CTS Corp (CTS) 2012 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the CTS Corporation Q1 earnings call. At this time, all participants are in a listen-only mode. You will have an opportunity to ask questions after the presentation. Instructions will be given then.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to our host Mr. Mitch Walorski, Director of Investor Relations. Please go ahead.

Thank you Kara. I am Mitch Walorski, Director of Investor Relations, and I will host the CTS Corporation first-quarter 2012 earnings conference call. Thank you for joining us today. Participating from the company today are Vinod Khilnani, Chairman of the Board and CEO; and Tom Kroll, 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 on 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 reconciliations are available on our website in the Investor Relations section. I will now turn the discussion over to our Chairman and CEO Vinod Khilnani.

Thanks Mitch, and good morning, everyone. Last evening, we released our first-quarter results for 2012. It was a challenging quarter with a combination of new product launch and manufacturing consolidation activities, one-time expenses and timing of reimbursements.

The quarter included major initiatives around the commissioning of our Thailand EMS facility, consolidation of our Asian engineered frequency manufacturing from China into Singapore, launching of our second pedal module for global vehicle platform and wrapping up our product for disk drives.

Let me give you some more details on a couple of these major items. Our Thailand EMS facility, which was extensively damaged in floods last year, has been completely refurbished. Some of the equipment has been installed, and processes are under way to switch the supply chain and begin moving production back to Thailand from our California facilities.

By the end of the second quarter, or early July, all customers and production which was in Thailand before the flood, should be transferred back. This will eliminate all of our excess flood-related headcount of approximately 220 temporary workforces -- workforce in California by July.

In our Components and Sensors business, we were manufacturing our engineered frequency product at two locations in Asia -- China and Singapore. We have now simplified the structure and consolidated all Asia frequency products' manufacturing in Singapore. This process created some disruptions and inefficiencies, which affected our shipments and margins in the first quarter.

However, going forward, this should improve our cost structure. Now, moving on to first-quarter operations and growth initiatives, sales in the first quarter of 2012 at $147 million were 3% lower year over year, but 2% higher sequentially. Lost EMS sales due to Thailand, and overall a weak start of 2012 in January and February, impacted our seasonally weak first quarter.

Order rates and shipments did improve in March. Overall, we expect our sales for the second half of the year to be much stronger. On a segment basis, Components and Sensors segment sales were $76.4 million, up 6.1% year over year, and 8.1% higher sequentially. Within this segment, sales of automotive sensors at $47.8 million were up 4% year over year, while global automotive unit sales were up 3%.

Despite a weak euro, which depressed our US dollars sales, our Automotive Sensor sales growth still out paced the underlying market growth. North American vehicle inventory levels remained well managed at 57 days at the end of March.

Earlier this morning, we announced winning four new automotive sensor programs in the first quarter. These programs are expected to bring approximately $17 million of new revenue over the lives of the programs. Production for two of these new programs begins this year. Three of the awards are for a pedal module, and one is for an exhaust gas re-circulation sensor.

These products are serving light vehicle markets in Japan, Korea and China. CTS continues its success in winning new programs in faster-growing Asian markets. We expect our sensor sales for full-year 2012 to be up in the range of 14% to 15% year over year, driven by new business wins and new product introduction.

Continuing with the Components and Sensors segment, sales of electronic components increased by approximately 10% year over year, primarily driven by the acquisition of Valpey-Fisher in February and strong piezoceramic sales, which were up double digits year over year. Electronic components were adversely impacted in the first quarter by a weak telecom market and production disruptions caused by consolidation of our two Asian frequency products operations into one.

Our distribution buy-sell business started off weak in general in January and February; however, we finished the quarter with sales to distributions book-to-bill ratio of 1.07, indicating improved demand.

I am pleased to report that CTS recently signed a four-year agreement to formalize its recent win to supply piezoceramic elements to hard disk drive suspension assemblies. The agreement projects estimated revenues of $50 million to $60 million over four years, contributing to double-digit sales growth expectations from the Components and Sensors segment over the next several years.

Our EMS sales segment sales in the first quarter 2012 were $70.6 million, or approximately $9 million lower year over year. We believe Thailand floods caused $10 million to $11 million of lost sales; however, we are expecting to recover lost margins on these sales from our insurance coverage.

