CTS Corp (CTS) 2013 Q2 法說會逐字稿

Ladies and gentlemen, we'd like to thank you for standing by and welcome to the CTS Q2 earnings teleconference call. At this time all participants are in listen-only mode. (Operator Instructions). As a reminder, today's conference call will be recorded.

I would now like to turn the conference over to your host and your facilitator, Mr. Tom Kroll. Please go ahead sir.

Thank you, Stephen. My name is Tom Kroll and I'm the CFO of CTS Corporation. Thank you all for joining us today. Joining me today is Kieran O'Sullivan, our CEO.

Before beginning the business discussion, I would like to remind our listeners that the conference call contains forward-looking statements. These statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements. Additional information regarding these risks and uncertainties was set forth in last evening's press release, and more information can be found in the Company's SEC filings.

To the extent that today's discussion refers to any non-GAAP measures relative to Regulation G, the required explanations and reconciliations are available on our website in the investor relations section.

I will now turn the discussion over to our CEO Kieran O'Sullivan.

Thanks, Tom and good morning everyone and welcome. In addition to reviewing the second-quarter performance, I will also provide an update on the initial steps we've taken to simplify our business as discussed in our June press release.

First, the second-quarter results. Sales for the second quarter were $151.6 million, [up 1.4%] from the first quarter of 2013 and down slightly from the second quarter of 2012, driven primarily by the EMS softness we highlighted in our last call.

While our components and sensor segment displayed sales and earnings growth, we are disappointed with our EMS results. Our EMS management team is fully mobilized and we have improvement actions started to deliver the return to more normal margins for the fourth quarter.

Overall gross margins improved nearly 3 percentage points from first quarter 2013. Operating expenses reduced by 1% from the first quarter to the second quarter 2013, which was at 17%. We clearly understand that we have more improvements to work on as part of our lean corporate and business structure.

R&D counts were slightly lower in Q2 and SG&A improved by 0.6 points. This resulted in an adjusted operating earnings for the quarter of 7% and an adjusted EPS of $0.20.

Our balance sheet performance was only marginally improved, controllable working capital of 17.9% versus 18% for the first quarter. Operating cash flow improved to $13.7 million, but we need further improvement in management of our inventory.

Tom will take you through the financial details including restructuring and cash repatriation.

Year-over-year with strong sales growth performance and the components and sensor segment up 37%, which included 20% organic growth. EMS sales declined to $46.2 million, down 10% from the first quarter of 2013 and further down from last year's performance.

Production of our Smart Actuator in the second quarter remains on schedule towards a solid first year of sales for commercial diesel engine applications. Sales of our piezoceramic components for disk drive applications were clearly ramping in the second quarter to meet increased demand in 2013 as second-quarter hard disk drive sales were up 25% over Q1.

The integration of D&R is progressing on schedule. We are also seeing synergistic benefits terms of revenue growth. I am pleased to report that CTS was awarded approximately $40 million of new business to supply [right high] sensors for several Asian North American vehicle programs of a major US auto manufacturer.

First shipments of the seven-year program will begin in 2015.

In our electronics components product line, ClearPlex waveguide technology was recognized by RF Global as one of the top new technologies for 2013. These exciting new developments further underscore CTS's commitment to strong growth in our Components and Sensors segment.

Our Components and Sensors segment sales in the second quarter were $105.4 million, up 37.2% year-over-year. Within this segment, automotive sensor sales of $67.7 million in the second quarter were up 43% year-over-year despite continued weakness in Europe.

The second quarter of 2013 global automotive production of light vehicles increased 2.7% year-over-year. This includes a 5% increase in North America, a 3% increase in Asia and a 0.8% decrease in Europe. We are encouraged to see positive signs as the US auto sales improved from pent-up demand and low interest rates. New vehicle sales are expected to top 15.3 million units in 2013.

Continuing with our components in sensor segment, electronic component sales of $37.7 million in the second quarter of 2013 were up 27.8% year-over-year, driven primarily by increasing new piezoceramic product sales for disk drives as this market continue switching to dual-stage actuation.

