Don Duda - CEO Doug Koman - CFO Ron Tsoumas - Controller & Treasurer

David Leiker - Robert W. Baird Steve Dyer - Craig Hallum Christopher Van Horn - FBR Jimmy Baker - B. Riley

Welcome to Methode Electronics Fiscal Year 2016 Earnings Conference Call. At this time all participants are in a listen only-mode. A brief question-and-answer session will follow the formal presentation. 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 statements to actual results or changes in Methode's expectations on a quarterly basis or otherwise. Forward-looking statements in this conference call involve a number of risks and uncertainties. The factors that could cause these actual results to differ materially from our expectations are detailed in Methode's filings with the Securities and Exchange Commission, such as our annual and quarterly reports. Such factors may include, without limitation the following. Dependence on a small number of large customers, including two large automotive customers; dependence on the automotive, appliance, computer, and communications industries; investment in programs prior to the recognition of revenue; timing, quality and cost of new program launches; ability to withstand price pressure, including pricing, concessions, currency fluctuations; customary risks relating to conducting global operations; ability to successfully market and sell Dabir services, dependence on our supply chain, income tax rate fluctuations, dependence on the availability and price of raw materials; fluctuations in our gross margins; location of a significant amount of cash outside of the U.S.; ability to withstand business interruptions; ability to keep pace with rapid technological changes; a breach of our information and technology systems; ability to avoid design or manufacturing defects; ability to compete effectively; ability to protect our intellectual property; ability to successfully benefit from acquisitions and divestitures; the recognition of goodwill impairment charges and cost expenses due to regulations regarding conflict materials. It is now my pleasure to introduce your host, Don Duda, President and Chief Executive Officer of Methode Electronics.

