CTS Corp (CTS) 2002 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the CTS Corporation first quarter 2002 results conference call.

At this time, our participants are on a listen-only mode. Later, we will conduct a question-and-answer period. Instructions will be given at that time. If you should require assistance during the call, please press zero, followed by star.

And as a reminder, today's conference is being recorded.

I would now like to turn the conference over to your host, President and CEO Mr. Don Schwanz. Please go ahead.

Thank you, . Participating from management today are Vinod Khilnani, senior vice president and chief financial officer; Donald Schroeder, executive vice president and chief technology officer; and George Newhart, vice president investor relations.

Before beginning the business discussion, George would like to remind our listeners about statements we make during the call.

Good afternoon, I would like to remind participants that this conference call may contain forward-looking statements. These statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements.

Additional information regarding these risks and uncertainties were set forth in this morning's press release. More information can be found in the company's SEC filings, all of which are current.

I would also like to remind everyone that we will be presenting at the Baird Growth Stock Conference on May 8 in Chicago, at the Bear Stearns Technology Conference on June 13 in New York City and at the Blair Growth Conference on June 27 in Chicago.

I will now turn the discussion back to Don Schwanz.

Thank you, George.

First quarter earnings results came in close to what we expected. Sales of approximately $113 million, however, were slightly softer than anticipated due primarily to two factors. First, one of our major EMS customers delayed ramp-up on a new product, and secondly, we saw slower than anticipated pass of component sales.

Though the first quarter component sales are normally impacted adversely by seasonal factors, soft holiday season sales of handsets left an estimated 10 million units of excess inventory in the sales channels at year end. This proved to be a significant added drag on component sales in January and February.

Even though Q1 sales were lower than Q4 sales, operating earnings, before consideration of unusual gains and previously announced restructuring costs, were slightly improved, reflecting the continuing benefits of restructuring actions taken last year. Vinod will discuss these results in more detail in a moment.

Overall, our sense is that the underlying demand levels in the markets we serve remain fairly flat to those we saw in Q4. Automotive sales in the U.S. are running at a seasonally adjusted pace of 16 to 16.5 million units, slightly better than had been expected, with the production rate up correspondingly. European automotive demand, however, is down about 3 to 4 percent from last year. Overall, handset demand also appears fairly flat, running at an annual rate of around 400 million units.

With the excess inventory issue I mentioned a moment ago probably now worked out of the system, we saw component demand improve in March and now in April which correlates with this view. Quarter over quarter, price erosion in this sector continues to be above historical levels, adversely affecting results.

Communications infrastructure markets remain extremely soft. Demands for components and subassemblies in the computing sector is up slightly, though some of this probably reflects further reduction in excess inventories by our customers rather than strengthening in underlying demand.

Nevertheless, the first quarter order pattern shows improvement over Q4. Demand for our contract manufacturing services was down slightly, reflecting the product ramp issue I mentioned earlier.

Quarter over quarter, orders increased from Q4 with book-to-bill ratios over one in all major pieces of business.

In summary, there are clearly signs of more stability in the markets we serve and some hints of improvement, though no clear and obvious trends. Though the general economic indicators are encouraging, based upon what we are actually seeing in the markets we serve, our approach remains one of caution.

Operationally, we continue to work toward completion of the facility consolidations we announced last year. The only significant tasks remaining are the completion of the transfers of frequency product operations from our Sandwich, Illinois, and Carlisle, Pennsylvania, facilities to Singapore and Tianjin, China.

As previously noted, this is a phased move, requiring that production be qualified at the new location before shutting down the existing operation. Progress remains generally on-track, and we have already started delivering production product from the new locations. We expect to complete the transfer this summer.

I also want to take a moment and highlight some of the new product and sales initiatives that we believe offer us significant potential going forward.

Earlier this year, we announced two important wins for our throttle position sensor in Asia. The first application was for motor scooters. The throttle position sensor is a key component of the typical electronic fuel injection systems that will be required for scooter manufacturers to meet exhaust emission regulations in Taiwan.

We also won a contract to provide the throttle position sensor for a major Chinese manufacturer of engine throttle bodies for use in Chinese manufactured automobiles.

During the quarter, we began low-rate production of the motor scooter throttle position sensor in our Taichung, Taiwan, facility. This is the first automotive-type sensor we will be manufacturing in Asia.

Discussions are under way with a number of other potential customers in the region, and we believe we can expand our share and content in these rapidly developing markets. The two programs I mentioned are expected to bring about 40 million in sales over the next five years.

During the quarter, we began delivering production in tent prototypes for our new seatbelt tension sensor. Volume production is set to begin in early 2003. Discussions are continuing with a number of other OEMs regarding purchase of this product.

The belt tension sensor was developed to address the federal regulation for increased control of front air bag deployment to improve passenger safety.

Our network family of products is continuing its market success, gaining an additional 13 new design wins in the quarter, bringing our total to 40. Delays in new product launch by many customers in the current economic environment have slowed the ramp-up of this new product, although we are now starting to shift initial production quantities and expect this product to contribute to second half sales growth.

Several months ago, CTS launched an initiative to increase sales through distribution channels. This initiative encompassed three key elements: first, to establish a centralized distribution operation in order to improve service to distributors and then customers and to more effectively develop and promote offerings through distribution.

In March, CTS went live with a new centralized distribution center that provided a single point of focus for all CTS products sold through the distribution sales channel.

We also enhanced our Internet-based order interface to our distributors.

Our second objective was to increase the number of products offered through distribution.

In this regard, we recently added ceramic duplexers and oscillators for wireless applications as well as the product through our distribution sales channel.

Our third objective was to expand distribution globally. To help address this objective, we added as a worldwide distributor of CTS components, thereby extending our distribution products into both Europe and Asia.

Going forward, we believe our increased focus on distribution has the potential to add over $10 million in sales by 2003.

Vinod Khilnani, our CFO, will now provide a brief discussion of our financial results.

Vinod?

Thanks, Don, and good afternoon everyone.

As you know, CTS released its first quarter earnings earlier today. I will now go with a summary financial and financing activities briefly that was the subject of that release.

