CTS Corp (CTS) 2009 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the CTS Corporation fourth quarter and full year 2009 earnings release conference call. At this time all participant lines are in a listen only mode. And later there will be an opportunity for your questions. Instructions will be given at that time. (Operator instructions).

I would now like to turn the conference over to the Director of Planning and Investor relations, Mitch Walorski, please go ahead.

I'm Mitch Walorski, Director, Planning and Investor Relations and I will host the CTS Corporation fourth quarter 2009 earnings conference call. Thank you for joining us today. Participating from the company today are Vinod Khilnani, Chairman of the Board and CEO and Donna Belusar, 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 was 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 Web site in the investor relations section.

I will now turn the discussion over to our chairman and CEO, Vinod Khilnani.

Thanks, Mitch. Last evening we released our fourth quarter and full year financial results. I'm pleased to report that we recorded a stronger than expected fourth quarter with earnings and free cash flow both exceeding our earlier guidance and street expectations.

Our increasingly diversified business model and global customer base combined with lower cost structure and favorable segment mix helped us improve our sequential and year-over-year gross and operating margin percents in the fourth quarter. Excellent performance on the balance sheet front was also noteworthy as both inventory turns and receivable days outstanding improved sequentially and year-over-year. Donna will go over the details with you a little later.

But before I comment on the business conditions further, let me first comment on the recent voluntary safety recall of 2.3 million pedal modules by Toyota which result from a rare set of conditions which may cause the accelerator pedal to become harder to depress, slower to return, and in some absolutely rare situations Toyota believes they it may get stuck in the partially depressed position when used in situations where conditions go beyond the original Toyota specifications.

Based on the information that Toyota has provided us, we are aware of fewer than a dozen instances in the US where this has occurred in some rare conditions. Our product has consistently met Toyota's specifications, and we have no knowledge of an accident or injury due to this rare phenomenon.

Toyota has stated publicly that this recall is different from and unrelated to the sudden unintended acceleration issue which was the subject of their earlier floor mat-related recall which I believe has been extended to 1.09 million additional vehicles in the last 24 hours, and includes vehicles with pedals made by both of Toyota's pedal suppliers.

The floor mat-related recalls also include vehicles that date back to model year 2002 while CTS became a pedal supplier to Toyota only starting with model year 2005, leading us to conclude that the slower return pedal phenomenon is clearly unrelated to the sudden unintended acceleration issue.

Toyota remains a small but important customer for CTS with close to 3.2% of our annual sales. We are working diligently and collaboratively with Toyota to find a field fix and put additional capacity in place to manufacture the new pedal to support the recall.

Let me now comment on the business conditions. Sales in the fourth quarter of 2009 at $133.9 million were up 6% sequentially from the third quarter. Our automotive sensor sales increased 24% sequentially from the third quarter as we saw increased demand from our customers as a result of higher light vehicle production, sequentially in North America and Europe by 7% and 9% respectively. Some Asian markets, like China, grew 17% to 18% sequentially in the fourth quarter. Ramp up in new business wins allowed us to increase our market share and grow our sales faster than the over-all improvements in the automotive production volumes and inventory build.

Continuing with the component and sensor segment, sales of electronic components representing approximately 16% of total sales, were up 5.2% sequentially, although still 23% below fourth quarter of 2008. Improved sequential sales were driven by wireless infrastructure and electrocomponent sales.

We are continuing to see improved orders from our distribution channels as they build back their inventories to more normal levels. We also continue to record infrastructure design wins at a healthy clip with 76 new design wins in the fourth quarter versus 71 in the same quarter last year.

Our EMS segment sales represented 51% of our total sales. EMS sales were down 3% sequentially as improvements in depressed industrial and communication markets were more than offset by weaker shipments in defense and aerospace and medical markets primarily due to timing of new replacement programs.

Incidentally, the overall reduction in EMS sales as a percent of total company, from 64% a year ago to approximately 51% in the current quarter, had a positive impact on our consolidated gross margins.

Overall, looking back at a very difficult economic environment in 2009, we stayed focused on two key objectives. First, managing our cost structure and right sizing our operations by taking numerous temporary and permanent actions proactively in late 2008 and early 2009.