Thank you, Michelle, and good morning, everyone. Thank you for joining us today for our fiscal 2016 financial results conference call. I'm joined today by Doug Koman, our Chief Financial Officer; and Ron Tsoumas, our Controller and Treasurer. Both Doug and I have comments; and afterwards, we will take your questions. Year-over-year fiscal 2016 sales decreased 8.2% to 809 million with lower sales in all segments. Net income decreased, affected mainly by lower sales and the corresponding manufacturing inefficiencies but was also impacted by higher pricing concessions in the automotive segment, increased legal and other professional fees particularly related to the Hetronic litigation, the absence of the gain on the sale of Trace Laboratories last year, higher income tax expense, increased expenses for wages, benefits, and stock award compensation, costs related to the transfer of Hetronic manufacturing from the Philippines to Egypt in the first quarter, and higher intangible asset amortization expense. Partly offsetting these unfavorable factors were the absence of the impairment of a goodwill charge last year, lower tandem cash expense, the one-time reversal of accruals related to our customer commercial issue in automotive, contractual adjustments for minimum purchases and the gain on the sale of a building, favorable commodity pricing and a favorable currency impact on the purchase of raw materials and labor costs. Compared to last year fiscal 2016, consolidated gross margins as a percentage of sales increased 150 basis points, but declined on a dollar basis. Gross margins were positively influenced by a favorable currency impact on the purchase of raw materials and labor costs in foreign operations, customer contractual adjustments for minimum purchases, and the gain on the sale of a building. However, increased pricing concessions, manufacturing inefficiencies related to decreased sales of the interface and power segments, and costs due to the transfer of manufacturing from the Philippines to Egypt in the interphase segment negatively impacted gross margins. Year-over-year, fiscal 2016 selling and administrative expenses increased, negatively affected by higher costs from legal and professional services, wages, benefits, and stock award compensation probably were offset by lower bonus expense. Fiscal 2016 operating income was a 109.7 million compared to a 112.2 million last year. Operating margin was 13.6% this year compared to 12.7% in fiscal 2015. Fiscal 2016 revenues came in higher than our revised guidance we issued last quarter due to higher than anticipated fourth quarter automotive sales. Operating income and EPS came in higher than the guidance primarily due to one-time reversal of accruals related to customer commercial issues in the automotive segment as well as contractual adjustments from minimum purchases and the gain on the sale of a building both in the power product segment. Without these items which occurred in the fourth quarter and totaled 4.6 million, operating income would have been 105.1 million and EPS would have been $2.11. For fiscal 2017, Methode anticipates sales in the range of 820 million to 845 million, income from operations in the range of 102 million to 117 million, and earnings per share in the range of $2.11 to $2.35. Based on this guidance range, our fiscal 2017 operating margin target is in the 12.4% to 13.8% range. Our guidance considers several factors which will affect our top line results including pricing concessions in the automotive segment, price reductions on purchase displays negotiated by a customer of approximately 13 million in the automotive segment, improved PowerRail sales in the power product segment of approximately 9 million ramping in the second quarter, increased 10 gig copper transceiver and uninterrupted power supply of product sales in the Interface segment weighted towards the latter half of fiscal 2017. Our guidance also considers several factors will affect our income and earnings including a full year of long-term incentive amortization compared to only eight months in 2016 and effective tax rate in the low to mid 20% range and no significant changes in tax valuation allowances or enacted tax laws. It is important to point out that the $13 million in price reduction on purchase displays will be neutral to the bottom line since cost of goods sold is reduced in conjunction with the sales decrease. While we do not provide quarterly guidance, we expect the first quarter of fiscal 2017 to be lower in revenue and earnings than the fourth quarter of 2016. As I just mentioned, the fourth quarter included about $0.09 in one-time benefits to the quarter's earnings and the fourth quarter is typically our strongest in terms of sales and earnings. The guidance ranges for fiscal 2017 are based on management's expectations regarding a variety of other factors and involve a number of risks and uncertainties as well which have been detailed in this morning's release and the Form 10-K. Moving on to a review of our segment results. Compared to last year, fiscal 2016 automotive sales declined 2.2% as a result of lower volume in the Ford center console program, lower steering angle sensor product, and transmission lead frame assembly volumes as well as pricing concessions. These declines were partially offset by higher General Motors' center console program volumes, improved tooling sales and increased hidden switch product volume in our European operations, as well as higher linear position and interior lighting product volumes in our Asian operations. Exchange rates have negatively impacted automotive sales by 1.2% in the fiscal year. Automotive gross margins improved to 27.8% in fiscal 2016 from 25% last year as favorable commodity pricing and a favorable currency impact on the purchase of raw materials and labor costs was partially offset by increased pricing concessions. For fiscal 2017, we're targeting automotive gross margins in the high 20% range. We are very pleased to report, we were awarded the General Motors supplier quality excellent award. It was presented to our Monterrey, Mexico facility during a plant-wide ceremony held in April. General Motors recognized the effort of the entire team to achieve this honor. This prestigious award is issued to only a percentage of their suppliers who have met stringent criteria throughout the year. To earn the award, we had to achieve zero new product launch issues and pass their quality assessments while providing over 2 million defect free parts with 100% on-time delivery to five assembly plants. We congratulate the North American Automotive team on this very significant accomplishment and award. Moving to our Interface segment, year-over-year sales decreased 12.9% mainly due to lower appliance and data solution product volumes partially offset by increased sales at Hetronic. Looking ahead, we believe the data center industry will continue contracting in the near term as cloud computing expands an important reducing demand for our data group’s products. We are reviewing our data group’s infrastructure against what possibly may be a new norm. As we've done in the past we will make adjustments accordingly. Compared to last year, Interface gross margins as a percentage of sales decreased to 50 basis points, negatively impacted by costs associated with the transfer of manufacturing from Philippines to Egypt. Without the costs associated with the relocation of the manufacturing Interface's gross margin would have been 24% consistent with last year. For fiscal 2017 we are targeting Interface gross margins in the low to mid 20% range. I wanted to take moment to discuss our ongoing Hetronic litigation. These costs were 9.9 million in fiscal 2016 and at this point we are anticipating similar costs for fiscal 2017 depending on how litigation proceeds. We are engaged in litigation when the Hetronic's former distributors who copied and sold Hetronic label products with non-Hetronic components embedded in them and now are selling knockoffs of Hetronic systems and components. We are seeking to stop this competitor from selling of our parts and collect damages for their bad acts. In conjunction there was a two former senior Hetronic employees took thousands of documents which they have used in their efforts to unfairly compete against Hetronic. We are seeking the return of those documents and damages for the use of those documents in other bad pacts [ph]. We believe it is critical that we protect the Hetronic brand, prevent unfair competition and protect our path to market in the industrial space which is a key component to our five year growth plan. Moving to Power