CTS Corp (CTS) 2004 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the CTS Corporation Fourth Quarter and Year 2004 Results Conference Call.

At this time, all participants are in a listen-only mode; later, we will conduct a question and answer session, instructions will be given at that time. If you should require assistance during the call, please press "star" then "zero." As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. Mitch Walorski, Director of Investor Relations. Please go ahead.

Thank you, Stacy. I'm Mitch Walorski, Director of Investor Relations, and I will host the CTS Corporation fourth quarter earnings conference call. Thank you for joining us today.

Participating from the Company today are Don Schwanz, President and CEO, Vinod Khilnani, Senior Vice President and Chief Financial Officer, and Don Schroeder, Executive Vice President and Chief Technology Officer.

Before beginning the business discussion, I would like to remind our listeners that the conference call contains 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 last evening's press release. And more information can be found in the Company's SEC filings.

To the extent that today's discussion refers to any non-GAAP measures relative to Regulation G, the required explanations and reconciliation are available on our website in the Investor Relations section.

I will now turn the discussion over to our CEO, Don Schwanz.

Thank you, Mitch. Last night we released our fourth quarter financial results. Sales at 142.5 million or up 8% over the fourth quarter last year, which is at the top end of the range we had projected during our third quarter conference call. While this is solid growth, it is lower than the year-over-year growth rates we've seen for the past four quarters.

During the third quarter conference call, I noted, that we expect that the communications infrastructure demand would be weaker than in quarter of 2003 and that our component sales into mobile handset market would decline from the prior year, as we continued to de-emphasize this market segment.

Both of these projections played out largely as expected and were factors in the lower Q4 growth rate. All that being said, however, we also feel that the markets we serve were much more subdued in the last half of the year than in the first half, so there was very little market tailwind contributing to fourth quarter results.

On a segment basis, fourth quarter EMS sales led the way up nearly 18% year-over-year, driven by volume growth from longstanding customers, such as, HP and Motorola, as well as increased volumes from new customers.

In fact sales volumes from customers other than HP or Motorola were 22%. Sales in the components and sensors segment were down just slightly from Q4 last year. While this decline was primarily driven by the continued reduction in sales into the handset market, which I mentioned a moment ago.

You may recall that in past conference calls, I have noted our intent to de-emphasize the handset market because of its volatility and often-destructive pricing environment. We have continued to pursue this strategy with the result that handset related components sales have declined from 11% of our total sales in 2003 to 7% in 2004. Component demand for communications infrastructure application was also down about 4% from Q4 last year.

After showing very robust growth and demand during the first half of 2004, we saw a significant slowing in this market in the last half. On a full year basis, however, component sales in the communications infrastructure applications were up about 24%, which is significantly above the market growth. Component sales and other applications including computing grew about 8% year-over-year in the quarter and about 7% on a full year.

Also, on the plus side, sensor sales in the automotive market were up about 10% in the quarter, continuing the strong new product driven growth trends we've seen through the last six quarters. Profitability also continued to show strong growth. Fully diluted earnings per share of 17 cents were up 55% on a GAAP basis over the fourth quarter last year. Profit improvement continues to be driven by volume leverage, continued cost-reduction, and mixed improvements.

Note that the fourth quarter this year included a 1-cent per share negative adjustments to reflect a new accounting requirement for contingently convertible securities. Vinod will state more about this in a moment, but I did want to point out that on an operational basis, the earnings growth was stronger than might appear on a GAAP basis.

On a full year basis, 2004 represented a dramatic improvement over 2003. Sales were up almost 15%. Net earnings grew 59% to 3.8% of sales versus 2.7% last year. Return on equity improved to 6.6%, and our balance sheet continued to strengthen with debt to net of cash continuing to decline and debt to total capitalization holding well within our target range. As we've done in the past, I will also comment briefly on the progress against our growth initiatives in the quarter. Beginning with automotive products where our growth initiative continues to drive very positive year-over-year results.