We reduced our global head count by approximately 25% to around 4316 people from its peak in mid 2008, lowered compensation, utilized furloughs, as and when necessary, reduced discretionary expenses by 50% to 60% in some cases, et cetera. The team did an equally admirable job by managing the balance sheet well as evidenced by $40 million in free cash flow in 2009.

Our second key objective was to focus on launching new products, winning new business, and increasing our market share despite all the economic turmoil and budgetary constraints. We achieved an all-time record of winning $300 million in new business in 2009, including several strategic wins in the commercial vehicle operations with smart actuators. This positions the company well with new customers, new products, and programs in 2011, '12 and beyond.

The company not only continued its core R&D activities in these difficult economic times but actually grew them selectively to pursue certain strategic, high growth target markets. Increased focus on design and development activities not only helped us win new business, it also strengthened us on the intellectual property front to build a protective mold around our business model so to speak.

The number of patents granted to CTS increased 31% from 16 in 2008 to 21 in 2009. The patent application filings and indication of future patent grants increased 20% from 50 in 2008 to 60 in 2009. In addition, we continue to lower our risk profile by further diversifying our customer, industry and geographical base. Today no one customer represents more than 7% to 8% of total CTS sales.

We have a growing presence in Asia where markets are expanding at a higher rate than North America and Europe. CTS now has approximately 50% of sales coming from outside the US. Our sales into a wide array of markets like automotive, communication, defense and aerospace, medical and industrial, also help us better manage the cyclicality in any one sector.

Looking ahead to 2010, our near-term order board in the first quarter shows slow but steady improvement, keeping our seasonality in mind. We view the volume improvements in the last several quarters with some caution, due to the positive impact of government stimulus and inventory replenishment activities which will begin to taper off at some point.

Having said that, we remain cautiously optimistic and barring any major economic downturn, expect a 10% to 15% growth in our full year 2010 sales and project our earnings to an EPS range of $0.45 to $0.53 per share.

Now I will turn the meeting over to Donna Belusar, our CFO, who will provide further details regarding our financial results. Donna.

Thank you, Vinod. I am pleased to take all of you through the highlights of our 2009 fourth quarter financial results and provide a wrap-up of the overall full year financial performance.

The fourth quarter 2009 finished with sales of 133.9 million, up 5.8% from the third quarter 2009 sales of $126.6 million and down 17.8% from the same period last year. Net earnings of $4.1 million or $0.12 per diluted share included a $2.5 million non cash tax valuation charge at one of our Asian tax jurisdictions.

Our adjusted Earnings Per Share were $0.19 per share, which excludes this tax charge. In spite of the overall weak economic and financial environment, the fourth quarter improved sequentially in both sales and operating earnings from the third quarter.

For the full year 2009, sales were $499 million, compared to $692 million for the full year 2008. Our full year 2009 GAAP earnings was a loss of $1.01 per share. Our full year 2009 adjusted Earnings Per Share was $0.36 per share which compares favorably to our previous guidance of $0.27 to $0.31 per share.

The adjusted earnings of $0.36 per share excludes some discrete items that occurred earlier in 2009, such as goodwill impairment, restructuring and the tax impacts of our cash repatriation and the fourth quarter tax charge just discussed.

Our components and sensor segment sales reflected higher sales of automotive sensors and electronic components which improved our segment mix. The components and sensors segment sales were 49% of CTS total sales compared to 44% in the third quarter.

Gross profit margin for the fourth quarter 2009 was 23.1% of sales, up from 20.7% in the third quarter of 2009, and improved from 18.2% in the fourth quarter 2008 despite a year-over-year decline in total sales. The increase in gross profit margins is primarily driven by the shift in the segment mix to the higher percentage of sales in components and sensors and an overall leaner cost structure.

Throughout 2009, we managed in an uncertain economic and financial environment. We tightly managed expenses and took pro-active initiatives to reduce global resources, thereby improving efficiencies across our global manufacturing footprint.

Fourth quarter 2009 had $18.8 million of selling, general and administrative expenses or SG&A of about 14% of sales. We finished with total 2009 SG&A expenses of $67.1 million, down $15.3 million from the full year 2008 SG$A levels.

Some of the actions and initiatives we implemented were tactical, such as a temporary reduction in discretionary expenses, salaries and the suspension of 401 matching contribution. Some actions were more permanent as we reduced global resources across the company. Late in the fourth quarter 2009, we reinstated the salary reductions and in 2010 we will reinstitute the 401 matching contributions.