Products, net sales decreased 37.6% in fiscal 2016 compared to last year. As we've been discussing all year, we experienced significantly lower PowerRail power product sales as well as reduced Asian bus bar and cabling products. Favorable to fiscal 2016 power product sales were 1.5 million in contractual adjustments for minimum purchases and 1 million on the sale of a building. Year-over-year segment gross margins decreased to 24.3% from 32.4% due to lower sales and the corresponding manufacturing inefficiencies. Again, fiscal 2016 margins included the contractual adjustments for minimum purchases and the sale of the building. Without the benefit of the contractual adjustments for minimum purchases and the sale of building, gross margins would have been 20.6%. For fiscal 2017 we are targeting power products gross margins in the mid 20% range. I am pleased to announce that during fiscal 2016, Methode purchased $62 million or nearly 2 million shares of the outstanding common stock at an average purchase price of $31.3. Under the Board of Directors authorized $100 million repurchase plan. There is $38 million of remaining availability under the plan although the plan can be terminated or suspended at any time. Moving to new business, we were awarded an extension of our T76 lead frame business through fiscal 2022, average annual revenue from this program has been approximately 20 million. With Ford we were awarded a 6 year program for the audio control panel of the integrated center stack for a SUV beginning late in our fiscal 2019 as well as a five year program for an integrated tail gate module for a passenger car which include the camera assembly, trunk release and license plate illumination. This product is an excellent example of Methode’s ability to think outside the box and provide the OE cost reduction ideas while improving Methode’s margins. Both programs have had averaged annual revenue of $5 million each and we expect the innovative tail gate concept to expand on other platforms and OEs. In our European operations, we were awarded in shift-by-wire modules for major European OEM, shift-by-wire is a premium car feature, however the solution is moving in the mainstream vehicles since it simplifies controls by using electronics for shifting thereby eliminating mechanical linkages. The ship lever is located at an optimal position within the cabin resulting in improved styling while freeing up important space. This award represents practically $3 million in average annual revenue for 5 years beginning in our fiscal 2018. We anticipate additional awards as the concept further migrates to mid-range vehicles. Additionally, we have awarded two new torque sensor eBike [ph] programs, Methode now has eight eBike customers which makes us one of the leading global eBike torque sensor providers. For fiscal 2017 annual revenue from our eBike sensor business will be approximately $3 million growing to approximately 11 million in fiscal 2018 and 23 million in 2019. Finally, we’ve had our first significant order for our lithium-ion based uninterruptible power supply or UPS system from the federal government for 40 units, with a likelihood of an additional 200 units late this fiscal year. While that’s significant from a revenue standpoint, it is important in that, it is being deployed by a government agency at remote locations and may lead to use by other government agencies and represents the first major deployment of the system. Now let’s move on to developments with our Dabir Overlays and for the last call, there have now then over 3,000 surgeries using Dabir technology and there are several important clinical trials and pilot studies underway. First let me review the 3D laboratory based case studies, the first study confirm that Dabir Overlay’s compatibility with various operating table pads, warming blankets and dressing on patients. The favorable results represented at the symposium on Advanced Wound Care Conference in Atantic in April. A journal article is also in preparation with the White Paper and anticipated later this year. This study confirms that the Dabir Overlay will work well with item commonly used on the operating table. Second, an emergent study to access the maximum weight limit for Dabir Overlay is now complete. The study was conducted by an independent test laboratory and found that our overlays can now be used for our med-search patient weighing up to 600 pounds and for a patient undergoing surgery, weighing up to 400 pounds. We anticipate findings from this study to be presented in a journal article as well, additionally another study of 15 bariatric subjects is under considerations with data potentially being collected later this summer. Third, a blood profusion study to qualify the effects of using a Dabir Overlay to enhance skin blood flow is currently in progress. Enhanced blood profusion is concerned by many experts to be linked to tissue preservation and a key component to accelerating wound healing rates. In the Dabir study, twin subjects of various ages and BMIs are participating. Data collection phases is expected to be completed later this summer with early outcomes showing very favorable results. An abstract is also under development to present results at this symposium on Advanced Wound Care in Las Vegas in October. A journal article will also be submitted later this year. On the clinical and pilot trial front, we currently have 4 trials underway. At a major Midwest academic 50 neurosurgery patients have used the overlay for surgeries lasting 3 hours or greater with now pressure ulcers having been reported. This whole system will also present their mid-study finding at the symposium on Advanced Wound Care. And a major Midwest academic medical center, Dabir technology is being evaluated in a pilot trial in 13 cardiovascular operating rooms including the pre-op period. Over 1,000 surgeries have been completed to date with no reported pressure ulcers using Dabir. Indications are that the center will likely extend the trial for enhanced data recording purposes with analysis of outcomes anticipated this fall. Thirdly at a New York nursing home, a pilot study on 10 very high risk patients placed on Dabir overlays for 100 days is complete with no reported pressure ulcers. The nursing home staff and Dabir clinical team are actively working to summarize the data and complete a white paper. Similarly and other side outcome data to long-term care patients is been gathered for potential future claim on the prevention and treatment aspects of Dabir. Additionally, we have eight other studies and trial opportunities varying from in-home care to emergency departments to spinal cord injuries, to robotic surgery. Alignment with Medicaid treatment and prevention codes remain a primary objective for post-acute activities as this is an important step in fully commercializing the product in this market. We will provide update on this process as they become available. Another interesting development is the potential need for Dabir in emergency departments where long patient waiting times for admittance to a hospital room is sometimes as long as 48 hours to 72 hours, can negatively impact patient comfort and therefore hospital quality metrics and subsequent marketing scores. Currently six, East Coast hospitals are evaluating Dabir overlays for patient comfort and pressure ulcer prevention was positive site feedback received thus far. Separately a contract with QB Medical [ph], a service disabled veteran owned small business distributor for commercial entry into government VA accounts has been successfully negotiated with several VA sties already engaged for product evaluation. On the international fronts, we are introducing Dabir technology to hospitals in New Zealand, Australia and Spain. We have also had a request for hospital product evaluation in Singapore through one of our regional Methode sales offices. However, as we have explained in the past, the introduction of Dabir technology to healthcare professionals has been and continues to be a lengthy process. Product evaluations to confirm product effectiveness combined with the challenge is getting to the C suite decision makers who truly understand and recognize the commercial benefit of pressure ulcer prevention can be challenging. To offset this, we have accelerated recruitment activities for personals tied to commercial sale, customer support and clinical service. These costs are reflected in our increased investment in Dabir from $5 million in fiscal 2016 to a budgeted $7 million in fiscal 2017. Now I will turn the call over to Doug, who will give further details regarding our financial results.

