CTS Corp (CTS) 2006 Q1 法說會逐字稿

[OPERATOR INSTRUCTIONS]

I would now like to turn your conference over to your host, the director of investor relations, Mr. Mitch Walorski. Sir, you may begin.

Thank you, Latreece [ph]. I’m Mitch Walorski, Director of Investor Relations, and I will host the CTS Corporation first quarter 2006 earnings conference call. Thank you for joining us today. Participating from the company today are Donald Schwanz, President and CEO, and Vinod Khilnani, Senior Vice President and Chief Financial 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 B, the required explanations and reconciliation are available on our web site in the investor relation section.

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

Thank you, Mitch. Last night we released our first quarter financial results. Sales of $150.5 million were down approximately $5 million or roughly 3% from the first quarter last year. This was consistent with our expectations in the sales guidance we provided in the January conference call. We knew at that time that there were several unusual factors that would make year-over-year sales growth in the quarter unlikely. For example, sales of EMS services to HP, our largest customer, were down almost $11 million year over year. You may recall that we had been transferring production of HP mass storage systems from our U.S. and U.K. facilities to our Singapore operation at HP’s request. To buffer this transition HP increased its demand in Q105 making sales net quarter artificially high. Once the transfer to Singapore was complete, the lower costs available in that region were reflected in price reductions which effectively reduced Q106 sales.

Another driver for the decline was a $6 million drop in sales of comp versus subscriber applications in Q1 this year versus last year. We have been consciously exiting this market, so the decline was anticipated. Q2 is expected to follow a similar pattern, so the year-over-year drop will only be about $3 million. While there will be continue to be year-over-year drops in Q3 and Q4, they get smaller and are less of a factor in making comparisons.

Even with softer sales, diluted earnings per share were strong in the quarter coming in at $0.16 versus $0.09 in the same quarter last year. Note that first quarter earnings were negatively affected by $0.04 per share as a result of the Burn consolidation and associated restructuring that we announced in January. On the positive side during the quarter we resolved a long-standing insurance dispute which contributed approximately $0.03 to earnings per share.

But the biggest driver to the improved results was margin expansion, particularly in electronic components, so it was a good quarter with sales where we expected and earnings better than expected. Vinod will provide more detail on the financial results in a moment, but first I want to add some color on the quarter.

The automotive market has gotten a lot of bad press in the last quarter given the situation at Delphi, Dana, GM and others. While the situation at Delphi and the erosion of market share at GM and Ford has hurt our sales, the direct impact so far has been relatively small. Results overall in this part of CTS’s business remain very positive and our outlook continues to be upbeat. Sales of components and sensors into the automotive market were up about 9% year over year in the quarter. We picked up several new platform wins, including two additional wins with our accelerator pedal modules. These awards will contribute about $3 million of revenue a year beginning in 2008.

We continue to see strong sales growth in China with sales roughly doubling year over year in the quarter. More broadly, sales into the Asian region grew about 60% and now represent about 15% of total automotive product sales.

We also had an excellent quarter with electronic components picking up another 34 design wins and infrastructure applications. Ten of them came in Winnax [ph] Applications, which is a submarket that is showing strong growth indications. Another came in 3D wireless applications. As I have noted in the past, it generally takes about 18 months for a design win to convert into a revenue stream, so these wins are not expected to contribute significantly to ’06 sales, but should be strong contributors to sales growth next year adding to our confidence that we can grow component sales into infrastructure markets at double-digit rates. We are already seeing the benefit of strong slot wins from 2004 and last year as sales of components and infrastructure applications grew about 40% year over year in the quarter.

As I previously noted, EMS sales were down largely driven by the decline in sales to HP. On the plus side, however, we captured six new EMS customers in the quarter, four in medical, one defense, and one industrial reflecting our focus on diversifying our market base. In support of this initiative, we obtained ISO-13485 medical accreditation in our Singapore facility during the quarter. This is the fourth CTS facility to receive this certification.