During the fourth quarter, we secured orders for integrated accelerator pedals for eight new platforms, bringing the total number of platforms that were used to CTS paddle to 34. Production for these platforms will begin next year and will ramp-up over the next few years, adding about $7 million of new revenue a year by 2007.

Total captured business for pedal modules is now forecasted to provide about $48 million in 2007 revenue, up from about 13 million in 2004. It is worth noting that the reason awards came from major Japanese and European OEMs who use the paddle modules on vehicles in Europe and Asia, as well as North America. So these awards are a good example of the success we're having in our efforts to broaden our customer and geographic base.

In the components market, despite the slowdown in communications infrastructure demand in Q4, we continued to have success in the market with our higher value added modules, winning seven additional platform applications. ClearONE Terminator sales also continued to show year-over-year growth with Q4 sales up 40% over the prior year. Additionally, we were designed into nine new applications to ClearONE during the quarter, bringing the total designs win to 150.

In the EMS arena, we continued to focus on capturing new customers, while broadening our participation in other markets. Three new customers were captured during the quarter with all three coming from the industrial market. These three customers are expected to generate about $10 million of revenue in 2005. For us, the most significant event in the quarter was the agreement to acquire SMTEK. As I noted during the acquisition related conference call in November, one of our objectives in the acquisition was to accelerate our expansion into new markets. In 2004, approximately 4% of our EMS sales were derived from markets other than computing and communications.

In contrast, about 50% of the new business captured during the year came from markets other than communications and computing. In 2005, the combination was SMTEK, along with our organically driven market diversification is expected to increase the percent of sales from the medical, industrial and security, and aerospace, and defense markets to about 30% of total EMS sales, thereby reducing both customer and market concentration risk. We also see these markets is offering excellent growth opportunities with a good fit to our high mix business model.

Since the announcement in November, I personally have visited most of SMTEK's major customers to discuss the acquisition. Customers clearly see the strengths each of this brings to the combination, which reinforces my belief that the market will proceed to combined company as a strong competitor going forward. Incidentally, the new combined EMS operation will be called CTS Electronics Manufacturing Solutions and will be headquartered in northern part of California.

As we have worked through the details the combination, we have been able to refine our estimate of the contribution that SMTEK will make to CTS this year. In November when we announced the acquisition, we estimated the acquisition to be accretive by 2 to 3 cents per share in 2005. With the closing now expected to occur this coming Monday, January 31, which is earlier than previously anticipated, and with a better handle and integration costs and purchase accounting. We have updated that protection and are now estimating that the acquisition will add in a range of 4 to 6 cents per share.

Now, I will turn the meeting over to Vinod Khilnani, our CFO to discuss our financial results in more detail.

Thanks, Don, and good morning, everyone. As Don noted, we were pleased with fourth quarter results, especially in light of somewhat soft market. Before I go over the financial results for the quarter, let me take a moment and highlight a few unusual non-operating items, which need to be considered to fully appreciate the true year-over-year operating improvement in CTS results. 2004 results were impacted by two non-operating items; first, a change in accounting rules finalized in December 2004, not acquire that the impact of contingently convertible securities be included in the diluted earnings per share. This change resulted in an adverse impact of 1-cent on the fourth quarter and 2 cents on the full year 2004 results of CTS.

Note that, even though the accounting rules were finalize in Q4, we were required to retroactively apply the changes and that adversely affected the third quarter by 1 cent per share as well, since we did the convert in May, June time frame.

Secondly, as previously reported, we had booked a gain on the sale of excess Canadian land which favorably impacted the second quarter 2004 earnings per share by 6 cents. Excluding these two items, adjusted diluted earnings per share for the fourth quarter were 18 cents and for the full year 2004 were 49 cents.