Thank you, Don. I have just a few brief comments on the quarter and the fiscal year. The effective tax rate for the fiscal year was 23.7%. This was within our guidance range of low to mid 20s. As we stated in our guidance factors for fiscal 2017 we expect the effective tax rates also be in the range of low to mid 20s. As Don mentioned earlier, year-to-date we have repurchased just under 2 million shares. The 62 million released for the repurchase primarily came from borrowings under our credit facility. And at the end of the fiscal year we have 57 million outstanding under that credit facility. In the fourth quarter, the reduction in shares outstanding due to the buyback program benefited EPS by about $0.03 per share. For the full year, the benefit was about $0.05 per share. If we were not make any further share repurchases, the fiscal 2017 EPS impact of the buyback program would be between $0.05 and $0.06 per share. You’ll note that in the fourth quarter, SG&A as a percentage of sales was 13.9%. Sequentially, this is in line with the 14% in the third quarter, but higher than the 11.8% in each of the first and second quarters. In addition to the higher legal and professional fees, a contributor to the SG&A percentage increase was the award of the eperformance based RSAs and RSUs, two key employees late in the second quarter of fiscal 2016. The amortization expense for these long-term incentive awards during the first half of fiscal ’16 was only 800,000, all of which occurred in the second quarter. During the second half of the fiscal year, the expense related to these long-term incentive awards was 4.8 million, or about 2.4 million per quarter. In fiscal ’17, we expect the expense for this long-term incentive awards to be approximately 9.6 million. In fiscal 2016, we spend 23.2 million from capital expenditures. For fiscal ’17, we expect capital spending to be down slightly and be between 18 million and 22 million. Depreciation and amortization expense in fiscal 2016 was 23.9 million. For the full year of 2017, we expect it to be between 23 million and 25 million. EBITDA in 2016 was 134 million or about 16.6% of sales based on our fiscal 2017 guidance. We expect EBITDA will remain in the 16% range to be between 126 million and 141 million. Finally, for fiscal 2016 free cash flow was 85.2 million. And again based on our guidance we expect fiscal ’17 free cash flow to be between 83 and 92. Don that concludes my comments.

