After a Wild Year, CTS is poised for Growth
Ken Nagy, CFA
CTS Corporation’s (CTS) 2011 Fiscal year was biblical, as the firm dealt with the adverse effects of earthquakes, fires and floods. Patient investors should be rewarded with double digit top and bottom-line growth and healthy free cash flow in 2012.
On January 25, 2012, CTS Corporation, 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 fiscal year, ended December 31, 2011.
The fourth quarter resulted in a nearly 1 percent decrease in year over year revenues to $143.999 million which compares to revenues of $145.025 million for the three months ended December 31, 2010.
The fourth quarter results were negatively impacted by approximately $11 million to $13 million due to the flooding in Thailand.
CTS had previously disclosed that its EMS Scotland Facility experienced a fire related disruption during the second quarter of 2011 while its Thailand Facility was affected by floods in the third quarter of 2011.
Still, the Company’s Components and Sensors segment sales grew by 8 percent year over year, which was primarily driven by a $5.3 million or 17 percent increase in automotive sensor and actuator sales which were offset by a 5 percent drop in electronic component product sales.
Sequentially, the Components and Sensors segment increased $1.6 million or 2 percent, driven by a $4.9 million or 12 percent increase in automotive sensor and actuator sales offset by a $3.3 million or 12 percent drop in the sales of electronic component products.
The Company’s EMS segment sales fell by $6.3 million or 8% compared to the fourth quarter of 2010. Here again, the drop was primarily due to the flooding in Thailand.
Sequentially, EMS segment sales fell $3.7 million or 5 percent, again reflecting the flooding in Thailand.
Still, CTS Corporation’s fourth quarter net income increased by 22 percent or $1.056 million to $5.856 million from net income of $4.800 million for the comparable quarter of 2010.
Based on the weighted average number of diluted common shares of 34.945 million shares, diluted net income per share for the fourth quarter resulted in net income of $0.17 per basic share during the fourth quarter of fiscal 2011. This compared to a diluted net income per share of $0.14 on a weighted average number of diluted shares of 34.952 million shares during the three months ended December 31, 2010.
It should be noted that a restructuring and related charge of $2.4 million or $0.05 per share was included in the fourth quarter compared to a restructuring and related charge of $1.7 million or $0.03 per share during the comparable quarter of 2010.
Gross margin for the three months ended December 31, 2011 dropped to 17.9 percent from 20.1 percent for the fourth quarter, ended December 31, 2010.
For the year ended December 31, 2011, year over year revenues improved by $35.865 million or 6.5 percent to $588.506 million while net income fell by 4.9 percent or $1.071 million to $20.967 million.
The increase in full year revenues was primarily driven by a 14 percent increase in year over year EMS segment revenue which was driven by a 28 percent increase in industrial sales and a 20 percent increase in defense and aerospace sales.
Based on the weighted average number of diluted common shares of 35.006 million shares, diluted net income per share resulted in net income of $0.60 per diluted share during the fiscal year ended December 31, 2011. This compared to a diluted net income per share of $0.63 on a weighted average number of diluted shares of 34.849 million shares during the fiscal year ended December 31, 2010.
It should be noted that full year diluted earnings per share included $0.07 per share for restructuring and certain legal expenses. Additionally, management estimates that the lost earning impact from the natural disaster net of all insurance recoveries for the full year was a loss of approximately $0.02 per share.
Gross margin for the year fell to 18.7 percent compared to gross margin of 21.7 percent for the fiscal ended December 31, 2010.
Approximately half of the percentage decline in gross margin is mainly due to a higher percentage of EMS sales in 2011 versus 2010 and the other half of the decrease is primarily due to higher year over year commodity and precious metal costs as well as certain new product costs related to CTS’ hard disk drive product.
Still, during the fourth quarter CTS announced a 17 percent dividend increase to its shareholders, increasing the annual dividend to $0.14 per share from its previous rate of $0.12 per share.
The increase in dividend reflects the Company’s confidence in future cash generation.
Furthermore, during fiscal 2011, CTS repurchased $3.6 million of its Company shares which equates to approximately 403,000 shares at an average price of $8.86, of which approximately 257,000 were repurchased during the fourth quarter.
Along the same lines, the Company has approximately 574,000 shares remaining in its one million share buyback authorization.
CTS Corporation’s cash and equivalents for the fiscal year ended December 31, 2011 improved to $76.412 million while working capital totaled $159.149 million. This compares to $73.315 million of cash and equivalents and working capital of $146.555 million for the fourth quarter ended December 31, 2010.
Along the same lines the Company finished the year with debt of $74.4 million and a debt to capitalization ratio of 22 percent.
However, it should be noted that in January CTS completed the acquisition of Valpey-Fisher, the designer and manufacturer of engineered electric components.
The Company originally announced that it entered into a definitive merger agreement to acquire Valpey-Fisher in the fourth quarter 2011.
Still, new products in the Components and Sensors segment as well as the Valpey-Fisher acquisition is expected to allow the CTS’ electronic components sales to increase 15 percent to 20 percent in 2012 over 2011 as well as help operating margins.
Along the same lines, management provided guidance, expecting its full-year 2012 sales to be in the range of 10% to 13% over sales from fiscal 2011. The increase is expected to be primarily driven by key new program launches as well as the Company’s moving past from the negative impact from the Thailand flood and Japanese earthquake.
Diluted earnings per share for the full year are anticipated to be in the range of $0.75 to $0.80 and full year free cash flow to be in the range of $16 to $21 million.
However, the 2012 earnings guidance includes a net adverse impact of approximately $0.05 per share from a combination of higher expected effective tax rate, higher pension costs, and an expected property damage insurance recovery.
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