Similarly, full year 2003 results included two unusual items; a tax credit, which equated to 22 cents per share and asset impairment charge of 10 cents per share. These two items created a net positive impact of 12 cents per share, excluding which the adjusted EPS for full year was 24 cents versus a GAAP EPS of 36 cents in 2003. Adjusted EPS therefore, have more than doubled in 2004 on a 15% sales increase. So, all in all, we believe these are very positive results that reflect impressively-- that reflect impressive earnings leverage and sales growth.

Looking at the fourth quarter of 2004, gross margin at 21% were up six-tenths of a percent sequentially, and two tenths of a percent higher year-over-year. Although the higher mix of EMS revenue affected the margin adversely by a little over one percentage point year- over-year, a strong improvement in components and sensors margins of 4.4 percentage points year-over- year and 1.1 percentage point sequentially was more than sufficient to offset the less favorable segment mix.

We continue to keep a very close eye on our SG&A and R&D expenses, which continue to come down as a percent of sales. Q4 2004 expenses were 14.6% of sales versus 15.2% in Q4 2003. Q4 2004 total other expenses were also lower by $1 million, year-over-year, primarily due to lower interest expense and higher interest income. Our effective tax rate stayed at 23% for the fourth quarter and full year of 2004. Please note, however, that the effective tax rate was 25% in 2003.

Net earnings of $6.6 million in the fourth quarter were 68% higher than the year ago quarter of $3.9 million, driven by higher margins, lower operating expense, as a percent of sales, lower interest and other expenses, and lower effective tax rate. Diluted earnings per share of 17 cents, including the negative impact of contingent convertible accounting of 1 penny compare well to the EPS of 11 cents for the fourth quarter of 2003.

From the balance sheet perspective, our key metrics were maintained within our target range, controllable working capital defined as receivables plus inventories minus payables ended the year at 12.5% of sales with our target range of 10% to 13%. Capital expenditures at 12.7 million, or 2.4% of sales was below our target of 3% to 5% of sales. Debt-to-capital ratio at 23.9% also continued to stay at the lower end of our 20 to 30% range.

Free cash flow, defined as operating cash flow and net of investing cash flow, was a positive 21.1 million for the full year. Cash balances increased to 61 million at the end of 2004, versus 25.3 million at 2003 yearend. And our total debt, net of cash, had further declined to 36.5 million in 2004 versus 50.5 million in 2003. Overall, we are delighted to close 2004 with very strong financials. Full-year sales of 531 million were up approximately 68 million or 15%. Gross margin for the year stayed essentially flat at 20.7%, despite the higher mix of EMS revenues, which were 51% in 2004 versus 45% in 2003. Adjusted operating margins, which exclude unusual items improved to 5.3% in 2004 versus 4% in 2003.

Diluted earnings per share were 53 cents in 2004, compared to 36 cents in 2003. Adjusted EPS was 49 cents in 2004, more than twice the 2003 level of 24 cents. Non-operating items, which we discussed earlier, are excluded.

Looking ahead into 2005, we see continued improvements in our financial results, driven by sales growth and operational improvement. The SMTEK acquisition will increase our EMS segment sales to about 60% of the total company. This mix change, absent any other improvements would bring total Company growth margins down by approximately 2 percentage points. However, we anticipate further margin improvements within each of our two segments, which combined with further leveraging of SG&A and R&D expenses are expected to more than offset adverse impact on our operating margins.

Other non-operating factors affecting our 2005 earnings per share include, first accounting for contingent convertible, which will have a negative impact of approximately 5 cents in 2005. Second, expensing of options effective July '05 will add approximately $1 million in expenses or 2 cents per share of negative impact in the second half of 2005.

And finally, we are also changing our defined benefit pension plan assumptions to be more conservative, lowering the long term expected returns on US pension assets from 8.75% to 8.50% and reducing the current discount rate of pension liabilities from 6.25% to 6.0%. These changes will lower our consolidated total FAS 87 pension income by approximately 3.7 million in 2005 or the equivalent of 7 cents per share.