Thank you. Michelle, we are ready to take questions.

Thank you. At this time we'll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of David Leiker with Robert W. Baird. Please proceed with your question.

I guess two topics here in general; one, if we look at the segment numbers, you’re doing a nice job of pulling those margins up, what do you think the longer term targets across each of those segments are for margins and what it takes to get there?

We’ve said not so much from our gross margin standpoint, but from operating margin, our target is to grow Methode by 1% per year on average. That means some years maybe higher, some years maybe lower, but to achieve that pretty much across the board our new products have to be successful. Particularly when we look at Interface, I think that’s critical, power is to -- improvement in the industrial segment, and then Mineral [ph], we’ve seen a little bit about in Mineral. We've talked about our big data customer returning, although not as brisk of they were in '15. I think those are things that -- and our 10-gig product in interface. Some of the negative factors that are causing some headwinds, the data center business as I said in my prepared remarks, we may be looking at a new norm there as Cloud computing is becoming a little bit or is becoming more prevalent, so we may have to make some adjustments there. And then just in general, the industrial areas being down have impacted the power.

And then if we -- could you touch on just the automotive side there, in particular, how much room you have? Nice performance here in Q4 and how much room you have to push the margin in that particular part of your business?

That one is a little tougher. I mean we are on some very good areas or nice areas of the vehicle, but there is margin pressure. If you look at just the screens themselves, that was neutral to us, but that was a large reduction in sell price, the revenues, because of the reduction there we will continue to have price pressures in those areas, a little bit less when you get into transmissions. And we did benefit from favorable currency and exchange, so how much higher, we can go high, I think that’s going to be difficult. It would also be dependent on new product, so we talked about shift-by-wire, we are very excited about that, it’s a small program. But that is kind of the way the controls are going, so that would carry higher margins than the other programs, but auto's a little bit more difficult to see getting higher than what we’ve -- what I said in our prepared remarks.

Okay and then just one last item on there as it relates to auto, I mean part of the keys of success as you all know is being able to take your costs down faster than the price downs come down. What is -- how does that relationship look for you in terms of just the current tone of the business but as you look forward in terms of the ability to maintain that gap in the performance?

That’s our -- always our goals. I’ve said before, as you get towards the tail end of a program, it gets harder and harder, but if you look through the life of really the K2 program, our team has been able to do that and actually improve our margins. It's hard to forecast exactly what that will be in the future, it's -- how many changes will the automaker allow that benefits both them and us, how quickly we can implement those. Those are always factors, commodity pricing hasn’t been helpful to us that could turnaround and could also help us. So that’s a hard one to answer on a go forward basis.

And then Don just one last clean up question. As we look at the run off of the Ford centric stacked business, where are you on that, how much is left?

We're trying to look that up, we may-- it's less than 10 million.

Okay that’s fine. That’s okay great. Thank you.

And our next question comes from the line of Steve Dyer with Craig Hallum. Please proceed with your question.

Just kind of touching on David's last question, I think over the last couple of years you guys have announced a decent amount of new business that was supposed to start rolling on in fiscal '17, I mean by my math maybe close to a 100 million bucks. Can you sort of break out as you look at guidance, maybe how much overall business rolls off and did some of that new business that was announced -- did some of that slide or just kind of help walk through the puts and takes of the guidance?