First quarter started fairly weak in January, with sales at 28.6 million, but gradually improved to 32.4 million in February, and finished strongly at 51.6 million in March.

Overall sales in the first quarter at 112.6 million were approximately 10 percent lower than the fourth quarter of last year.

Please note that normal seasonality makes first quarter sales weaker than the proceeding fourth quarter. That trend was magnified in the first quarter of 2002, as last Christmas lackluster sales of handsets caused some inventory build-ups which we believe caused our wireless component sales to be very soft in the first two months of this year.

In addition, as Don pointed out earlier, we also experienced lower ramp-up of a major new product.

Gross margins for the first quarter were 20.1 percent versus 15.3 percent in the fourth quarter of 2001.

Margins were favorably affected by a 3.1 million customer reimbursement, most of which was related to prior period expenses.

Please also note that gross margins in the fourth quarter of 2001 were unfavorably affected by a 2.4 million in restructure related one-time charge.

Gross margins, excluding nonrecurring items like these, were approximately half a percentage point higher sequentially: 17.7 percent in the first quarter of 2002 versus 17.2 percent in the fourth quarter last year.

Operating expenses came down sharply as we began to see benefits of our restructuring efforts. In addition, we continued to manage our costs aggressively by pushing out certain expenses. These expenses were 4.5 million or 17 percent lower sequentially from the fourth quarter of 2001.

SG&A expenses, including amortization of intangibles, went down by 4.2 million, 0.7 million of which was due to lower amortization of intangibles, and approximately 1 million was due to volume-sensitive items like commission, freight, et cetera.

Please note that due to materiality, we have started to combine amortization of intangibles with our SG&A expenses from this quarter.

In the first quarter, despite a 10 percent decline in sales from the fourth quarter of 2001, CTS still achieved positive operating results with operating earnings at 0.2 million.

Interest expense of 2.7 million the first quarter compared with 3.5 million last quarter primarily because of bank debt amendment related fees incurred last year. Exclusive of these expenses, interests costs remained fairly flat compared to fourth quarter of 2001.

Our income and expense category was minimal in the first quarter. In the fourth quarter last year, they had included approximately 1 million in business tax refunds. Our effective tax rate remained at 25 percent.

Earnings per share was a loss of 6 cents versus consensus estimates of 14 cent loss. Please note that non-recurring customer reimbursements discussed earlier equated to approximately 7 cents per share.

On the balance sheet front, inventory dollars and turns have further improved from 2001 year end levels, with inventory turns improving sequentially from 4.4 turns last quarter to 5.0 turns in the first quarter of this year. dollars were slightly lower, but day sales inched up do to strong sales at the end of the quarter with 46 percent of the first quarter sales taking place in March, thereby inflating the at quarter end.

Working capital, excluding current debt, as a percentage of sales was 16.5 percent in the first quarter of 2002, versus 17.1 percent and 14.8 percent in the first and fourth quarters of last year, respectively. A slight increase in the working capital percentage from the previous quarter is normal and was expected.

As previously noted, the significant cap-ex levels of 2000 and early 2001 are behind us now. Capital expenditures during first quarter were 4.7 million, a little lower than the normal level of the fourth quarter 2001 of 5.8 million, but considerably lower than 15 million to 30 million per quarter levels of the first three quarters of 2001.

We expect our quarterly capital expenditures to be in 6 million to 9 million range going forward, and that will put our 2002 base cap-ex around 28 million to 30 million range versus our actual capital expenditures of 78 million in 2001.

During the quarter, total debt was reduced by 32 million, or 21 percent, from 152.5 million at the end of the fourth quarter to 120.1 million at the end of the first quarter. This was done primarily through the sale of equity which raised approximately 31.6 million from private placement and dividend reinvestment programs.

We finish the first quarter with a more conservative debt-to-capital ratio of 31 percent, versus 39 percent at the end of the first quarter and 47 percent at the end of March 2001. As you know, we also raised 25 million in the five-year convertible subordinated debenture offering in April. The debentures have a coupon of 6.5 percent and are convertible at a 15 percent premium and have no financial covenants.

The proceeds were used to pay down bank debt which has been brought down from more than 150 million to approximately 53 million in the last five months.

We believe all of the actions we have taken in the last four to five months have positioned the company with a conservative balance sheet and lower total debt, a minimal bank debt component and a balanced portfolio of debt when it comes to fixed and floating interest rates and senior versus subordinate debt.

Given the nature of our industry, our desire to have a more conservative balance sheet, flexibility as we go forward, and the opportunity to lock in some debt from floating to fixed interest rates makes a lot of sense. And we feel very comfortable with our current capital structure.

And with that, I turn this back to Don.

Thank you, Vinod.

Signs of stability and recovery in the economy are positives that hopefully will benefit the markets we serve as the year progresses. How fast or how much will be key to our results this year. As already noted, sales were slightly softer in Q1 than we had expected, thought much of this was due to a customer product launch delay, which is now behind us, and the handset inventory issue I mentioned, also seemingly behind us.

With first quarter profits about where we expected, generally improving market conditions should still allow us to achieve the full year operating results of 20 to 30 cents positive, which we discussed in our January conference call. At this time, we see no particular reason to change that target, but I would have liked to have seen clear evidence of improvement in the communications market by now.

As noted in the past, CTS will continue its focus on operational improvements and developing new sources of revenue and growth, both of which are already generating benefits and which are expected to contribute to improve results going forward.

Now, I will open the call to questions. operator: Ladies and gentlemen, thank you for standing by and welcome to the CTS Corporation first quarter 2002 results conference call.

At this time, our participants are on a listen-only mode. Later, we will conduct a question-and-answer period. Instructions will be given at that time. If you should require assistance during the call, please press zero, followed by star.

And as a reminder, today's conference is being recorded.

I would now like to turn the conference over to your host, President and CEO Mr. Don Schwanz. Please go ahead.

Thank you, . Participating from management today are Vinod Khilnani, senior vice president and chief financial officer; Donald Schroeder, executive vice president and chief technology officer; and George Newhart, vice president investor relations.