Please note that despite tightening these two key assumptions, CTS continues to be in an overfunded situation and expects no material cash contributions to be required in the next four to six years. Despite these three unfavorable non-operating items, CTS expects diluted earnings per share in the range of 65 cents to 72 cents in 2005, up approximately 35% to 45% from adjusted EPS of 49 cents in 2004. We expect to continue to generate 15 million to 20 million of free cash flow in 2005. Depreciation and amortization expense of approximately 30 million, and capital expenditures of approximately 23 million to 28 million.

As a final comment, we are contemplating repatriating 25 million to 60 million of our cash from our foreign jurisdictions, pending some technical clarifications around American Jobs Creation Act, which allows corporations a one-time opportunity to repatriate funds at minimal tax rates. And with that I hand it back to you Don.

Thank you, Vinod. As I noted earlier, 2004 ended with the market reserve generally flat. Current indications suggest that the first part of 2005 will be much the same. For the full year, our plans assume continued modest growth in the economy providing some upside growth in underlying demand across both our business segments. Beyond that, our growth initiatives, including the introduction of new products, as well as expansion of our customer base are expected to be a continuing impetus for expanding sales. The acquisition of SMTEK of course, will lay on additional sales beginning February 1st, 2005.

Considering all these factors, sales for the year are expected to be in the range of 690 to 720 million with about 60% of total sales coming from the EMS business and the rest coming from the components and sensors segments.

Earnings per share for the year are expected to be in the range of 65 to 72 cents per share. This estimate includes consideration of an estimated negative EPS impact of about 1 cent per quarter beginning in Q3, reflecting the Accounting Standards Board directive regarding the expensing of stock options. Additionally, it reflects 5 cents per share of negative impact for the new accounting requirement as regards to the treatment of contingent convertibles, as Vinod discussed earlier.

I want to again remind our listeners that parts of our business are subject to seasonal patterns. As a result, our first and third quarter tend to be softer relative to the second and fourth quarters. SMTEK does not have a strong overriding seasonal pattern. So, it will tend to dampen our seasonal variation somewhat, but remember, however, that we will not have the benefit of SMTEK for the full first quarter.

Now with that, I will open the call to questions.

Thank you. Ladies and gentlemen, if you wish to ask a question, please press "star" then "one" on your touch-tone phone. You will hear a tone indicating that you've been placed in queue. You may remove yourself from the queue at any time by pressing the "pound" key. Once again, if you wish to ask a question, please press "star" then "one" at this time.

And our first question goes to the line of Kevin Kessel with Bear Stearns. Please go ahead.

Good afternoon.

Good afternoon.

Going back to SMTEK, I wanted to understand the assumptions that you're making at least for the first quarter. You should get about two months of that acquisition, and it sounds like, from your comments, that would be roughly 20 million or so in terms of revenue?

Approximately, yes.

All right. And what about, in terms of SG&A cost and any interest expense?

I think SG&A cost should be in line with our overall SG&A expenses in our EMS segment. Kevin, we have never broken out SG&A expenses for our EMS segment versus component and sensors, but SG&A expenses do run lower in EMS segment than component and sensors. So, I see a positive impact on overall Company's SG&A expenses as a percent of sales because of that.

Right. What about any interest expense expected?

We expect to drawdown from our revolver. Our revolver interest rates are running approximately 4% to 4.5%. Eventually when we bring down -- bring back the fund from our foreign jurisdictions, the interest impact of higher interest expense should be cancelled.

Okay. And in terms of shares -- additional shares that should be issued, it's roughly close to 1 million?

I think it should be lowered than that. It will be closer to 900,000, I believe.

Right. Okay. And tax rate, is that expected to change at all with the acquisition?

We're putting the overall effective tax rate for next year at 23%. We're still trying to sort out exactly what the impact would be because they do have an NOL situation, which we should be able to utilize and they do have full evaluation on it. So we see some positive impact, we have not fully determined that on CTS.

Okay. And then in terms of your components business, operating margins are up rather significantly quarter-to-quarter with only a 4% revenue increase. What really drove that? How was pricing in the quarter? Was that strong?

