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Methode Electronics Inc. (NYSE:MEI)
Q2 2020 Earnings Call
Dec 5, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to the Methode Electronics Fiscal Year 2020 Second Quarter Conference call. For this quarterly conference call, the company has prepared a PowerPoint presentation entitled Fiscal 2020 Second Quarter Earnings, which can be found at methode.com in the Investor Relations section. 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 a 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 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, commercial vehicle, computer and communications industries; international trade disputes resulting in tariffs and our ability to mitigate tariffs; timing, quality and cost of new program launches; ability to withstand price pressure including pricing reductions; ability to successfully market and sell Dabir Surfaces products; currency fluctuations; customary risk related to conducting global operations; ability to withstand business interruptions; recognition of goodwill impairment charges; abilities to successfully benefit from acquisitions and divestitures; investment in programs prior to the recognition of revenue; dependence on the availability and price of materials; fluctuations in our gross margins; dependence on our supply chain; income tax rate fluctuations; ability to keep pace with rapid technological changes; breach of our information technology systems; ability to avoid design or manufacturing defects; ability to compete effectively; ability to protect our intellectual property; success of Grakon and/or our ability to implement and profit from new applications of the acquired technology; significant adjustments to expense based on the probability of meeting certain performance levels in our long-term incentive plan; and cost and expenses due to regulations regarding conflict minerals.

All lines have been placed on a listen-only mode and the floor will be open for your questions and comments following the presentation.

[Operator Instructions]

At this time, it is my pleasure to turn the floor over to Mr Don Duda, President and CEO. Sir, the floor is yours.

Donald W. Duda -- Director, President & CEO

Thank you Cynthia, and good morning everyone. Thank you for joining us today for our fiscal 2020 Second Quarter Financial Results Conference Call. I'm joined today by Ron Tsoumas, our Chief Financial Officer. Both Ron and and I have comments and afterwards, we will take your questions.

To start, Please turn to Slide 4. Although our second quarter and six-month fiscal year-to-date results were adversely impacted by the 40 day UAW labor strike at General Motors, incremental sales from Grakon, revenue from new product launches, benefits from our initiatives to improve profitability and our continuous improvement actions to reduce cost, improved Methode's year-over-year results on a GAAP basis. Methode's revenue increased 8.2%, our net income increased 36% and our net income per share increased 35.3% for the six months ended October 26th of this fiscal year.

Again, please refer to Slide 4 for our adjusted net income and adjusted income per share results, which exclude expenses for initiatives to reduce overall costs and improve operational profitability, acquisition-related costs, including purchase accounting adjustments and long-term incentive plan accrual adjustments in the applicable periods. As you can see in Slide 5, our year-to-date performance, excluding the adverse effect of the UAW labor strike at GM still saw headwinds tempering our growth. Weaker auto [Phonetic] sales, lower industrial equipment purchases and lower planned sales as well as the impact of weaker foreign currencies affected growth. However, with the strike behind us, the opportunities that we have going forward and our teams focus on our strategy, operational discipline and managing the business allows us to reaffirm our pre-tax income and EPS guidance for the fiscal year as shown on Slide 6. Please note that we have reduced fiscal year 2020 revenue guidance largely due to the effect of the UAW labor strike. During the second quarter, new business wins and business development efforts in both the automotive and industrial segments continued to capitalize on important vehicle trends including electrification, LED lighting and safety.

Methode has been awarded a custom complex insert-molded product for European vehicle manufacturers, 48 volt powertrain system launching mid-fiscal year 2023, with an annual average revenue of $10 million. We've also been awarded an injection molded bus bar and contact assembly for another European OEMs, AGV 48 volt auxiliary battery pack for approximately $3 million per year, again, starting in fiscal year 2023. For the first time, Methode was awarded the digital cluster display and central display touchscreen with haptic feedback by a European premium luxury OEM for the next generation vehicle. This key strategic win will launch in our fiscal year 2023. It is expected that this HMI solution, while small in initial revenue, will over time be carried across the customers' other vehicle platforms, increasing revenue potential. Further, we believe that know-how and technology can be brought to other customers.

Grakon and Pacific Insight and continue to win several LED interior and exterior lighting programs for applications in automotive, commercial trucks, electric vehicle, buses and railcars, increasing their content per vehicle and per OEM customer with some of these launches starting in our fiscal 2022.

