CTS Corp (CTS) 2012 Q4 法說會逐字稿

Ladies and gentlemen, good morning. Thank you for standing by and welcome to the CTS Corporation 2012 fourth-quarter earnings conference call. At this time, all lines are in a listen-only mode. Later there will be an opportunity for your questions and instructions will be given at that time. (Operator Instructions). And as a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Director of Investor Relations, Mr. Mitch Walorski. Please go ahead.

Thank you, Tom. I am Mitch Walorski, Director of Investor Relations and I will host the CTS Corporation fourth-quarter and full-year 2012 earnings conference call. Thank you for joining us today. Participating from the Company today are Vinod Khilnani, Executive Chairman of the Board; Kieran O'Sullivan, President and Chief Executive Officer; 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 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 website in the investor relations section. I will now turn the discussion over to our Executive Chairman, Vinod Khilnani.

Thanks, Mitch, and good morning, everyone. Last evening we released our fourth-quarter and full-year 2012 financial results. Against the backdrop of weak global economic growth and Europe in recession, we reported year-over-year Components and Sensors segment sales growth of 7% in the fourth quarter and 9% in 2012 full year.

Our EMS segment continued to lag with sales down 12% in 2012 driven by weak defense and aerospace industry sales, our decision to exit our unprofitable Scotland EMS operations, and some lost sales due to Thailand floods. Lower EMS sales were in line with our third quarter guidance of a 10% to 12% decline in 2012.

Total full-year sales as a result were somewhat lower than our expectations of flat sales, and were down 2% in 2012 with improved segment mix in favor of our growing Components and Sensors segment. As a result, our gross margins have steadily improved in the four quarters of 2012. We were adversely impacted by certain tax benefits which were expected in 2012 but were delayed into 2013, resulting in lower-than-expected EPS in the fourth quarter.

Working capital and free cash flow were again very strong in the fourth quarter with full-year free cash flow at $28 million, coming in higher than our guidance range of $22 million to $26 million. On the business growth front we successfully launched several significant new products and announced the acquisition of D&R Technologies in December, a synergistic, $50 million in revenue sensors company, to fill certain product and geographic voids in our sensors and actuators business.

We also completed several significant restructuring initiatives to lower our overhead cost structure and simplify our global operations by reducing our global square footage by approximately 17% or 330,000 square feet. Our Components and Sensors segment sales were $75.7 million in the fourth quarter, up 7% from the fourth quarter of 2011. Within this segment, sales of automotive sensors and actuators were $44.3 million, down $1.4 million from last year. But they were up $9.3 million, or 5.3%, on a full-year basis despite lower sales in Europe.

The weakness in the fourth quarter was primarily due to softer sales to Japanese automotive customers in China due to island dispute-related disruptions. The China situation continues to improve gradually, however. The disruptions resulted in approximately $3 million in lower sales in the quarter. Beyond this issue, the underlying sensor sales in fourth quarter were up approximately 3% to 4%, driven by a strong US market and new products and despite headwinds of a strong US dollar versus euro and overall negative economic growth in Europe.

European light vehicle production was down approximately 6% year-over-year in 2012. Overall, our automotive sensors and actuators business continues to do extremely well, with six new program wins in the fourth quarter; three new and three replacement programs. Our major Smart Actuator program is in volume production as we speak. We expect our sensors and actuator sales to grow year over year by a strong 40% to 45% in 2013, driven by the D&R acquisition and organic new products like Smart Actuators growth. Approximately 60% of this growth is acquisition related and 40% is organic.

Continuing with our Components and Sensors segment, sales of electronic components in the fourth quarter of 2012 were up $6.4 million, or 26%, to $31.3 million. On a full-year basis, sales of electronic components were up $15.3 million, or 14.5%. The strong fourth quarter and full-year sales growth was driven by a strong period of ceramic sales for the new disk drive application and Valpey acquisition.