We also announced during the quarter that we will begin EMS operations in our Matamoros, Mexico facility later this year. This facility, which is primarily used to manufacture automotive sensors and components, has unused floor space allowing us to leverage the current facility and infrastructure to begin EMS operations. Motorola will be the initial customer in the facility, but we have had many customers express interest in the Mexico operation.

Also, from an operational perspective the Burn consolidation continues on track with a requalification process beginning for several of the product lines that eventually will be transferred. We still are expecting the transfer to be largely completed in the third quarter.

Construction of our new Czech Republic facility was completed recently and we have begun to move equipment into the facility. Regular production is expected to begin midsummer.

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

Thanks, Don. We were pleased to report the first quarter earnings yesterday, which reflected strong operating margins and earnings per share. Two unusual items impacted the quarter, which are worth noting before we review the financial performance in more detail.

First, you will remember that earlier this year we announced plans for consolidation off of our Burn, Indiana operations. Fully estimated pretax restructuring charges and related costs are now estimated to be around $4 to $4.5 million, somewhat lower than our previous estimates in a payback of less than one year. We incurred approximately $2.1 million of bad restructuring costs of $0.04 per share in the first quarter.

The second item had a favorable pretax impact of approximately $1.5 million or $0.03 per share on the first quarter earnings. This resulted from settlement of a long-standing insurance dispute. The associated expense had been incurred by CTS in the past and so the favorable settlement benefitted the bottom line when it got results in the first quarter.

As Don noted, sales in the first quarter of 2006 have earned $50.5 million, although 3% lower than the same quarter last year, but in line with our internal projection. Gross margins had a percent of sales increased to 21.3% in the first quarter of 2006 versus 18.2% last year, an increase of 3.1 percentage points year over year.

The bulk of the improvement came from two areas. A little over two percentage points of this improvement was driven by higher senses and components gross margins which benefitted from increased sales of higher margin infrastructure components, as well as increased royalty income in the first quarter.

CTS normally expects annual royalty income of approximately $2 to $3 million; however, amount and timing among the four quarters often vary significantly. This year the first quarter saw $1.3 million in royalty income compared to only $0.1 million in the same quarter last year.

The second major driver for the growth margin improvement was a shift toward sensors and component segment, which generates higher growth margins than EMS segment. Sensors and component segment sales were 45% of total sales in the first quarter of 2006 versus 41% in the same period last year. This shift impacted gross margins favorably by approximately one percentage point.

SG&A and R&D expenses combined for $20.8 million or 13.8% of sales in the first quarter versus $22.5 million or 14.5% of sales in the same period last year. The first quarter of 2006 included the previously discussed favorable settlement of an old insurance claim which provided approximately $1.5 million in benefits. Operating earnings of $9.3 million were 64% from the first quarter last year driven primarily by higher-growth margin and despite the impact of lower pension income and increased precious metal pricing.

Expensing of stock options also adversely impacted the first quarter pretax earnings by $223,000. Full year 2006 impact of option expensing is estimated to be around $1.3 million pretax. It is related towards the second half of the year due to the timing of our annual options grants, adjusted operating earnings without restructuring, and related charges of $2.1 million with $11.4 million up 100% from the same period last year.

Interest and other expenses were 0.7% of sales down one-tenth of a percent due to lower interest expense from reduced levels of outstanding debt. Effective tax rate was 25% in 2006 versus 23% in the same quarter last year. Net earnings were up 84% at $6.2 million, a 4.1% of sales. Diluted EPS at $0.16 was up 78% from last year. The number of averaged diluted common shares had $40.2 million with $745,000 lower than last year primarily due to buy-back activities in 2005. Excluding the restructuring and related costs, adjusted net earnings and diluted EPS would be $7.8 million or $0.20 per share respectively, more than twice the first quarter 2005 level.