Overall, our first-quarter financial performance was weak; however, this was driven by either some timing-related items like flood insurance recoveries, engineering prototype and commodity pricing recoveries, or one-time items like manufacturing consolidation-related activities and unusual legal expenses to aggressively pursue certain companies who are infringing on our patents.

All major growth initiatives and new product introductions like piezoceramics for disk drives, pedal module for the new global platform, grill shutter actuator, and our major new business of smart actuators for diesel engines, have either just been launched or on schedule to be launched later this year. We remain confident in our growth plans for the next several years.

Looking forward, we generally expect the global economies to grow modestly in 2012. Europe, and a week euro, will continue to create some headwinds in our Component and Sensor segment. We believe approximately $0.07 to $0.08 per share in favorable reimbursements will benefit our operating as result in the second and third quarter, and some of the second-quarter reimbursements will get recognized in the third quarter. That, combined with our new programs mentioned earlier, will provide strong growth in the second half 2012.

We are, therefore, maintaining our full-year guidance and still expect diluted adjusted earnings per share of $0.75 to $0.80 per share in 2012. Although we normally would not give quarterly guidance, given the timing of the reimbursements and unusual items, we expect second-quarter adjusted diluted earnings per share to be in the range of $0.15 to $0.21 in the second quarter. And now, I will turn the meeting over to Tom Kroll, our Chief Financial Officer, who will provide further details regarding our financial results.

Thank you Vinod, and welcome everyone. Before I review the financial results in greater detail, I will comment on the continued effects of the October 2011 Thailand flood, which continues to disrupt our EMS operations, impacting sales, expenses and inventory. During the first quarter, our gross margin was negatively impacted by flood-related expense and the margin on lost sales by approximately $6 million to $7 million. We expect to recover $4 million of this in the second quarter.

As expected, a substantial portion of our first-quarter insurance recoveries of $5.4 million were for the fourth-quarter 2011 expense and property damage. The second-quarter flood-related expense and margin on lost sales are expected to be approximately $3 million to $4 million, as production continues to be transferred back to our Thailand facility. The timing of insurance reimbursements related to the second-quarter expenses will lag by two months to three months.

Our consolidated -- excuse me -- now, I will discuss our financial results. Our consolidated first-quarter 2012 sales were $147 million, a 3% decrease from prior year and a 2% increase from the prior quarter. Our first-quarter gross margin of 15% includes approximately $6 million to $7 million of flood-related expenses and the loss margin on sales, impacting our gross margin percent by approximately 4 percentage points. If we adjust for these items, our gross margin would have been in the range of prior year's gross margin of 19.2%.

The favorable segment sales mix shift, in favor of Component and Sensors, had a positive impact on gross margins but was essentially offset by higher commodity and certain product launch and transfer costs. Our selling, general and administrative expenses were $19.4 million, or 13.2% of sales, versus $18.4 million, or 12.1% of sales last year. The increase from last year was primarily due to lower pension income and higher legal expenses.

The first-quarter 2012 R&D expenses were $6.1 million or 8% of Component and Sensor segment sales versus 7% of Component and Sensor sales last year. The increase of $1.1 million from the first quarter 2011 is primarily due to engineering expenses to launch new products and the timing of some customer reimbursements for prototypes. We expect engineering expenses to finish the year at around 7% to 7.2% of Component and Sensor segment sales, which is similar to last year.

Our first-quarter net interest, currency and other expenses totaled $0.4 million of income. This was less than last year, primarily due to lower foreign currency gains. Our first-quarter effective tax rate included the impact of a favorable ruling in a foreign jurisdiction. We continue to expect our full-year 2012 effective tax rate to be approximately 25%, compared to 20.4% in 2011. The first-quarter 2012 GAAP-diluted earnings per share were $0.07, and on an adjusted basis, earnings per share were $0.14, compared to $0.15 in first quarter 2011.

Now, let's look at the balance sheet. From a working capital perspective, our accounts receivable days improved to 51 days from 53 days in the first quarter 2011. Our accounts payable at 67 days closely compared to the first quarter last year at 68 days. While our inventory reduced slightly from year end, it did increase $4.1 million from last year. We expect EMS inventory levels to steadily decrease as our Thailand factory becomes fully operational by the end of June.

