleased with the considerable leverage realized given our substantial outrise in sales. As we announced this morning, we have increased fiscal 2014 guidance, now anticipating sales in the range of $670 million to $700 million and earnings per share in the range of $1.40 to $1.60. This replaces our previous guidance of $630 million to $660 million in sales and $0.91 to $1.11 in EPS. This increase in sales and earnings is based on stronger-than-projected sales for the General Motors K2XX program, greater volumes than originally anticipated from new product launches in European Automotive and North American Power, an improved sales mix in Power Products, stronger-than-expected base appliance sales and higher first quarter sales and earnings than we originally anticipated. We anticipate the second quarter to be similar to the first quarter in terms of sales and earnings. In the third quarter, typical holiday slowdowns will likely lead to sequentially lower sales and earnings over the second quarter. But the fourth quarter includes the planned production of the General Motors SUV center consoles. The low end of the guidance range reflects our concern regarding stabilization in the European economy, as well as softening in our Interconnect and Power Products segment sales over those achieved in the first quarter and any potential production delays of new products. The high end of the range anticipates stabilization in Europe and higher domestic Automotive revenues. Of particular note, we were nearly able to reach our fiscal 2014 fourth quarter operating margin goal in this first quarter as a result of higher-than-anticipated sales, lower scrap and greater manufacturing efficiencies than we originally projected. Therefore, based on the new guidance ranges, our fiscal 2014 operating margin target would increase to an approximate range of 9% to 10% from the original 7% to 9%. Before I review our segments, I want to spend a moment on our outlook for Europe. We have seen our European business has stabilized. And while we anticipate second quarter sales on levels similar to the first quarter, current releases are indicating second half sales could be down from the first half. Now turning to a review of our individual segments. Automotive segment had sales increase nearly 46% in the first quarter due to production of the General Motors K2XX program, as well as higher sales of the Ford center console program. Additionally, new product launches in Europe and higher sales in Asia also contributed to the revenue growth. First quarter Automotive segment gross margins improved to 18.3% from 13.2% last year due to increased manufacturing efficiencies, driven by increased sales and the benefit of the vertical integration. Based on anticipated sales in this segment, we believe fiscal 2014 Automotive gross margins will vary quarter-to-quarter but will likely be in the 17% to 18% range based on geographic mix. And at this point, we would anticipate our fourth quarter gross margin run rate will be nearly 19% for this segment. Before I move on to Interconnect, and I am also very pleased to announce that during the first quarter, Methode was awarded a new integrated center console program for a North American OEM. Production is slated to begin in our fiscal 2017, with annual revenue in the $20 million range. This award continues to show our strong capability and expertise in the center stack space. Moving to Interconnect. Sales increased nearly 38% in the first quarter compared to the same period last year, due mainly to improved appliance sales from our 2 largest customers. Volumes of the new laundry program came in near our expectations. Of note, a consumer report has recently rated 2 versions of this platform as best in class. Also during the quarter, volumes of our base appliance business came in higher than we anticipated. Radio Remote Controls sales increased modestly over last year due to the acquisition of the Italian dealership. Interconnect's gross margin declined to 27.2% from 29.3%, due mainly to the increased laundry sales, which have a higher material content than other products in the segment, but this segment's margins should remain stable throughout fiscal 2014. For margins to improve in this segment, we would need to see improved sales in Hetronic's European industrial business. Additionally, we substantially leveraged selling and administrative expenses in this segment, which contributed to a 51% rise in Interconnect's income from operations over last year's first quarter. First quarter Power Products sales improved 43%. The launch of a significant program for a datacom customer in the U.S., along with bus bars for the Nissan Leaf battery pack and a high-current bypass switch, both in Europe, drove the year-over-year improvement. While we have limited visibility, we do anticipate the first quarter run rate will continue at least through the second quarter of fiscal 2014. Power Products gross margins improved in the first quarter to 22.5% from 16.5%, mainly due to favorable product mix and lower raw material costs, partially offset by new product development costs. Without the new product development costs, gross margins would have been 26% in the second quarter. We anticipate this segment will meet its margin target for the year -- and that's actually in the first quarter, not the second quarter. Now I will turn the call over to Doug, who will provide further details regarding our finances. Doug? Douglas A. Koman: Thank you, Don. Good morning, everyone. I have just a few additional comments on the quarter. You may recall that in the fourth quarter of last year, we began accruing for the tandem cash award portion of the 2010 long-term incentive program. In