This was partially offset by weak wireless infrastructure and distribution channel sales. The 26% fourth quarter year-over-year growth was split 70% due to Valpey acquisition and 30% due to organic growth. Overall, our electronic component products are also growing in line with our double-digit growth target for this group. In 2012 it grew by 15% and in 2013 it is expected to grow again by 15% to 17%, driven primarily by organic new product growth.

Moving onto our EMS segment, sales in the fourth quarter were $62.6 million or 45% of total Company sales versus $73.3 million or 51% of total Company sales in the fourth quarter of 2011. Closure of unprofitable locations and flood-related disruptions caused fourth quarter 2012 sales to be lower by 14.6% year over year and 11.7% lower on a full-year basis.

Much faster growth in our component and sensors segment sales, as we discussed earlier, on the one hand, and exiting certain low-margin EMS business, on the other hand, will continue to make our EMS segment a smaller part of total Company. With more focus on profitability in the EMS segment than growth. We expect EMS segment sales to be approximately 40% of our total sales in 2013.

Many of you will remember that EMS was 60% of our total sales a few years back when we launched the initiative to flip the segment mix. We targeted the Components and Sensors segment to be 60% and the EMS to be 40% of the total sales to a double-digit targeted growth for Components and Sensors segment driven by R&D, new products and some bolt-on acquisitions.

Staying with the EMS segment, gross and operating margins in the fourth quarter and full-year improved as we continued to take cost actions and completed our recovery of insurance reimbursements for flood-related expenses, lost sales and business disruption.

Looking ahead, we expect that new products, our recent sensor acquisition and continued modest recovery in global economic conditions will allow us to grow our 2013 sales in a range of 12% to 15% year over year. Earnings per share are expected in the range of $0.73 to $0.78 per share, which includes approximately $0.05 per share for CEO transition costs. Excluding these one-time transition costs, the underlying, ongoing, normalized earnings per share is expected to be in the range of $0.78 to $0.83 per share in 2013.

Before I hand the call over to Tom Kroll, our Chief Financial Officer, to go over the financial results in greater detail, let me take a few minutes and introduce Kieran O'Sullivan, new President and CEO of CTS Corporation.

We are delighted to have him on board. Kieran joined the Company on January 7 and has hit the ground running. His extensive global experience leading large business enterprises successfully, familiarity with our technology and strong ties in the automotive and electronics components industries will be of tremendous value to CTS. Let me invite Kieran to say a few words. Kieran?

Thank you, Vinod, and good morning. I'm excited to join CTS, especially at a time when it is poised to grow from the recent acquisition and the significant new product introductions like the Smart Actuator and the piezo products for the hard disk drives.

This is only my fourth week on the job, so I'd like to keep my comments brief. I am preparing to visit our Asia locations with Vinod. I've been to several of our US sites while also conducting reviews to get quickly up to speed with CTS products and technologies. I'm looking forward to my first customer meetings next week and meeting many of you in the very near future. I'll be happy to answer any questions later on, but for now, let me turn it over to Tom.

Thank you, Kieran, and welcome, everyone. Before I review the financial results in greater detail, I want to comment on four fourth-quarter events. First, as Vinod mentioned, in late December we acquired D&R Technology for $63.5 million in cash, utilizing our existing $200 million revolving credit facility. Our year-end revolver balance was $153.5 million, leaving us with approximately $45 million available under this facility. D&R is expected to add sales of approximately $50 million in 2013 with EBITDA of about $8 million. The acquisition is expected to be slightly accretive in 2013 even after recognizing non-cash amortization of intangibles created by the acquisition.

Secondly, we entered into a sale-leaseback transaction at our Singapore facility, netting cash proceeds of $17.7 million. A $10.3 million pretax gain was recognized in the fourth quarter and an additional $4.5 million of gain will be deferred and recognized over the next six years, partially offsetting our lease expense at that facility.

Thirdly, as discussed in our third-quarter conference call, we initiated a restructuring action in the fourth quarter, primarily related to the closure of our small, unprofitable EMS operation in Tianjin, China, and the partial impairment of an operating lease.

Finally, we completed our Thailand flood-related insurance claim, receiving $5.7 million in reimbursements for our flood-related costs and lost margin on sales. Now I will discuss our fourth quarter results.