Controllable working capital, defined as three accounts -- receivables, payables and inventory, was 18.3% of annualized sales; about 1% higher than the same period last year. Our controllable working capital, as a percentage of annualized sales, are expected to improve by approximately 2 percentage points by year end.

Our first-quarter 2012 cash flow from operations was usage of $4.1 million versus a usage of $2.5 million a year ago. The capital expenditures were $4.4 million versus $3.2 million a year ago. Our first-quarter 2012 free cash flow, defined as cash flow from operations less net capital expenditures, was usage of $8 million versus usage $5.7 million a year ago.

We expect our capital expenditures to be approximately 3% of sales for the full year 2012. So, despite starting the first quarter with cash usage, we anticipate 2012 full-year free cash flow to be in the $16 million to $21 million range, unchanged from previous guidance. Our net debt, defined as total debt less cash and cash equivalents, increased $26.3 million during the quarter, primarily due to the Valpey-Fisher acquisition of $14.7 million net of their cash acquired, and also due to the Thailand flood-related higher working capital requirements.

During the first quarter 2012, we repurchased approximately 272,000 shares of CTS stock, or $2.7 million, at an average price of $10.05. Approximately 302,000 shares remain in our 1 million share buyback authorization. This concludes the financial overview, and I will now open the call for questions. Thank you for joining us today.

(Operator Instructions)

John Franzreb, Sidoti.

Morning everybody. I've got a couple questions here, Vinod. First, regarding the reimbursements schedule that you just laid out. You said $4 million will flow into the second quarter, and, did I hear you correctly, now the $4 million will flow into the third quarter?

No. We believe something less than $4 million will flow to the third quarter, and the reason for that, John, is because the expense level will be lower in second quarter than first quarter because first quarter got the full blast of this. During the second quarter, we'll gradually be moving production back to Thailand. So, we are still estimating it, but our guess is that the second quarter would be somewhat less than $4 million, but maybe close to $4 million.

Okay. Now, regarding this whole process. You said that you estimated lost sales of $10 million to $11 million in EMS. Did I hear that right?

In the first quarter, yes.

In the first quarter. But you've maintained your revenue guidance for the full year. I want to reconcile that. Do you have commitments from your customers that they will come back? Because I assume they have been getting product elsewhere. You shared a willingness to maintain the revenue outlook. Do you have commitments from the customers, or do you expect to actually make it up some place else?

It's a combination. Some customers, we believe, will be coming back to us and increasing their volumes, and we may have a little bit of recovery there. But, some of the sales, I would say more than half of these sales, are lost --

Yes.

-- for good, because although we may have those customers -- but you are right, we are making those customers somewhere else. The reason, at this point, we are maintaining the sales guidance is because we expect to make it up in other areas.

It's possible that some of our programs, like the grill shutter actuator, which we were estimating we will start shipping in August time frame, maybe, and I think we are looking and working hard to potentially launch that a little bit earlier, so that's a couple of months earlier. We are still pulling up our supply-chain. Our customer definitely wants us to start shipping that product earlier, because the customer is anxious to move that production from a euro cost zone to a dollar cost zone because of the currency.

We are, right now, trying to see how we can accommodate that request to pull up the launch. So, we are hoping that that will get pulled up a little bit, and I also expect further strengthening in sensor products, because we believe that some of our key customers will still be in the process of increasing their inventory levels. And so, we expect our sensor volumes to rise further from where we stand today.

Okay. That is helpful. On a unrelated topic, the disruption in Germany, production of nylon 12, it's a feeder [line] into the pedal process, and you being a pedal module manufacturer, have you gotten any feedback on potential implications to your Business? Or not?

We have looked at if that product has a direct impact on any of our components, and we essentially don't have any material impact. We have some very small component where that we believe that that raw material may be going, but we don't believe that is going to cause any disruption. On the other hand, we are in touch with our large automotive customers, and trying to find out if they will have impact on their production volumes because of shortage of this, its called PA-6/12 or something, component.

At this point, our customer -- our automotive OEM customers are telling us that they do not expect impact disruptions on their production volumes. Having said that, they're watching it very quickly because they are developing some alternate material and substitute product. We have not seen any impact on their orders in our system at this point; however, we continue to watch it very closely.