As noted on slide 7, some of these wins are a result of cross selling our technology, specifically Grakon is leveraging Pacific Insight's RGB LED light engine technology with commercial truck and electric vehicle OEMs. This technology was originally developed for the automotive market and provides Grakon customers with proven technology as they look to further advance their features and customer offerings. I want to extend to the Grakon team my appreciation for their integration efforts and their focus on growing the business with booking awards of over $83 million since being acquired by Methode which includes replacement and new business. Our magneto-elastic sensor business continues to grow, doubling the revenue on e-bikes this quarter versus last year. Also our eddy-current sensor technology has been chosen for European transmission position sensor starting in the second quarter of fiscal year 2021 at approximately $2 million in average annual revenue.

Moving to Slide 8, our sensor group continued its development of a tow load sensor system based on Methode's magneto-elastic technology. Methode offers a sensor that provides real-time tow load and tow force data to the user and vehicle systems which should also improve drive stability. We are targeting light truck and commercial OEMs to implement the benefits that can be derived from the sensor when driving with trailers. In the second quarter at Dabir, we added four new customers and completed nine hospital evaluations and five evaluations in process with several scheduled in the coming months. Dabir development team is also in the human subject phase of testing of a new surface with two hospitals that are targeting Dabir for use with pediatric patients. Successful testing and implementation [Phonetic] will give Dabir another revenue path in the acute space.

Turning to Slide 9. And in summary, I am very pleased that Methode worked diligently to minimize the financial impact of the strike and the effect on our workforce. I would like to thank our worldwide team for their efforts and their focus on operational performance despite the many business challenges they faced.

And at this point, I'll turn the call over to Ron who will provide more detail on our financial results.

Ronald Tsoumas -- Vice President, Corporate Finance and Chief Financial Officer

Thank you, Don and good morning everybody. Please turn to Slide 10. Second quarter sales declined 2.6% or $6.8 million to $257.2 million in fiscal '20 from $264 million in fiscal '19. Sales in the second quarter were negatively impacted from the UAW labor strike at GM which reduced net sales by $32 million. Foreign currency exchange continue to be a headwind as the euro and renminbi exchange rates were weaker than the prior year, reducing net sales in the quarter by $3.9 million. This was partially offset by higher sales from Grakon of $32.3 million. Grakon was acquired in 2Q of fiscal '19 and was included for 1.5 months versus the entire quarter this fiscal year.

On a GAAP basis, second quarter net income increased $9.2 million to $23.8 million or $0.63 per share from $14.6 million or $0.39 per share for the same period last year. Second quarter GAAP net income benefited from the results of Grakon, lower acquisition related costs, lower stock award amortization expense and the net benefit we received from initiatives to reduce cost and improve profitability, which included lower expense for those actions in the current fiscal year versus last fiscal year. On a non-GAAP basis, second quarter adjusted net income decreased $7.7 million to $24.2 million or $0.64 per share, from $31.9 million or $0.85 per share for the same period last year. Negatively impacting second quarter GAAP and non-GAAP net income were the adverse impact of the UAW labor strike at GM of $9.6 million, higher expenses for net interest and tangible asset amortization, income taxes and net tariffs as well as the impact of foreign currency translation.

China tariffs continue to be a headwind, although we are aggressively working to mitigate the impact on our results. In the second quarter, our net tariff expense was $600,000 and year-to-date net tariff expense was $900,000. This includes tariff revenue reimbursements related to fiscal '19 which were agreed to during the first quarter by some of our customers. Therefore, the amount recognized year-to-date does not represent a run rate for the remainder of the year. We expect the net impact of tariffs to be higher for the remaining two quarters of fiscal '20 but lower than the $4.5 million to $5.5 million range we estimated during our first quarter fiscal ' 20 earnings call in August. Currently, we believe tariffs for the fiscal year will be in the range of $2.5 million to $3.5 million at the current tariff rate. Moving to margins on Slide 11. Second quarter GAAP gross margins were basically flat, but the non-GAAP adjusted gross margins declined 150 basis points year-over-year in fiscal '20. Current year gross margins were impacted by the UAW labor strike at GM, the negative impact of foreign currency translation and lower radio remote control, bus bar and appliance sales. This was partially offset by the benefit of Grakon sales. Non-GAAP adjusted gross margins exclude expenses for initiatives to reduce costs and improve profitability and purchase accounting adjustments in the applicable periods. Second quarter GAAP selling and administrative expenses as a percentage of sales decreased 530 basis points year-over-year, favorably impacted by lower expense for operational improvements, the benefits of those operational improvements, lower acquisition costs, and lower stock-based compensation expense. However, non-GAAP selling and administrative expenses as a percentage of sale, which exclude acquisition related costs, expense for operational improvements and stock-based compensation accrual adjustments in the applicable periods increased 100 basis points year-over-year in the second quarter of fiscal '20. The increase was mainly attributable to lower sales as a result of the UAW labor strike at GM.

