CTS Corp (CTS) 2013 Q4 法說會逐字稿

Good day and welcome to the CTS fourth-quarter and full-year 2013 conference call. Today's call is being recorded. At this time I would like to turn the conference over to Kieran O'Sullivan. Please go ahead.

Thank you, good morning, and thank you for joining us on our call today. Welcome to CTS' fourth-quarter 2013 conference call. This past year has been a year of transition for CTS as we divested our EMS business, changed our margin profile from the low 20%s to the high 20%s and delivered improved financial results in each quarter. We still have a lot more to accomplish on this journey.

Joining me today is Ashish Agrawal, our Chief Financial Officer. Before I turn the call over to Ashish to get the Safe Harbor statement, I want to thank Tom Kroll for his constant support this past year as we initiated changes at CTS. As you are aware, we previously announced that Tom would retire in March of this year. Ashish.

Before beginning the business discussions 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 discussions refer to any non-GAAP measures relative to Reg 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.

Thank you, Ashish. Last year we began to simplify, focus and drive profitable growth as we set out on our journey to transition CTS and further clarify the future identity of our Company. As we progressed through the simplification steps we achieved some near-term milestones.

We developed a very clear strategic plan. We divested the EMS business and thereby reduced business risk while improving our balance sheet and our margin profile. We started to address our global footprint and utilization performance to enhance our cost structure.

Finally, we made changes to strengthen our management team to execute on our strategic plans with the addition of Ashish Agrawal as CFO, Tony Urban now leading the sensors and mechatronics business and Bob Patton as General Counsel.

While we have made progress, we are clearly focused on the milestones we need to achieve by quarter over the next several years to strengthen and grow the business. Last evening we reported our fourth-quarter and full-year 2013 financial results.

Our component and sensor sales of $102.4 million increased by 35% from the same period last year driven primarily by the D&R acquisition and our piezo products. We divested our EMS business in October 2013 resulting in total 2013 full-year sales from continuing operations of $409.5 million, that is an increase of 34% compared to 2012 full-year sales.

The fourth-quarter net loss was $0.09 compared to earnings of $0.26 per share in the same period last year on a GAAP basis. Adjusted net earnings in the fourth quarter were $0.25 per share compared to $0.18 per share in the same period last year.

For the full year 2013 net loss per share on a GAAP basis was $0.12 compared to earnings per share of $0.59 for 2012. The 2013 GAAP loss includes non-cash tax expense, expenses relating to restructuring actions, EMS divestiture and CEO transition expenses.

Adjusted EPS was $0.82 compared to $0.64 in 2012. Overall gross margins were 29.5% in the fourth quarter, similar to last year's fourth-quarter levels for continuing operations. This reflects a shift from the low 20% range in earlier years, which included the EMS business.

SG&A costs were 17.1% in 2013, down from 20.7% in 2012. We reduced our debt to capitalization leverage from 32.3% at the end of the third quarter 2013 to 20.1% at the end of 2013. Working capital and cash flow improved in the fourth quarter with full-year free cash flow of $24 million.

Control of our working capital was 11.8% at the end of 2013 compared to 16.8% in 2012. This reflects operational improvements taken in 2013 and also the impact of the EMS divestiture.

Taking a look at business awards we secured new orders of $78 million in the quarter, $52.5 million of these orders were for sensors and mechatronics, while $25.7 million related to electronic components. We also secured an additional agreement to supply ClearPlex filter technology to a major telecommunications company focused on the US federal government market.

Finally, in the fourth quarter we added our first silicon timing products to our component portfolio.

As we look forward and as we move through this transitional year for CTS, we are forecasting sales growth in the range of 4% to 6%, while carefully monitoring the trend in the emerging markets. Earnings per share are expected to be in the range of $0.96 to $1.02 with the first half earnings per share lower than the second half of the year.

We continue to make progress on our strategic plan of simplifying, focusing on the core and driving profitable growth. We have specific and detailed plans by product line targeting organic growth. We are focusing our R&D resources and increasing our spend from $23 million in 2013 to $25 million in 2014.

Additionally, we are supporting this strategy with increases in our spending and sales and marketing, moving our teams closer to existing and new target customers. We are in the early stages of investigating appropriate inorganic growth opportunities as we transition out of the EMS business, stabilize the core and strengthen our capabilities.