From the balance sheet perspective, our controllable working capital has a percent of sales increased to 15.4% of sales above our target level of 13%. Higher inventory levels were the key driver behind the increase. Factors like interplant product transfers, Czech Republic plant startups, new product launches, and some in-sourcing of subassemblies affected the inventories adversely.

In addition, a four-day increase in the receivables partially due to Delphi pre-Chapter 11 filing balances made achieving of our target especially challenging. We expect our controllable working capital to improve materially starting third quarter of 2006 when most of the product task activities will be complete. Total debt-to-capital ratio further decreased to 19.7%, which is at the lower end of our 20% to 30% target range.

Free cash flow was essentially break even in this quarter, however we still expect to generate $23 million to $26 million of free cash flow in 2006 with capital expenditure of around $18 to $20 million. Overall, it was a very strong quarter, and with that I will hand it back to Don.

Thank you, Vinod. As I noted earlier, first quarter sales were in line with our expectations and there is nothing we are seeing in the market that has changed our perspective on sales for the year, so we are maintaining our estimate for full-year sales growth of 6 to 8% over 2005. On the other hand, we are increasing our earnings estimates based on first quarter results. Excluding the full-year consolidation-related restructuring costs estimated to be about $0.08 per share, we are now projecting that adjusted diluted earnings per share will be in the range of $0.75 to $0.80.

Now I will open the call to questions.

[OPERATOR INSTRUCTIONS] Our first question is from Kevin Kessel of Bear Stearns. Your line is open.

Hey, good morning, guys.

Good morning.

Good morning.

I just wanted to clarify something you said earlier, Don. You said year over year you expect sales to be down in Q2 as well as Q3?

No, I did not say that.

Okay. Maybe I misunderstood at the beginning of your prepared remarks.

Oh, handsets I was talking.

Oh, okay.

That’s where I used that remark. I was talking about the fact that in Q1 we saw a $6 million drop in components in handset applications.

Uh-huh.

Okay. You know, as we go down that year-over-year comparison keeps narrowing, so in Q2 I said it would only be about $3 million year over year again, and then it keeps dropping after that, the difference from year to year.

I got it. Okay.

It’s pretty much gone by the end of the year.

No problem. At this point, I mean, it appears that you would at least expect seasonally your revenue to be up in the June quarter. Would that be fair?

Well, in the next quarter you’re talking.

In, yeah, the current quarter you’re in now.

Yes.

Right. And when you look at the HP, you mentioned obviously year-over-year decline related to Singapore. Last quarter you actually spoke a little bit about Rojas and the fact that they were pausing ahead of some Rojas transition. Can you give us an update on that?

It’s still an issue and it is certainly affecting demand. It’s not as big a factor as the Singapore transfer was, but it is a factor. They’re, like everyone, trying to be careful to work off their noncompliant inventory, and I think it’s a little bit hard for them to predict which customers are willing to take the older versions or the noncompliant versions versus which customers are insisting on the new versions, and so there’s a lot of inventory balancing work that’s going on.

I think everybody is running a little bit tighter on their hub inventories that they keep as a result and so it’s having an affect. How much? That would be hard for me to get my arms around.

Okay. But from CTS’s perspective, you guys are Rojas compliant today?

As required by the customers, yes. Not everybody has asked us to move to a compliant products form yet.

Okay. But I mean when they do, you don’t envision that being an issue?

No, no, no, no. We’re not having an issue that way.

And for the most part, your customers are on the deadline of the end of June?

Yeah, some of them have waivers.

Okay.

And again, it’s interesting. I think some customers have been I’ll say late to recognize the transition challenges, and so we’re doing a lot of rush work for people to help them.

Would either of your largest two customers have waivers at all for EMS in place? I mean, I would gather they wouldn’t given the products that they do, but

I don’t know of any. I’m not saying that they don’t for some older end-of-life products, but I don’t offhand know of any. I know that they’re both talking about and working with us on Rojas-compliant product, so

Sure. And then just you had mentioned also in Mexico you’re using your current site here, using unused floor space for Motorola. Can you give us an understanding of essentially how much floor space is open, how many SMT lines you might be dedicating to this or is it just an assembly, not

It’s just assembly right now.