Before beginning the business discussion, George would like to remind our listeners about statements we make during the call.

Good afternoon, I would like to remind participants that this conference call may contain forward-looking statements. These statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements.

Additional information regarding these risks and uncertainties were set forth in this morning's press release. More information can be found in the company's SEC filings, all of which are current.

I would also like to remind everyone that we will be presenting at the Baird Growth Stock Conference on May 8 in Chicago, at the Bear Stearns Technology Conference on June 13 in New York City and at the Blair Growth Conference on June 27 in Chicago.

I will now turn the discussion back to Don Schwanz.

Thank you, George.

First quarter earnings results came in close to what we expected. Sales of approximately $113 million, however, were slightly softer than anticipated due primarily to two factors. First, one of our major EMS customers delayed ramp-up on a new product, and secondly, we saw slower than anticipated pass of component sales.

Though the first quarter component sales are normally impacted adversely by seasonal factors, soft holiday season sales of handsets left an estimated 10 million units of excess inventory in the sales channels at year end. This proved to be a significant added drag on component sales in January and February.

Even though Q1 sales were lower than Q4 sales, operating earnings, before consideration of unusual gains and previously announced restructuring costs, were slightly improved, reflecting the continuing benefits of restructuring actions taken last year. Vinod will discuss these results in more detail in a moment.

Overall, our sense is that the underlying demand levels in the markets we serve remain fairly flat to those we saw in Q4. Automotive sales in the U.S. are running at a seasonally adjusted pace of 16 to 16.5 million units, slightly better than had been expected, with the production rate up correspondingly. European automotive demand, however, is down about 3 to 4 percent from last year. Overall, handset demand also appears fairly flat, running at an annual rate of around 400 million units.

With the excess inventory issue I mentioned a moment ago probably now worked out of the system, we saw component demand improve in March and now in April which correlates with this view. Quarter over quarter, price erosion in this sector continues to be above historical levels, adversely affecting results.

Communications infrastructure markets remain extremely soft. Demands for components and subassemblies in the computing sector is up slightly, though some of this probably reflects further reduction in excess inventories by our customers rather than strengthening in underlying demand.

Nevertheless, the first quarter order pattern shows improvement over Q4. Demand for our contract manufacturing services was down slightly, reflecting the product ramp issue I mentioned earlier.

Quarter over quarter, orders increased from Q4 with book-to-bill ratios over one in all major pieces of business.

In summary, there are clearly signs of more stability in the markets we serve and some hints of improvement, though no clear and obvious trends. Though the general economic indicators are encouraging, based upon what we are actually seeing in the markets we serve, our approach remains one of caution.

Operationally, we continue to work toward completion of the facility consolidations we announced last year. The only significant tasks remaining are the completion of the transfers of frequency product operations from our Sandwich, Illinois, and Carlisle, Pennsylvania, facilities to Singapore and Tianjin, China.

As previously noted, this is a phased move, requiring that production be qualified at the new location before shutting down the existing operation. Progress remains generally on-track, and we have already started delivering production product from the new locations. We expect to complete the transfer this summer.

I also want to take a moment and highlight some of the new product and sales initiatives that we believe offer us significant potential going forward.

Earlier this year, we announced two important wins for our throttle position sensor in Asia. The first application was for motor scooters. The throttle position sensor is a key component of the typical electronic fuel injection systems that will be required for scooter manufacturers to meet exhaust emission regulations in Taiwan.

We also won a contract to provide the throttle position sensor for a major Chinese manufacturer of engine throttle bodies for use in Chinese manufactured automobiles.

During the quarter, we began low-rate production of the motor scooter throttle position sensor in our Taichung, Taiwan, facility. This is the first automotive-type sensor we will be manufacturing in Asia.

Discussions are under way with a number of other potential customers in the region, and we believe we can expand our share and content in these rapidly developing markets. The two programs I mentioned are expected to bring about 40 million in sales over the next five years.

During the quarter, we began delivering production in tent prototypes for our new seatbelt tension sensor. Volume production is set to begin in early 2003. Discussions are continuing with a number of other OEMs regarding purchase of this product.

The belt tension sensor was developed to address the federal regulation for increased control of front air bag deployment to improve passenger safety.

Our network family of products is continuing its market success, gaining an additional 13 new design wins in the quarter, bringing our total to 40. Delays in new product launch by many customers in the current economic environment have slowed the ramp-up of this new product, although we are now starting to shift initial production quantities and expect this product to contribute to second half sales growth.

Several months ago, CTS launched an initiative to increase sales through distribution channels. This initiative encompassed three key elements: first, to establish a centralized distribution operation in order to improve service to distributors and then customers and to more effectively develop and promote offerings through distribution.

In March, CTS went live with a new centralized distribution center that provided a single point of focus for all CTS products sold through the distribution sales channel.

We also enhanced our Internet-based order interface to our distributors.

Our second objective was to increase the number of products offered through distribution.

In this regard, we recently added ceramic duplexers and oscillators for wireless applications as well as the product through our distribution sales channel.

Our third objective was to expand distribution globally. To help address this objective, we added as a worldwide distributor of CTS components, thereby extending our distribution products into both Europe and Asia.

Going forward, we believe our increased focus on distribution has the potential to add over $10 million in sales by 2003.

Vinod Khilnani, our CFO, will now provide a brief discussion of our financial results.

Vinod?

Thanks, Don, and good afternoon everyone.

As you know, CTS released its first quarter earnings earlier today. I will now go with a summary financial and financing activities briefly that was the subject of that release.

First quarter started fairly weak in January, with sales at 28.6 million, but gradually improved to 32.4 million in February, and finished strongly at 51.6 million in March.

Overall sales in the first quarter at 112.6 million were approximately 10 percent lower than the fourth quarter of last year.

Please note that normal seasonality makes first quarter sales weaker than the proceeding fourth quarter. That trend was magnified in the first quarter of 2002, as last Christmas lackluster sales of handsets caused some inventory build-ups which we believe caused our wireless component sales to be very soft in the first two months of this year.