Research and development, or R&D, expenses were $3.9 million or 2.9% of sales in the fourth quarter 2009. R&D averaged approximately 2.8% of sales throughout 2009, up from a 2.6% level in 2008, signifying the company's commitment to growth initiatives.

Total other expenses, which include items such as interest expense, interest income and currency translation gain or loss and other nonoperational expenses or gains were $.4 million for the fourth quarter 2009, which is approximately $500,000 lower than the same period last year. This decline is primarily attributed to the decreased interest expense and overall lower debt levels.

As mentioned earlier, the fourth quarter included a discrete noncash tax valuation charge for a specific Asian tax jurisdiction of approximately $2.5 million. Excluding this discrete item, as well as the tax related to the cash repatriation and the goodwill charge, our full year tax rate would be approximately 18%.

Looking ahead to 2010, we anticipate an effective tax rate to be higher, in the range of 21% to 23%, with the year-over-year increase primarily due to the anticipated sales growth in higher tax jurisdictions as well as some specific foreign low tax incentives expiring.

I would now like to shift our focus to CTS's balance sheet. 2009 finished with a solid balance sheet. Strength in our global cash balances, a positive net cash to debt position, consistently improving controllable working capital and a positive free cash flow.

At the end of fourth quarter 2009 we had $51.2 million of cash, up $6.5 million from the year end 2008 level of $44.6 million. Our total long-term debt was $50.4 million which is down $29.6 million from year end 2008. Our total debt to capital is approximately 16.9%, improved from 22.4% from year end 2008.

In the fourth quarter we generated $12.5 million of cash flow from operations, driving year to date cash flow from operations to be $46.6 million compared to $34.1 million for 2008. Our full year capital expenditures were $6.5 million or 1.3% of sales. Though we remain prudent in our spending levels, given the wariness in the economic outlook, we are targeting to return to a more normal range of capital expenditures for the year 2010 at approximately 2.5% to 3% of total sales.

Free cash flow, which is cash from operations less capital expenditures, was $10.7 million for fourth quarter 2009 or $40.1 million for the full year 2009 versus $16.5 million for full year 2008. We expect to continue generating positive free cash flow in 2010, in the range of $20 million to $25 million, driven by top sales growth offset with increasing working capital requirements.

I will wrap up with a brief look at our controllable working capital which includes Accounts Receivable plus inventory less Accounts Payable. Controllable working capital is a percent of annualized sales was 13.8%, improved from 14.4% as of the end of 2008.

Accounts Receivable collections, as measured by day's sales outstanding, improved by four days or approximately a 7.7% improvement on days receivable outstanding.

Inventory decreased significantly from year end 2008 [of a] $70.9 million to $54.3 million for year end 2009. We improved inventory turns both sequentially as well as over year-over-year.

CTS's financial position has gained strength and remains strong throughout 2009 despite the downward pressure on top line sales growth.

In summary, we have a solid balance sheet with healthy cash balances and strength in our liquidity, and we continue to invest in R&D and planned capital expenditures. We are well positioned for profitable growth as the economic conditions improve.

With that we will open the call for your questions so I'll turn it over to Leah. Thank you.

(Operator instructions). Our first question is from the line of John Franzreb, Sidoti & Company.

Good morning, Vinod, Donna, Mitch. First question is you mentioned that you were going to bring back some costs next year, some discretionary spending. Could you quantify how much in costs you expect to come back and the timing of those costs will be even throughout the year, Or will it build up as the year progresses?

I think roughly $3 to $4 million in costs will come back next year, and that cost is related to either the salary reductions we implemented in 2009 -- which by the way, we -- reversed on November 1st or first week in November.

So the fourth quarter did see some of that reversal take place, but obviously will have the full year impact of that in 2010. We also intend to restart the 401(k) matches back from January 1, so those kind of things and the salary reductions which have been reinstated, my guess would be, John, there'll be a $3 million, $3.5 million kind of a number.

Okay is that the biggest reason while the sustainability of the fourth quarter earnings going forward isn't as strong as what you reported in the fourth quarter?

Sustainability of fourth quarter earnings, some of it is seasonality. You know the first quarter normally is less than fourth quarter. So that will be lower from that point of view.