Just one last clarification. You mentioned on the hard disk drive product line starting to roll out. You gave a revenue number, $50 million to $60 million in sales. I didn't catch the time frame that you expect that [by]?

Over the next four years.

Four years. When does that begin full production?

Now.

So, right now it's at that run rate?

It will be pretty close to that run rate. We expect the run rate to go little bit higher. But, I would say that 2012 will not be a partial year, or something, we will pretty much -- our estimate is, John, that 2011 sales can be anywhere from $10 million to $14 million. We are trying to figure that out. If it's closer to $14 million, you are at the run rate of the full year.

Right. You are 3, just over 3.5.

That depends, not on us, but how our customer is ramping up product of this new generation of disk drives. So, they still have a mixed thing. They continue to make the old kind of disk drives, the way I understand it, and this new dual actuation disk drive. So, the number can be anywhere from $10 million to $14 million. Just to give you a reference point, our sales of this product last year was probably around $2 million to $3 million.

Perfect. I will let somebody ask questions. Thank you Vinod.

Gary Prestopino, Barrington Research.

Hi. Good morning all. For our purposes here, will Q4 be a quarter where we are not going to have any insurance-related payments or coming in, just from basically what has happened in Thailand, ex-ing out any other natural disasters, or whatever?

Exactly. I think you follow the -- we are expecting it to be a clean quarter, because Q3 will be a quarter where we don't expect really anything material from an expense point of view, but we will see some recovery. We will see some favorable bounce in Q3, which will kind of a catch up of Q1, essentially. And Q4, we are expecting a fairly strong quarter, because a) we are not expecting and disruptions, and b) some of the product launches, which are taking place the middle of year or in the third quarter, they would be fully operational in the fourth quarter. Unlike in the prior years, this year, because of the timing of all these things, Gary, we are expecting a disproportionately strong quarter in the fourth.

Could you go into what some of the product launches in Q3 and Q4? Or is that just too --

No. I can mention it. The two noteworthy products will be -- one is the grill shutter actuator, which we will launch in August, and which we just commented that we are trying to pull it up to June timeframe. That product, in the fourth quarter, should generate close to $4 million to $5 million incremental sales. We really didn't have anything -- I mean we did have anything in Q1 and Q2 and will have some in Q3, so that is probably one program which would benefit us in the fourth quarter. The second one is this hard disk drive, which we think, although we will benefit from it in Q1, Q2 and Q3, but we believe that in Q4 it will have a slight ramp-up impact on the sales.

If I have to very roughly estimate that, I would say compared to Q1, Q2 and maybe Q3, Q4 may have $1 million to $2 million in incremental sales on that. Those two items are in Component and Sensors, and some of the pedal module programs, which got launched in the first quarter, may have some ramp-up impact in the third quarter. Those are three things -- the pedal module, active grill shutter and high density disk drive piezo material, and out of these three the biggest one will be the grill, because the grill shutter actuator essentially don't have any sales in Q1, Q2, and may have some sales in Q3.

You are still, this year, still spending incremental $0.06 to $0.08 in R&D, right? Which, that should go away next year?

That should go away next year. What is going to happen, Gary, is that the absolute dollars will probably come down slightly, but not go away. But those dollars, which don't have any sales associated with that, will have sales associated with it next year. So, as a percent of sales, R&D definitely should see a decline next year compared to this year.

Two quick ones for Tom. Do have the D&A and the stock comp? I didn't see a cash flow statement on the press release.

We did put that additional information, Gary, in the press release, but the depreciation and amortization was $4.8 million for the quarter.

Oh, I see, in the supplemental information?

Yes. The equity-based comp was $1.2 million.

I'm sorry, I see that. It's right at the top of a page here, so I apologize for that.

That equity -based comp is the same as last year.

Thanks, sorry about that.

No problem at all.

Ken Nagy, Zacks Investment Research.

I was curious if you could provide an update on the effort to bring smart actuators to commercial applications.

Ken, the smart actuators program is on schedule. Actually, I was told that the customer, the OEM, who makes the diesel engines is in our plant, as we speak. From a process point of view, we are still on schedule to launch that product for the first time in December. I understand that almost all technical spec-type issues and testing is complete. We are now in the process of looking at ramping up the productions of the supply chain issues, and those kind of things are being addressed.