Moving to year-to-date margins on Slide 12. Year-to-date GAAP gross margins improved 50 basis points, but the non-GAAP adjusted gross margins declined 30 basis points in the year-over-year in fiscal '20. Gross margins were impacted by the UAW labor strike at GM, the negative impact of foreign currency translations and lower radio remote control bus bar and appliance product sales. This was partially offset by the benefit of increased Grakon sales.

Non-GAAP adjusted gross margins exclude expenses for initiatives to reduce costs and improve profitability and purchase accounting adjustments in the applicable periods. Year-to-date GAAP selling and administrative expenses as a percentage of sales decreased 350 basis points year-over-year, positively impacted by lower expense for operational improvements, the benefit of those operational improvements, lower acquisition costs, lower stock-based compensation expense and by selling and administrative expense attributable to Grakon, which is lower as a percentage of sales than Methode as a whole. However, non-GAAP selling and administrative expenses as a percentage of sales, which include acquisition related costs, expense for operational improvements and stock-based compensation, accrual adjustments in the applicable periods, slightly increased on a year-to-date basis. The increase was mainly attributable to lower sales as a result of the UAW strike at GM.

Shifting to EBITDA on slide 13, the company generated $43.6 million in the fiscal '20 second quarter versus $29.2 million in the same period last year. However, adjusting for expenses for initiatives to reduce overall costs and improve operational profitability, acquisition-related costs, and stock-based compensation accrual adjustments in the applicable periods, second quarter of fiscal 2019 adjusted EBITDA was $50 million compared to $44.1 million in the current period. The [Indecipherable] decrease was primarily attributable to the adverse effect from the UAW strike at GM, partially offset by higher EBITDA from Grakon.

Moving to year-to-date EBITDA on slide 14, the company generated $93.9 million in fiscal '20 versus $66 million in the same period last year. However, adjusting for expenses for initiatives to reduce overall costs and improve operational profitability, acquisition-related costs and stock-based compensation accrual adjustments in the applicable periods, fiscal '19 adjusted EBITDA was $88.2 million compared to $94.4 million in the current period. The improvement is primarily attributed to higher EBITDA from Grakon, partially offset by the adverse impact from the UAW labor strike at GM.

A few other financial items to review. Year-over-year Intangible asset amortization expense in fiscal '20 increased $3.9 million or 69.6% to $9.5 million, primarily due to amortization expense related to the Grakon acquisition. In fiscal '20, we invested approximately $27 million in capex, mainly to support programs and launches in North America and Europe and our facility expansion in India.

Year-to-date depreciation expense for fiscal 2018 was $14.2 million. Our year-to-date tax rate of 92.3% was impacted by discrete items recorded during the period. Excluding the impact of the discrete items, our year-to-date tax rate would have been approximately 18%, which is higher than the prior year due to the level of mix of earnings among taxing jurisdictions. Our expected rate for the remainder of this fiscal year is expected to be lower than what we experienced year-to-date. Therefore, in spite of a higher anticipated effective tax rate, we estimate our tax rate will be in the range of 18% to 21% in fiscal '20.

Let's move to Slide 15. Free cash flow for fiscal '20 was $49 million. As shown on Slide 16, we have used some of our free cash flow to pay down debt. We delevered nearly $18 million in debt since the beginning of the fiscal year and since purchasing Grakon, we've reduced our debt by $83 million. We ended the quarter with $96 million in cash. Our debt to EBITDA ratio, which is used for our bank covenants is approximately 1.5 times, which lowers our incremental borrowing cost by 25 basis points and 10 basis points on the commitment fee.