So system level, not

Yes, yes.

-- second

There’s no SMT lines down there. We’ll kind of watch how this evolves and may at some time put SMT lines down there. And depending on how it evolves, we also may well look to go into a nearby facility.

Okay. To that point would you say that this is them rebalancing their current production with you or is this, in fact, maybe some new business that they’re giving you?

It’s both.

It’s both? Okay. And then the last question is for Vinod. I just wanted to be clear. This insurance gain that you mentioned of $1.5 million was that included as an offset to SG&A?

Yes.

So it was. So essentially SG&A would have been closer to $22 million?

Yes.

And why would have SG&A risen sequentially then excluding the gain when your sales went down?

Well, there are always some timing of expenses. And then we have not really commented on the quarterlies. Depending on how we accrue certain expenses, it’s possible that quarters may vary from one to another.

But then going forward, Vinod, what do you think is kind of the target for the company in terms of maybe as a percentage of sales or maybe as a $1 maybe a $1 amount is easier to think about because most of it is fixed I imagine at this point.

We have talked about as a percent of sales as our target, and as you know that number has continued to come down in the last several years from as high as 19% kind as a number, 19% of sales in 2002 to a low of 13.5% in 2005. We have said that we expect the number to come down to more around 12 to 12.5% of sales on a full-year basis as our target.

And by “target,” you mean this year, next year?

We have not clarified it, but we see that target as more of 18 months to a two-year type of target.

Okay. And then your gross margins were somewhat surprising to us in terms of how good they were. Do you think that’s sustainable or was that also benefiting from anything that was one time?

Well, I think the gross margins were clearly very good, and the big driver was the positive mix not only between the segments but within each segment we saw a very good mix. In component and sensor segments we had sales up higher margin products, either whether they were infrastructure products or our PZT products or whether they were distribution sales, which is the mix was higher. I would say that the mix was probably unusual strong in the first quarter and I would not expect every quarter to benefit from that kind of unusual mix.

Lastly, can you give us a breakout on the options between SG&A and cost, the $223,000?

It was I think split pretty equally between margins and operating expenses. That expense goes along with the salaries and fringes expense which gets spread over between all the categories.

Thank you.

Our next question is from Sid Parakh of Robins Group. Your line is open.

Hey, good morning.

Good morning.

Good morning.

On the automotive fund, it sounds like there was some trend there and what I was trying to understand is that is this trend based on volume growth or was it more like new products or new program implementation?

The driver for our growth has been new products and the expansion into Asia and our ability to take some of our existing products and drive growth in that region. So we’re seeing higher underlying demand growth going on in Asia, and so that’s not necessarily just new products.

Okay. And would you say that I mean, growth rates in this range are maybe even higher or sustainable for the rest of the year?

Well, you can get variations from quarter to quarter, but we’ve said for quite awhile now that our expectations are for on average double-digit growth in the sale of automotive product. And we won’t necessarily see that happen in every quarter on a year-over-year basis, but on average I think we can continue to do that for awhile.

Okay. And also can you talk a little bit more about the new product introductions that, say, the company plans in the automotive sector or going forward or, say, throughout the year of 2006?

Well, there’s a lot of launches that are going on all the time, so if you’ve looked at the material that we’ve used in investor relations meetings which have been on our web site or and you’ve heard me talk about this some in our conference call, we have one, for example what is it, I think it’s 44 platforms for automotive pedals. I don’t know offhand how many of those have been launched at this point in time, but I would guess it’s half or something in that range. And so there’s a lot of them that are still to be launched, and the OEM space these out so they’ll launch one and then launch another platform and launch another platform. The same thing is true in some of the other products, so I can’t get more specific than that other than to say that there’s more launches this year than there were last year of these kinds of products.