We expect to start shipping the product in December. There will be very little this year. Maybe $0.5 million, maybe $1 million, but that number is projected to ramp to more like $15 million to $20 million, kind of number, next year. A major project, clearly a few more things to do, but on schedule.

Thank you very much.

Hendi Susanto, Gabelli & Co. Please go ahead.

Good morning, Vinod and Thomas. Couple of questions. First, we expect (inaudible) the lost sales in Thailand?

EMS

Purely EMS?

Yes.

Could you specify more what EMS components?

There were several customers there, Hendi. We had some important customers overall who were affected by Thailand were medical customers. There was one large industrial customer. Those are probably the two most important customers. Both of those customers we supported beautifully by moving their production to California. Those were the two customers, and a couple of other customers, where -- key customers where we actually went out of our way and supported them to make sure that their production and their shipments were not disrupted. They were fine.

But, in this process, we decided to not support couple of very small customers. I believe one in industrial and one in communications, I believe. These were small customers, which we decided to walk away from because they were not strategic customers, the margins were low and we did not want to incur huge expenses to support those.

Okay. How do you characterize the reason for the unexpected delay in insurance reimbursement? I am wondering if that's driven purely by paperwork, or regular business practice, or whether there are other reasons?

Hendi, very good question. It's primarily paperwork driven, and the fact that from an accounting standpoint, these recoveries cannot be recognized until you are some certain that the insurer will recognize the expenses. There's a lot of documentation, a lot of hard work going on behind the scenes to get the process moving.

Okay. What drove the lower demand from telecom equipment providers? How long do expect that to persist?

That is a tough question to answer, because a lot of telecom sales are large projects related in the past. We have said these sales can be lumpy. As a percent of our total sales, they are kind of small amounts. They are spread over some large OEMs. So, it's very difficult for me to give you a better feel, other than saying that we clearly haven't lost any business. We continue to have more design wins.

So, these kind of things can either be driven by timing of some projects. They didn't get large projects in Asia or some other places, and they start buying less components from us. It's very difficult to put a finger on that. Sometimes, it can be an impact of the mix between the kind of products they are building. Some of their products, whether it is CDMA or LTE time have different mix of components. Some models and products, we may have a higher content than others. So, their mix, product mix, combined by timing of their large projects, all of the timing of their purchases of components from CTS, can have an impact.

The grill shutter actuators, the press release indicates that it will go into passenger cars and light trucks. I'm wondering whether you can share more color on the target market, and what kind of passenger cars, and which one your first customer is going to use it for?

All we know, Hendi, at this point, is that we are tier two, on that. We sell the actuator to a German company -- German automotive component supplier, and they make the whole system. Our understanding is that their system is going on a passenger vehicle made by one of the three Detroit automotive makers. I am not sure I know whether its GM, Ford or Chrysler, but it's one of those vehicles, but our sales are to a German company.

You know you have expressed excitement about the Valpey-Fisher's strength and resources. What is your plan with regard to Valpey-Fisher's future product pipeline?

Valpey-Fisher -- I'm glad you asked this question. I will tell you that when we did that acquisition, we said that it will be slightly accretive, and we still, looking at their performance for 1.5 months or two months, we still feel that they are performing exactly the way they had projected for 2012. We are excited by their new product pipeline.

As we had said earlier, we also like the management team, and we actually have -- the gentleman who was leading Valpey-Fisher is now leading not only Valpey-Fisher, but CTS' engineer frequency product family. We are, right now, looking at finding additional synergies between CTS engineer frequency engineering organization and Valpey-Fisher engineering organization.

That's helpful. Thomas, could you remind us how much revenue is denominated in euros?

Hendi, we have approximately EUR35 million to EUR45 million. That's offset with some euro expenses, too. So, net net probably in the EUR30 million to EUR40 million range.

Okay. Got it. Thank you.

Alek Gasiel, Barrington Research.

A couple questions. You may have already mentioned this, I apologize, it seems that the automotive product sales for the quarter were a bit weaker. I wonder if you could provide a little more color on that?