Right.

And then partly because probably some of those expenses will probably come back.

Okay. And Donna, you mentioned that essentially if I got the numbers right you're going to double the CapEx budget. Could you identify where the cash is going to be going, what projects might have been delayed or what projects are out there to support growth?

I think, John, generally our capital expenditure runs in the $11 million, $12 million, $13 million kind of range. We will be kind of more to the normal space in 2010. We have also said roughly half of it goes toward maintenance and half of them will be new products and capacity increases. We will need additional CapEx which is included in this number to add more capacity for Toyota pedals.

Okay. Since you brought it up --.

I'm sorry I did that.

Could you discuss how unique the Toyota pedal product is and how much -- I'll phrase this -- cross-pollination of that product there is to other pedal products you put out there?

John, there isn't any cross-pollination of this pedal with other pedals. I do know for sure that all of our other large pedal customers like Honda's, and Nissan's and Mitsubishi's, very different pedal. And they're all designed to their specifications. All designs are different. And they are all very different pedals.

So the sensor you say in the Toyota pedal wouldn't be the same sensor in the Honda pedal?

Well, before I comment, I'll tell you that sensor has nothing to do with this issue.

Okay.

Not a sensing issue. It's a mechanical issue.

Okay.

The mechanical issue is driven by the design. And that is a Toyota unique pedal. So it has nothing to do with sensor. It's a design thing. And the pedal was designed to a set of specifications. All the customers have different specifications and they're all designed differently. And so it is a unique design to meet the specifications given to us.

That's very helpful. One last question, Vinod. Can you comment on Ford's announcement of current production? Have they touched base with you? Do you have any idea why they did that?

Yes, I think it was a very, very small volume. We very recently started supplying to them. It is a different design, and it is --- there is just natural process taken place where they want to sit down with us and get comfortable and get convinced that that design is different and that process is taking place.

And Ford is not a customer of CTS. And that is just a GAV which bought those pedals and they are different and we are in discussions with them, and we hope very soon they will be able to go back to normal productions because that is a different design. We're just in the process of talking to them and sharing that information.

Thanks a lot, Vinod, I'll let someone else ask some questions.

Next is the line of Hendi Susanto from Gabelli & Company.

Good Morning. Vinod, what is your expectation in terms of (inaudible) repeat of your top line growth in 2010?

Our guidance of top line growth next year?

Yes. I mean in terms of linearity from Q1 to Q4 do you expect it's more back-end loaded (inaudible)?

Okay. I expect the normal seasonality where by first quarter is normally a weaker quarter and then second quarter is normally good and then third quarter has some shutdowns and weakness and then we expect fourth quarter to be very strong.

Okay. And then you mentioned that the EMS there is the weaker sales due to production timing?

Yes.

Will we see some shift of the new sales in the second quarter or some kind of upside from Q1 up from Q4?

Yes, I think most of that upside is the second half of the year.

Okay.

I expect EMS sales to gradually start from a lower level similar to fourth quarter and the first quarter and then gradually improve.

Okay. And these are questions for Donna. What is your plan with regard to CTS capital structure this year?

Say it again?

What is your plan with regard to CTS capital structure this year?

Capital structure.

Yes.

Well, we finished the year with very strong balance sheet. One of the things I commented that we had a net position of cash to debt. We closed with $51 million of cash and the debt level around $50.4 million.

We currently have a single unsecured line of credit or revolver out there that we draw upon. So I think we have a very comfortable overall capital structure.

Hendi, we don't see much change in capital structure, nothing unusual in 2010.

Okay. And how much R&D will increase in 2010?

What will increase?

R&D?

R&D. I don't have the exact R&D information or percent. But I think you will see us increase our R&D a little bit as a percent of sales in 2010. Nothing dramatic because I think we have already ramped it up in 2009, maybe a little bit more increase from that as we add more engineering strength to the company.

Okay. And then this is a question about the gas pedal issue. If Toyota needs a replacement part, will CTS have some sort of like partial responsibility of the costs by the way?

We don't believe that, because we developed a pedal to their specifications. And Toyota has concurred with that. Toyota is a very important customer. They may be small, but they are a very important quality customer for us.

