Welcome to Methode Electronics Fiscal Year 2017 Fourth Quarter 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 forward-looking statements which reflects management's expectations regarding future events and operating performance and speak only as of the date hereof. These forward-looking statements are subject to the Safe Harbor protection provided under the securities laws. Methode undertakes no duty to update any forward-looking statements to conform the statements to actual results or changes in Methode's expectations on a quarterly basis or otherwise. Forward-looking statements in this conference call involve a number of risks and uncertainties. The factors that could cause these actual results to differ materially from our expectations are detailed in Methode's filings with the Securities and Exchange Commission such as our annual and quarterly reports. Such factors may include without limitation the following: dependence on a small number of large customers including two large automotive customers; dependence on the automotive, appliance, computer and communications industries; investment in programs prior to the recognition of revenue; timing, quality and cost of new program launches; ability to withstand price pressure, including pricing concessions, currency fluctuations, customary risks related to conducting global operations, ability to successfully market and sell Dabir Surfaces; 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.; the effect of a catastrophic event or significant business interruption at one of our facilities; ability to keep pace with rapid technological changes; a breach of our information technology systems; ability to avoid design or manufacturing defects; ability to compete effectively; ability to protect our intellectual property; ability to successfully benefit from acquisitions and divestitures; the recognition of impairment charges and costs and expense due to regulations regarding conflict minerals. It’s now my pleasure to introduce your host, Don Duda, President and Chief Executive Officer of Methode Electronics.

Thank you, Brenda, and good morning, everyone. Thank you for joining us today for our fiscal 2017 fourth quarter financial results conference call. I am joined today by John Hrudicka, our Chief Financial Officer; and Ron Tsoumas, our Controller and Treasurer. Both John and I have comments and afterwards we will take your questions. As you saw in our press release this morning, we were very active on the acquisition front during the fourth quarter and thus far into this fiscal year. On Monday, Methode and Procoplast, an independent manufacturer of automotive assemblies, entered into a stock purchase agreement for the acquisition of Procoplast. Located close to the Belgium German border, Procoplast is in proximity to several key automotive customers. Its brand new facility includes automated assembly equipment, injection molding, and test and measurement equipment. The company produces high volume products for BOSCH, Kiekert, ZF, TRW, and others. The acquisition is expected to augment our highly successful transmission lead-frame business. The transaction is expected to close in the second quarter of our fiscal 2018 and is subject to customary conditions including but not limited to regulatory approvals. In the guidance section of our release, we indicated that if the acquisition closes as expected in our second quarter, we anticipate approximately $17 million in revenue, which represents approximately 7 months of Procoplast’s revenue. The agreement to acquire Procoplast is a transaction with a private company and the selling stockholders have requested that the purchase price not be discussed publicly, but I can tell you that Methode is paying at approximately 8 times EBITDA multiple and further information regarding the pending transaction is available in our financial statements released this morning. Additionally, we incurred $1.5 million of expense related to an acquisition we chose not to make in Asia. The company’s end…

Thank you, Don. I have just a few brief comments on the quarter and fiscal year. Good morning, everyone. The effective tax rate for the fiscal year was 19.8% just slightly below our guidance range of low-to-mid-20s. The lower tax rate when compared to prior year is due to a $4 million tax benefit recorded in Q4 for foreign investment tax credits, $1.2 million related to more income and lower tax jurisdictions and $1 million representing the change in other deferred tax assets in part offset by a tax expense of $1.7 million recorded in Q4 on a dividend between foreign entities. For fiscal year 2018, we expect the effective tax rate to be in the range of low-to-mid-20s. Turning our attention to SG&A, you will note that in the fourth quarter SG&A as a percent of sales was 13.4% compared to 13.9% the prior year basically flat in terms of dollars spent, but on higher sales. We incurred an increase of $1.5 million related to M&A expense from an acquisition we elected not to undertake neutralized by lower compensation, legal and professional fees and selling expenses. For the full year, SG&A as a percent of sales was 13.2% compared to 12.8% to prior year or $4.3 million higher. This is primarily due to $5 million in higher stock award amortization, $1.6 million increase in legal and other professional fees and $1.5 million in M&A expenses mentioned previously. Offset in part by $2.3 million in lower selling expenses and $1.5 million in lower travel. Moving to capital expenditures, in fiscal 2017 we invested $21.8 million. For the fiscal year 2018, we expect capital investments to be between $20 million and $24 million. Expense for depreciation and amortization for fiscal 2017 was $22 million. For fiscal year 2018, we expect depreciation and amortization to be between $20 million and $24 million. Shifting to EBITDA, for fiscal 2017 it was $139.5 million or 17.1% of sales. We expect EBITDA to be in the 16.5% to 18.5% range or between $135 million and $150 million for the full year. In terms of free cash flow for fiscal 2017 was $95.4 million. Based on our guidance and capital spending estimate, we expect fiscal 2018 free cash flow to be between $90 million and $100 million. Lastly I just want to bring everybody current on both our share repurchase program and credit facility. For our share repurchase program inception to-date we have purchased 2.3 million shares for a total of $71.8 million, leaving $28.2 million outstanding. Our credit facility outstanding balance is $27 million. During fiscal 2017, we had no borrowing but had principal payments of $30 million. We have $123 million available to borrow on this credit facility, which does not include the option to increase the principal amount by $100 million. Don that concludes my comments.