Our consolidated fourth quarter 2012 sales were $138 million, an increase of $1 million from the prior quarter and $5.7 million lower than the prior year. Our gross margins were 19.4% versus 17.9% last year. The Components and Sensors segment sales were 55% of total sales in the fourth quarter of 2012 versus 49% in the fourth quarter 2011. This segment sales mix shift had a positive impact on gross margins of approximately 1.5 percentage points.

Our selling, general and administrative expenses were $22.2 million versus $16.8 million last year. The increase from 2011 was primarily due to acquisition-related expenses; the G&A from the Valpey-Fisher acquisition, which we acquired in January of 2012; higher pension expense; and certain legal expenses. Fourth quarter 2012 R&D expenses of $5.38 million were similar to the fourth quarter 2011.

Our fourth quarter net interest and other income were favorable by about $0.5 million to last year, primarily currency related, as the Chinese renminbi strengthened relative to the US dollar. Fourth quarter 2012 net earnings were $8.8 million or $0.26 per diluted share, compared to net earnings of $5.9 million or $0.17 per diluted share in the same period last year.

Included in the fourth-quarter 2012 earnings was a $0.23 per share gain from the Singapore facility sale leaseback transaction; a $0.09 per share restructuring charge; and a $0.06 per share of acquisition-related and other charges. Excluding these items, our fourth quarter 2012 adjusted earnings per share were $0.18 compared to $0.22 in the prior period.

The year-over-year decrease is primarily due to a higher effective tax rate in the fourth quarter of 2012, including a delayed US research tax credit not signed into law in 2012, as anticipated, but signed in early 2013, and a delay in the formal approval of a Chinese high technology incentive tax credit. These tax items combined represent approximately $0.06 per share of lower earnings in the fourth quarter, which we expect to record as a tax benefit in the first quarter of 2013.

Looking at the full year, sales were $576.9 million, a decrease of 2% from prior year revenue of $588.5 million. On a full-year basis, we believe it is prudent to look at gross margins on an adjusted basis, which adjusts for insurance reimbursements and restructuring-related costs. The flood-related business interruption reimbursements were $20.9 million, shown as a separate line on the P&L, essentially offset the associated losses and expenses which are included on the cost of goods sold line, as well as lost margin on sales not made due to the flood.

Accordingly, our adjusted gross margin of 21.6% compared to 19.4% last year. Approximately half of this percentage increase is related to a favorable sales segment mix as we had a higher percentage of Components and Sensors sales in 2012 relative to 2011, 53% versus 48%.

Relative to 2011, the 2012 gross margin includes a negative $3 million impact related to foreign currency and additional non-cash pension expense. This $3 million was more than offset by operational improvements and some margin recovery on lost sales. Looking ahead to 2013 and given the continued favorable segment sales mix change discussed by Vinod, we expect our gross margin percent to continue to improve another 100 to 150 basis points in 2013.

Our full-year selling, general and administrative expenses of $80.4 million, or 13.9% of sales, versus $71.9 million, or 12.2% of sales in 2011. The 2012 amount includes the normal Valpey-Fisher SG&A of $3.1 million; higher non-cash pension expense of $2.2 million; and higher legal, CEO search, and acquisition-related costs of approximately $3.4 million. Our R&D expense of $20.9 million compared to $20 million in 2011. In both years, the amount is approximately 7% of Components and Sensors segment sales.

Net interest and other income of $0.3 million were $0.8 million less than last year primarily due to the Chinese renminbi appreciating less in 2012 than in 2011. We continue to assess our foreign currency exposure and strive for naturally hedged positions. Our full-year 2012 overall effective tax rate was 24.5%, which was higher than the tax rate in 2011 of 20.4% due to the tax items previously discussed.

Our 2012 diluted earnings per share were $0.59, including a $0.23 per share gain on the Singapore facility sale leaseback transaction; a $0.19 per share charge for restructuring; a $0.05 per share charge for legal and other costs; and a $0.04 per share charge for acquisition-related costs. Excluding these items, full-year adjusted earnings per share were $0.64 compared to $0.67 last year. Again, the difference was primarily due to the delay in receiving certain tax benefits of approximately $0.06 per share, as previously noted.