One of the key drivers as Don pointed out is the mix within that segment between sensors and components and then -- within components, we are shifting the mix from components which go in handsets to components which go in infrastructure. Both of those trends are improving the mix within our component and sensors segment, which is benefiting the margins tremendously from a pricing and normal point of view, we don't see any unusual pressures than what we've seen in the last several quarters.

Okay. And in terms of the overall components business, how much of that what you say actually goes through distribution as opposed to being Director OEM or through EMS.

Barely a small piece goes through distribution as a total company, I believe, less than 10% of our sales go through a distribution channel.

Okay. And then what about the breakup between an EMS and direct?

EMS is almost all direct.

But the rest is, it is all EMS. Okay. Then the last question is on cash. Cash was up, I think, 13 million, in the quarter, free cash flow was about two, so I am just curious where did the other 11 million come from?

I am trying to think here what happened to our cash -- cash is up.

Did you draw down in the revolver in the quarter?

The revolver -- good point. Glad you answered the question. Yes, we did drive down. If you look at the debt, the debt moved up from the revolvers.

Okay. So that was the cash. And then any buybacks in the quarter? I know last quarter you did some buybacks.

No, I don't believe we activated the buybacks this quarter. And I think the reason for that is because of the SMTEK transaction, our council advised us not to go into the market.

Sure. Great. Well thank you very much.

Thanks.

Thank you. We have a question from the line of Scott Merlis with Thomas Weisel Partners. Please go ahead.

Good morning, everybody. How are you?

Good morning, Scott.

Good quarter.

Thank you.

Just thinking through the guidance, the -- it's coco 5 cents a hit, options 2 cents at seven and pension is a hit 7 cents.

Yes.

So clearly, I guess -- clearly your guidance would have been -- these are all non-cash items in a way, right, I guess? 14 cents -- your guidance would have been 14 cents higher essentially without those accounting issues.

Absolutely.

So that implies that cash flow and operating income is growing faster than EPS, right?

That's correct.

And looking at the cash flow, can you guide us through your capital spending, depreciation, net spending for our models?

Well as I commented capital expenditure, next year is projected in the range of 23 million to 28 million, that's a step up, so some of the cash will go in that direction. From depreciation and amortization point of view, we are guiding a number which is higher, we are seeing 30 million and the primary driver in that increase is SMTEK, and we're still in the process of determining the split between goodwill and intangibles, and as you know, we don't amortize goodwill but we do amortize intangibles. And so we believe that intangibles, because with of SMTEK transaction, will be up by 1 to 2 million, we still don't know. We're trying to determine that. And then the additional depreciation from SMTEK would be approximately 2.5 million range. So compared to a run rate of DMA of 26 million, we are projecting next year to be 30 because of the four million incremental from SMTEK.

Right. So if capital -- your net spending then should generate cash by at least 2 million.

That is correct.

30 million -- 28 is the upper end of cap spending.

That is correct

That's interesting. And...

I don't know the smaller number in '05 than it was in '04. We had a bigger gap in '04.

Right. Looking longer term, there seems to be more excitement about the electronic accelerator pedal module. The fact that the Japanese customers and the leading Japanese producers seem to be buying your product, to what extent -- assuming they are a trendsetter, Japanese producers as leaders, to what extent can later in the decade, this be a real home run. Are you seeing orders increase? You mentioned Auto 7 (ph). I mean is there much competition, is the interest broad-based among Europeans and North American producers? Could this some day be a majority of vehicles in the world, in a majority market -- majority of the market type of thing?

First of all, this -- the trend towards using integrated paddle modules actually started in Europe, and has now moved into North America. And certainly it is clearly a global trend. We have sold pedal modules to Chinese OEMs who will be using them in vehicles in China, so there's nothing unusual about Europe or North America or any particular place. It's not like it's a mandate to use this. This is being done because it makes economic sense for the OEMs to use the module as opposed to the other approach. And I pick 2007 as a year that was just a way for me to convey what the captured business would bring to us. Obviously, when you get put on a platform, you are typically on a platform for several years. So the captured business goes well out beyond that time frame. The other thing to note is that when we get an award from an OEM, sometimes we get an award that covers several models and they'll phase it in.