In addition, as Don pointed out earlier, we also experienced lower ramp-up of a major new product.

Gross margins for the first quarter were 20.1 percent versus 15.3 percent in the fourth quarter of 2001.

Margins were favorably affected by a 3.1 million customer reimbursement, most of which was related to prior period expenses.

Please also note that gross margins in the fourth quarter of 2001 were unfavorably affected by a 2.4 million in restructure related one-time charge.

Gross margins, excluding nonrecurring items like these, were approximately half a percentage point higher sequentially: 17.7 percent in the first quarter of 2002 versus 17.2 percent in the fourth quarter last year.

Operating expenses came down sharply as we began to see benefits of our restructuring efforts. In addition, we continued to manage our costs aggressively by pushing out certain expenses. These expenses were 4.5 million or 17 percent lower sequentially from the fourth quarter of 2001.

SG&A expenses, including amortization of intangibles, went down by 4.2 million, 0.7 million of which was due to lower amortization of intangibles, and approximately 1 million was due to volume-sensitive items like commission, freight, et cetera.

Please note that due to materiality, we have started to combine amortization of intangibles with our SG&A expenses from this quarter.

In the first quarter, despite a 10 percent decline in sales from the fourth quarter of 2001, CTS still achieved positive operating results with operating earnings at 0.2 million.

Interest expense of 2.7 million the first quarter compared with 3.5 million last quarter primarily because of bank debt amendment related fees incurred last year. Exclusive of these expenses, interests costs remained fairly flat compared to fourth quarter of 2001.

Our income and expense category was minimal in the first quarter. In the fourth quarter last year, they had included approximately 1 million in business tax refunds. Our effective tax rate remained at 25 percent.

Earnings per share was a loss of 6 cents versus consensus estimates of 14 cent loss. Please note that non-recurring customer reimbursements discussed earlier equated to approximately 7 cents per share.

On the balance sheet front, inventory dollars and turns have further improved from 2001 year end levels, with inventory turns improving sequentially from 4.4 turns last quarter to 5.0 turns in the first quarter of this year. dollars were slightly lower, but day sales inched up do to strong sales at the end of the quarter with 46 percent of the first quarter sales taking place in March, thereby inflating the at quarter end.

Working capital, excluding current debt, as a percentage of sales was 16.5 percent in the first quarter of 2002, versus 17.1 percent and 14.8 percent in the first and fourth quarters of last year, respectively. A slight increase in the working capital percentage from the previous quarter is normal and was expected.

As previously noted, the significant cap-ex levels of 2000 and early 2001 are behind us now. Capital expenditures during first quarter were 4.7 million, a little lower than the normal level of the fourth quarter 2001 of 5.8 million, but considerably lower than 15 million to 30 million per quarter levels of the first three quarters of 2001.

We expect our quarterly capital expenditures to be in 6 million to 9 million range going forward, and that will put our 2002 base cap-ex around 28 million to 30 million range versus our actual capital expenditures of 78 million in 2001.

During the quarter, total debt was reduced by 32 million, or 21 percent, from 152.5 million at the end of the fourth quarter to 120.1 million at the end of the first quarter. This was done primarily through the sale of equity which raised approximately 31.6 million from private placement and dividend reinvestment programs.

We finish the first quarter with a more conservative debt-to-capital ratio of 31 percent, versus 39 percent at the end of the first quarter and 47 percent at the end of March 2001. As you know, we also raised 25 million in the five-year convertible subordinated debenture offering in April. The debentures have a coupon of 6.5 percent and are convertible at a 15 percent premium and have no financial covenants.

The proceeds were used to pay down bank debt which has been brought down from more than 150 million to approximately 53 million in the last five months.

We believe all of the actions we have taken in the last four to five months have positioned the company with a conservative balance sheet and lower total debt, a minimal bank debt component and a balanced portfolio of debt when it comes to fixed and floating interest rates and senior versus subordinate debt.

Given the nature of our industry, our desire to have a more conservative balance sheet, flexibility as we go forward, and the opportunity to lock in some debt from floating to fixed interest rates makes a lot of sense. And we feel very comfortable with our current capital structure.

And with that, I turn this back to Don.

Thank you, Vinod.

Signs of stability and recovery in the economy are positives that hopefully will benefit the markets we serve as the year progresses. How fast or how much will be key to our results this year. As already noted, sales were slightly softer in Q1 than we had expected, thought much of this was due to a customer product launch delay, which is now behind us, and the handset inventory issue I mentioned, also seemingly behind us.

With first quarter profits about where we expected, generally improving market conditions should still allow us to achieve the full year operating results of 20 to 30 cents positive, which we discussed in our January conference call. At this time, we see no particular reason to change that target, but I would have liked to have seen clear evidence of improvement in the communications market by now.

As noted in the past, CTS will continue its focus on operational improvements and developing new sources of revenue and growth, both of which are already generating benefits and which are expected to contribute to improve results going forward.

Now, I will open the call to questions.

Ladies and gentlemen, if you wish to ask a question, please depress the one on your touchtone phone at this time. You will hear a tone indicating that you have been placed in queue and you may remove yourself from that queue at any time by depressing the pound key. If you are on a speaker phone, please pick up your handset before pressing the number.

And our first question comes from the line of . Please go ahead.

Yes. Good afternoon, everyone. Can you hear me?

How are you, ?

Good. How are you?

Great.

Quick question. Some of the passive component guys, and obviously your product line is different, but the and the have talked about a sequential improvement in shipments in June versus March, and they're very heavily skewed toward the handset market, as well. Just your comments on that.

And then, secondly, even given that, it seems to get to, kind of, the 20 to 30 cents EPS we'd be looking for some continued pretty hefty margin recovering.

Two questions here. Let me address the first one.

I don't have all the data in front of me, so I'm going to have to speak a little bit in generalities. But if you went back over the course of the next -- or the last six to nine months, we saw component sales increase in -- at the end of the third quarter, and then, kind of, stay up through the first part of the fourth quarter, and then come down through the fourth quarter. Very soft in January and February, the first quarter of this year. And then rebounding back again to levels that were at or above the rates we saw in the latter part of the fourth quarter.