EMS sales declined from $51.4 million in Q1 to $46.2 million in Q2, down 10% sequentially. We experienced softness in our EMS business in communications and defense and aerospace was down 50% year-over-year. You can expect that we will implement additional improvement actions, lower our operating expenses and improve margins.

The momentum on our sales drive is showing promising results as we bring more focus to the business. Two new customers were added in the past quarter and we expect to bring an additional $40 million to $50 million of new orders across the balance of the year.

On the new business front, CTS secured new business in the second quarter with future revenues totaling $116 million compared to $54 million of new business won in the first quarter.

In automotive products, in addition to the $40 million awarded discussed earlier, we were awarded $31 million of new business across our product lines for nine new programs such as pedals, belt tension sensors, and throttle position sensors, including a $6.8 million award for next generation contacting pedal for small cars in India.

In electronic components, we won eight new programs valued at approximately $2.4 million with our piezoceramic products for sonar buoy and hydrophone applications, and our position frequency products for data, broadband and cloud based applications. We are pleased with our increased business in our piezoceramic products, including our inkjet printer applications which continue to grow in 2013.

In our electronic components products we've won various new programs with $6.5 million of future revenues. Applications include ultrasound, industrial and oven controls.

In EMS, our enhanced marketing initiatives are gaining traction as new business code activity to date is double digits over last year, signifying improved confidence for the next year. As a result, we have secured approximately $36 million new business with existing customers and two new customers in the industrial and communication space.

The full-year outlook for components and sensor segment sales remains robust. However, weaker EMS sales performance is impacting CTS's full-year sales guidance which management now estimates at a 6% to 8% increase over 2012.

Despite the softness in our EMS business, we are holding our earnings guidance, which now reflects restructuring cost savings. Therefore, we expect full 2013 adjusted earnings per share will remain unchanged between $0.78 and $0.83 per share, which excludes tax expense and cash repatriation, restructuring and related costs, and CEO transition costs.

On June 11, we announced initial steps in our business simplification, additional stock buyback and cash repatriation plans. I'm pleased to report progress in these areas. The process of consolidating manufacturing into other locations continues in Singapore and we've obtained an agreement for closure of the Scotland facility. Restructuring actions are on schedule.

These consolidations are expected to be completed in 2014. The consolidations allow us to optimize our cost reduction programs and capital utilization to gain efficiencies and competitiveness. We will provide updates as we proceed about our business simplification plan or announce additional EMS improvement actions.

We have reduced our debt and will continue our buyback program.

My priorities remain unchanged, focusing on leadership strength, supplying our business model with an emphasis on quality products and margins, and creating a lean corporate culture.

We continue to refine our strategic focus as a management team, the analysis of the portfolio is well underway and we've identified strategic options. We will carefully review these options with our board and execute with precision to clarify the vision for CTS and to maximize shareholder return when approved.

With that, I'll now turn the call over to Tom Kroll, our CFO. Tom?

Thank you, Kieran. Before reviewing the financial results, I'd like to make comments on two second-quarter financial events. First, in late June, we repatriated $30 million of cash from Singapore to the US with an associated tax expense of $0.32 per share. That cash was used to pay down debt.

Second, we incurred $8.1 million or $0.17 per share of restructuring and related cost as part of the restructuring plan announced on June 11. These costs include severance and asset impairment towards reducing our cost structure and improving our global manufacturing utilization.

Now our results.

Our second quarter 2013 sales were $151.6 million, an increase of $2 million from prior quarter and a decrease of $2.7 million from the prior year. Our gross margins were 23.4% versus 16.8% last year, or a 6.6 percentage point improvement from two major reasons.

First, the Components and Sensors segment sales mix grew to 70% of total sales in the second quarter 2013 versus 50% in the second quarter 2012. This segment sales mix shift had a positive impact on gross margins of approximately 5 percentage points.

In addition, the second quarter of last year included Thailand flood related expenses, which lowered the gross margins in that quarter.

Our gross margins, up 23.4%, also compare favorably to the 20.9% in the first quarter reflecting both the more favorable segment sales mix and our emphasis on gross margin improvement.