So one model might be this quarter, another model might be two quarters from now, another model might be next year. And so it takes time for it to ramp up. We expect to continue to win more platforms. As I indicated I picked the number, if I recall correctly, I said for 2007, it was 48 million, we expect that that will win more and drive even more revenue in 2007 and we have already won.

De you tend to be dual sourced for these products or is there another competitor that's being in there with you -- trying to be in there with you?

The other competitors, they don't tend to dual source a particular platform, at least in the same continent, put it that way.

And I guess the last question I have regarding new products, have you put out a slide yet or talked about -- maybe I missed this earlier in the call, but what percent of your sales growth is from new products? Did you say that?

I did not. And I really haven't tried to calculate it that way.

Okay. You did that last year, but --

I haven't yet.

Not yet for this year.

No.

Once again, great quarter. Thank you very much.

Thanks you, Scott.

Thank you, we have a question from line of Reik Read with Robert W. Baird & Company. Please go ahead.

Good morning, guys.

Good morning.

Can you guys just tell us how much is the handset business a percentage of revenues of components at this point, where you down to?

It's down to...

I think you mentioned 7%.

7% of the total sales. And so we are roughly 50-50, so it's like 14 percent of the sensors and complement segment. And...

From a run rate point of view, Reik, that number 7% is more like five in the fourth quarter.

Okay. Yes -- that's -- and that's what I was trying to get at. That's great. And how you think that that will decline throughout '05?

Well let's talk more in absolute terms. Because you got the effective SMTEK layering in EMS business, that alone would cause the percent to drop. In terms of an absolute standpoint -- hang on a second -- I'm just trying to see if I've got the day off hand for -- I would expect it to continue to trend down. Okay.

Because the growth rate in other segments is higher.

I mean in dollar absolute terms.

Well in absolute dollars, I mean, are we getting close to by the end of the year that it really is a diminutive amount?

Well in the fourth quarter that number was closer to 7 million -- 7.5 million. So that's a run rate per quarter, if you asked me to speculate, I will say that number goes down to maybe 5 million per quarter. So maybe 18 million to 20 million per year kind of a number in 2005.

Okay. And you guys had mentioned the good strength that you're seeing in automotive relative to the host of contracts that you signed and our signing. That is historically been highest margin segment for you guys. It sounds like that will continue to gain momentum. Your lowest margin segment is dissipating, so from a mixed perspective we ought to see all things being equal -- some pretty good margin improvement in that segment throughout.

Absolutely. And that's what you saw in the fourth quarter in this year, and that is really the primary reason why we are able to offset the unfavorable segment mix in the sense that we have more and more EMS sales as a percent of the total sales.

I am just going to chime in here. I just want to remind people, though, that even though EMS has got lower margins than components and sensors segment, it also is much less investment intensive. And when you look at it from a return standpoint -- return on assets perspective, they're both quality businesses.

Let me go back over to the EMS segment; this is the last question for me. I want to give you guys a chance to address this a little bit more broadly. You talked about, as you've gone through the process of getting all the accounting squared away for SMTEK, that you were able to increase your guidance for how accretive that might be. Can you talk a little bit about where you -- what do you see from a synergies perspective? Does it start out to be small and there's some things you can do throughout the year that it really becomes meaningful? And can you talk about where you are from integration standpoint? How much is actually been started or are you beginning from a standstill?

Let me take your questions in reverse order. We've had integration teams in place from right after the acquisition was announced comprise of people from both organizations doing things you would typically do. We've got to get the accounting system it together, we have to know how we're going to do that, we've got to be able to put out payroll, we have to understand how IT systems are going to be tied together. So, there's a whole set of things that people have been looking at with a view towards -- on day one, how are we going to operate, and then, what's the rollout of the integration.