Now, let's look at the balance sheet. Cash and cash equivalents were $109.6 million versus $76.4 million last year. Approximately half of this cash increase resulted from the Singapore sale leaseback transaction. The debt was $153.5 million versus $74.4 million last year. Most of the increase resulted from funding the two acquisitions.

From a working capital perspective, our accounts receivable days were 51 days, similar to last year, and their accounts payable days were 65 days, compared to 70 days last year. Our inventory decreased $16.7 million during the year helping inventory turns improve to 6.0 from 5.0 last year. And please note that in order for these metrics to be meaningful, they do exclude the impact of the D&R acquisition which we acquired in late December.

Our controllable working capital, that we define as these three accounts, receivables, payables and inventory, improve to $16.8 million of annualized sales compared to $17.4 million last year -- sorry -- so, 16.8% of annualized sales in 2012 versus 17.4% last year. And again, that excludes D&R.

Our 2012 cash flow from operations was $41.7 million, an increase of 88% from last year's cash flow from operations of $22.2 million. 2012 capital expenditures were $13.5 million versus $15.6 million in 2011. Our capital expenditures as a percent of sales are still below our target of 3%.

Our full-year free cash flow, which is defined as cash flow from operations less net capital expenditures, was a strong $27.6 million versus $8.7 million in 2011. In addition to our increased dividend this year, we also continued our stock buyback activity during the quarter, repurchasing 440,000 shares for $3.8 million. During 2012 we repurchased 1.1 million shares or about 3% of our shares outstanding at a cost of $10.4 million.

This concludes the financial overview. I will now open the call for questions. Thank you for joining us today.

(Operator Instructions). John Franzreb, Sidoti & Company.

Welcome aboard, Kieran.

Good morning.

Thank you.

I guess I want to review the restructuring moves that you have made in the past few quarters and continue to make into the first quarter. Can you guys give me an update on the timing of when all the restructurings will be fully complete and the potential savings that should be realized in the first annualized year?

Sure, John. The restructuring that we announced in the second quarter, that is substantially complete. And that included primarily closing our EMS operation in Scotland, as well as some other EC actions to close a facility or two. The restructuring action that we announced in the fourth quarter is substantially complete. And we expect the EMS operation in Tianjin, China to be closed by late January, early February.

The savings associated with the Q2 restructuring -- we had talked about a $5 million to $6 million number per year but, again, that is a little bit volume sensitive, so we would tone that down a bit to, say, $4 million to $5 million. And the restructuring that we did in the fourth quarter, the one for $3 million, will have a little longer payback of about three to four years.

Okay. And you talked a little bit about an adjusted gross margin of 21.6% and that the potential for 2013 to be 100 to 150 basis points better than that. I actually want to talk a little bit about this. How much of that margin improvement is mix, be it D&R versus the product mix of new products? How much of that is cost savings? And is this a GAAP type number that we should expect to see in coming quarters? Could we just talk a little bit about the gross margin profile as you see it progressing and why you see it progressing this way?

John, let me give it a shot and then I will have Tom to put some more color on that. I think the primary benefit, the primary driver behind the margin improvement is segment mix. As you can see from our comments, that bulk if not all of our growth in the top line in 2013 is coming from Components and Sensors segment. So, as we take that segment to what we are projecting to be 60% of the Company and stuff, I believe 51% this year, then segment mix is the primary driver for that.

Now to the extent the D&R acquisition is in that segment isn't helping the segment sales to go up. Clearly that is contributing, too. As Tom pointed out, the restructuring is benefiting that and we have not very clearly -- we can break out how much of that is overlapping with the segment mix.

If you tell us to really give you a clear view of that, I would probably speculate that one-fourth of the gross margin improvement, one-third to one-quarter of the improvement has come from the restructuring, but I would suspect bulk of the savings are coming because our segment mix continued to be favorable toward Components and Sensors segment.