I'm very excited by what we have started and our future as we shape the identity of CTS. I will now turn the call over to Ashish to provide further detail. Ashish.

Okay, thank you, Kieran. In the fourth quarter, as Kieran mentioned, we divested the EMS business on October 2, 2013 for $75 million. EMS is now reported as discontinued operations.

Our fourth-quarter 2013 sales for continuing operations were $102 million which is an increase of $27 million from 2012. This reflects the acquisition of the D&R Technologies and an increase in the demand for our piezo-ceramic products as well as the increase in automotive production volumes. Sales were $1 million lower than the third quarter of 2013.

Our gross margins were 29.5% which is similar to last year. In the fourth quarter selling, general and administrative expenses were $17.2 million versus $17.7 million last year. As a percentage of sales the SG&A expenses were 16.8%, an improvement of 6 points from the fourth quarter of 2012. R&D expenses were $5.5 million, similar to the fourth quarter of 2012.

In the fourth quarter the net interest and other income were favorable by $1.3 million compared to the same period last year. Our interest cost was lower as we paid down debt and we had favorable currency impact as the Chinese RMB appreciated versus the US dollar.

The fourth-quarter net loss was $0.09 per share compared to net earnings of $0.26 per diluted share in the same period last year. Included in the fourth quarter 2013 earnings was a $0.23 per share charge for the divestiture of EMS, $0.08 charge for restructuring and $0.03 per share charge for CEO transition expenses.

Excluding these items adjusted earnings per share were $0.25 in 2013 fourth quarter compared to adjusted earnings of $0.18 in fourth quarter of 2012 which is an increase of 39%.

Looking at the full year, sales from continuing operations were $409 million, an increase of 34% from prior year revenue of $304.5 million. This increase is driven by the increase in demand for our piezo-ceramic products, the acquisition of D&R Technologies and an increase in the automotive related product lines.

The 2013 gross margins were 29.6% which is similar to 2012. In 2013 we took an $11.8 million charge for restructuring expenses. This relates to the footprint rationalization initiatives that were announced in June 2013 and subsequently. We expect the announced projects to be completed on schedule in the first half of 2014 and we will continue to look at further ways to improve our cost structure.

SG&A expenses in 2013 were 17.1% of sales compared to 20.7% in 2012. As Kieran pointed out, we will continue to increase our sales and marketing efforts to drive growth. We expect to do this without adding additional operating expense burden on the business by carefully managing G&A expenses.

R&D spending for 2013 was $23.2 million or 5.7% of sales compared to $20.9 million in 2012. Net interest and other income of $0.3 million was $900,000 better than last year primarily due to the appreciation of foreign currency as compared to the US dollar.

Our full year 2013 loss per share was $0.12 on a GAAP basis. Included in this are $0.31 per share charge in tax cost of cash repatriation and the tax cost was mostly non-cash; $0.28 per share charge in restructuring; $0.25 per share charge related to the divestiture of EMS; $0.07 per share charge for CEO transition costs; and $0.03 per share charge for writing off a tax asset related to restructuring.

Excluding these special items, the adjusted EPS for 2013 was $0.82 compared to $0.64 in 2012.

Now let's look at our balance sheet. Cash and cash equivalents were $124 million versus $110 million last year. During 2013 we repatriated $30 million in cash from Singapore, which was used to pay off our debt -- sorry, to reduce our debt.

In addition, we used the proceeds from the sale of EMS to further pay down our debt. Debt balance was at $75 million in December 2013 compared to $153.5 million at the end of last year.

From a working capital perspective, our accounts receivable days were 54.5 days, up slightly from 2012, reflecting the change in our customer profiles. Accounts payable days were 72 days compared to 63 last year and our inventory turns improved from 6 in 2012 to 8.2 turns.

Controllable working capital overall reduced from 16.8% in 2012 to 11.8% at the end of 2013. This reflects the impact of ongoing working capital improvements across all our sites as well as a mix of business since the sale of EMS.

In 2013 cash flow from operations were $38 million compared to $42 million in 2012. Capital expenditures were $14 million compared to $13.5 million in 2012. And our free cash flow for the full year, which is defined as cash flow from operations less net capital expenditures, was $24 million.

In November 2013 we increased our dividend by 14% to $0.16 per share and we also continued our stock buyback activity during 2013 and purchased 419,000 shares for $6.2 million. This concludes our financial overview; I will now open up the call for questions.

