Mixed Results at CTS

Zacks Small Cap Research

By Ken Nagy, CFA

On January 28, 2013, 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 fourth quarter and full year, ended December 31, 2012. The company, whose competition includes AVX (AVX) and Plexus (PLXS)  has several growth drivers such as Pedal Modules and is finding a way to get  New Products to New Customers

The Company’s fourth quarter resulted in a nearly 4 percent or $5.701 million decrease in year over year revenues to $138.298 million compared to revenues of $143.999 million for the three months ended December 31, 2011.

Sequentially, revenues improved by $941,000 or nearly 1 percent over the $137.357 million from the third quarter fiscal 2012.

Sales of the Company’s components and sensors segment grew by $5 million or 7 percent year over year to $75.675 million, despite the continued negative impact of the Japan/China territory dispute and the weak European economy.

Likewise, within the segment, sales of electronic components increased $6.3 million or 26% from higher piezoceramic product demand for HDD and incremental sales from the Valpey-Fisher acquisition.

Early in 2012 CTS acquired Valpey-Fisher, a designer and manufacturer of precision frequency products with annual sales of $15 million. The acquisition was accretive during their first year.

The components and sensors segment’s automotive product sales declined year over year by only $1.4 million, benefiting from sales of new products.

Still, CTS’ new smart actuator product for commercial diesel applications and grill shutter actuator product are expected to add over $20 million of incremental sales in 2013.

Similarly, CTS’ new smart actuator for commercial diesel engines, which was launched late in the fourth quarter, will be transformational to CTS as this product alone will provide over $40 million in annual sales at full ramp.

Furthermore, it should be noted that the Automotive Sensors and Actuators business continues to do extremely well, with six new program wins in the fourth quarter, which include three new, and three replacement programs.

Likewise, management anticipates its Sensors and Actuator sales to grow year-over-year by a strong 40 to 45 percent in 2013, driven by the D&R acquisition, and organic new products like smart actuator’s growth.

Late in the fourth quarter CTS announced the synergistic acquisition of D&R Technologies, a leading designer and manufacturer of custom-designed automotive sensors with annual sales of approximately $50 million.

The acquisition expands CTS’ strategic automotive sensor product platform with new customers and a broader product portfolio into applications for safety systems and vehicle chassis management. Integration efforts are proceeding on schedule.

The acquisition is expected to be slightly accretive in 2013, even after recognizing non-cash amortization of intangibles created by the acquisition.

The decrease in consolidated sales was primarily a result of a $10.677 or 15 percent, year-over-year reduction in the lower margin EMS segment sales due to lower government spending in the defense and aerospace markets and from closing a small, unprofitable operation in the U.K.

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

Sequentially, the Components and Sensors segment improved by $110,000, up from the $75.565 million in the third quarter of fiscal 2012.

Similarly, the EMS segment’s fourth quarter 2012 sales improved sequentially by $831,000, or just over 1 percent from the third quarter of 2012.

Net income for the quarter increased year over year by $2.976 million or 51 percent to $8.832 million from net income of $5.856 million for the comparable quarter of 2011.

Sequentially, Net income improved by $2.915 from $5.917 million for the quarter ended September 30, 2012.

The improvement in net income was primarily due to a $10.334 million gain on the Singapore facility sale-leaseback transaction as well as improved margins.

Gross margin during the quarter improved year over year to 19.4 percent from 17.9 percent for the quarter ended December 31, 2011.

Based on a weighted average number of diluted common shares of 34.330 million shares, diluted net income per share resulted in net income of $0.26 per diluted share during the fourth quarter of fiscal 2012.  This compared to a diluted net income per share of $0.17 on a weighted average number of diluted shares of 34.945 million shares during the three months ended December 31, 2011.

For the full year ended December 31, 2012, year over year revenues fell slightly to $576.918 million from $588.506 million for full year ended December 31, 2011.

Still, full-year Components and Sensors segment revenue increased 9 percent on a year over year basis.

The improvement was driven primarily by a 15 percent year over year improvement in electronic component sales due to higher piezoceramic product demand for HDD and the Valpey-Fisher acquisition and a 5 percent year over year improvement in automotive sensors and actuators sales as a result of higher pedal module sales and new products, despite lower sales relating to the Japan/China dispute, the weak European economy and unfavorable currency impacts.

Full-year EMS segment revenue decreased $36.2 million, or 12 percent year over year as a result of lower government defense spending, the closure of a small, unprofitable operation in the U.K. and disruptions from the Thailand flood.

However, lower sales in defense and aerospace, communications and computer markets were partially offset by double-digit increases in industrial and medical sales.

Net income for the twelve months fell by $634,000 year over year to $20.333 million for the full year ended December 31, 2012. This compares to $20.967 million for the comparable twelve months ended December 31, 2011.

Here again, fiscal 2012 results benefited from a $10.334 million gain on the Singapore facility sale-leaseback transaction.

Based on a weighted average number of diluted shares of 34.523 million shares, diluted net income per share resulted in net income of $0.59 per diluted share during the full year fiscal 2012.  This compared to a diluted net income per share of $0.60 on a weighted average number of diluted shares of 35.006 million shares during the twelve months ended December 31, 2011.

Still, CTS Corporation’s cash and equivalents for the fourth quarter ended December 31, 2012, improved to $109.571 million while working capital improved to $194.646 million.  This compares to $88.620 million of cash and equivalents and working capital of $173.080 million for the third quarter ended September 30, 2012.

Full year fiscal 2012 cash flow from operations was a strong $41.7 million, compared to $22.2 million for the previous year primarily due to reduced inventories and as the disruptions from the Thailand flood is now past.

Similarly, full-year free cash flow was $27.6 million, coming in higher than management’s guidance range of $22 to $26 million and rocketing past last year’s free cash flow of $8.7 million.

Full year capital expenditures were $13.5 million, or 2.3% of sales, compared to $15.6 million, or 2.6% of sales, in the prior year.

Additionally, accounts receivable days were 51 days, similar to last year, and accounts payable days were 65 days, compared to 70 days last year.  Likewise, inventory decreased $16.7 million during the year, helping inventory turns improve to 6.0 from 5.0 last year.

It should be noted that as a result of the weak economic environment, the Company has taken proactive actions to further reduce its overhead cost structure which is expected to position the company for stronger growth in 2013.

Restructuring actions initiated in 2012 are substantially complete, with the EMS China closure to be completed by the end of the first quarter 2013.

Furthermore, during the third quarter 2012, CTS authorized the repurchase of up to one million shares as a result of its prior authorization of one million shares being completed.

During the fourth quarter the Company repurchased approximately 440,000 shares of common stock in open market transactions for $3.8 million.

Finally, management believes that as a result of the 2012 restructuring actions, new product launches and recent acquisitions, CTS will drive double-digit growth.

Accordingly, management anticipates full-year 2013 sales to increase in the range of 12 percent to 15 percent over 2012 revenues and diluted earnings per share to be in the range of $0.73 to $0.78.

It should be noted that the 2013 diluted earnings per share estimate includes approximately $0.05 per share of CEO transition-related costs.

Likewise, management expects gross margin percent to continue to improve another 100 to 150 basis points in 2013.

Similarly, first quarter 2013 results are expected to show normal seasonality with gradual improvements during the year.

 

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