I mean, what I was also trying to get to was are we going to see new product introductions in itself as in a product that is to say which will generate business from several other platforms, like the [axle rays?] or pedal module frames?

Okay. You’re talking about new families

Right, right.

-- of products?

New families. Okay.

You will see them, but I’m not going to talk about what it is we’re going to be doing until we’re a little farther along.

Okay. Okay. Hey, and I just wanted some clarification on the guidance. Now, you’ve said EPS of $0.75 to $0.80. Now, does that also include the $0.03 benefit from the insurance claim?

Yes.

Yes, it was. The only thing that we excluded from that number was the roughly $0.08 related to the restructuring Burn consolidation.

Okay. Okay. And also, just a couple of quick questions. Start-up costs for the new Czechoslovakian plant can you quantify that number? And can you also give us a sense of what will be in, say, Q2 and third quarter?

I’ll give you some color on that. We believe that the Czech start-up costs are probably going to be in the range of $1.5 to $1.7 million; $400,000 of that approximately have flowed through in the first quarter and the rest will be spread out throughout the year, but I think the bulk of that would hit us in the second quarter.

Okay. Okay. Now, also just going back to, say, the HP revenue line. Now, you said they’re sort of holding back to see what happens with the inventory that they have that is non-Rojas compliant. Now, do you have a sense of when they should be done with that aspect and start ordering, say, components based on your standards?

Well, the Rojas deadline if you will is, what, July so we’ve got another three months roughly, but there are exceptions around that, so it’s not an absolute, hard-break line. But I would expect that this stuff will work itself pretty much out over the next quarter.

Okay. All right. That’s about it for me. Thanks a lot.

Thank you.

Our next question is from John Franzreb of Sidoti and Company. Your line is open.

Good morning, guys.

Good morning.

Good morning, John.

Could you just talk a little bit about the component mix and the margin benefit from it? What’s the real drivers there?

I think the component and sensor segment benefitted from the mix because it was a higher mix of automotive sensors and infrastructure components than the handset components, for example. Don talked about handset components have continued to come down, so that shift has benefitted us.

In addition, within our electronic component product groups we have had a very favorable mix with higher sales which are going to distribution or our PZT products. Within that, we had a very favorable mix which benefitted the gross margin.

But Don has kind of alluded to the fact that the automotive side will likely do a high-single, low double-digit pace. But, Vinod, you kind of said that you can’t really expect that kind of a great margin mix to be sustainable. We’ve kind of alluded to that. Why would that be the case?

I wasn’t implying that the automotive sales growth has gone slow. What I was implying that within the electronic components category we may not have a higher percent of sales going to those product families within that segment which carry higher margins, so on our PZT product, our auto distribution product has a percent of that segment it may fluctuate between quarters.

Okay. And one last question. When you kind of think about the revenue in the quarter and then you maintain your revenue guidance do you think there’s a certain kind of revenue catch-up that you can expect from the coming periods or can you give us a little color of how you see the revenue playing out for the balance of the year?

Well, we cannot add any more color to it other than the fact that we think that the full-year sales are going to be up 6 to 8% from prior year. We have not broken out that by quarters in any way in the past.

Okay. Do you have a sense it’s going to accelerate as the year progresses or any thoughts along those lines?

Well, we do think that the seasonality between the quarters should be pretty similar to what we saw last year.

All right. Thanks a lot. Good quarter, guys.

Thank you.

[OPERATOR INSTRUCTIONS] We have a follow-up question from Mr. Kevin Kessel of Bear Stearns. Your line is open, sir.

Hey, guys. One thing I wanted to clarify, Vinod. You said free cash flow for the year is still expected to be $23 to $26 million?

That’s correct.

And then cash from operations it sounds like it was around what was it in the quarter?

The cash from operations essentially was offset by capital expenditure, which was around $2.5 million.

So cash flow was $2.5 million in the quarter?

Cash flow was break even, so if you take operating cash flow of roughly $2.6 million

$2.6, okay.

