Mixed Results at CTS
By Ken Nagy, CFA
On January 28, 2013,
CTS Corporation (NYSE:
, 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
) and Plexus (NasdaqGS:
) 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
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
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
Sequentially, the Components and Sensors segment improved by
$110,000, up from the $75.565 million in the third quarter of
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,
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,
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
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
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
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
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
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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