John, I would agree with that assessment, that about two-thirds is probably sales segment mix related and the rest from other operational efficiencies resulting from some of the restructurings. And then to answer your other question, yes, you will be able to see that in 2013 as a GAAP number on the face of the P&L.

Okay. So, all the insurance recoveries and noise associated with that is out of the picture at this point?

Yes, John, that is this all wrapped up.

One last question. Are you assuming growth in EMS in 2013 in your forecast?

No, John, we're not. Looking at a slight decrease of maybe $10 million, net.

And is that from exited businesses, or is that -- go ahead.

Yes, the two businesses that we exited reduced sales by $25 million, $30 million, but we expect to claw back a portion of that. So, maybe net of $10 million to $15 million.

Okay. Thank you very much. I will let somebody else go.

Anthony Kure, KeyBanc.

Just wanted to clarify, I guess I didn't -- and I apologize if I missed this earlier in the call, I just jumped on -- but to the prior question about -- around the restructuring and the timing, could you quantify or maybe give your best guess or estimate as to what the actual hard dollar savings in calendar 2013 is factored into your EPS guidance?

Sure, Tony. As I mentioned earlier, the second quarter restructuring charge that we took was a little over $5 million. And we expect -- at the time we had expected about a one-year payback. Given some of the volumes we've tempered that a little bit. So, maybe $2.5 million to $3 million is already baked into our 2013 plan. And then with the Q4 restructuring that we just announced, roughly $3 million, there's probably $1 million or so baked into the 2013 plan.

And when you say $1 million of that, you mean $1 million of savings, correct?

$1 million of savings, yes.

Got you. Okay. That is helpful.

Pretax.

Right. Okay. And then as far as the impact from the Japan issues in the fourth quarter, is there any factor factored into your top line guidance into 2013?

Yes, I think we are expecting that to continue to improve. Nevertheless, continue to affect negatively in 2013. Our current assumption is that that will continue to affect us negatively probably the first half of the year, but it's very hard to predict. These things have a tendency to improve and then some event spikes it.

But if you look at the reported data from the key Japanese companies and China, the numbers we saw were that in the third quarter there sales year over year were down as much as 50% because of this issue. And then we saw the report that in the fourth quarter it improved. But even in the fourth quarter, companies like Toyota, Honda, the Nissans who were down year over year by more like approximately 25%. So, it is improving; instead of down 50% year over year, they were only down 25% year over year.

We are projecting that they will continue -- the situation will continue to improve. Nevertheless, we are projecting they will still be down year over year in the first and second quarter of 2013 and maybe by midyear the situation will become normalized.

Is it fair to say from a degree of impact that it will be as big in the first and second quarter as the fourth? Or based on the fact that it's improving, it will be less of a headwind in the first and second quarter?

It will be less of a headwind in first and second quarter, so we think it will further improve from the fourth quarter.

Okay, great. Thank you. And then wanted to get one more in as far as what you are hearing or seeing in the distribution channel as it relates to you inventory levels. Could you talk about your comfort level with inventory levels in the channel?

Yes, the year started with distribution sales down year over year and the first half of the year even in the third quarter, our distribution sales, as we have commented in the earlier earnings releases, was down double-digit year over year. We did see an improvement in the fourth quarter, our fourth quarter distribution sales year over year are flat to maybe slightly down versus earlier in the year we saw double-digit declines.

We are seeing the inventory in the channel to be pretty reasonable. It's not excessive inventory, which tells us that any improvement in the distribution will flow through to us as higher sales into the channel. So we clearly saw an improvement in the fourth quarter and, frankly, we are expecting that improvement to continue. And we expect first and second quarter to be better than what we saw in 2012.

Great. Thank you so much.

Hendi Susanto, Gabelli.

My first question, may I inquire what the operating margin and gross margin of D&R Technology look like? And if you don't share numbers, probably like qualitatively?