the first quarter, the expense for the tandem cash awards was $1.1 million. Of this amount, about $800,000 represented the increase in our share price from $14.05 on April 27 to $19 on July 27. The balance of the expense was due to normal amortization of the awards. Looking at capital spending. In the first quarter, we spent $9.3 million. For the full year, we expect capital spending to be between $25 million and $30 million. This includes the additional capital needed to launch the SUV portion of K2XX. Depreciation and amortization expense in the quarter was $5.7 million. For the fiscal year, we expect the full year depreciation and amortization to be between $23 million and $25 million. The full year effective tax rate is 8.7%. This is lower than our previous estimate of the mid-teen number. This is primarily due to increased domestic income, which is sheltered by net operating loss carryforwards. The effective tax rate does not include any adjustments to valuation allowances, which may result from changes in events and circumstances. Given the guidance we provided today, we expect free cash flow to be between $47 million and $57 million. And then looking at working capital, due to the expected significant increase in sales in 2014, we do expect to have increased investments in working capital as inventory, receivables, payables increase commensurate with sales. We also expect to continue to draw on our credit line throughout fiscal 2014 to fund domestic cash needs. Don, that concludes my remarks. Donald W. Duda: Thank you, Doug. Melissa, we are ready to take questions.

[Operator Instructions] Our first question comes from the line of Jimmy Baker with B. Riley and Company. Jimmy Baker - B. Riley Caris, Research Division: Don, there's been a lot of talk lately about Apple integrating its iOS into the center stack or otherwise having an increased automotive presence. Can you maybe just speak to what you're planning for in terms of vehicle connectivity, how that impacts your business and maybe the value add that you bring to the table in that equation? Donald W. Duda: Sure. I've said in the past, we look at the center console area as us providing the TV, if you will. What content goes on that and what controls are there -- actually, what content is up to the automaker and its alliances, whether that be with Apple or someone else. We provide the touchscreen, we provide the interface to the other vehicle systems, whatever controls are required, whether they be touch or conventional. So our view is that the changes in this space from a content standpoint, whether it's bring your own IP, be it your cellphone or something that the automotive OEM provides, is not as critical to us because we are, to a large degree, the hardware supplier. And I don't want to minimize what we do because once we have that center area, we also have to integrate with all of the onboard systems, and that does require us to write the interface software or, I guess, the drivers, if you will. Jimmy Baker - B. Riley Caris, Research Division: Okay, that's helpful. Switching over to the K2XX. First, can you confirm that -- and I'm not sure that you can speak to this, if you're permitted to, but can you confirm that you're shipping to 2 of the 3 facilities now? And when would you expect to ship to all 3? Donald W. Duda: I'd like to answer that, but you were right with your original premise, that I have to respect our confidentiality agreement with our large customer. Jimmy Baker - B. Riley Caris, Research Division: Okay, okay, fair enough. So I think projections for K2XX volume have ticked up recently from the third-party forecasters. And obviously, we're just seeing very strong overall truck demand in recent months. Can you maybe just highlight how those projections, perhaps offset by some European adjustments, would impact your FY '15 booked revenue figure? Donald W. Duda: Let me talk about Europe first. That's still a large question mark, I think, for everyone. We've seen -- as I said in the prepared remarks, we've seen some stabilization, but we've also seen some reduced releases for our third and fourth quarters. So that remains a question mark, and I suspect it will remain that as we move into fiscal '15. As far as domestic auto sales and K2, we will update our revenue chart here in November based on our knowledge of releases and, of course, the published data. But at this point, I think I'll just comment on our '14, and we'll -- in a couple months here, we'll be announcing where we think we'll end up in '15. Jimmy Baker - B. Riley Caris, Research Division: Okay. Last one for me, and then I'll pass it off. I think you mentioned Q4 Automotive gross margins are expected to be roughly 19%. Is your expectation still that you could drive that figure into the low 20s in fiscal '15? And if so, maybe you can just speak to what's driving that next leg up. Douglas A. Koman: Okay. Yes, with our -- our expectations are into the low 20s in '15. The vertical integration of the touchscreen will be a big help there. We solved the vertical integration of the [indiscernible] process. That helped margins, and particularly in this quarter, so that we anticipate we'll get a good increase from that integration. And we'll have a full year of K2 and SUV as well. So we'll have the increased volumes. And we continue, as a matter of standard practice, continue to drive costs out of our manufacturing systems. So between those 3, we would anticipate we're going to hit that margin goal. Donald W. Duda: And we have programs today that we've identified that, if we make this change, we will reduce this cost, although it takes us 6 to 12 months to implement all that. Most of the time, you need customer approval.

