Solid Quarter for CTS as Components and Sensors is Set to Be the Single Segment

Zacks Small Cap Research
October 30, 2013

By Ken Nagy, CFA

On October 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 third quarter and nine months, ended September 29, 2013.

The company’s third quarter revenues were solid, improving year over year by over 16 percent or $22.206 million to $159.563 million. This compares to revenues of $137.357 million for the three months ended September 30, 2012. Sequentially, revenues improved by over 5 percent or $8.002 million above the $151.561 million from the second quarter fiscal 2013.The year over year jump was primarily due strong sales from CTS’ component and sensor segment. 

Sales of the company’s components and sensors segment jumped to $103.632 million, a 37 percent or $28.067 million year over year increase. Likewise, within the segment, the jump was primarily due to sales of $11.8 million from the D&R Technology acquisition.

Late in the fourth quarter 2012, 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.

Sequentially, the Components and Sensors segment revenue fell by $1.749 million from $105.381 million for the second quarter of fiscal 2013. The quarter over quarter decrease was primarily driven by softness in demand for CTS’ HDD products which is expected to continue into the early part of 2014 and then return to more normal levels as inventories are depleted and new platforms are launched.

CTS’ EMS segment sales decreased year over year by $5.861 million to $55.931 million. The EMS segment’s third quarter 2013 sales grew sequentially by $9.751 million from $46.180 million during the second quarter of 2013. The segment was sold on October 2, 2013 for $75 million.

Third quarter net income was $6.819 million, or $0.20 per share, compared to net earnings of $5.917 million, or $0.17 per diluted share, in the same period last year.

Still, the third quarter 2013 results include restructuring and other costs of $0.04 per share. Excluding these items, third quarter 2013 adjusted earnings were $0.24 per share compared to adjusted earnings of $0.20 per share in the same period last year and $0.20 per share in the second quarter 2013.

Gross margin during the quarter jumped year over year to 23.5 percent from 19.4 percent for the quarter ended September 30, 2012. Sequentially, gross margin was flat from the 23.4 percent for the second quarter fiscal 2013. The 4.1 percentage point improvement in gross margin was primarily due to the component and sensor segment mix growing to 65 percent of total sales in the third quarter of 2013 versus 55 percent in the third quarter of 2012.

Additionally, the restructuring action and ongoing cost containment action assisted in the lift off in gross margin.

CTS announced a $16 to $20 million restructuring plan in June 2013, with expected annual savings of approximately $8 to $10 million once fully implemented in 2014. The plan is designed to further improve the company’s cost structure and capacity utilization. 

CTS secured new orders of $105 million in the quarter as well as received its first award with an Asian OEM which is expected to launch in 2016.

CTS Corporation’s cash and equivalents for the third quarter ended September 29, 2013, was $96.730 million while working capital improved to $186.042 million.  This compares to $86.044 million of cash and equivalents and working capital of $176.587 million for the second quarter ended June 30, 2013.

Debt at the end of the third quarter was $128.6 million versus $153.5 million at the end of 2012 resulting in a debt to capitalization ratio of 32.3 percent compared to 36.4 percent at year end 2012.

Still, third quarter 2013 cash flow from operations
improved to $15.3 million compared to $13.7 million in the second quarter 2013 and $13.0 million in third quarter 2012.

Third quarter 2013 capital expenditures were $2.5 million versus $2.9 million in 2012 and $3.7 million in the second quarter 2013. 
Third quarter free cash flow, which is defined as cash flow from operations less capital expenditures, was $12.8 million compared to $10.1 million last year and improved from cash usage of $10.0 million in the second quarter 2013. Management continues to anticipate full year capital expenditures to be approximately 3% of sales.

On June 11 the Board of Directors authorized a repurchase of up to 1 million additional shares of the company stock. Similarly
, during the third quarter, CTS repurchased approximately 49,800 shares for $731,000 at an average price of $14.69 while the company repurchased approximately 200,000 shares for $2.2 million during the first nine months of 2013.

Management expects full-year 2013 sales to be in the range of $555 million to $560 million reflecting the October 2, 2013 EMS divestiture.
   In early October 2013, CTS announced that Benchmark Electronics, Inc. acquired its Electronics Manufacturing Solutions (EMS) business for $75 million in cash. The sale will enable the management team to more quickly focus on core business. Still, management is maintaining 2013 adjusted earnings per share to be in the range of $0.78 to $0.83 per share.

A copy of the latest research report can be downloaded here >> 
 CTS Corp. Report

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