Please look move to Slide 17 to look at the key drivers to our anticipated EBITDA performance for fiscal '20. Looking at the EBITDA based on $155 million of EBITDA in fiscal '19 and adding incremental EBITDA for a full year of Grakon, which is about $24 million, adding EBITDA from the new automotive in laundry program launches of about $17 million, adding back the one-time costs we incurred in fiscal '19 for initiatives to reduce costs and improve profitability of about $11 million, adding back the one-time costs we incurred in fiscal '19 for acquisitions and restructuring of about $29 million, increasing our anticipated international government grant and come by $4 million and subtracting the net impact from the UAW labor strike of GM of $5 million and subtracting the impact of the lost EBITDA from reduced passenger car production, which we estimate to be about $14 million.

In conclusion, I'll finish up my remarks with guidance. Please turn back to Slide 6. As a reminder, the guidance ranges for fiscal '20 are based upon management's expectations regarding a variety of factors and involve a number of risks and uncertainties, which have been detailed in this morning's release Form 10-Q and our fiscal 19 Form 10-K. As we announced this morning, we reaffirmed fiscal 20 pre-tax income in the range of $150.3 million to $164.3 million and earnings per share in the range of $3.25 to $3.55 but we believe there are more headwinds than tailwinds in the second half of fiscal '20. However, primarily as a result of the UAW labor strike at GM, we are revising our sales guidance to $1.1 billion to $1.13 billion from the prior sales guidance in the range of $1.13 billion to $1.17 billion. For fiscal '20, we are estimating capital investment to be in the $48 million to $54 million range and depreciation and amortization to be in the $51 million to $54 million range. We expect fiscal '23 free cash flow as defined as net income plus depreciation and amortization less capex to be between $122 million and $136 million. Finally, Methode's third-quarter performance tends to not be as strong as its fourth quarter, largely due to the holiday seasons and other factors. We anticipate the same holding true this fiscal year with the fourth quarter expected to be stronger than the third quarter. Don, that concludes my comments.

Donald W. Duda -- Director, President & CEO

Ron, thank you very much. Cynthia, we are ready to take questions.

Questions and Answers:

Operator

Thank you. The floor is now open for your questions.

[Operator Instructions]

Our first question comes from Chris Van Horn of B. Riley FBR. Please state your question.

Chris Van Horn -- B. Riley FBR -- Analyst

Good morning everyone and thanks for taking my call and congrats on solid execution in a challenging environment.

Donald W. Duda -- Director, President & CEO

Thanks.

Chris Van Horn -- B. Riley FBR -- Analyst

I just want to touch on guidance really quickly. I mean obviously the labor strike had an effect here. But when you look at kind of the underlying, this is specifically for auto, when you look at kind of the underlying production estimates, are you changing anything from either IHS or LMC, whoever you use in terms of that your production expectations?

Ronald Tsoumas -- Vice President, Corporate Finance and Chief Financial Officer

No, I mean, we look at both of those, but we're more certainly in the United States, we have more truck and SUV. So we tend to analyze those much closer and those have remained strong. If you take -- Chris take the strike out of it but what we are anticipating some recovery from the UAW strike in orders from our customer, not a lot, but that is in our thinking. And then in Europe, we monitor that really on a weekly basis because that still tends to be very spotty.

Chris Van Horn -- B. Riley FBR -- Analyst

Got it, got it. And then as you look at kind of your awards that we'll be launching over the next call it 12 to 18 months, do you see a dramatic shift in your geographic mix as those as those launches happened?

Ronald Tsoumas -- Vice President, Corporate Finance and Chief Financial Officer

No, no. I mean the US, number of launches in Europe is smaller but larger number and a few in Asia with the Great Wall. But I don't really see a geographic change.

Chris Van Horn -- B. Riley FBR -- Analyst

Okay, got it. And margins are holding up really well and I think, correct me if I'm wrong, Grakon is a big part of that and you're certainly making a lot of initiatives on the cost side through operational -- your operational efficiency and spending there. Where are we in that cost cutting or that those initiatives to reduce costs? Is a bulk of it done? I know there's always stuff to be had, but it seems like you've really ramped it up over the past 12 months and I'm just curious if you see more low hanging fruit as we look out next year and what that looks like?

Ronald Tsoumas -- Vice President, Corporate Finance and Chief Financial Officer

First of all, I would say that we're ahead of where we thought we would be, the Grakon factory improvements and kudos to the team in Asia, the Methode team and the Grakon team, that certainly helped us in the quarter, will help us for the balance of the year. But I would say we're probably about halfway, it gets harder, initially you're picking up dollar bills and eventually you to get down to pennies, but we anticipate that we've got another year of I think solid improvement there.