As I said in my comments, Alek, the sales were higher than overall market growth. But, they were affected somewhat negatively in the translation part of that. As Tom mentioned, EUR30 million to EUR40 million on an annual basis is euro-denominated sales. If you are making year-over-year comparisons, you will note, that last year in the first quarter, that euro was probably sitting at $1.40, $1.45 range, and this year, in the first quarter, the euro is sitting at $1.30 range. That's like a 10% deterioration. So, EUR30 million to EUR40 million sales at 10%, we have $4 million worth of year-over-year comparison deterioration, simply because of exchange rate. So, that did have some negative impact on the top line.

On the call, you mentioned the book to bill for the electronic components was 1.07. It definitely looks like then, for the balance of the year, should be relatively strong. Is that fair to say?

Two comments. That book to bill, which I mentioned, we track for the distribution portion of our electronic components, so I know in electronic components we have some sales which goes through distribution channel. I would say that is probably 5% of the total company, 6% of the total company. The reason we've launched that is because that gives us some forward-looking indication of what the market is doing. And in that piece of our Business, we did see our book to bill improve about 1 in March. Indicating, that our distribution shipments in April and May, at least, should be stronger.

One last question. I guess, looking at the capital structure with the recent Valpey-Fisher acquisition, do you guys have room and are you looking at other little tuck-in acquisitions?

We definitely have room. We are always looking at small tuck-in acquisitions which can be accretive, and where we can see clear synergies day one, either through the engineering organization or marketing organization. Obviously, if we do those acquisitions in US, we clearly have room. If we look at those acquisitions outside US, we have even more room because, as you know, we have close to $70 million in cash outside US, which can be utilized for acquisitions. So, Yes. We clearly feel very comfortable from our leverage ratios.

With the focus primarily being electronic components?

The focus primarily is electronic components or sensors.

Thank you so much.

Jon Franzeb, Sidoti

A follow up on the guidance node to the second quarter. I think you said $0.15 to $0.21. I think you used the term adjusted. Is it adjusted number or is that a GAAP number?

At this point, it's a GAAP number. Although, we are continuing to look at if we find obvious improvements in our cost structure, which have a relatively low payback, then we will continue to look at those opportunities. And, I always like to keep my options open.

I just want to be sure -- what I'm talking about. It's almost a follow-up to an earlier question. Q3 had the benefit of insurance reimbursements, but also the benefit of having everything online. Is that a correct assessment?

Q3 definitely would have some benefit from insurance proceeds. Q3 will also will not have any disruptions from the floods because we think that maybe, by June and July, we should be able to clean that up. Q3 will also not have any impact, negative impact, from this engineered frequency consolidation because we think that process, which affected us in the first quarter, will still affect us little bit negatively in April, May time frame, but we should be caught up and done by May time frame.

Where I would probably hedge my bet, a little bit, in Q3 will be that we may have some additional launch-related activities going on in active grill shutter actuators, and we would be ramping up the production activity to prepare for the major Q4 start of the smart actuator. So, there may be something there. That's why I said that a combination of those things, I will probably say between Q3 and Q4. Q4 should be much stronger than Q3.

You took my next question. Which way was going to balance out? But still, we are looking for a substantial step up in Q3 versus Q2, correct?

Yes. But the bounce in Q4 should be bigger than that.

Okay. That's fine. I just want to make sure I heard you correctly on another item you said -- you said the sensor business, in total, you look for 14% to 15% growth year over year?

Yes.

Okay.

That is primarily driven by the mention of the global platform we talked about combined with active grill shutter, and combined with, we believe, some of our key automotive OEMs should be pulling a little bit more product from us than their underlying demand, because we think they should be building a little bit more inventory.

Given your debt position and maybe your appetite for M&A, will you still be actively repurchasing stock?

You know, we are constantly looking at our stock repurchase activity, by looking at where we think the valuations are. That is on going thing. I am looking towardsTom to let you know, how much dry powder we do we have in our existing buyback.

And we do have about 300,000 shares remaining.

Regarding the patent infringement case with TK, is that part of the legal expense that you were discussing in the SG&A, or is there something else, and can you give us a little bit of color on that process?

I'm glad you asked the question, because it is clearly adding to my expense base in this year. I think we have spent almost $400,000 in the first quarter, which was frankly, was not in my thought process of guidance as I started the year. It is a pretty material number for me. I may have to spend a little bit more money, but we also look at how good the opportunity we have, because we think we have a clear-cut case against this other company.