Thank you very much. Brenda, we are ready to take questions.

Great. [Operator Instructions] Our first questions come from the line of David Leiker with Robert W. Baird. Please go ahead with your questions.

Good morning, everyone.

Good morning, David.

Don, on Procoplast, I guess, a question here in terms of the mode of the acquisition, how much of it was a function of the product and product line extension as opposed to – sometimes you make acquisitions that is effective way of expanding the capital base for capacity, what are your thoughts on that?

Sure. Some background, our European operation has, for quite a while, felt they needed a base of operations in mainland Europe particularly in the area where Procoplast is located. We're operating in Malta, we are operating in Egypt, and larger components such as the active stability control where we’re magnetizing a portion of the steering arms or stability arm. That while logistically we can handle it, it really doesn't make a lot of sense to ship it out of Germany into one of the other plants and then back, so we were looking for where can we have a facility to handle larger product, maybe we're making some of the components in Egypt or Malta, but final assembly from a logistic standpoint, we felt in certain instances needed to be done mainland Europe, and we felt this for quite a while and have been looking maybe greenfielding a plant, which we've done in the past. Egypt was a greenfield operation, but that takes three years or so to do that, so we also started to look at potential acquisitions. What Procoplast does for us and the reason we are excited about is, one, it has a brand new plant that they moved into less than a year ago, well equipped, I’ve been there, again, good location. So, it – and it is capable of doing the magnetization that we need to do as magnetoelastic starts to expand; we think we will be able to handle that. They also do complex insert molding, which we do some of that in Malta, but they do that for the customers we mentioned. And if you look at the customer base, the competitor to Continental is BOSCH on transmission controllers.

Okay.

So, with Procoplast we pick up those customers. So for a variety of reasons it made sense to do the acquisition. We did not need – if we wanted to add capacity, we could add it in Malta or Egypt. Regionally, it made sense to us and then also a customer base. So it was a very – it’s a smaller acquisition, but it really fit into our plant.

Great. That sounds like a great addition. And then just – the only other question I have right now is just on exit of the two business units, just some of your thoughts behind exiting those operations.

We do a review of all our units at least once a year, and we’ve been talking about that – we felt that particularly in the connectivity business area that because of cloud computing that model probably didn't make sense anymore. We had very slight loss last year because we were able to curtail expenses, but going into this year revenues were going to be further down and we were going to be in the red. So that just – us doing what – expected to do is to look at those even as – and make the appropriate adjustments. Now on active energy, that market was just developing slower than we like. We bookshelf the technology and we're very aware that managing businesses like that take management time. So where should we be putting that management time and we elected to again bookshelf the technology and close the operation.

So, the comments you made on connectivity somewhat arguer to – as we look at your 10 gigabit transceiver and why do you view that as being a different opportunity situation?

Very good question. Whether it's in cloud computing or data centers, the need to go from 1 gig to 10 gig is still there. The switches can operate at 40 gig. So that's not an expansion, that's really more of an upgrade to existing data centers. So, I won't say that it is total or mutually exclusive, but it’s close. I’m not – we’re not particularly concerned about that. Past 10 gig, we're starting to see attraction there. Our major customer for one gig has tested the product and we're discussing commercial terms now, it's been through the labs. HP continues to buy product at an increasing rate. So – not completely different, but enough that we are optimistic about 10 gig.

Okay, I understand. Thank you much.

Thank you.