Yes, I think, Hendi, we have only shared the sales and EBITDA, so that people can get a feel for what kind of EBITDA multiples we gave for this company, which are pretty reasonable and pretty fair compared to the market transactions. Clearly, we expect D&R Technologies to help the overall gross margins of the Company because it is a component and sensor kind of a company versus an EMS company.

The margins will be tempered in the first couple of years because we will have a fairly large slug of amortization of the intangible costs, but I understand and I will have Tom add to that, is I think those things are amortized on a double digit declining balanced method. And so our margins and the amount we have mentioned as of accretion will continue to improve beyond 2013 as that amount gets amortized fully.

And, Tom, what is the estimate for the amortization of intangibles for 2013?

Hendi, on the transaction, approximately $3 million.

$3 million, okay. And then, Tom, may I inquire what the operating margin in Q4 for Components and Sensors look like if we exclude the gain from the Singapore sale leaseback transactions that was offset by acquisition-related costs and legal expenses?

Sure, Hendi. In the fourth quarter, if we exclude the Singapore gain, then that margin of op earnings before corporate charges and before -- obviously, restructuring is not in there -- would be about 10.6%.

10.6%. Tom, how should we think of operating margin in Components and Sensors going into 2013?

Well, I think, as Vinod mentioned, we'll have some headwinds on one of our automotive products for diesel engines, the Smart Actuator. In the last conference call, we talked about a safe mode startup, so we will see some pressure there on gross margins and operating earnings. But other than that, Hendi, we should see pretty much consistency relative to the last couple of years.

Hendi, I think we're sticking with a double-digit operating margins on Components and Sensors going forward. And as Tom said earlier, that since the overall gross margins should be higher by 100 to 150 basis points, we frankly expect that to flow through to the operating margins, too.

Okay. Yes. And if I look at your latest corporate presentation, I saw that the target pedal sales for 2012 and 2013 have been lowered to $109 million and $112 million from $115 million and $120 million. Could you share the reason considering that while Europe may be weak, other companies are expecting strong growth of auto in North America and Asia?

Yes, I think -- good question. Hendi, our underlying sales continue to grow and we continued to get a bigger and bigger share with our key customers. But the two headwinds which were reflected in that was, one, as we just recently talked about, that we are expecting continued impact, at least in the first half of the year, from the China issue around the Japanese OEMs. So, that's a little bit of a headwind in 2013.

And then, as you rightly pointed out, we are still expecting Europe to not grow and actually slightly lower in volumes in 2013 as we go forward. So, if you look at 2012, I will tell you that Europe, which is approximately 30% of our automotive business, was down as much as 7%. It's a combination of economic weakness, recessionary trends there, and a strong dollar compared to euro. It took away 7% of our European sales and we recorded a full-year sales growth of 5% year over year in automotive sensors despite the fact that 30% of our European sales were down 7%.

Looking at 2013, we don't expect sales to be down an additional 7%, but I think overall we are looking at Europe to be flat at best, but probably a couple of percent down given what we are hearing from the customers and the general economic trends.

Okay. Yes. And similarly, if I look at the communication infrastructure market estimate, the CAGR was lowered from 11% to 10%. Other than the concerns about macroeconomic, are there other reasons?

No, no other reasons. We have not lost any sales. We continue to win new business. If we lowered it from 11% to 10%, I will be honest with you, there wasn't a conscious adjustment, it was probably rounding or a few other things. But probably reflected by the general economic conditions -- nothing product or customer-specific.

Okay. And then looking at your growth driver in 2013, the piezoceramic for hard disk drive. In terms of the end products -- could you share what the product footprint looks like? I would like to know whether it is part of, let's say, the ultrabook or -- ultrabook market as well?

My understanding is -- before I say that, we continue to expect growth in that and it is one of the key reasons why we are still predicting electronic components to grow double digits in 2013. My understanding is that Western Digital, which is a key customer in that space for us, they are systematically switching all their products to the dual stage actuation, next generation kind of product.

And the growth is coming not only based on what Western Digital is going to sell more and more disk drives, but the growth is coming because more and more families of their disk drives are being converted into the dual stage actuation versions and dual stage actuation products have the piezoceramic elements as a key component. And so we see the growth not only driven by market but by the conversion.