The upside is pretty substantial. On the one hand, we are probably not baking into our thinking additional legal expenses, but on the other hand, we are also not baking into our guidance any recoveries we may have on that. As you saw in our press release, we are estimating the recovery potential to be $3 million to $5 million, or actually $3 million to $6 million range. We already had one round of favorable ruling from the judge, which made the judgment in favor of CTS that our assertion stands.

We have some more work to do, and we believe that there is a second round, which we should know something by the end of June time frame. We believe that if we win that round, if common sense prevails, that both sides should be able to go in the room and agree that we should compensate CTS for it. Pretty substantial amount. The early ruling from the judge are in our favor.

One last question, if I may. On your decision to hang it up at the end of 2013 and move to Florida. Could you talk a little bit about the succession plans?

That is a just wild rumor that I'm going to Florida. [Laughter] Seriously, on my succession planning, the Board decided that we should be transparent, and the Board decided that we should have a long, careful, thoughtful process. Therefore, unlike many other companies, where the announcements come out three, six months before the CEOs go, the Board decided that is more prudent to have a much longer runway so that we have a very systematic and controlled process, and there is plenty of overlap and transition, and so we believe that between now and the end of 2013, there's a long period, a lot of new products will be launched.

I think the company is in excellent shape. The mix of the business is very good. A lot of products which we have been working on for the last four or five years would be launched. So, It's a good time for transition. Having said that, the Board also has my commitment that, for whatever reason, if the period needs to be adjusted, in either direction, that the Board has authority and they can do that. In other words, it's a very thoughtful, slow, methodical succession process, which every good company should pursue.

Gary Prestopino, Barrington Research.

Just a general question. In the three regions of the world where you are really operating. Could you just very briefly summarize your feelings for the outlook, meaning Europe, the Pac Rim and North America?

Gary, North America, the growth rate we are baking into our thinking, our GDP growth of around 2%, 2.5%, and overall feeling is positive, because we believe that things will continue to improve in the US -- on North American markets. Europe, we baked in our thinking a flat kind of year, economic growth-wise in Europe. We stayed somewhat concerned that Europe actually may do slightly worse than that and may finish 2012 with a negative growth in the European common markets.

In Asia, from a growth point of view, it is obviously our strongest growing market. We are expecting the growth in our key markets like China, India and some other markets to be around 7%-ish. Kind of a GDP growth kind of numbers that are clearly softer than last year. We clearly continue to watch it. A little bit concerned with all the news coming out of China, that the growth would be 7%, or slightly better or slightly worse.

Overall, the growth is clearly higher through Asia, but year-over-year, they are down. Europe, year-over-year is down. US seems to be improving, and we think at the end of the day, North American markets will be better than last year.

What categories of your sales make up most of Europe? Is that mostly the EMS side, or the other side of your Business? Or is it just spread around?

It's spread around. We have good business in automotive sensors in Europe. As Tom pointed out, we have approximately EUR40 million in euro-denominated sales, which are all European, primarily made in our Czech Republic and Scotland manufacturing facilities. We have probably a little bit in EMS, but very little, not material to us. So, I would say number one would be automotive and number two would be electronic components.

Thanks.

Hendi Susanto, Gabelli and Co.

One follow-up question from the piezoceramic for hard disk drive components. What is the latest status of working with the second major hard disk drive? Is there's still some hope that you may be able to win some awards there? At this point?

Hendi, the answer is yes. We are still working. We hope to win some business with the second disk drive maker.

Let's say if you win some business, will that [send] date still be for 2012 or will it be for 2013?

That is yet to be determined. If we sense that they turn that thing on, I would say in the next couple of months, we may still be in a position to foresee some shipments in the fourth quarter. If they made the decision much later than that, then I think that would probably fall in 2013.

Thank you.

(Operator Instructions)

We have no further questions. Please continue.

I would like to remind our listeners that a replay of this conference call will be available from 1.30 PM. Eastern Daylight Time today, to 11.59 PM on Wednesday, May 2, 2012. The telephone number for the replay is 800-475-6701, or 320-365-3844, if calling from outside the US. The access code is 244201. Thank you for joining us today.

That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.