Yeah. And then take out the capital expenditure, which was actually $2.5

I see.

-- then you have a slightly positive free cash flow.

I got it. And then, Don, you mentioned six new customers in the quarter, four in medical, one defense, one industrial. Could you ballpark what you think these might add to the top line whenever they ramp and maybe what you think in terms of a ramp schedule for these guys?

I really don’t want to get into real hard numbers. They will contribute to sales this year. They’re ramping on different schedules. Some are later, so obviously there’s more from them in the next year and following years, so

Would you say like in a ballpark these are programs that sort of fall in a $1 to $5 million range or $5 to $10 or are they much bigger than that or I’m just trying to get a sense, like maybe you never get all of them.

It’s both. I mean, it’s a mixture. We find we have some customers that especially in the early years would be smaller and then we expand our relationship and others might be bigger right off the beginning, so it’s both kinds.

But it’s just a mixture, but

Yeah.

I mean, would it be fair to say that on average maybe $5 million if they were at a minimum of say an average of $5 million a year, then we’re talking about $30 million in aggregate?

Honestly, I haven’t even looked at it that way, so it’s

Okay. What about you guys have been I know it’s becoming more difficult to do, but you guys have historically given us at least a sense of where Syntech [ph] was, at least its customers, and I think last quarter you’ve mentioned it was around $22.8 million or so.

We don’t even sort it out that way anymore.

Any sense for if they were up or down in the quarter?

Kevin, we did say last year when we did the acquisition that we’ll break them out for the first year and then it becomes tougher and tougher as it becomes intermingled with our other EMS business.

Right.

So we have started not to try to break them out separately. Now, you can get a sense by looking at the medical, defense or non-computer and communication piece of our EMS business.

Right.

Because as you know, before Syntech essentially our EMS business was focused on computer and communication segments.

Right. Okay. Any update at all on this OCS that you guys heard last quarter wasn’t going to go forward? Has there been any update there, any more discussions?

No, there’s nothing new.

Nothing new. And then what about as related to the infrastructure orders out of China? Anything new there?

You’re referring to what I talked about previously, trend at Unicom?

Yeah.

No. They’ve published speculation, I’ll call it, is that 3G licenses will start to be issued sometime in Q3. I guess you could say we’ve kind of had this kind of speculation before, so we’ll see. And that when that happens, that will start to break the log jam on capital expenditures. So I know nothing more than that.

Do you know what’s driving those license the timing there? Does it have anything to do with the Olympics or is it just

Well, it’s two things.

-- the government doing it?

It’s two things. And again, this is what I think and what a lot of other people who watch the market believe, but nobody knows for sure. One is, China is developing their own protocol, TDS CDMA, and that protocol has been in test. And they had some issues with it and people generally believed that they have held up infrastructure development so that that protocol can get far enough along and become the basis for a significant portion of infrastructure sales in China. If they let the service providers go ahead and spend their capex now, it would go into the other protocol, so it’s held up a lot of investment in the country, so that’s what’s causing them to wait.

What is pushing in the other direction is what you just mentioned, they’ve got to get the infrastructure in time to support the Olympics. And they’re going to run out of time if they wait a heck of a lot longer than the end of the year.

Can you give the percentage of the note of sales for your top two customers that are over 10%, what they were in the quarter?

I believe we have only one customer, which is higher than 10%, which is HP.

Okay. What did they end up being in the quarter?

HP was roughly 25% of the total sales in the first quarter.

And your second largest customer is now below 10?

Yes. And the same number for last year, HP was 31% last year in the first quarter. So it’s lower to 25% versus last year at 31%.

Okay. And here’s a question for you, Vinod. Why would the insurance gains not have been broken up separately on the P&L? Like, why would it because I mean, in a way I understand what you guys said about you were incurring expense for it along the way, but shouldn’t this be viewed as somewhat of a one-time gain here?