And I'm talking about basically into the handset market now with that comment.

So that's the pattern we've seen. And you're right, there are differences, depends on what phones you're on and a lot of other things.

Very clearly, there was excess inventory out there at the end of the holiday season. And we saw the impact of that for a couple of months.

OK.

And on the, kind of, margin recovery or margin improvements, whether it be from costs or some of the efficiencies. Again, to get to that 20 or 30 cents range you'd have to make some pretty aggressive assumptions.

, this is Vinod.

You are right. We are expecting some margin improvements, as we see our volumes go up and as we complete our restructuring program this summer, which we announced last year.

OK.

And just, finally, what are the key, kind of -- some of the new programs? I know you talked about one being delayed, behind you, and now it's back on track. But beyond that, are any of the, you know, disk array program or any of the automotive programs -- like, what are the top three key programs that are starting to ramp up or that we should be looking at toward the second half?

I mentioned some of the programs that are going to help drive second half sales. There's a number of new ones in the EMS arena, of course. And that's, kind of, normal; those products change. But there are several there during the latter part of the year.

The , obviously, is significant impact, the belt tension sensor I mentioned really doesn't impact 2002. The throttle position sensor that I talked about, that will impact us in the last half of the year.

Don, any others that...

Certainly, the product is forecasted, based on what we see right now for customer demand, to increase in the second half of the year, , and that's in the mass data storage and servers and wireless LAN applications -- the major ones we have there.

OK. If you had to put into a dollar amount, what would you say is, kind of, the revenue increment in the second half of just an aggregate for these programs? Are we talking about, you know, 75 million, you know, 100 million, in aggregate?

Not for those programs. When we looked at it going into the year -- again, I don't have the data in front of me -- my recollection was that we were looking at, during the course of the year, about $100 million in sales coming from new products, new customers, that kind of thing.

All of them combined.

Combined, right. That goes beyond the ones I just talked about.

OK. Thanks a lot.

Our next question comes from . Please go ahead.

Good afternoon.

How are you, ?

Good, thanks.

Just to maybe circle back on the guidance and question that you put forward, and you're still saying 20 to 30 cents, does that also imply that you're holding your revenue forecast of that 3 to 8 percent that you talked about last quarter?

Well, it's going to take a better market in the last half of the year than we had expected, given that we were short of where we thought we would be in the first quarter, to do that. So I'm not suggesting that that's going to happen at this point in time.

But it sounds like you're still expecting a pretty significant ramp-up. You know, it strikes me to come to that number, you know, you will probably need, you know, 10 to 15, maybe even a little bit higher, million dollar increments per quarter. And I guess, I'm wondering, you know, you're holding that guidance steady. You know,what's giving you the confidence? I know you mentioned the book-to-bill, given a significant ramp. I mean, how good of an indicator do you feel that is and what might some of the other factors be that are giving you that degree of confidence?

, we are more comfortable, as Don indicated, to stay with EPS expectations, because of our confidence in our restructuring savings, which we expect to achieve. And even if the sales are slightly off the mark, we are comfortable that we will take corrective actions in our cost structure and still feel comfortable with estimates, which Don had indicated earlier.

Does that mean, Vinod, that you would need to get somewhere toward the 25 percent-type gross margins in the third and the fourth quarter? I mean, is that what you're forecasting in your models?

Between the progress we're going to make in growth margins and the SG&A areas, you're right, we're expecting, as we demonstrated in the first quarter, that we will continue to keep the expenses in a pretty tight range.

Maybe last question, and asking it in a little different way, Vinod, and we ask this almost every quarter. Can you give us a sense for where the break-even level is from a revenue viewpoint? And I know it's mixed dependent, but if you can assume the mix doesn't change too much, can you give us a sense for where that might come in?

, that's a moving target. As you know, the cost structure moves, the mix moves, and it's very difficult to put a number. You can, obviously, run a break-even point based on our first quarter P&L this quarter, but rather that break-even point will still be valid next quarter or the quarter beyond is, frankly, very difficult to predict.

OK. Guys, thanks very much.

Our next question comes from . Please go ahead.

Yes, just a couple of somewhat related questions. When you talked about $100 million in sales in new products and new customers, is that an annualized number or was that what you expected in the second half?

It was what we expected during the course of the year.

OK. What was you said that is on an annualized basis?

We didn't look at it that way. I don't have that number.

OK. If I just, sort of, took the second half of last year, I would add $100 million to that, and that's kind of what you're -- what from new customers and new products you might see in the second half of this year.

What we were doing is just looking at the year in the context of what's driving growth, as opposed to you look at the kinds of customers and product sales you had at the end of the year, and many of those programs go on. You sell the same product to the same customer. The volumes may vary. Some go up; some go down, depending upon the end customer situation. Some go away, obviously, and then there's some new business that comes in.

And what I was talking about was the amount of new business that ends up being, not totally incremental but certainly a significant driver to the performance of the business from a sales perspective over the course of the rest of the year.

Some of it comes in at the end of the year. Some of it comes in at the second quarter, so I just don't have a good way to annualize it for you.

That helps though.

Vinod, can you just elaborate a little bit more? If volumes were to stay flat, how do you see growth margins changing through restructuring efforts through the course of the year?

I think, Charles, there are two elements. Obviously, savings, we expect to get one -- as you pointed out -- with higher sales, we'll be able to leverage our fixed expenses obviously and expect the growth margins to improve.

From a cost reduction and restructuring point of view, there are a couple of different elements. One of them is that restructuring has an element which is more fixed cost and SG&A-oriented element, which is not sensitive to volumes. So when we quote the two factories mid-year, we would be eliminating a layer of fixed expenses which we will achieve no matter what the volumes do. Same way the improvements we have made on the SG&A side of the cost structure, we will be able to reap the benefits no matter what the volumes are. So they are not sensitive to the volumes.