Chris Van Horn -- B. Riley FBR -- Analyst

Okay.

Unidentified Speaker

And of course -- at Methode, that's what we do for living. And I know that's continuous improvement, but Grakon, we knew going into it that there were certainly improvements we can make.

Chris Van Horn -- B. Riley FBR -- Analyst

Okay. That makes sense. Last from me. Congratulations on your digital cluster win. Yeah, I'm not sure how much detail you can get into, I imagine you displaced the incumbent and I'm just curious about any more detail. It seems like a new product line for you, there are many other players in the space that we can think of that are in the digital cluster arena. So any detail about what the award was or how it came about and maybe your competitive advantage in that win?

Donald W. Duda -- Director, President & CEO

I have to be very careful here because I can't really say too much about the product and certainly not the customer, I can say that is a customer that knows us well and that we developed the technology, probably two, three years ago and we're deploying for the first time, much as we deployed center councils on premium vehicles years ago before we landed some of the larger piece of the business, but I really, because -- I'd like to say more, we're excited about it, but I can't.

Chris Van Horn -- B. Riley FBR -- Analyst

Okay. Well hopefully maybe in the coming months or quarters, we can get some more detail around it.

Donald W. Duda -- Director, President & CEO

Yes, absolutely.

Chris Van Horn -- B. Riley FBR -- Analyst

Okay, thank you so much for the time guys.

Donald W. Duda -- Director, President & CEO

Thank you.

Operator

Our next question comes from Steve Dyer of Craig-Hallum. Please state your question.

Ryan Sigdahl -- Craig-Hallum Capital Group LLC -- Analyst

Hey guys, congrats on the good quarter. This is Ryan on for Steve. Just thinking in the guidance, I guess, a little more, I see reduced revenue guidance by $35 million at the midpoint, primarily for GM, but you maintain the profitability expectations. Where are those cost cuts or efficiencies coming from I guess that you weren't expecting a couple of months ago, when you last guided?

Donald W. Duda -- Director, President & CEO

As I was talking with Chris a little bit ago -- certainly from our Grakon cost improvement that is ahead of schedule and that definitely helped and Grakon sales were up. And we model Grakon sales both looking at what our customers are telling us, plus what we're seeing from ACT, I always forget that, and we were modeling a slight decline. And in fact it was, it was better than we expected. We're still anticipating and we've modeled into our guidance a decline, but that didn't happen as fast as we thought. And again, kudos to the team, they have done an excellent job on tariffs. When we entered the year thinking around $8 million...

Ronald Tsoumas -- Vice President, Corporate Finance and Chief Financial Officer

$8.5 million, yep.

Donald W. Duda -- Director, President & CEO

And we're considerably below that. So all of that will contribute into it.

Ryan Sigdahl -- Craig-Hallum Capital Group LLC -- Analyst

Great. And then just switching over to Dabir. So in early October, you announced a massive product agreement with Trinity Health but then subsequently, there was a notice to disregard, I guess, just any way to clarify I guess, what was going on at those press releases and then as well as just if you could talk about the opportunity with that health system and then what that could potentially mean for any other hospitals too?

Donald W. Duda -- Director, President & CEO

Okay. Very simply, we shouldn't have use their name and they're obviously going to be a good customer and we wanted to quickly correct that which we did. But that is really our first system win. Most of our wins have been, if fact all of them have been discrete hospitals, maybe they're part of the system, but they have been one-off wins, the exciting part of that that is a system win and Dabir will be deployed throughout their hospitals. And that we found very exciting and that's why we also wanted to announce that to the Street and I think that's probably all , I can't say that -- I can't tell you the revenue amount, but it very quickly would become Dabir's largest customer.

Ryan Sigdahl -- Craig-Hallum Capital Group LLC -- Analyst

And then maybe just one follow-up question. You said it will be deployed throughout the hospitals. Will that be a hospital-by-hospital decision or is this basically like a hunting license essentially or is this -- will it be automatically essentially deployed across all their hospitals?

Donald W. Duda -- Director, President & CEO

It's probably a little bit of a mixed bag. We will have to go and train each hospital but the system is adopting Dabir. So I don't want to say that a hospital has to use it, but it is in their system and we will, it's a little bit more than a hunting license, we have to go and train the staff and then it will be used routinely.