A 100 million is a not the number we have, let's look that way. We have two programs that are in launch now which are -- that utilize the K2 platform, one has annual revenue of around 20 million, the other one around 16 million, 17 million, those are the two large ones for this year, they do increase next year. We've got a variety of smaller programs which I don't have in front of me but those are an additional, let's say around 10 million of new launches offset by the decline in the Ford business. That nets for a gain in auto of about 30 million, but it's nowhere near a 100 million. And then you do have to -- included in that is our contractual price reductions, which we were talking about with David, the team does a good job taking off the -- offsetting the reductions with cost reductions, but it still comes off the top line. I can't stress that enough, that even if you offset -- I would just pick a number, if you offset $5 million in the price reduction, it still comes off the sale. So, that's where we end up with our guidance range. But again it's nowhere near a 100 million.

I guess in my notes in looking back and I saw the Renault program started this year and then a couple of smaller ones Subaru, Alfa Romeo, Aston Martin things that have just been announced and maybe [Multiple Speakers].

Right, and then those are -- when I mentioned a variety of other programs in that 10 million, I do not have the launch list in front of me, but the two GM platforms are Arcadia, Trailblazer, Merdel actually launched in '16 so did Aston. BMW 7-series that was a small program that launched in '16 as well, so, we'll probably have a -- we may have a combination of '16, '17 and some '18 launches there. And there's more of a ramp in '18 then there's in '17.

Got it, okay, you've spoken publicly about the fact that you supply bus bars for Tesla's model S and X. Any indication of what the opportunity for content in the model Three might be?

We would anticipate that would be used but I don't -- we do not have an award for that.

And then just a couple of quick ones, hopping over to the Dabir, it sounds like that's getting closer to a sales ramp, any sense for maybe A, how you go to market with that and B, a little more granular as to what that sales ramp looks like, maybe how much you're thinking about for this year and then what kind of a jump you may see next year?

We haven't said anything specific on Dabir revenue for this year, it is kind of small, revenues are contemplated in our guidance towards the end of the fiscal year but the ramp -- the way we view the ramp for Dabir it is a fiscal '18 event. We get the clinicals [ph] behind us here, as you heard in my prepared remarks, there is tremendous amount of activity going on. Its knock on wood, it's hard to point something negative, we're getting very-very good results from all of the trials that are going on, it’s just a lengthy process. So, I was at -- some revenues in it and let's leave it at that, it's really an '18 event for Methode.

Got it, and then last one from me, kind of when you put those pieces together you stuck by your 9% to 10% EBITDA growth, CAGR in that, if I remember kind of started in fiscal '15. So you were down in fiscal '16, your guidance implies sort of flattish in '17 which means sort of the remaining three years would indicate a pretty good pick up, A, am I thinking about that correctly and B, where does that come from? I think you know -- is that largely Dabir driven, are there some good indications on some more center stack business, any help there? Thank you.

Dabir is in our five year plan. So that’s a factor, the other new products that I talked about earlier are in there. We are anticipating some improvement in our industrial businesses and also our more auto programs and auto programs that are launching now that will be fully ramped. The other one that's very interesting is our eBike torque sensor business which is our magnetoelastic technology. So, it's a combination of the advance that will get us there. And if you look at our prior five year plan, it was the last, really two years, I think it really started in maybe in the third year, but it was really the fourth and fifth year that it ramped. So you are right, the CAGR will have to be, for the latter, here it will have to be greater. But the stage is set for that and I also can't stress enough that, I can't say a 100%, but we've booked our renewal business on most of our automotive programs. And auto as you know, you can take a giant step backward -- forward and then have it offset by not being able to renew business. We've been able to do that, we've just announced the 276, that was also critical. So, the stage is set. It is new product dependent and of course you have to decide on what the [indiscernible] is going to be, but we're confident in that and that's what we reiterated in our release this morning.

Our next question comes from the line of Christopher Van Horn with FBR. Please proceed with your question.

Could you just comment on the pricing concessions that you saw both during the quarter and during the year, were they kind of in line with expectations or were they a little bit more aggressive than you originally thought?