Our next question comes from the line of Steve Dyer with Craig-Hallum. Steven L. Dyer - Craig-Hallum Capital Group LLC, Research Division: As you look at the increase in guidance, I'm wondering if it's possible that you could sort of bucket that -- the impact of that in terms of how much of that is maybe a little bit better in earlier K2 launch than expected. How much of it is Ford just selling a lot of the models that you're on, and maybe how much is Europe sort of stabilizing relative to a quarter ago? Donald W. Duda: Well, no question that we have increased sales in K2 than we originally anticipated. And if you go back to when we were preparing our original guidance, we had very little visibility to the production requirements we were going to be in and no history. So now we have a little more of that, but it is a huge launch. And as we move forward, we'll continue to garner history and probably a little more predictability. Ford was higher in the quarter than we anticipated. It's not for me to say whether that continues. There's a lot of data that's out there on both the K2 and Ford. New product launches in Europe, last year, we had new launches in the first -- with the first quarter. They didn't come in as high as we thought. So this quarter, they actually exceeded the expectations. But a little more color on the volatility in Europe, if I go back not too many months ago and look at production releases for Europe for the first quarter, they were below our expectations that we were anticipating and factored into our guidance. And then it actually came in through the quarter much stronger than we anticipate now. Whether that continues is a question mark. We're saying the second quarter will be similar, perhaps slightly down. But third and fourth quarter, which we saw last year, we had a pretty good first half last year in Europe, and the second half was down. So -- but net-net, contributing to the increases is that it is higher year-over-year than we had anticipated. And Power in the U.S. is also -- where we're launching a product for a datacom customer and those -- which was a 2.5-year, almost 3-year project, and those projections, which are difficult to predict, came in much higher, and we anticipate that can continue at least through the second quarter. And as I said in my remarks, we have very limited visibility beyond that. And then base appliance sales, which we felt would improve at some point this year, and this is the non-laundry business, came in higher. And I would -- I guess, I would cite the slight recovering in housing for that. And that will likely continue through the year. I don't know, Doug, if there's anything else you'd add to that? Douglas A. Koman: I think that's everything on the sales side. Donald W. Duda: And then net earnings has flowed through from them. We did lower taxes on them than we anticipated. Doug commented on that. And there was also a decrease in shares outstanding. And then also, as we move forward, as long as we can maintain our scrap rate on the K2 launch, which still is in a significant ramp, that is a strong contributor to earnings. And I congratulate the team on that. There's no such thing as a flawless launch in this business, but this one came as -- knock on wood, came as close to it as possible, so I'd be remiss if I didn't congratulate our team. So long-winded answer, but I hope it gives you some color where -- what we used to develop the new guidance. Steven L. Dyer - Craig-Hallum Capital Group LLC, Research Division: Yes, that's helpful color. With respect to Ford, they just announced, I think, in the last couple of days that they're bringing the MyFord Touch to Europe. Is that somewhere that you would hope to play, or would you -- any reason why you wouldn't? Donald W. Duda: Our business with Ford in Europe is in hidden and some visible switches. We do not have, at this point, a center console program for them. But it would certainly be an opportunity for us on future vehicles. There's no question that we're pursuing that. We are not on anything right now. Steven L. Dyer - Craig-Hallum Capital Group LLC, Research Division: Okay. And then just -- I don't want you to have to speak for GM, but I understand that your expectation is for the SUV portion of the K2 to kick off sort of on time early next year. That's still the thought there? Donald W. Duda: Yes, we are on schedule. Our job is to meet our deliverables to the