Ryan Sigdahl -- Craig-Hallum Capital Group LLC -- Analyst

Great. One more from me and then I'll turn it over. So it looks like the auto and laundry launches is a couple of million worse than what you were expecting last quarter. Has there been another delay in that big product launch there or what's going on?

Donald W. Duda -- Director, President & CEO

I would say that our auto launches are on time and on track. Laundry is still behind. And if I look at going forward, what risk is there, I mean I suppose there can be further decline in the European auto market, but we really look at the laundry program as the biggest risk to that category.

Ronald Tsoumas -- Vice President, Corporate Finance and Chief Financial Officer

And these launches, more back-end loaded to the third and fourth quarter as well as they ramp up more toward the launch.

Ryan Sigdahl -- Craig-Hallum Capital Group LLC -- Analyst

Okay, thanks guys, good luck.

Donald W. Duda -- Director, President & CEO

Thank you.

Operator

Our next question comes from David Leiker of Baird. Please state your question.

David Leiker -- Robert W. Baird -- Analyst

Good morning, everyone.

Donald W. Duda -- Director, President & CEO

Good morning, David.

David Leiker -- Robert W. Baird -- Analyst

I wanted to follow up on question a bit earlier on the digital cluster. I don't know if I missed it or if you didn't say it. Did u put a dollar number on that?

Donald W. Duda -- Director, President & CEO

No, we didn't. But I can tell you it's in the million-dollar range, and then we expect it to be carried over to the other platforms.

David Leiker -- Robert W. Baird -- Analyst

Okay, great. And the GM strike. I guess first of all, are you -- where are you in terms of ramping up to full production on that post strike?

Donald W. Duda -- Director, President & CEO

Let me answer it this way. We are shipping everything the customer asked us to ship on time.

David Leiker -- Robert W. Baird -- Analyst

Okay. And then, can you talk a little bit about the actions you took to mitigate the impact of the strike? What kind of mix and what was tactical for the moment versus structural changes that are going to stay around for a while?

Donald W. Duda -- Director, President & CEO

There were a number of tactical things which we took with our labor force in Mexico, we were very quick to -- we were taking action within 12 hours of the strike. Ron?

Ronald Tsoumas -- Vice President, Corporate Finance and Chief Financial Officer

Yeah, some other things in terms of longer-term structural, we did reduce some of the workforce and we incurred some costs and doing that, that will be right sized going forward and as Don mentioned, we got creative with the workforce to mitigate as much as possible and which included building some products. So that will avoid any over time -- future over time in the event of a ramp-up and things of that nature. So we took all those things into account and mitigated a very delicate situation, pretty well, all things considered.

David Leiker -- Robert W. Baird -- Analyst

Did you continue any production at all? I know you weren't shipping but... ?

Ronald Tsoumas -- Vice President, Corporate Finance and Chief Financial Officer

Yeah, I mean we, it's a fine line, you certainly don't want to lay off your workforce since you are the only one being affected by it in that business park and you're going to drive everybody to your next door neighbor. So we did a blend of vacation, running production. We have a very clean plant. Lot of things got painted and I did say this, [Indecipherable] going into another week of the strike, we -- our plan would have called up for us to take much more dramatic action and thank goodness we didn't have to.

Donald W. Duda -- Director, President & CEO

A key takeaway is how keen the competition is for good employees in that area. So that was part of our long range thinking. Two, was to make sure that we keep our well trained employee base for the future. So all of those things were tangential considerations to how we managed it.

Ronald Tsoumas -- Vice President, Corporate Finance and Chief Financial Officer

And David, we did have the advantage that since the major product that we produce there goes on trucks and SUVs, building some additional inventory didn't cause as much of a concern and that we know we will ship the product if it was mainly passenger car, you're not quite sure what platform, this we can project out and do some, I would call them strategic build. But again, we couldn't have gone much further.

David Leiker -- Robert W. Baird -- Analyst

Okay. And then on slide 17, you call out revenue replenishment. I'm assuming that's revenue that from volume, that GM mix that they lost during the strike. Is that the way to read that?

Ronald Tsoumas -- Vice President, Corporate Finance and Chief Financial Officer

Yeah, it's basically, David, it's about 20% of the revenue that we lost in the strike. So, we will get some of that. We anticipate getting a modest amount of that back in the EBITDA throughout from that we're estimating to be about $2 million. So we're -- it's not a very aggressive replenishment model, but we are expecting maybe a little bit of recapture of the lost lost sales for that extended shrink.

