CTS Returns to Form (CTS)

CTS Returns to Form

Ken Nagy, CFA

On October 25, 2011, CTS Corporation (CTS), the designer and manufacturer of electronic components and sensors and a provider of electronics manufacturing services (EMS) to OEMs, reported financial results for its fiscal 2011 third quarter, ended October 2, 2011.

The solid third quarter resulted in a nearly 5 percent increase in year over year revenues to $146.070 million which compares to revenues of $139.362 million for the three months ended October 3, 2010.The firm results were primarily driven by growth of sales in the EMS segment which was offset by a slight drop in the Components and Sensors Segment sales.

The Company’s EMS segment sales grew by $9.4 million or 14% compared to last year’s third quarter.

The strong growth was driven by sales to existing and new customers in the defense and aerospace, communications and industrial markets which were partially offset by a decrease in the computer and medical markets.

However, the Company’s EMS sales decreased $1.9 million or 2% sequentially from the second quarter 2011.

While higher gross margins and the insurance recovery for fire-related property damage resulted in an increase in sequential segment operating earnings sequentially, the weakness in sequential sales was primarily due to lower sales in all markets except defense and aerospace

CTS corporation’s Components and Sensors segment sales decreased $2.7 million or 4% compared to the same quarter of last year.

The Components and Sensors segment sales were negatively impacted from the Japanese earthquake and tsunami, which resulted in a decrease of approximately $4 million. The decrease, as a result of the impact from the Japanese earthquake and tsunami, was partially offset by increased sales for the Company’s new piezo product for hard disk drive (HDD) applications.

Still, it should be noted that the Toyota Motor Corporation and Honda Motor Company both recently reported that its global vehicle production had recovered to pre earthquake and tsunami levels.

Along the same lines, the two Japanese automakers have been making an effort to intensify production in the coming months in an attempt to compensate for lost time and production as a result of the disaster.

As a result, CTS began to see a pickup in production schedules in late September and expects to see continued ramp up into the fourth quarter which may lead to a recovery during the fourth quarter as the Japanese automotive production ramps up and inventories are replenished.

With 32 percent of CTS Corporation’s Fiscal 2010 net revenues originating from the automotive markets, the news of the Japanese automakers recovery and ramp up bodes well for CTS and its shareholders in the near future.

Similarly, the Components and Sensors segment sales increased $1.1 million or 2% sequentially, over the second quarter of 2011. The improvement was primarily driven by increased automotive product demand which was partially offset by lower sales of electronic components.

Still, CTS Corporation’s third quarter net income fell 15 percent or $1.052 million to $5.863 million from net income of $6.915 million for the comparable quarter of 2010.

Based on a weighted average number of basic shares of 34.375 million, basic net income per share resulted in $0.17 per share which was down year over year from $0.20 basic net income per share on a weighted average number of basic shares of 34.181 million.

The decrease in net income and earnings per share was mainly a result of lower gross margin and a retirement-related pension charge which was offset by insurance recovery benefits.

Gross margin for the three months ended October 2, 2011 dropped to 18.8 percent from 21.5 percent for the third quarter, ended October 3, 2010.

For the nine months ended October 2, 2011, year over year revenues improved by over 9 percent to $444.507 million from $407.616 for the comparable quarter of 2010.

Still, net income for the nine months decreased approximately 12 percent or $2.127 million year over year to $15.111 million for the nine months ended October 2, 2011. This compares to $17.238 for the comparable nine months of 2010.

The lower net income was primarily a result of lower margins.

Gross margin for the nine months dropped to 18.9 percent compared to gross margin of 22.3 percent for the nine months ended October 3, 2010.

Still, CTS went on to report that its business development front proved strong during the third quarter with the Components and Sensors segment winning four new automotive sensor programs as well as seven replacement programs.

Consequently, more than 70% of the new business the Company captured was in the Components and Sensors segment, demonstrating a trend in which the Components and Sensors segment may represent a larger percent of the Company’s sales moving forward.

Similarly the electronics components recorded 59 new a wireless infrastructure design wins, verifying demand for the company’s products.

Along the same lines, during the third quarter, the Company’s EMS segment won two new customers in the medical markets, one of its key target markets.
It should be noted that overall CTS captured $46 million in new business in the third quarter of 2011 versus $39 million for the comparable period of 2010 and $101 million in new business year to date which compares to $60 million for the comparable period of last year.

CTS Corporation’s cash and equivalents for the third quarter ended October 2, 2011 improved to $89.172 million while working capital totaled $170.752 million. This compares to $73.315 million of cash and equivalents and working capital of $146.555 million for the third quarter ended October 3, 2010.

Management maintained its full-year 2011 sales to be in the range of 9% to 13% over 2010 revenues but lowered its diluted earnings per share guidance for the full year to be in the range of $0.68 to $0.71 from its previous $0.70 to $0.75 range. The decrease was the result of the impact from the Thailand flood, combined with slower than expected recovery from the Japan earthquake in 2011.

CTS further reported that during the third quarter it continued its maintenance stock buyback program which was triggered in June 2011.
The Company announced that during the three months ended October 2, 2011, it purchased approximately 111,000 shares at an average price $9.10 per share for a total cash outlay of approximately $1 million.

CTS further noted that it had approximately 831,000 shares available in its 1 million stock buyback authorization as of the end of the third quarter.

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