I’ll give you a rationale and that’s why we broke it out so that people can treat it any way they wanted to. Our rationale was that that was not a windfall gain like a gain on the sale of some assets, like we have Canadian land where we sold the land at a much higher value than what we paid for it. This is an offset of an expense which we incurred and it flowed through our income statement in the prior period. So when the expense took place, we did not exclude it and, therefore, when we essentially got reimbursement for the expense, we decided that it’s probably not appropriate to exclude it.

I understand.

The other reason is that when we take aggressive stance to go and fight the battles to get the money which we believe rightfully belongs to CTS, we have to incur certain expenses, legal expenses, maintain the legal staff and incur some external expenses, so there is an expense associated in going and winning these kind of claims against other people. So there is a cost associated, which also flows through my income statement.

When you guys gave your guidance last quarter of 7175 did you expect this to happen in terms of at least settling in your favor sometime? Was that built into your 7175 set of guidance?

It was built into our thinking to some extent, yes.

Okay. And because essentially what I’m looking at, and maybe you guys can correct me if I’m wrong, but you had some up side year in the quarter relative to expectation. $0.03 of that might have been due to this, but regardless there were still up sides. But it seems like when we look at the new guidance for the year, those haven’t really changed.

EPS if you exclude this gain essentially is almost unchanged, especially if you back out the upset in Q1. And so to me, I’m kind of curious because it seems that the market has improved a little bit over the last three months. And if that’s the case are you guys being conservative or are you just not seeing that improvement?

Well, our thinking was you’re right. You should exclude from an extrapolation point of view, you should exclude the sense, because we’re now going to get similar kind of positives in the rest of the year. It’s not that we are unaware of it obviously.

We also pointed out that we had a couple of pennies’ worth of royalties, which was which came into the first quarter. It was incremental to the full year, but it was incremental to the first quarter, so from a timing point of view, that is at the expense of higher royalties in Q2, 3 and 4.

We looked at the favorable mix and gross margins and we concluded that we should keep the positive in other words, our mix should not go below what we had earlier assumed in the rest of the year. And we should whatever we have gained in the first quarter should carry over to the full year and we shouldn’t lose that. So all those went into our guidance and we came out with $0.75 to $0.80 which includes the $0.03 from the settlement.

And in the royalties can you say what those are for? What products are those on?

They’re primarily electronic components which we get every year. It fluctuates roughly $2 to $3 million every year and it comes from fairly large primarily Asian OEMs so they’re not from smaller companies where we may not be sure about the collect or our ability to collect those.

So the one time up side in Q1 that’s not expected to continue in terms of royalties? It’s just the stream is lumpy and the timing is up in the air, but

Exactly, lumpy. And we’re still thinking that we will get the similar amount we have thought in our guidance earlier for full year; however, Q1 was higher than what we thought.

Okay. The last question is, a lot of guys at least on the component side are talking about price, the pricing environment being relatively favorable, not necessarily pricing being up, but being down less than expected. Some companies actually are even hinting that they think they might be in the cycle. You guys have a feeling in terms of end markets out there, whether things are that good or whether this might just be certain come a gain in market share?

That’s an interesting question. I have not heard our people talking about pricing in the sense of it really being different other than there has been some ability at times to maybe deal with some of the material costs that flow through and offset that, but that’s about it.

In other words, we are not seeing that as an up side. We did comment that precious metals, we use silver and palladium in our component and sensor segment. Those prices are up a good 40% from the same period last year, and so some of that pricing advantage may be there to offset that kind of increase.

Thank you, guys.

[OPERATOR INSTRUCTIONS] Mr. Walorski, I’m showing no further questions, sir.

Okay. I would like to remind our listeners that a replay of this conference call will be available from 3:15 p.m. Eastern Daylight Time today through 11:59 p.m. on Wednesday, May 3, 2006. The telephone number for the replay is 800-475-6701 or 320-365-3844 if calling from outside the U.S. The access code is 825567. Thank you for joining us today.