Our selling, general and administrative expenses were $20.7 million versus $19.4 million last year. The increase from last year was primarily due to the D&R related amortization expense of about $0.6 million and CEO transition cost. The second quarter 2013 R&D expenses were $5.8 million, increasing from the $5.1 million last year, and reflects our continued commitment to invest in our future.

As a percentage of Components and Sensors segment sales, the R&D was 5.5% in the second quarter 2013 compared to 6.7% in the same period last year, reflecting the increase in the segment sales of $28.6 million or 37%.

The restructuring and related charges were $8.1 million in the second quarter 2013. Of this amount, $7.2 million is reflected on the restructuring line on the P&L and the remaining $0.9 million is included in cost of goods sold. The second quarter charges represent the initial phases of the recently announced restructuring program, with planned total cost of $16 million to $18 million through 2014.

The second quarter also included a tax asset write-off of $1 million or $0.03 per share associated with the Scotland facility restructuring. The 2013 savings expected from the second quarter restructuring are estimated at $1.5 million to $2 million. The total restructuring plan to be implemented through 2014 is expected to generate $8 million to $10 million of annualized savings going forward.

Our second quarter 2013 net interest, currency and other expenses were $0.9 million, which was $0.3 million lower than last year due to $0.7 million of lower currency losses partially offset by $0.4 million of higher net interest expense associated with the higher debt levels.

The second-quarter tax expense was $12.1 million, which includes $11.8 million of non-cash tax expense from repatriating $30 million of cash from Singapore and the UK tax asset write-off related to our restructuring. On a full-year basis we continue to expect our adjusted effective tax rate, which would include these two items, to be approximately 25%.

The second quarter 2013 net loss was $11.3 million or $0.34 per share compared to earnings of $3.3 million or $0.10 per diluted share in the same period last year. This loss includes $0.32 of tax expense related to the cash repatriation and $0.22 per share of total restructuring and other costs.

Excluding these costs totaling $0.54 per share second quarter 2013 adjusted earnings were $0.20 per share, a 43% increase over the first quarter 2013 adjusted earnings of $0.14 per share and 11% increase over adjusted earnings per share of $0.18 in the second quarter 2012.

Now, let's look at the balance sheet. Cash and cash equivalents were $86 million versus $109.6 million at the end of 2012. Debt was $129.5 million versus $153.5 million at year-end 2012. These cash and debt changes were primarily due to using the $30 million cash repatriation to pay down debt.

We finish the quarter with a debt to capitalization ratio of 33% compared to 36.4% at year-end.

From working capital perspective our accounts receivable were 54 days versus 50 days a year ago. While we continue to closely manage our collection terms, our DSO levels are expected to be slightly higher in 2013 compared to 2012.

Our accounts payable were 64 days versus 69 days last year and our inventory turns were 5.6 turns versus 6.5 turns in the second quarter 2012. The turns reduction was primarily due to delays in customer orders and the delays of new product launches in our EMS segment.

Our controllable working capital that we define as these three accounts -- receivables, payables and inventory -- was 17.9% of annualized sales, improved from the prior quarter of 18.0% of sales, but higher than last year of 16.7%. Our management team continues to focus on improving these metrics.

The second quarter 2013 cash flow from operations was $13.7 million versus $16.1 million in the same period last year and improved from the first quarter cash usage of $3.5 million. Second quarter 2013 capital expenditures were $3.7 million versus $2.5 million in 2012 and $4.7 million in the first quarter.

Our second-quarter free cash flow, which is defined as cash flow from operations plus capital expenditures, was $10 million compared to $12.5 million last year, but improved from the first quarter 2013 cash usage of $8.2 million. We continue to expect our full-year capital expenditures to be approximately 3% of sales.

During the second quarter we repurchased approximately 44,900 shares for $445,000 at an average price of $9.91. Approximately 318,000 shares remain from our 2012, 1 million share buyback authorization. For the first six months of 2013 we repurchased approximately 150,000 shares for $1.5 million.

On June 11, the Board of Directors authorized the repurchase of up to 1 million additional shares of the Company stock.

This concludes the financial overview. I will now open the call for questions, and again thank you for joining us today.

(Operator Instructions) John Franzreb, Sidoti & Company.