And CTS is doing everything in our power to work very collaboratively with them and will support them in every circumstance. I was actually very pleased to see a press release by Toyota done actually yesterday, late yesterday, which is actually in front of me which says that Toyota Motor has been working closely with supplier CTS on a device design that effectively remedies the problem associated with accelerator pedals.

So we have actually the fix. It is a much robust pedal which is meeting the tougher specifications by Toyota. Toyota press release continues and says pedals -- and I quote-- pedals featuring the device design are now in full production at CTS to support Toyota's needs. And I will conform that three or four plants, as we speak, are producing the newer pedals to meet Toyota's demand. Their press release continues to say, meanwhile we are also working with them to test effective modifications to existing pedals in the field that will be rolled out as quickly as possible. And the final quote in the press release says, we commend CTS for working diligently and collaboratively to find a solution to the potential problem and in developing a new design.

And it goes on to say CTS is a long-term and valued supplier to [TUS]. So we think Toyota is a first class company. I think the actions they have taken, they are trying to demonstrate that Toyota followed the highest-quality principles and CTS is working hand in gloves with Toyota.

And as we speak, we have Toyota people in our factories working with us to help us see how we can ramp up the production as rapidly as possible so that they can do the replacement pedals and implement them very, very quickly.

Thank you all.

Next is the line of Rick Giesen with Ellesar Investment Management. Please go ahead.

Good Morning, everyone.

Good Morning.

Regarding the new pedal that's been designed to meet the tougher specifications, do those new specifications include taking care of the condensation issue that's been reported in the press?

Yes. Actually it takes care of that.

Good.

That is, we believe, is the reason for the slow return of the pedal, which is by the way very different issue from Toyota's earlier recall of 4.2 million pedals which were associated with the mat issues. And I believe in the last 24, 36 hours they have announced in the recall of 1.09 million pedals. They're also of the mat category. This one is condensation related and the new pedal takes care of that, yes.

And the press also reported yesterday that Toyota dealerships or at least the one in the Toronto area that they cited was taking the recalled cars and replacing the CTS pedal with Denso's pedal. Are such actions as far as you know sanctioned or mandated by Toyota?

I have no knowledge of that. I'm not aware of that. What Toyota is advising us, and as I read their press release, that they're taking the lead. We're working very closely with them. And we have been asked to ramp up the production as fast as we can. And we are in the process of adding some capital expenditure additional production line to meet their needs as quickly as possible.

My final question is in the event that any legal action is taken against CTS as a result of these recalls, what business liability insurance coverage does CTS have in general, and if you could comment on the deductible levels, too?

Well, you know, this is clearly premature. We do not believe that we have any liability in here. Because as you know, most of the unfortunate accidents and injuries have related to the first recall or the floor mat problem.

And as I pointed out, clearly our pedal is not related to that because those recalls go back to model year 2002 when we started supplying to Toyota from model year 2005. That combined with the fact that everybody's pedals are involved in that, it clearly says to me that accelerator pedals have nothing to do with that.

Having said that, you know, CTS is a global publicly-traded company and we have all the normal general insurance and product liability insurance coverages which every prudent company will take. I do believe that our deductible is approximately $1 million.

Okay. And since this issue is a mechanical design issue, does that imply that perhaps Toyota would provide CTS with indemnification against any legal actions, as remote as they might be at this point? But in the event that occurs, is there any indemnification?

I rather not speculate on those kind of theoretical questions at this time.

Thank you very much.

Next we go to the line of Nat Kellogg with Next Generation Equity. Please go ahead.

Good Morning, guys. How are you doing?

Good Morning.

Just a couple of quick things. I jumped on the call a minute or two late, so you may have already addressed this. Are you guys the sole supplier presently for that pedal?

Toyota has two suppliers, I believe. And some regions may have some cars and some platforms which will be supported by one supplier, and other region another platform may be supported by another customer.

So for example, the earlier recall which I will refer back to the floor mat recall, both of Toyota's pedal suppliers were involved in that, are suppliers to those vehicles. At different times.

Okay. So is that fair to say that the current issue is an issue with the CTS pedal and the other supplier's pedal?

Say it again?

The current issue is an issue with both the pedal that you guys are supplying and an issue with the other supplier's pedal?