Okay. And then for the dual stage activations, is it multi-source or is it single-source to CTS?

At this point, my understanding is that we are single-source on that product.

Okay. And then a question for Tom. Tom, for modeling purpose, was tax rate should we use for our projection?

Hendi, it will be similar to 2012. And that even includes the $0.06 adjustment that I talked about. But it will be pretty similar to 2012.

Okay. And then are we still expecting more legal expenses to continue in 2013?

Nothing unusual, Hendi.

Okay, thank you.

Brad Evans, Heartland.

Heartland Advisors. Vinod, thanks for taking the question and I guess this might be the last time we will be able to speak. And welcome aboard, Kieran. I just wanted to ask a question with regard to -- going back, growing shareholder value for CTS has been very elusive and odd. And if you exclude even the bubble period since 2002, the stock is down an annual rate of about 2%, so 30% total price appreciation negative since 2002. In the same timeframe, the Russell 2000 index is up a total return of about 103%.

Despite all of your better efforts to restructure the Company, and I know you've had a lot of bad luck with respect to Thailand and the Japanese tsunami and now Europe, so a lot of the things that larger companies are able to sidestep and manage through have had a disproportionately negative impact on CTS and has resulted in it being very elusive for you to grow shareholder value. And the stock has been, frankly, a dead man's heartbeat for some time.

And I understand the transition you've come through with HP on the EMS side and the transition to Components and Sensors, but at the end of the day, growing shareholder return is why you are a public company. And I just wanted to understand from your perspective, from the Board's perspective, why is it not in shareholders' best interests to perhaps hire an investment banker to pursue strategic alternatives to see if there is a pathway for some value for shareholders who have been very patient to be realized? Thank you for answering the question.

Well, Brad, I think you raise some good points. We have had unusual situations in the last several years. And I agree with you that we clearly understand that EMS has been a drag on us. If EMS would have been, to be honest, a smaller percent of the Company, we probably would have looked at some other alternatives. But given the size of the EMS and the fact that a lot of facilities were intermingled, we have essentially closed the two locations which were intermingled, so Scotland and China were intermingled. And as you know, we announced the closure of that.

We also felt that a lower risk strategy would be to not only make EMS more stand-alone so that the Board had more alternatives available to them, but at the same time, the core of the Company, which is Components and Sensors, needs to grow. And as you know, four years back we started the process to develop new products in Components and Sensors. And as a result, we feel that despite a lot of issues, we are beginning to see double-digit growth in Components and Sensors. And we are talking about a 40% to 45% growth in sensors in 2013, as of our guidance.

But even if you exclude the D&R acquisition from it, the organic growth in components and on the sensors side of the business, we are projecting is double digit. So, yes, it has taken us longer. Some of the products, it has taken us two to three years to develop. The Smart Actuator product is very different from what CTS has ever done. The average selling price of that product is more than $100 when our traditional sensor products will sell for $10 to $15.

We have worked hard to win that business. That one customer alone is going to generate $40 million to $50 million in sales and, once they are designed in on the diesel engine platform, you are pretty much locked in for eight to nine years as a single-source kind of an element. So, yes, it has taken us a long time but the flipside of that is that the annuity we are creating from that is also locked in for a long time. Major design and development effort.

And as a result, I'm confident that the guidance we are giving and the new programs which are ramping up as we speak, and you will start seeing those higher volumes starting from the first quarter of 2013, are clearly a game changer for the CTS Corporation. And you will remember a slide we had in which we said, several years back, that we going to flip the segment mix -- 60% was EMS and 40% was component. Well, in 2013 we will flip it. We have 60% of our sales coming from Components and Sensors.

So, I guess what I'm saying is that the path was long and difficult and painful, but I believe CTS has arrived at a point where not only 60% of our sales but almost 80% of our profits are now coming, projected to come from Components and Sensors, which gives the management and the Board lots of alternatives to realistically look at how to drive shareholder value by picking the segments more carefully or driving different kind of things which are maybe more short-term in nature around buybacks or dividends kind of thing.