The other element of restructuring savings is correlated to the volumes, and that is when we consolidated some of our production from manufacturing locations where the cost of manufacturing was a lot higher to the locations where the cost of manufacturing was much lower, that kind of savings is correlated -- directly correlated with the volumes. And as the volumes ramp up, we will be able to manufacture the products at a lot lower cost now than we were able to manufacture a year back.

So some element is volume-sensitive, and some element are improvement in the fixed cost which we will expect to see as we go forward.

Do you have a -- are you able to articulate at all what the dollar amount of fixed cost reduction is going to be that's not volume dependent, and how that breaks down between the COGs line and the SG&A line?

The piece which is less dependent on volume -- I think when we announced the fourth quarter restructuring last year we had talked about numbers which were around $8 million per year -- in that range; so roughly 2 million per quarter. And we believe we began to see that from the first quarter of this year.

The element -- and to answer the second part of your question, as to the breakdown between SG&A and cost of goods sold -- that element -- a fairly large portion of it, clearly the majority of that, would be in SG&A line.

The element which is volume-oriented, that is a little bit more to put a number on, because we began to see pieces of that last year as we implemented our June restructuring last year. And we will fully begin to see that from the third quarter of this year, because it will be wrapped up this summer, and we will probably see the final pieces of that.

And that piece is volume-oriented. And we have talked about numbers which are as high at 20 million, if we reflect the full volumes which we saw in year 2000, to as low a number as roughly 10 million per year with lower volumes, which we began to see from late last year.

And can you just elaborate a little bit more on the move to China? Do you anticipate moving crystal-growing and building your own crystal-growing facilities over there? Or do you think you're going to end up buying crystal-growing facilities in China?

Don, you want to take that?

Yes, just a clarification. We do not grow our own rock quartz. We purchase the rock quartz material from a variety of suppliers, some located in North America, some in Asia. What you might be referring to though is the fabrication process, the machining and processing of those into quartz crystals. And that has been moved to Tianjin, China, and to Singapore.

And I think, as Don mentioned, we'll be complete in about June of this year.

OK. Thank you.

That being said, we don't at this point fabricate all of our own crystals. That's one of the things that as we go forward will provide us additional cost reductions as we do more of that; now that we have the capability set up over there, we can do that.

Great.

Did we answer your question, Charles?

Yes. Thank you.

Our next question comes from . Please go ahead.

Good afternoon, gentlemen.

Hi, Larry.

Hi. Maybe I -- I think I missed this in the comments, but these $3.1 million payments, can you elaborate on that a little more please?

That payment, Larry, is -- from one of our customers we had a lot of move-related activities which created certain expenses which we had been incurring, but we had some contractual agreements with that customer. And we got reimbursed for a lot of expenses for certain projects that got wrapped up in the first quarter of this year.

OK, but most of the expenses occurred...

Yes.

... prior to the first quarter.

Yes, absolutely.

OK. So -- but you made the decision not to break this out separately, just to, kind of, lump it in with the .

Well, it was really one customer.

OK.

And one settlement. So we kept it together.

OK, now the 20 to 30 cent outlook, is this 3.1 million included in that number, or excluded?

It's included in that number. We knew it was coming fairly early in the year, and we had based that in our projections.

OK. And do you care to make an outlook for the second quarter in terms of maybe revenue guidance or EPS?

We, as a practice, Larry, don't break down the quarters.

OK. Maybe you can give us a little color on how April has been running. Maybe if you can tell us if it's running ahead of March or flat, behind. I mean you're, you know, you're only...

Yes, it would vary from area to area, but in general most of what we've seen -- there's always some quarter-end stuff. Some of our customers react very strongly to the end of quarter. We're used to that, so we have some patterns that we see quarter after quarter after quarter. If I discount that particular set of patterns that we generally see, it's pretty steady from March into April.

Larry, you do have to remember that our accounting quarter is broken down four week/four week/five week. So March would be a five-week month and April would be four weeks. To that extent, absolute numbers would be lower.

OK. That makes sense.

What else? And I guess do you guys plan on issuing any more equity, or are you through that for now?

I think we don't see any large placement, kind of, projects on the horizon as we have done in the recent past. We obviously would look at continuing our dividend reinvestment, kind of, activity off and on, but we don't have anything on our plate like we have done recently.

Right. OK. All right, thanks, guys.

Our next question comes from .

Please go ahead.

How are you, ?

Hi. Good. How are you guys?

Fine.

I had a few questions here. First of all, talking about the revenues being back-end loaded, I was just looking at comparing to last quarter's, the first two -- similar patterns, but the March quarter was about, like you mentioned, 47 percent. Can you specify or break down what areas of business you saw any strength in that was greater than the previous two months?

There were a couple areas which drove that more than anything else, the EMS service business and the communication components.

OK. Communication components. So that was basically what I was going to ask for my next question. You had mentioned that inventories for wireless handsets have been worked through. So how is that trending then, you said for March? Has that followed through in April as well, the strength in handset components?

Yes.

OK. And can you elaborate on any particular areas, regions, technologies for that strength?

Regions almost don't make sense in this context because of, you know, the place that, you know, people build handsets keeps moving.

Are these design ones that are kicking in or are these just orders from distributors? Maybe you could elaborate on it.

No, this is not principally through distribution. In the component side, CDMA is a big driver for what's going on out there right now.

OK. And what did capacity utilization rates look like this past quarter, you know, given the consolidation? Where are those tracking?

, we don't see any major change in our capacity utilization in the first quarter. Pretty similar to what we had at the tail end of last year.

Going forward, I think, you know, we may see pockets of tightness in our capacity, and that will depend on the mix of the product which comes our way.

OK. The reason that I ask is because I see that your capital expenditure guidance is for 28 to 30 million, when this quarter you had less than 5 million. Where do you expect that to -- you know, to come in? Is that new products? Is that new capacity?

It's primarily driven by new products and cost reductions.

OK. And the last question that I had was, would you care to mention what the backlog is for this past quarter?

We are seeing some trends of increasing backlog. Our backlog was up in the first quarter of 2002 from the Q4 2001 level.

OK. And is this a similar percentage to the new order or the bookings increase?

