CTS - Solid Quarter at CTS, Bottom-Line Out Look is Maintained

Zacks Small Cap Research

By Ken Nagy, CFA

On July 23, 2012, CTS Corporation (CTS), the designer and manufacturer of electronic components and sensors and a provider of electronics manufacturing services (EMS) to original equipment manufacturers (OEMs), reported financial results for its second quarter and six months, ended July 1, 2012.

The Company’s second quarter resulted in a $7.375 million or 5 percent increase in year over year revenues to $154.294 million which compares to revenues of $146.919 million for the three months ended July 3, 2011.

Sales of the Company’s components and sensors segment grew by 8 percent year over year or $8.8 million.

The year over year increase in the segment revenues was primarily driven by a $7.0 million, or 17 percent increase, in automotive sensor and actuator sales as Japanese automotive customers recovered from last year’s earthquake.

Likewise, electronic component sales increased by $1.8 million, or 7 percent, year over year.

Electronic component sales benefited improved piezoceramic product demand, including HDD sales, and incremental sales from the Valpey-Fisher acquisition.

The Company entered into a definitive merger agreement to acquire Valpey-Fisher in the fourth quarter 2011 and completed the acquisition in January 2012.

Still, CTS Corporation’s electronics manufacturing services (EMS) segment’s second quarter sales decreased $1.4 million, or 2 percent, year over year primarily as a result of the continued impact of the Thailand flood, which was partially offset by new customer program ramps.

However, it should be noted that the Company’s Thailand EMS facility, which had been out of service since the October 2011 flood, is now fully operational with substantially all production having been transferred back to Thailand from the California EMS facilities.

Sequentially, the components and sensors segment was flat while the EMS segment’s second quarter 2012 sales increased $6.9 million, or 10 percent over the first quarter of 2012.

Gross margin for the three months ended July 1, 2012 dropped to 16.8 percent from 19.0 percent for the second quarter, ended July 3, 2011.

CTS Corporation’s second quarter net income fell by $831,000 to $3.301 million from net income of $4.132 million for the comparable quarter of 2011.

Based on a weighted average number of diluted common shares of 34.576 million shares, diluted net income per share for the second quarter resulted in net income of $0.10 per diluted share during the second quarter of fiscal 2012.  This compared to a diluted net income per share of $0.12 on a weighted average number of diluted shares of 35.025 million shares during the three months ended July 3, 2011.

It should be noted that during the second quarter 2012, results were affected by restructuring and related charges of approximately $0.08 per share. Likewise, in the second quarter 2011, results were affected by restructuring and legal charges of $0.02 per share.

Excluding these items, adjusted second quarter 2012 earnings per share were up 29 percent at $0.18 compared to $0.14 in the same period last year.

For the six months ended July 1, 2012, year over year revenues improved by 1.0 percent or $2.826 million to $301.263 million from $298.437 million for the first half of 2011.

Gross margin for the six months fell to 15.9 percent compared to gross margin of 19.1 percent for the six months ended July 3, 2011.

Net income for the six months fell by $3.664 million year over year to $5.584 million for the six months ended July 1, 2012. This compares to $9.248 million for the comparable six months ended July 3, 2011.

Based on a weighted average number of diluted shares of 34.647 million shares, diluted net income per share resulted in net income of $0.16 per diluted share during the first six months of 2012.  This compared to a diluted net income per share of $0.26 on a weighted average number of diluted shares of 35.050 million shares during the six months ended July 3, 2011.

CTS Corporation’s cash and equivalents for the first quarter ended July 1, 2012, equaled $83.039 million while working capital totaled $167.012 million.  This compares to $84.441 million of cash and equivalents and working capital of $176.999 million for the first quarter ended April 1, 2012.

Second quarter cash flow from operations was $16.1 million while year-to-date cash flow from operations was $12.0 million, compared to $8.8 million in the same period 2011.

The second quarter cash flow from operations was CTS Corporation’s highest level since the third quarter of 2009.

Similarly, CTS’ second quarter debt balance decreased $11.7 million from the first quarter as a result of its strong cash flow.

Still, management lowered its guidance, expecting its full-year 2012 sales to now be in the range of 4% to 7% over sales from 2011.

The Company lowered its guidance from the previously expected 10% to 13% year over year increase in sales as a result of lower than expected global economic growth, including negative economic growth in Europe and also due to a stronger dollar.

However, management is maintaining its guidance of diluted earnings per share for the full year to be in the range of $0.75 to $0.80 as a result of expected restructuring savings.

Nevertheless, during the second quarter 2012, CTS repurchased $2.9 million of its Company shares which equates to approximately 300,400 shares at an average price of $9.68.

Likewise, year to date, the Company repurchased approximately 572,500 shares for $5.6 million, at an average price of $9.86.

Furthermore, during the second quarter, CTS initiated a $5 million restructuring plan with expected annual savings of approximately $6 million.

Last, CTS’ new grill shutter actuator product was launched in May, one quarter earlier than originally planned and production on its major smart actuator program is expected to begin as scheduled in late fourth quarter.

Please visit scr.zacks.com to access a free copy of the full CTS research report.

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