And we're well down on that path. So, I'm comfortable with where we are. It will take time to get all of these things done, once the closing formally occurs next week. That being said, there is going to be both, some costs upfront associates with that process and as well as it will take time to realize the benefits that will come out of some of those integration efforts.

From a synergy standpoint, the most import long-term synergy here is in terms of competitive strength and how we believe that that can drive our sales and our sales growth. From a cost structure standpoint, they are a public company and so you get rid of certain public company costs that will go down. So there will be some kind of savings along those lines. But we're not closing units are doing those kinds of things, so we're not going to see contribution from that standpoint. That's much more incremental and we will look at those kinds of things. I give you the significance of this acquisition far more in terms of the strategic aspects and the future growth.

Great. Thank you very much for the comments.

Thanks.

We have a question from Ray Carpenter with Southwest Securities. Please go ahead.

Hi. Good morning. Good quarter guys.

Hi Ray.

Couple of questions, I'll be brief, linearity within the quarter communications infrastructure and automotive, did see a strengthening in the communication infrastructure or did you see any type of linearity or maybe accelerations in demand?

Ray, your voice was fading in and out a little bit. I'm not sure I understood if you're asking about '04 or about '05.

I was asking about the quarter, actually. Linearity for the quarter and just going into this next quarter, are you seeing your communications business strengthen or weaken?

Our expectation -- first of all, the market demand was very strong at the beginning -- at the end of 2003 and going into the beginning of 2004, and then softened in the last half of the year. Our expectation is that it will remain softer in the first part of the year and strengthen in the latter part of the year. And again, if you watch some of the announcements that are coming out of the service providers, that's what you'd be led to believe is going to be the nature of their spending this year on capital equipment.

All right. And then, for automotive new products?

Automotive, you can find a variety of projections for automotive demand, nominally flat in North America to some people are saying, maybe down just slightly, a few hundred thousand units, I've seen both of those similarly in Europe, little bit of growth in Asia.

So this is what you are basing your forecast on?

Yes.

And then, obviously, new products are doing extremely well, what new products are outperforming your expectations beside the...

Well, I have very high expectations. So if I ever said anything was exceeded my expectations -- I'm not sure I can say that. I'm happy with the results. The new business capture, our EMS segment is going very well. There was -- I think 12 in the past year or 16? 16, excuse me, in the past year of new customers. So I've been very happy with that. I think that's going to mean good things as we go forward. Certainly, we have already talked about the modules; I don't need to say more on that.

And the, finally, I guess, the increase in this is much better than you would have hope, I mean where is the upside coming from?

I think, Ray, the upside is partially coming from the fact that we understand the transaction better. Don, mentioned that he has listed all the customers. So we have very high confidence level of delivering the topline. We also are pulling up, as you pointed out, the transaction up a month, so the timing is helping us. And frankly, we're just a lot more comfortable with the transaction as we finish our due diligence and put the integration plans together. We're just improving our projections.

Thank you very much. Nice quarter guys.

I think we have a question from the John Franzreb with Sidoti & Company. Please go ahead.

Good morning guys. Good quarter.

Hi John.

I'm looking at the EMS operations margins, and kind of I'm curious with two things. One, what kind of target op margin you think you can do in that business, and how does the addition of SMTEK kind of moved the needle in the op margin for EMS?

John, we have historically said that our long-term target, ongoing target for EMS is approximately 5% operating margin. And I think if you look at it historically, we have exceeded those numbers.

In the last year or so we came down on those margins that we had talked about for a combination of factors. US currency affected us adversely, we launched EMS operations in Singapore and added one more location. That adversely affected the segment because we cross charge more admin expenses from one segment to another.

So if you look at EMS segments on its own, they were affected on adverse currency impact, admin expenses cross charges, and just some launch related expenses to go and launched a new geographic location from that point of view.