Our next questions come from the line of Steve Dyer with Craig Hallum. Please go ahead with your questions.

Thank you. Good morning.

Good morning.

Don you mentioned within auto a couple of awards that start in your fiscal 2020. Just curious there’s been sort of a large one that's been – it’s been lingering out there, I’m wondering what you can say about that, has that been resolved or awarded or is that still a potential for you guys here in the next couple of years?

That is – if you're talking about the opportunity with our other large customer, that is still pending and we would anticipate that they are going out for bid here sometime this year. I can't confirm from when, but that is still very much an opportunity for us.

So, we’re likely -- would you say at least a year off from an award there?

It's up to the customer. No I don’t – I think we'll see that in this calendar year.

Okay, got it. Any comment, I guess, around that as to how you feel your position presumably fairly well given some of your other successes in relationship?

It depended on the customer – decides to bid it. With GM, the screen is involved, with this customer it usually isn't. So it depends what the package will look like from the customer. I know they are still evaluating exactly what the configuration should be. Every time I get asked this question, I don't wanted say too much because it is a competitive situation. We have to be conscious of the customer’s wishes as well. So it's about all I can say.

Okay, got it. And then I guess just last question for me. A few years ago you laid out kind of a target and a composition package around 9% to 10% EBITDA CAGR through 2020, is that still a goal that you think is achievable or has anything kind of puts or takes moved around there since that was initially sort of laid out?

First of all, we very much believe it's achievable and certainly the awards we announced this morning certainly help that. I’d say in the past Dabir is a factor in that, not heroically, but it is a factor, so that’s something that has to happen. Now we never had connectivity or AES in for big numbers for 2020, but they were in there. But we had also at one point in fact in the original plan we had taken our appliance business to zero because of – Whirlpool has changed to more of a in-house design and then go out for built to print to contract manufacturers, which we generally don't participate in that. But what has changed since then and you saw the award, the award we announced this morning. We now feel that we will continue to have a good business with that customer. They've changed their approach. So, while some things gone out, that's actually a rather large one that has come back in plus in the interim while we were – maybe we get along with that customer, the group refocused on commercial cooking and also – and vending [indiscernible]. So we see that growing as well. So, a number of ins and outs, but we're still very enthusiastic about that. And I can't really talk – say anything more about the acquisition we didn't make. We weren't quite at the altar, but we were in the church. We have been through a good portion of due diligence that also would have contributed to 2020. So we are enthusiastic about it. We are planning on that. We are obviously incentivized to that.

That’s pretty helpful. Thanks, Don.

Thank you. [Operator Instructions] Our next questions come from the line of Jimmy Baker with B. Riley. Please go ahead with your questions.

Hi. Good morning, Don. Good morning, John.

Good morning.

Good morning.

So you're going through it seems about a $0.12 headwind to earnings from the litigation spend, I guess, it’s a little less than half the fiscal 2017 headwind, right? So, should we take that to imply you’re optimistic about a resolution midway through this year, but if it does go to the full year then that's when the language – you mentioned I think that it could approach fiscal 2017 levels, then that number about $11 million spend would come back into play?

Jimmy, I make the attorneys nervous whenever I comment on litigation. So if you don't mind, I think I'll just stick with my prepared remarks there.

Okay, fair enough. Just switching gears then over into interface. So I'm just hoping you could speak a little bit more about what could pressure the gross margin there into the high-teen that’s pretty low for that segment, which I guess is counterintuitive if you’ve exited the – a fairly unattractive business?

That’s a good question. We are taking a little bit of a wait and see approach. 10 gig is – well, it is gaining momentum, that's going to be latter half of the year that we are encouraged with what I talked about earlier with our prime time customer for 1 gig and then HP as well. So that's a factor there. It’s probably more of us just being cautious that let's see how 10 gig goes. Appliance is – lately has been up, not every month, but Whirlpool has had some good success. They had help from [indiscernible] competitors that has helped us. And then we really want to see where Hetronic goes in the first half of this year. I don’t want to say that there is conservatism in that, but there's probably some room.

Okay. And I just wanted to go back to the 2020 plan, if we could. So you talked about your conviction and that target still – can you – and I understand that there are many puts and takes and there are various scenarios that can get you to that level. Help us understand in terms of just the automotive backdrop. Is there a SAR level where if we're below, is it $16 million, is it $14 million, where you feel like at that point or below it's really compromised your ability even if some other things go very well for you?