Yes. And again there are two issues. One is the earlier recall of 4.2 million floor mat pedals which has been extended to another 1.09 vehicles. In that one, both the pedal module manufacturers are involved, and it covers periods when CTS wasn't even a supplier.

Right. Right.

So accelerator pedals are not a common denominator there. Therefore that leads me to believe that that issue has nothing to do with accelerator pedals.

Separate from them, we have another recall which Toyota has announced, which is CTS pedals. And there the issue is the pedals return back slowly to its normal idle position because of some condensation or extreme environmental conditions which go way beyond original specifications.

And there only CTS pedals are involved. But we are not aware of any injuries or accidents of that category of pedal module. And Toyota themselves have separated the two recalls, clearly recognizing that the second one which affects us is in a rare situation. They have said there are no accidents and injuries involved. So we concur with Toyota's analysis and conclusion in that regard.

Yeah. That's fine. I was just trying to get some clarity there. That's helpful.

I think it's a very important point. Because I've seen many press releases, many a report, that people are intermingling the two.

Yep.

And I think that is clearly not what Toyota has said, neither we believe that. I think that is just a misunderstanding on the part of the reporters.

Okay. Yeah. I mean, I realize when these kind of things hit, it's people put out press releases first and ask questions later, right?

Plus it is a very complex question. And it has been to some extent intermingled. So I do understand why someone will misunderstand that and will try to intermingle the two. So it's kind of understandable.

Right. And then do you guys have the production, the spare capacity to ramp up if Toyota comes to you and says, all right, here's the new design. We've solved the problem and we need to replace the pedals in all these cars. Do you guys feel like you have the capacity there? Or is that going to cause any issues?

Step one is that we have a new design which we have been working very closely with Toyota for awhile. And that new design has, I believe, been tested adequately by CTS and Toyota and has been agreed as the solution. So that has been done.

We have been putting that new production pedals in the production, and as we speak all of our three facilities which supply to Toyota are already making, producing the new pedal. Your second question is around the capacity. We obviously always have some excess capacity. But because Toyota rightly wants to replace those pedals in the field as quickly as possible, we are actually in conjunction with working with Toyota, are putting actually additional production lines in place to actually ramp up our production much faster than our existing capacity.

Okay. And with this -- I mean, that new business, I mean, is that going to carry normal margins? Or do you guys sort of say to Toyota, listen, we want you as a continued customer so we're willing to sort of chip in to solve this problem and so it's not going to be at the typical margins that maybe the business would normally be at?

You know, we are going to work with Toyota very, very closely. They are a customer. And CTS will participate and help Toyota solve the problem, not only production and capital but also work very closely with them and put all the resources necessary in engineering and priority to also work very closely with them to come up with a field fix which may go very, very quickly.

And Toyota clearly is taking the lead in that area. So we'll work with them. And as Toyota has said, we're a long-term, valued supplier and we hope to stay a long-term, valued supplier for Toyota as we go forward.

Okay. Then I'll move on. I really appreciate. All that color is definitely very helpful. Will you guys talk a little bit -- obviously did a nice job in cash in this year. But if you guys look to 2010, where do you expect uses for cash to fall as far as pay down debt, stock buy back, acquisitions, working capital build? If you could give us a little color there, that would be great.

All of the above.

Maybe priority? Maybe two or three things that you think are more likely to be a use of cash?

I'm being facetious. Look. Overall our debt to capital ratio is very, very low. I think we're around 16%, 17%. We are drawn against $100 million revolver by roughly $50 million. And I think we finished the year with $50 million of cash. So our net debt was zero. Our borrowings were $50 million.

So we -- I don't think that under normal circumstances we would have any strong desire to lower our debt further from where we are. So the excess cash, the uses for excess cash can be to fund organic growth, potentially M&A growth, and then the Board of Directors are always, on an ongoing basis, look at dividends and buy backs. And CTS does pay dividends. And they have historically done some buy backs. But they are constantly looking at that. But I would say ahead of that would be to fund our organic and acquisition growth.

Okay. Okay. No, that's helpful. And then just last question. Did you guys say what the effect of foreign currency was in the quarter?

The effect of foreign currency was very minimal in the quarter. Let me get the specific number for you. I don't have it readily at my fingertips.

And then that's fine. I can follow up with you guys. But as far as what -- where do you guys, as far as foreign currency, where do you guys have the most exposure? I mean, is it more on the Asian side or is it more in Europe?