customer, and those dates are cast in stone, and we've been hitting those. We just had our run rate on that, and that went very well, so we are on schedule. Steven L. Dyer - Craig-Hallum Capital Group LLC, Research Division: Okay. And then last question and I'll turn it over. You announced the $20 million annual center stack win. Any other new business announcements of any materiality that you'll add to that chart you were talking about of booked business? Donald W. Duda: Well, we will -- the chart in November, we will update for all of the wins we've had over the last year. Those have been announced. There were some other minor wins in the quarter, but not enough that we would remark on the call. It is too soon to tell whether that will be new annual business or one-off type business, so we usually don't comment on that.

[Operator Instructions] Our next question comes from the line of David Leiker with Robert W. Baird. David Leiker - Robert W. Baird & Co. Incorporated, Research Division: On the revenue upside, I know you talked about the launch. I was wondering, on the Automotive side, I mean, you had strong revenue performance in all the business, but in the Auto with the K2XX. Is that because the pace of the ramp has been faster than what you were expecting? Or is there a mix item going on there of higher content that take rates versus others? Donald W. Duda: It was higher than we anticipated. But as I said earlier, we had very little visibility as we went into the program. And really, month over month through the quarter, we saw the demand ramp at a higher rate than we anticipated. It's -- I don't know what more I can say. There's been a lot published on the K2 launch, and we put our guidance together based on what we knew at the time. And so obviously, it was -- it ended up higher than we had anticipated. I don't know if that was higher than GM anticipated, but that's -- and I guess I'd point it to them. I mean, how much was pipeline filled, how much was mix, that's very hard to say. We don't know. It's not tagged as pipeline filled, it's produced x part number and deliver it next week. David Leiker - Robert W. Baird & Co. Incorporated, Research Division: Is your content the same on all of the vehicles, or is -- that there really isn't a mix issue here at all? Douglas A. Koman: Well, there is -- some versions have a CD player, some don't. Some have a 4-inch screen, some have an 8-inch screen. We're one for one, so every pickup truck GM makes will have a center console arm, but that does vary slightly by the configuration of the vehicle. David Leiker - Robert W. Baird & Co. Incorporated, Research Division: Okay. But it doesn't... Donald W. Duda: Obviously, an 8-inch screen would carry a higher price, but not significant -- the margin is not that much more significant because all we're doing is substituting one screen for another. David Leiker - Robert W. Baird & Co. Incorporated, Research Division: Okay. So the total size of the K2XX opportunity is -- that hasn't really changed, it's just the timing of when you're going to get there? Donald W. Duda: Yes. I guess I would point to what's been published on -- what LMC has on K2. We'd look at that. And then ultimately, we will rely more on history for our projections. But right now, we need to look at the published data. David Leiker - Robert W. Baird & Co. Incorporated, Research Division: Okay, great. And then on Europe, the business that you're launching there on switches, I think that's with Volkswagen. Is there anything else that's going on -- going through there? Donald W. Duda: I don't have the list in front of me. Hidden switches and visible switches, there's some electro part [ph] brake switches for Volvo; obviously, as we've mentioned, Volkswagen; Fiat. There's a McLaren launching of a smaller volume. A combination of hidden and visible. David Leiker - Robert W. Baird & Co. Incorporated, Research Division: Okay. Doug, on the cash flow, we usually do numbers off of last 12 months sales. And with the surge in sales here, that becomes pretty much a meaningless number here. But as we look at the working capital receivables, inventory payables, those seem to be tracking pretty much with the revenue number. Are you happy with where those are falling here in the quarter? Douglas A. Koman: Yes. No, they're falling in line as we expected they would, and especially with the increase in the sales volume. David Leiker - Robert W. Baird & Co. Incorporated, Research Division: Okay. And then where do you think you hit a point that you'll become cash flow-neutral, change in that -- actually generating cash instead of using cash? It sounds like there's still some pretty healthy capital spending going on the next couple of quarters for the SUVs. Douglas A. Koman: Yes. The -- again, the increased sales will help. But we were still looking at kind of... Donald W. Duda: Inventory. Douglas A. Koman: Yes. I mean, again, looking at North America, and the -- our borrowings will still be burning cash. Consolidated, we will be cash flow-positive, so... David Leiker - Robert W. Baird & Co. Incorporated, Research Division: But that is in what time period? Douglas A. Koman: By this fiscal year. David Leiker - Robert W. Baird & Co. Incorporated, Research Division: Okay. And on the tax rate, where are you on that -- the booking time in terms of being able to reverse the valuation allowance? How many more quarters do you need to go? Douglas A. Koman: We can't really comment on that because that's a -- yes, because we just -- every quarter, we'll test, we'll look at the tax and circumstances and changes, and if it's appropriate, then we'll adjust the valuation allowance. But it's hard, and we can't sit here -- if I could tell you today, then I would have booked it. So it's just we follow the accounting rules. David Leiker - Robert W. Baird & Co. Incorporated, Research Division: How many quarters have you been profitable in the U.S. now? Douglas A. Koman: I don't think we have been profitable. Maybe this quarter? Donald W. Duda: Yes. Douglas A. Koman: That's about it. David Leiker - Robert W. Baird & Co. Incorporated, Research Division: Okay, great. And then the last item. If everything is going very smoothly for you, is there any challenges that you've run in into on the launch on either the Automotive, non-Automotive businesses there, where there's some challenges and things you need to overcome? It looks like everything has gone pretty well, though. Donald W. Duda: It's gone very well, but there's always challenges. It's -- often times, it's how quickly the team responds to it, and -- is what determines whether it becomes a major issue or not. There's been supply issues, there've been late changes made to the product. Those are all routine things, but they present challenges, both to our suppliers and to our manufacturing, but there has been -- and I get daily reports, and we're talking about one of this, one of that. I had an issue, we had just earned a line testing for some things, but now there has been nothing. And as I said to Steve, we are very pleased with the team's performance. They've definitely learned from the issues that we had with the Ford launch, and this one has been unremarkable. And that's what our customers commented on it, and our results show that. So as we -- as I speak, there is nothing, and I hope that remains that way. We have a lot of checks and balances in place to make sure that we don't have an issue. And if we do, it's the strength of the team that will respond to that. David Leiker - Robert W. Baird & Co. Incorporated, Research Division: Okay. Well, that's great news. I'm going to sneak in one more item here. If we take the midpoint of your guidance, it implies, with the first quarter numbers, Q2, 3 and 4 is somewhere between $0.35 and $0.40. Is there anything we should be aware of that is going to move one quarter one way or the other relative to -- just averaging that through the rest of the year? Donald W. Duda: Our visibility in Power is limited. We're looking -- we're in already to the second quarter, so we have some visibility to what's going to be produced there. That could -- if you run rate the first quarter in and add SAE [ph], you get -- kind of get to a midpoint. But the lack of visibility in the second half on Power and, as I've said a couple of times now, Europe is still a big question mark, so that could add or subtract to that. And then you do have to take into account the Christmas, the holiday season, those have an effect. We've seen that year-after-year.

Mr. Duda, there are no further questions at this time. I'd like to turn the floor back over to you for any closing comments. Donald W. Duda: Okay. Thank you, Melissa, and we'll just close up by wishing everyone a pleasant holiday coming up. Thank you.

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