No, they were in line. We made mention of them because as I said they do take from the top line, but no, they were in line.

And then you talked about being able to combat that on the operating line, can you give us anymore clarity specifically on, is it headcount reduction, is it better sourcing of materials like what are some of the things that you were able to enjoy specifically?

It is certainly that labor -- taking labor out is a key component to even if it's in a low labor area. Price reductions, favorable DPV [ph] is always a key. And the other aspect which continues to help us is our quality. I mean to ship two million parts with no defects, there is a definite benefit to the bottom line. That goes really without saying. Also, when you do have a quality problem even if it's a minor one you are scrambling and you are spending a lot of time and money to resolve it. So, the teams around the world, their ability to keep our PPM single digit is paying off dividends on the margin line, and again that also helps offset our price reduction. So it's a myriad of things that get planned, really a year in advance because we have to have, not so much the reduction in quality expenses, but anything else has to have the automakers approval. So, there is a lot of planning that goes into these offsets. And again, I always congratulate the team, on these calls because -- so they have the -- the margins we have on these programs is, compared to our peers I think is very good.

Could you give a little more detail on the shift-by-wire award, is that kind of how that was born and was it an existing customer that you kind of rolled into this new product line and what does the market look like that for going forward, is there a lot of competition or are you guys kind of first to market with your specific technology offering?

It is with the existing customer, I can't say who the customer is, but it is one of our existing customer in both U.S. and Europe. We don't have a patented design on that, but with our -- first of all, with our relationship with the customer and our quality reputation that got us really on to the bid list where there were six-seven other people on that, I think it was actually more to start with. We wanted to move in that area mainly because we could vertically integrate most of the components without really a large investment on our part. Those are really a combination of knowing the customers the market is changing. I don't have market data in front of me on where shift-by-wire is going, but for the most part we feel that's four or five years from now that'll be the norm. And it’s just an area, the vehicle that runs, often runs cross platform and we look for cross platform rather than being specific to an individual model, that way you would have to change the A surfaces of that, but the guts [ph] of bit will be about 60% will be common and then vertical integration is about 80%, so that's our first win and if there is opportunities with other, not only just the premium vehicles, but other mid-range you know with BMW, Audi, Mercedes, PSA and then potentially with the Japanese.

Got it, got it, and then just finally you know cash seems to be getting you know pretty high here. Could you just update us, do you still have the same priority between acquisitive buy backs, possible dividend raise, could you just kind of update us on your priorities for your use of cash?

We continue to pay a dividend we think that's very important, we continue to invest in our vertical integration where it makes sense and in new products those are always two high priorities for us. We have a stock buyback plan in place. I wouldn’t rule out increasing that if we did not find an acquisition that made sense to us. But really an acquisition is a key focus. I keep saying that and we've come close, but we have some pretty strict criteria and I'm confident that we will make a correct or the right acquisition, we're just being very patient, but if we don't do that you could see us take some other actions with that cash.

But I will also point out that [indiscernible] that most of that cash is overseas.

Got it, got it, thanks again for the time.

[Operator Instructions] Our next question comes from the line of Jimmy Baker with B. Riley, please proceed with your question.

Just wanted to follow up on shift-by-wire, so could you just talk a little bit more specifically about the content you're providing. Is that the UI or the underlying technology or both and I guess to the extent that you're providing the underlying tech, yet simply there is at least from our knowledge, there is a couple very entrenched competitors there with global scale that serve customers including yours, just interested in how you know on what basis you're able to compete and win against them.

People have said that about center consoles as well. We’re, first of all we're a multinational company that's vis-à-vis [ph] can have us produce products in any of their major areas. So we're a viable source for it. There are competitors, but there's competitors on center consoles too. So we're providing the entire system which like we do on the center councils. There's electronics in it which we are providing, the smarts for that is up to the OEs, the software, but everything else is no different than what we're doing on center consoles and we're able to effectively compete. I can't -- as I said earlier we don’t have a patent on it and there are some big players in it, but there's big players in almost now we do in automotive, so it's a good win for us, we think it'll get carried over to other vehicles and it's another area and it's centric to the center console, any which way we look to be in, we’re also on overhead councils where there is a whole bunch of competitors there and we're able to compete.