I think overall we have said that our currencies are naturally balanced if you look at transaction and translation side of it. We also have -- we also try to balance as much as possible in local currencies the local influence of that currency by selling into that country and expenses which can come from the production side of it.

So, you know, overall currencies are fairly well balanced now. We continuously watch it because as we grow in different parts of the world it continuously changes. But I don't believe -- and we will revisit that and Donna will call you back, but we don't believe that our currency imbalance is material.

Okay. All right. Appreciate all the color, guys. And I will hop back in the queue.

Okay. Thanks.

Next we go to the line of Brad Evans with Heartland. Please go ahead.

Yes. Thank you for taking the question. Vinod, can you just speak to with the balance sheet as it currently stands, the merits of potentially buying back stock at the current level based on the market's valuation for the company?

Brad, you know, buy back is always on the list to be considered. So is dividend. And the Board, we have a finance committee of the Board. And they are always looking at that. But when they are looking at that, obviously they will compare it to that as an acquisition opportunity and the merits of that acquisition. So as you know, no one subject will drive the decision. It is the relationship between that and what is the alternate use for the cash which will always drive that decision.

If I interpret the discussion here correctly, it sounds like the market is obviously reacting to the numerous headlines that are out there. But from a financial perspective, the impact of this recall should be relatively benign in the short-term. And it sounds like you hope in the long-term it will help establish a longer and stronger relationship and maybe a larger relationship with Toyota. Is that correct?

That is correct. And again, to further comment on that, we believe that this is a very small part of our business, a very small part of our sales. We are continuing to grow our business. We are diversifying, expanding it.

And I think after all this news gets fully digested and absorbed and other customers go through their processes and work with our engineering people, which they have already done to some extent or to a large extent, I think they will realize that at the end of the day it would reflect that the engineering strength in our sensors division was very strong and this was an isolated issue related to some extreme conditions which unfortunately cropped up at the same time when Toyota was trying to manage a very different issue with accelerations which I believe has nothing to do with acceleration pedals.

Partly I believe Toyota is saying that it is a floor mat and we would let obviously Toyota take the lead and determine that. So my view is yes, when the dust settles and people absorb all the news, this will not have any significant financial impact on the corporation.

One last question if I may. Could you just break out the respective growth rates you are anticipating for components and sensors in EMS for 2010, please?

2010. I think -- Brad, I don't have the growth broken out by my component sensor division and EMS separately. But what I will do is have Mitch return your call and give you some guidance on the growth by segment.

Is it fair to say though that components and sensors will grow more quickly than EMS in 2010, correct?

I believe so. I believe so.

Okay. Thank you.

But if you broaden it to say that component sensor will grow faster than EMS in the next two to three years then I will say yes with more confidence. Because we know that we have won a lot of new business which does not go into production until 2012 and 2013 time frame.

So as you know, EMS business you can win and it goes on right away and component and sensor business you win and it goes into the sales sometimes 18 months or two years later. So if you give me a slightly longer runway then I can tell you with more conviction that that side of the business is definitely growing faster than EMS.

Okay. Thank you for taking the questions.

We have a follow-up for John Franzreb. Please go ahead.

Vinod, did I hear you correctly one of the previous questions was not only your pedal but another supplier has the same design problem? I want to make sure I heard that properly.

No. What we believe -- what we believe we have heard is that the first recall which Toyota did in November, which is 4.2 million pedals, okay? That recall was characterized, I believe, as causing what they term "sudden unintended acceleration."

Right. I understand that. I'm just talking about the one that you're really involved with.

Oh. The second one which we are involved with, that only deals with CTS pedal. And there may be other people with the same design. We're not aware of it. We're focused on only CTS design issues on that.

Okay. And regarding your guidance, when you put that out do you -- did you think about the potential impact of the Toyota recall in that guidance number?

When we put that guidance out, we were aware of the recall issue, yes.

Okay. So any kind of margin hit on providing the replacement pedal is embedded in that number?

Our assumption at this point is that we do not see any material financial impact on CTS because of that, continue to work very closely with Toyota. We'll do everything to support them. But based on the facts which are available to us at this time, we're not aware of any material financial impact on CTS.

Okay. Great. Thank you very much.