The other thing I will point out is --

Vinod, if I can just interrupt you real quickly; I appreciate that commentary. I would just -- we realize and appreciate the hard work of the team, the employees, in transitioning the Company and it has been a long road as we been watching the progress. So, I just -- it just comes back to shareholder value creation.

And shareholders have been eminently patient, many of them. So I would just urge the board to have a sense of urgency -- Kieran, you inherit history here of a Company that has not been able to grow shareholder value. So, I just urge the Board to have a sense of urgency and taking steps to unlock shareholder value and pursuing any and all alternatives to facilitate that in a period of time that doesn't take too much more time. Thank you.

Brad, I just make a comment for you here. And, obviously, I am in a steep learning curve at the moment, but the strategic positioning of the business is really important for me as well as driving profitable growth. I think when you look at the Component and Sensor business -- and just keep in mind, even in the automotive markets, the trends are around the increasing sales in safety and emissions reduction.

May have been in the emissions area with fuel economy driving that part of it with our sensors and actuators. But also as we move forward now, we get into the safety area with the D&R acquisition. And that gives us another segment to play in and grow the business going forward.

And if you look at the hard disk drives, I believe what we are doing there with piezo can have applications as we drive towards the cloud in greater volume, but also in other markets that we participate in today and will in the future, as well. So I will certainly get back to you on the next earnings call and you'll get some progress reports from me.

Right, I think a lot of investors who have been watching this story develop would have expected -- would have all believed that 2013 was essentially an inflection point for you, especially on the Components and Sensors side. And I would have to be honest with you that the guidance that -- notwithstanding the macro, which obviously is turbulent, so I know you can't control that -- but the guidance that was given for 2013 -- hopefully, it is conservative, but it is disappointing in my eyes relative to the investments that we have been making and hopefully the payoff that was hopefully coming for shareholders in 2013 and beyond. So I just put that comment on the table, as well. Thanks a lot.

Thanks, Brad.

(Operator Instructions). John Franzreb, Sidoti & Company.

Just a little bit about D&R. Can you talk a little bit about the company's historic growth rates, the competitive landscape, how you envision growing that business going forward?

John, as Kieran pointed out, the product is focused towards the safety product side of it, which is a growing component in a vehicle. So we see that as a growth avenue. The other thing we liked about that is D&R has a strong presence with automotive OEMs in Detroit. And as you know, we have a strong presence -- a stronger presence with the Japanese OEMs and somewhat limited presence with the Europeans and the Detroit OEMs.

So this gives us an opportunity to cross-sell product, CTS product to the Detroit OEs and then take D&R product more to the Japanese where we have a better presence. So, the combination of customer mix there, which is very interesting to us, and the fact that D&R had certain opportunities they couldn't fully take advantage of because it did not have an Asia footprint and CTS's Asia footprint should help us cross-sell their product into our markets over there. So, those are some of the synergistic key things which drove us towards this acquisition.

Okay. And what was the historical growth rate of the business --?

I think the historical growth rate were, I believe -- Mitch, correct me if I'm wrong, was single digits, mid- to high-single-digit kind of a number. We can cycle back to you with some more exact information.

Okay. And who are their key competitors?

To some extent in the past CTS may have been a competitor of their product. Other than that, I'm not -- there may be some European.

Yes, [Borens] and some people --

[Borens] -- Kieran is more familiar with that, actually. [Borens], a European company, is a competitor. Nothing major. But those are the two competitors I am aware of.

Okay. And one last question, Tom, what is the tax rate going to be in the first quarter?

John, in the first quarter -- like I said, the full year, John, is going to be in the 25% range.

Right.

That first quarter -- let's see, just give me a minute -- it will be -- there will be that discrete item and that's going to be a couple of million dollars.

Cycle back to him.

Yes, I can cycle back to you, John. But the full year is going to be about 25% and that will include that, so obviously, first quarter will come down and I can give you the exact amount later.

All right. That would be great. Thank you, guys.

Gentlemen, nobody else is queuing up at this time.

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