Actually, I want to first focus on that 20% organic revenue growth you discussed in your prepared remarks. How much of that is new program growth versus recovery from your core business? Can you kind of color that little bit?

John, there are several programs in there. But if you look at the growth in smart actuator, piezo were the biggest drivers. Grille shutter actuator as well will be part of that for the year. They are probably some of the bigger things.

Okay. The automotive side of the business is doing relatively well despite problems in Europe. Europe companywide I believe is only 10% of sales. How much exposure does the auto side of the business have to Europe?

It's pretty small. We've won a significant customer in the region but we've got that pretty well-managed and we feel we're in good control of it.

Okay. Any guess on what kind of percentage we're talking about Kieran?

John, I can get that for you in just one second here, if you want to ask another question.

Okay.

I'm guessing it's less than 10%.

It definitely is.

Yes, okay, have you used all the cash from the repatriation or do you still have some left that you are going to put to work?

John, as soon as the cash came to the US it was immediately used to pay down the debt.

Okay.

And your answer on the automotive piece, it's right in that 10% range.

Okay. Tom, actually you mentioned delays in EMS orders in your remarks. I wonder if you could talk a little bit about that. Will EMS bounce back meaningfully? Or are we looking at a scenario where the revenues have been significantly brought down just by exiting those businesses?

Certainly in Q2 the revenues, we see the impact of exiting two of the factories last year. We probably average about $8 million per quarter in both Q1 and Q2 of sales that we voluntarily walked away from by closing those two factories.

Yes, I would say -- and if you look forward in terms of bouncing back, was the other part of your question, we put a strong emphasis during the quarter in terms of engagement with particular segments where we want to really focus going forward.

Certainly we'll see an improvement back above the topline level of Q1 and that even improving again in Q4. So -- and the message we gave on the last call was getting back to more normal operating earnings in the fourth quarter. That is still on track.

Great, great. One last question. What kind of tax rate should we be thinking about the second half of the year, Tom?

John, in order to stay on that 25% average that I talked about Q3 and Q4 would both be about 29.5%.

Thank you very much, guys, good quarter.

(Operator Instructions) Hendi Susanto, Gabelli and Company.

This is the third time that management lowered the full-year revenue guidance and simultaneously maintained the EPS guidance. What contributed to your ability to sustain EPS guidance? Is that products mix shift towards more electronic Components and Sensors? I am wondering whether there are like anything else that contributed to that.

Sure, Hendi. The decrease that we are seeing on the topline is primarily EMS related. And that shortfall in EMS margin contribution is being absorbed by the restructuring actions that we just announced in Q2.

And like I said in my prepared remarks, that will be between $1.5 million and $2 million. And the residual is from just a higher percentage of Component and Sensors sales relative to EMS, and improved overall margins due to some of the margin improvement actions that we've taken, and the tightening of our belt within SG&A. So those two things have been able to offset the contribution margin associated with the lower EMS sales.

And Hendi, just add to that, you can expect as part of the simplification plan, we'll continue to focus on obviously growing the business, but also driving margin improvement and managing operating expenses.

Okay, yes, and then the second question for Kieran. As part of the strategy review, like, what is your view toward the EMS operation at this point? For example like how lean is the EMS facility at this point and whether they are still room for more consolidation in EMS?

The first focus for me short-term is to make sure it's healthy, and that's been a strong focus in the last number of weeks here driving that. There are improvements we can make that are focused on the teams engaged on them.

But of course the topline was the first thing that got attention. There are improvements to be made on the operating expenses still and the utilization, and you will hear us talk more about that in the next quarter.

(Operator Instructions) Gentlemen on the panel and ladies, if there are any present, there are no further questions in queue at this time. Please continue.

Okay, thank you Stephen. At this point I'd like to remind our listeners that a replay of this conference call will be available from 1.30 p.m. Eastern Daylight Time today through 11.59 p.m. on Tuesday, July 30, 2013.

The telephone number for the replay is 800-475-6701 or 320-365-3844, if calling from outside the US. The access code is 297678. Thank you for joining us today.

Ladies and gentlemen, that does conclude our conference call for today. We'd like to thank you for your participation and thank you for using AT&T. Have a wonderful day. You may now disconnect.