Thanks, John.

we have a question from the line of [Derek Winger] from Jefferies & Company. Please go ahead.

Yes, thank you. Who are your competitors in the accelerator pedals and what is your market share position? And then do you sell the accelerator pedals to GM and Chrysler? And what do you sell to BorgWarner, Delphi, and Johnson Controls?

I don't believe we sell any pedals to GM. I don't believe we sell anything to Johnson Controls. I do believe we sell pedals to Chrysler, but again as I said, they are very different designs, very different specifications, and we don't believe that there is any impact on pedals to Chrysler or for that matter to other customers like Mitsubishi or Nissan because of this condition.

Okay. And what do you sell to BorgWarner and Delphi, and who are your competitors in the accelerator pedals, and what's your market share position?

To your question about BorgWarner and Delphi, we do not sell any pedals to BorgWarner or Delphi. We sell other products to BorgWarner but nothing to do with pedal modules --- we don't pedal.

And when it comes to competitors, we obviously compete with Denso who supplies to Toyota. And Denso and CTS both have pedals in their earlier recall which is floor-mat-related recall. And I think the other competitor is Hella, which has a division which makes pedal module. And in addition to Hella and Denso, I am not aware of any other major competitors to pedal modules.

In a November presentation you showed about --- that you had about 20% market share. Is that 20% share of all accelerator pedals in North America? US? Global? And what is your market share position there? And who are the largest suppliers?

I think our market share is somewhere between 16% and 20% globally. And I believe the major competitors are Denso and Hella.

So they are both substantially bigger than you?

I do know that Hella is bigger than us. Denso I believe is also bigger than us, yes. Because my understanding is they are more focused on pedal modules, probably. That is why they are bigger. And we being very diversified company with EMS electronic components, medical and other areas, pedals are clearly a smaller part of our business.

Any idea of what market share that the three entities have combined?

You mean Hella, Denso and CTS?

Yes.

I would suspect that Hella, CTS and Denso combined would probably be in the range of -- percent market share would be -- I don't know. I would say 60%, 70%.

Okay. So it drops off pretty dramatically after your third slot.

I suspect, yes. Yes. Actually I think that's true.

Okay. Thank you very much.

And next we go to the line of James Healy with USATODAY. Please go ahead.

Good day. You mentioned that you began working with Toyota some time ago. When exactly did Toyota contact you about coming up with a new design, please?

I don't have that information at my fingertips. You know, Toyota is taking the lead. I would prefer, you know, that question is addressed to Toyota.

Thank you.

We have probably time, Leah, for two more questions.

Very good. Next we go to the line of Mike Ramsey with Bloomberg News. Please go ahead.

Hi.

Hi, Mike.

Hello. My question is more focused on [Nitsa.] My understanding being that they have to sign off on the fix. Do you know whether they have approved of the fix? It seems with the production in full force that you would hope that they had.

I personally have no information on that. Toyota is taking the lead. I think Toyota may be more appropriate people. It's their recall.

Right.

I think they would probably know that information a lot more accurately than what I may hear from my people.

And just as follow-up, you said that you're working on a fix to existing pedals. So the ones that are being produced now are new pedals, right?

Absolutely. We are not making the old pedal for Toyota. So we are actually producing the new pedal, and we are working very closely with them for a field fix. A potentially quicker solution, and Toyota and we are working on it. And again, Toyota would be in a much better position to comment that how close they may be in coming up with a quick fix for the field.

Okay. I guess people would want to know how long it would take to produce all these pedals.

Yes. And again, as we speak we have Toyota people in our factories. We are obviously going -- we are ramping up right now.

Right.

But we are actually working collaboratively with Toyota to look at the bottlenecks, look at additional capacity, look at the key components, and everything together, the teams are working together to try to ramp up the production as rapidly as we can.

Our final question is from the line of Robert Sherefkin with Automotive News. Please go ahead.

Good Morning.

Good Morning.

Sir, I would just like to be clear on is there any chance that CTS might have to share in the costs of what you've outlined today?

We don't believe, what we know today our original part met Toyota's specifications. They have seen these slow return events. We have worked very closely with them. They came back to us with a much more stronger, robust specification. And we have worked with them and developed a new pedal to meet their new tougher specifications. And we do not believe that we have any major material impact on the corporation.

Thank you.

Thank you.

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