David Leiker -- Robert W. Baird -- Analyst

Okay. And then on the contribution of the revenue from Grakon. How much of that could you call is still kind of the revenue from the acquisition? Just it wasn't in last year's numbers versus growth you've had in Grakon since the purchase. Is there a way to characterize that?

Donald W. Duda -- Director, President & CEO

That would be [Speech Overlap] yeah right. In terms of, that would be pretty tough David right now for us to do.

Ronald Tsoumas -- Vice President, Corporate Finance and Chief Financial Officer

I think we can answer, but we have to do a little research.

Donald W. Duda -- Director, President & CEO

Yeah, it's right now.

Ronald Tsoumas -- Vice President, Corporate Finance and Chief Financial Officer

I can tell you higher than we anticipated on acquisition.

David Leiker -- Robert W. Baird -- Analyst

Yeah. Well, and you have done a great job there with the revenue performance versus the profit performance there. Certainly driving that profitability higher. We're starting to see the commercial vehicle off-highway [Phonetic] markets roll over a little bit. It seems like you're somewhat insulated from that or is that just being masked by the growth in other areas?

Ronald Tsoumas -- Vice President, Corporate Finance and Chief Financial Officer

No, it's in our plan. I don't know, we're definitely masked by it. In round numbers, we're about 80% Class 8, those let's say, flattened, not down as maybe the lower classes. But we have modeled pretty much in keeping with these things, and again, we believe that with customer releases and our knowledge of the customers' needs and their inventory.

David Leiker -- Robert W. Baird -- Analyst

Okay, great. And then a couple of last items here. If we look at the appliance launches, it sounds like that's started, but it's just been slow so far, is that the right way to characterize that?

Donald W. Duda -- Director, President & CEO

Correct way. We are shipping, but at a very small rate at this point. And that would -- David, that's certainly a risk to our, the delayed or/or reduced volumes as we know today is a risk to the -- to our targets in [Speech Overlap]

Ronald Tsoumas -- Vice President, Corporate Finance and Chief Financial Officer

And it's probably, we know they're going to launch or they're going to continue with the other product which run as well. But I think that will be slower in the third quarter and ramp up the fourth quarter. Exactly how much at this point, we can't say [Indecipherable].

David Leiker -- Robert W. Baird -- Analyst

So you don't have a lot of visibility from them in terms of what that ramp is going to look like at all, still, even though it started?

Ronald Tsoumas -- Vice President, Corporate Finance and Chief Financial Officer

That's correct, that's correct. Appliance tends to be a little bit like auto, but not, they don't follow the auto launch rules.

David Leiker -- Robert W. Baird -- Analyst

And then on working capital. Pretty significant contribution year-over-year in the quarter. Anything in particular behind that?

Ronald Tsoumas -- Vice President, Corporate Finance and Chief Financial Officer

No, I think Grakon is a great cash generating business and has really high margins, great cash generating business. So having having all that with us now has certainly made a big difference and a lot of our -- and that's exacerbated I think by what Don had mentioned earlier about all of the operational excellence, all that has turn to cash. So we're doing a great job in terms of acclimating that business into our and we are realizing the cash flows from that perspective.

David Leiker -- Robert W. Baird -- Analyst

Okay, great. I don't usually congratulate people publicly on the phone but you did a fantastic job of on the cost side in the quarter. So, well done.

Donald W. Duda -- Director, President & CEO

Thank you very much, David. That's very much appreciated.

David Leiker -- Robert W. Baird -- Analyst

That's all I have. Thanks.

Donald W. Duda -- Director, President & CEO

All right, thank you.

Operator

And there appear to be no further questions at this time. Mr Duda, I will turn the conference back over to you, sir.

Donald W. Duda -- Director, President & CEO

Cynthia, thank you very much and we'll thank everybody for listening and wish you a very safe holiday and good New Year.

Operator

[Operator Closing Remarks]

Duration: 42 minutes

Call participants:

Donald W. Duda -- Director, President & CEO

Ronald Tsoumas -- Vice President, Corporate Finance and Chief Financial Officer

Unidentified Speaker

Chris Van Horn -- B. Riley FBR -- Analyst

Ryan Sigdahl -- Craig-Hallum Capital Group LLC -- Analyst

David Leiker -- Robert W. Baird -- Analyst

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