We also had some timing on the pricing side of it, where we gave the price reductions and the reduction are costs because of going to Singapore began to come, with some amount of lag. Those things are getting behind us and therefore, you are seeing the operating margins bounce back up from a low of 2.9% a couple of quarters back. You'll see that number continue to improve towards the 5% and your comment on-- your question around SMTEK, we have said SMTEK margins are higher than CTS EMS margins and we believe that addition of SMTEK will improve of have a positive impact on the margins of EMS segment overall.

Is that a function of their end market makes? Because you adding three new EMS customers as an industrial, further kind of improve that margin outlook?

Yes, I think that the mix towards medical and industrial is positive for us. And that is a key factor and, as we've said before, SMTEK is a great company. It's not a turnaround, kind of acquisition, and we're glad to have them as part of the family.

Okay. Switching gears here. We have not heard much about the BTS market and I'm kind of wondering if the adoption rates are kind of slowing. Can you kind of give us some color, which will know about the attention sensors?

First of all, the adoption rates of BTS is driven by the federal mandate that said 25% of vehicles in North America 2004 model year had to be equipped with the new occupant classification system. I think the number was 65% for 2005 model year cars and then it goes to 100% for 2006. 2006 cars start to be billed in July roughly this year, so the selection process for platforms and that are basically going to be delivered against the first three years to phase in for this mandate is largely over with, that being said, there is kind of a phase two that is coming here.

In many cases, the OEMs might have been of a several years through a platform life. And the solution that they adopt in that kind of a situation will be different then they would adopt or potentially different --- and they would adopt for a brand new platform with which comes along.

And so we see another round as new platforms come along and they think about what technology what approach they want to use with the new platforms. So we're already starting to see some of that go on. So you're not going to see the kind of -- the number of new awards that we saw during the first ramp, just because of that mandate. But it will continue.

Okay. Now part of your growth strategy in the automotive center market includes 10 to 12% content growth. Could you talk a little bit about new products that you have and what the outlook is on new products or how much that's part of that content growth outlook?

That's -- there is a couple of aspects the content growth. One is certainly new products. Another one is obviously increasing our penetration in any given customer to put more about products into their vehicles and widening our customer base, as well.

We have widened our customer base out. Once you get a relationship with your customer it's a lot easier to add products and its first is to put your foot in the door. So we've been increasingly successful in doing that. You also asked about some of the other new products that we will contribute to growth going forward. We have a sensor been designed into a new turbocharger application, for example, we will be coming out now and ramping up turbochargers.

We think there will be more of those in the future and so we think that could be a pretty good product for us. The active manifolds actuators, we went to number of positions with that product and we think we will win more. So we think there is a pretty good opportunity and ramp coming from that, has. And one of the larger ones that I talked about in the past is and I mentioned a moment ago is a new generation or phase two in the occupancy classification system. And we have a full occupancy classification system in the late stage development. And we are getting a lot of interest from OEMs we're working with one very closely. And that would be a very significant content driver.

Great. Thanks for the color.

Thank you. Once again if you wish to ask a question please press "star" then "one" at this time. And we have a question from Greg Weaver with Kern Capital. Go ahead.

Hi. I was wondering if you could give us a sense of what you're banking into the revenue estimates for SMTEK and 05?

say it again Greg?

Could you say that-- could you give us a sense of the revenue estimate in 2005 from the acquisition SMTEK?

We're still trying to finalize a mix between SMTEK revenue versus our traditional EMS revenue and we have traditionally also non-broken those out. We're assuming fairly conservative estimates and that gives us a lot of confidence about our overall sales guidance, which we're giving for the total company. You looked at SMTEK in terms of their last published results they're running about $120 million a year run rate. As we look ahead, the customers are new to us and so we look at some kind of a range around that. And that is a good starting point.

Right. Okay. Thank you.

Thank you once again if you wish to ask a question please press "star" then "one" at this time. And there are no questions in queue. Please continue.

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