Well, I think Don commented that our book to bill was, you know, higher than, you know, 1 or 100 percent. And it's the first time in quite a few quarters we have seen that number at higher than, you know, 100 percent at the end of the quarter. Actually I think it has been last time we saw that number higher than 100 percent was at least five, six quarters back.

For the business as a whole.

For the business as a whole, yes.

And it was broad-based.

OK.

So that's a good sign.

And, Don, you did mention that it was broad-based. Were they all averaging around that same amount or any areas that were significantly different from that average?

Yes, it varied. It's not like we're seeing something that's, you know. 1.5 or something.

I think component side is clearly...

That was the strongest.

... showing the strength.

OK.

The interconnect or EMS business showed the least.

OK.

Did that answer your question?

Yes, that definitely helps. That's all. Thanks.

Thank you.

Our next question is from . Please go ahead.

Good afternoon. In the introduction, you mentioned 16 to 16.5 million automotive units. I'm not quite clear where you were going with that. Is that products you shipped or is that what you foresee as annual production?

That's just light vehicle sales North America. Going into the year, the expectations were probably a half a million below that. Most of the people that I've read said we're probably in the 15.5 to 16 million, so it's a little stronger than the expectations were. I was just remarking on that.

Then what percentage of those do you figure you have components in?

I don't know offhand.

We don't typically talk about market share by product family, but it's well over 50 percent of the North American market. Could say that. We're the world's largest manufacturer of travel position sensors.

I think he was asking a different question: What percent of the vehicles do we have content in?

It varies from type of vehicle to type of vehicle, but I don't know the number offhand.

OK. Now, in the financial section, it was mentioned inventory turned. Now, did you say it went from 4.4 to 5 or 5 to 4.4.

It went from 4.4 last quarter to 5 this quarter.

So that's an increase, not a decrease.

Yes. It's a turn, so increased the turns, which means we utilized our inventories more efficiency; or in other words, inventory levels came down vis-a-vis the volume we were handling.

Got you. You also mentioned that you had some inventory you wrote down.

We did not mention that.

OK. One thing, I don't know if I missed this, did you mention the DSOs?

We did not mention DSO, but the DSOs were 61 days; slightly higher than last quarter. Last quarter was 59. And I did say that the reason for the slight increase was the lopsidedness in the way the quarter turned out from sales point of view. Such a large percent of sales, William, were in March that all of those showed up in the receivables at the end of the quarter.

OK. You mentioned that your plant utilization hadn't changed much since the last quarter, but you didn't give us a figure on what your plant utilization is.

It's very difficult, William, to give a number because, if you look at all the different plants we have, which makes all different products, and the product mix keeps changing constantly, and so depending on, you know, what mix it is, it changes.

You don't have an aggregate on that?

It's very hard to give an aggregate. We have talked in the past numbers in the range of that we have 70 percent, 75 percent capacity utilization, but that's a very, very rough number.

Yes, I understand that. That just, kind of, gives me an idea.

Sure.

Now, I've been a shareholder for a long time. I think about a year ago it was mentioned that you were working on a Bluetooth module for Lucent, and then I just never heard anything else about that. Is that still in the works or was that dropped when Lucent had their recent problems?

The contract that I think we talked about previously was with a company called and Agere. The Agere project was terminated by Agere. They lost their contract.

Oh, OK. Yes, that's Lucent, that was spun off from Lucent.

That's correct.

Are you working in any other products in wireless LAN, like or Bluetooth?

.

?

Yes. Which is the wireless LAN protocol. Yes, we are active in that with Products, as well as termination devices.

How's that area looking for growth for you?

The company growth rate in that market's 22 percent per year for the next four years. So we're focused on it.

OK. How about the router business? You used to have quite a few more products in that area, as I recall, than you seem to emphasize now.

In the last quarter you probably saw our process releases where we announced some new high frequency clock oscillators and , and some of those are targeted at router applications. So, no, we haven't lost focus of that at all.

OK. One other question I got for you. Can you, kind of, give me an idea who you consider to be your major competition in, like, the automotive area?

In the automotive position sensing area, we would consider companies like Panasonic and as competition in that arena.

OK. And my last question. You have any plans on repricing any of your options in the next year or so?

No.

All right. Well, thanks a lot, guys.

Thanks, William.

Our next question comes from . Please go ahead.

Good afternoon. Thank you. Could you talk a little bit about the automotive area, the occupancy seats -- the occupancy weight sensor? How is that program going? I know you mentioned the seat tensioning, but what about the weight sensor?

The weight sensing technology that we developed and are continuing to develop is based on string gauge technology. And the recent wins that have been in the marketplace have been with a different technology. So we haven't announced any major contract awards yet.

What we've focused on recently is the belt tension sensor, which is required for either system. And we announced during the quarter a win for that particular product, and Don alluded to it earlier, the seat belt tension sensor program, which is forecast to be in production early 2003.

So does that mean then that your technology in the weight part of that system is no longer the case?

I wouldn't say no longer the case. I'd say the initial wins were with a different type of a system. Although we continue to do prototype work with the large OEMs and the tier-one suppliers. So we're continuing to work in the area. We feel it's a better system. But for a variety of reasons, the initial contracts went to a different technology.

Just to add a little bit to that. The alternate systems that Don is alluding to get put into the seat in a different way at a different stage in the production process, and as we understand it, are easier to adapt to the way they design the vehicles and build the vehicles today. So it's easier to incorporate on a short -- on a near-term basis.

We still get interest in our system looking downstream a year or two where they would have a chance to revamp the way they do things. So that's why we're continuing to work on it and we'll see where it goes.

OK. And with regard to pricing on the throttle sensor that you mentioned, how is pricing? Is it holding, is it falling?

I think the prices are holding.

So you haven't seen any fall in price for those sensors.

We haven't seen them, no.

OK. And then, finally, with regard to the HP Compaq merger; has there been any issue with regard to EMS in that area?

Not at all. Again, I said this before, Compaq is a major customer of ours that we worked with for a long time. We have a very good relationship with them. Most of what we do is in the storage area. They're extremely strong in storage system sales versus HP. I think their ratio is like 5-to-1, something like that. And they've got, obviously, a very, very good position in the overall industry.