I don't know that we’ve related to a SAR level, but obviously in 2020 if there's a downturn in automotive that affects our key platforms, which would be pickup trucks and SUVs, we are going to be affected by it. And that's a risk that we knew when we initiated the plan. We could also be in a full blown economic recession at that time, which could – which is going to affect everybody. Both of those events would affect certainly anybody that's in the automotive segment. So when we look at that plan, we – that don’t look – SAR is so much as we look at what is LMC showing through the platforms that were on. Given those projections, an LMC doesn't take into account any type of a downturn. Given those projections, we feel comfortable in our automotive – the contribution that our automotive group will give to the plan. Now, if there is a downturn in auto and Dabir is where we expect it to be, that could be offsetting. If we do an acquisition, that could be a non-automotive acquisition, that could be a offsetting. So, we run those scenarios, but that's still several years out and that is definitely out of our control. Other than – you know, what can we do in our other businesses are still potentially off something – offset something like that.

Okay, got it. Just lastly more of a housekeeping item. What's assumed in the guidance in terms of the average full year share count and any discussion with the board in terms of increasing that share repurchase plan?

Yeah. Jimmy, share count is 37.5 million. And I apologize, what was the other part of your question?

Just if you’ve had any conversations with the board about adding and expanding to that share repurchase program, I think, about three quarters the way through it at this point?

Well, we have discussions every quarter on that. And at this juncture, we didn't do any – last quarter we were looking at a larger exposition, so from that standpoint, we didn't go any further. We still have little ways to go on that. And then – so if we're – if we continue to look at acquisitions, it really depends. We make an acquisition, a larger one then maybe we won’t expand it, if we don’t then I think we will ask the board to continue it. We are sitting in a very good cash position and it makes sense if you're not going to use it for an acquisition or expansion within the company that we do something like or with the dividend.

Okay, understood. Thanks very much.

And then I just want to clarify what I was reach for before is commercial foodservice, not commercial cooking and vending where our touch sensitive group is pursuing and they also are pursuing on controls for gas pumps putting our touch sensor technology there, so that’s another area that we are working on. And so we do also came from Whirlpool, so we are feeling very good about touch sensors as we go into our 2020.

Thank you. Our next questions come from the line of David Leiker with Robert W. Baird. Please go ahead with your questions.

You just created a follow-up question for me. You said commercial foodservice and what’s the other one?

Vending.

Bending?

Vending.

Vending, got it.

So putting touch sensor on…

My ears figured it out. Yeah, because you’ve talked for a long time about a soda machine product right or…?

We are on a small program that Coca-Cola is coming out with. So the team has made some progress. I just want to clarify to commercial cooking in that I was…

Yeah, yeah. And vending, is this in restaurant or like a dispensing machine?

Right now, it’s in restaurant, but it could also be on Coke or Pepsi machines. Our hyper-touch technology allows us to work with vending and that it doesn't require any – or allows for space in between. The typical touch cell has to be in contact to the surface of [indiscernible].

Right.

That doesn’t require that. So that’s why we’ve gone back to the Coca-Colas and the Pepsis on that.

Yeah.

And then the gas pump application, the three select buttons are a large warranty issue for the pumps and then again the gas stations and we have demonstrated our ability to make them very robust using our touch technology. So that – in the lull while we are trying to figure out where Whirlpool – where they were headed and their vendor base team was redirected, so what we think now is that you’ve got Whirlpool back in the fold if you will and plus these other applications.

Okay. My real follow-up question was General Motors’ full size pickups. There is a lot of discussion about the model changeover there, they are closing down the plant to retool and then the switch over. What are your thoughts in terms of what you can share on the timing of that and the impact of that for you over the course of the next year?

David, I have to be very, very careful on what we say there and it’s up to the automaker to announce when they are going to launch the product.

Yeah.

But probably more of a fiscal 2019 effect then it is here in 2018, but again I really can’t say too much about that because I have to respect the customer’s wishes.

Do you – let me ask it this way. What kind of a revenue impact do you have – it doesn’t sound like there’s much of an impact in 2018 for you – revenue impact?

That’s correct. Yeah, yeah, exactly.

Okay. All right. That’s all. Thanks.

All right. Thank you.

Thank you. This concludes our question-and-answer session. I’d like to turn the floor back over to management for closing comments.

Thank you, Brenda, and we will wish everyone a pleasant summer and we will talk to you in the fall. Thank you so much.