Okay understood and then the $13 million concession that you called out and I think you talked about that as being in line with your expectations. I guess just to be clear was that, or is that incremental to the contractual annual price downs, and I guess if so will that essentially required to stay on a successor platform or did you gain any incremental business as a function of that concession?

Now that is simply the customer -- let me back up. Generally the OE will select the screen supplier, so they will negotiate their own contract with them that will have price reductions in it and then often Methode becomes the -- or that supplier or vendor becomes the directed sub to Methode. So we actually take over the management of the supplier, we get our margin on that, we’re responsible for his quality as well. But the OE has the right to go in and renegotiate that contract and again not with us, with that supplier and what happened here is, as you know the price of screens have dropped dramatically since the launch and the customers took advantage of that and we fully expected them to, they went in negotiated a reduced amount, it was $13 million that we -- approximately 13 million depending on the volume an take rate, that gets written into that contract. We are buying those screens for essentially $13 million less and our cost of goods sold is 13 million less. So it is neutral to our bottom-line and I think that’s very-very important. It’s not the normal price concessions where we work very hard to offset that, this we didn’t have to offset in that it was essentially a pass through and that happens not often, but it does happen, but it was a large enough number that since it came off the top line we needed to mention it. So slightly unusual but not -- it’s happened before.

All that clarifications is really helpful. Just had two more here, one on Dabir, just hoping you could talk a little bit more about what you're seeing that gives you the confidence to kind of time stamp some expected financial performance here, you know, commenting that you expect sales will ramp in the latter half of this fiscal year and then further into ’18. And then when you talk about $7 million investment in Dabir this year, should we think about that as a net investment so in other words you’re going to invest 7 million in addition to whatever you can offset in incremental revenues, so that it’s a -- call it $7 million net loss business this year?

Pretty much, that’s a good way of looking at it. Let me answer your first question, some of the guidepost we look at, let's say for the next 24 months. The clinical trials will certainly help us. As it just gives us independent verification and improves our credibility. We’ve got a number of those going on that I detailed and we continue to detail. The emergent study is also important and in that it could allow us to change our claim that could help heal wounds, we can’t do that now, we don’t have a verification. That would also require us to have a different FDA certification. Mevic Care Reimbursement code is another milestone that’s not easy to get and you can get the -- you do it wrong, you can get to lower an amount, so we’ve got consultants working on that, that is a -- it’s a process. That’s key when we look at -- for nursing homes, hospitals and long-term care. The VA evaluations also are very critical. I know you are looking for specific numbers, we’re not far enough along in the clinicals and in the -- not so much clinical, but really in the sales process that I want to project that. We know -- we’ve talked about what the market opportunity is and if you just take a small percentage of that, Dabir is a good product for us or business for us, but I am not quite ready to quantify where we think Dabir can go, we will, as we have more data. As I said on the call, everything has been going well and we are frustrated by the time it is taking we’re having good outcomes but it is taking far longer than we thought, we are adding additional people as we talked about to accelerate that and I think long-term it will go into some sort of distribution, we’re just not there yet. Doug is there anything you’d add?

I think that covers all of the major guide posts.

But again we do know we have to provide some numbers on that, but we're just -- let us go a little further in our sales effort here and we’ll be able to do that.

Sure understood, and then just lastly on the Hetronic litigation. I guess firstly are you able to kind of quantify or just you know maybe put some brackets around the size of damages you're pursuing, it seems like it's been, you know it's a costly litigation I guess so far, looks like the legal expense from disclosures in the 10-K was about a $0.19 headwind earnings in fiscal '16, what are you assuming in the fiscal year '17 earnings guidance in terms of legal spend?

Similar depending on how litigation goes and Jimmy, I'd like to answer your question, but since we're engaged in litigation I can't. I've said what I can on the prepared remarks and I really can't go any further than that and I hope you understand.

Okay, fair enough, appreciate the time.

There are no further questions at this time, I would like to turn the call back over to you Mr. Don Duda for any closing comments.

Michelle thank you very much, we'll thank everyone for listening and their questions today and wish everyone a very safe and enjoyable July 4th, take care now.