So we believe that as they go through their product rationalization process, which they've talked about, and that the products that we're working with are going to come out of that very well; that there's the leverage of the combined company to improve the sales. So we're optimistic about that as well.

But there's no delay in terms of any new contracts or extensions, I mean, as a result of the possible merger?

No, nothing that we've seen any indications of so far.

And then you mentioned the handsets. Did I understand that you believe that excess inventory in the field is gone at this point, in other words, of your products that the customers hold?

I can only go by two factors. One is indications from our customers saying that they believe it's gone. And secondly, I'll say the return of the order demands and polls in March compared to January and February.

OK. And this is with regard to handsets.

Yes.

And you did say that -- I heard you saying that the base station area is quite weak still?

Absolutely.

Is there inventory for those products in the field?

There is inventory in the field, and the investment in infrastructure, as you've probably read lately, continues to be pushed out, as the service providers are struggling with their own set of issues. So the market's staying very, very soft.

If I were to -- you know, on a rough basis -- in the passive area, talk about percentage of revenue currently from handset versus base station, can you just give me an idea of the breakdown between those two?

Hang on a second -- OK. Handsets are about, oh, in the 10 to 15 percent range.

This is passive components?

Yes.

I can't break the other one out with the data I've got, the way you're asking the question.

All right, but the point being, that while this is undoubtedly bigger than the handset part, or not, I mean, the base station...

In the sense of the passives, the infrastructure is smaller than the handset piece.

Oh, it is.

Yeah.

OK. All right. Thanks very much.

We have a follow-up question from . Please go ahead.

Hey, guys, I have just one quick follow up. With regard to the $3.1 million payment, I noticed a couple quarters ago you had a one-time payment. Now you had another one-time payment. And you mentioned that you knew about this 3.1 million a couple months ago, and that's why you gave the 20 to 30 cent guidance. So is there anything that we can model in to the next three quarters in terms of any more potential one-time payments to get us to the 20 to 30 cent number?

No, we're not aware of any. I think what you saw last year was a reflection of all the major changes and volume drops which were taking place, which created a lot of excess inventories. And we did the restructuring and that piece was, kind of, the piece which was given to us my our customers because we had a memorandum of understanding with them to reimburse us for those things. And so we think that's behind us.

This one was also connected with a one-time event which was connected with moving out of the facilities -- our customer's facilities, and we build our own facilities in China. And there were those kind of items which were also the items which we don't see in the next several years coming to us.

So it happened that we have two of these things within a two to three quarter period, but we don't foresee any more of these large reimbursements, unfortunately.

OK. So if there is another reimbursement that happens before year-end, that will be excluded from the 20 to 30 cent number. That'll be in addition to the 20 to 30 cents.

Yes.

OK. All right. Thanks, guys.

We also have a follow-up from . Please go ahead.

Hi, Vinod. I just wanted to get a little bit more clarity on the SG&A improvements that you're seeing. You had mentioned that this quarter, you had a sequential improvement in SG&A of 4.2 million, of which about a million of it was volume-sensitive which leaves about 3.2 million from, presumably, restructuring.

I just wanted to double-check is that, in fact, the case that you had about $3.2 million improvement from restructuring, and is that, sort of, a permanent improvement that we can anticipate going forward? And do you anticipate further SG&A restructuring improvements going forward?

To answer your question, that you're right. A million was volume-related things. Out of the remaining, I think there is a component, and if I were to estimate it, I may estimate it that component would be probably another 800 to a million kind of a number. And that's a component which is probably not a permanent reduction, but we continue to keep the belts tightened and we continue to push out discretionary expenses.

And I would think that we will reach a point where we will not be able to postpone those kind of expenses indefinitely. And they will begin to naturally show up in our numbers.

OK.

And so if you take those two pieces out, then I suspect you would be left with roughly a 2 million, 2.5 million kind of a number. And I would say that's probably the right magnitude of a permanent improvement which I think you can say is, kind of, institutionalized permanent improvement in the SG&A expenses.

Now that, kind of, annualizes to the 8 million number you talked about from the December restructuring.

That's correct.

You anticipate further permanent improvement along those same lines?

We do not expect much more in the SG&A line from additional restructuring improvement. We do expect some more restructuring improvement as we go forward, but they will be more in line.

OK. That helps. Thank you.

We have a question from . Please go ahead.

Hi, just one of your 10 percent customers in the quarter, and historically on an annual basis you broke your sales down by market segments. I was wondering if you could do that on a quarterly basis.

Bill, the -- we don't talk about the customers in the quarter or in the year. We talk about that only in the annual numbers. And also we really do the fine tuning of our breakdown by markets at the end of the year.

But I think roughly in the first quarter, we're probably something like maybe 35 percent in total into communications, roughly 30 to 32 percent computer, 27 -- 25 to 27 percent in automotive, and then the all other would be the remainder, so a little bit stronger probably then if you remember last year -- maybe in automotive at this point.

Can we assume the 10 percent customers first off are unchanged relative to the 10K and the percentages are about the same?

I think that's a good assumption to make at this point.

If you look beyond that, your top five customers represent about what percent of your sales?

I think in the annual report, the 10K, we said that the top 15 is something like 75 percent or so. So, I don't know the top five but certainly it would be probably a pro rata amount of that 75 percent.

Fair enough. Thank you.

And we also have a follow up from . Please go ahead.

Yes, gentlemen, I just had one last question here. The EMS delay ramp up that was mentioned to contribute to the slight lowering of sales this quarter, you said that was behind you. What area was that in? Was that infrastructure or storage? And maybe you could discuss a little bit about how you see that coming back into the assembly sales going forward.

That was in storage, and my point was that it -- near the end of the quarter, it seemed to be back on track. I don't offhand know that it's an issue going forward at all.

OK. Thank you.

There are no further questions. At this time, please continue.

Thank you, and again you can get a reply if you'd like. And as George said, we're going to be at a number of conferences over the course of the next month. We'd hope to see you there. Have a good day.

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