(Operator Instructions). John Franzreb, Sidoti & Company.

I would like to wish Tom good luck in his retirement. First question is regarding the fourth-quarter results. Can you give me a sense of what the organic growth was in the quarter ex-D&R?

Let me start off with the full year. When we would look at the full year the organic growth was 18% on the 35% overall. Ashish, for the fourth quarter you want to comment?

Yes. So the fourth quarter we had organic growth of just over 20% excluding the acquisition of D&R Technologies.

Okay. Then, Kieran, can you explain to me, against that backdrop, why the muted 4% to 6% revenue growth outlook in 2014?

Yes, I think if you look very carefully at our script in terms of what we put in the press release, we said that 2013 and 2014 are transitional years for us. We have obviously been moving forward with our strategy, divesting the EMS business was the first signal of that.

The other thing we are doing is we are now focused very much on the core and fine-tuning it in terms of their are certain products we want to advance at a faster rate, others we will fine-tune a little bit. So that is what you are seeing and that is why we called it a transitional year as well.

So, are you suggesting that you might be exiting some markets in the coming year?

No. Kind of really we have done a big part of that; we are just fine-tuning.

Okay. The gross margin profile now ex the EMS business, Ashish, if I understand is there some restructuring charges in the cost of goods sold in the fourth-quarter number?

Yes.

Okay, so by my calculation the adjusted gross margin is somewhere in the neighborhood of 30%. How sustainable is that going forward?

John, you are right. The gross margin excluding restructuring expenses would be right around 30%. As we announced in the June press release related to restructuring, we anticipate a lot of the savings from restructuring actions related to our footprint reduction to come in the second half -- starting in the second half of 2014 into the first half of 2015.

So we expect gross margin improvement as a result of those actions. And on an ongoing basis, Kieran, I think, would like to make a comment there.

Yes, John, I presume your question is moving towards how sustainable is that going forward.

Correct.

So obviously there are always pricing pressures out there like there is in any business and different industries. Well, we have got cost reductions, cost improvements -- you've seen actions we have taken but there are normal things that happen with material, design cost reductions, productivity, that is a key focus of ours to make sure we are not only keeping our margins but growing our margins as well. Not just by new products but by improving existing products to.

Okay. And can --.

You can expect (multiple speakers) continue.

I'm sorry, say that again, Kieran?

You can expect the margin profile to continue.

Excellent. And one last question and I guess I will get back into queue. Your comments suggest a stronger second half of the year. Typically the June quarter, at least on a revenue basis, is your strongest. I am wondering if your characterization of how the year progresses suggests a revenue shift or is that more of a function of utilization of the cost savings that Ashish just mentioned?

John, it is a combination of things. If you will think back into the -- last quarter's call we said that we had some softness in HDD and that was going to correct itself by the end of the first half of this year. And of course we have got the savings, as you correctly stated, kicking into the second half more strongly, so that is really the reason for it.

Okay, guys, I will get back into queue. Thank you very much.

Hendi Susanto, Gabelli & Company.

Good morning, and welcome on board Ashish.

Thank you, Hendi.

First question is for Kieran. In terms of your outlook for 2014, what are your targeted growth areas or growth markets?

I would tell you that when you look at components and sensors and really in those markets where we focused on the emission side on the automotive -- the chassis side of it. You can see that we are doing some clear things on the commercial markets as well with the products we have added to the portfolio.

I think also you see some indications of future work that is out there in terms of ClearPlex technology, we have announced already with this agreement today that that is the second agreement we have. We haven't given any color in terms of what's the size of those awards because we are going through predevelopment phases together.

But there are some other markets in terms of communications growing as well, defense also with our piezo products. So we have got a good blend of things in there. But we are just being very careful with the transition of the portfolio.

We did a lot of work on strategy last year, we spent a lot of time getting the framework and the foundation right and what we are doing now and why I'm being a little bit cautious with the statement is we are really getting to that next level of depth in each of the product areas, making sure that the decisions we are making are the right decisions that will maximize the return for shareholders going forward.

Okay. And, Kieran, in terms of M&A strategies, do you still have an active pipeline for M&A review and then which markets can be attractive to CTS going forward?

I missed the first piece of your question.

M&A strategies.

Okay, got you. Well, first of all, a few overall facts are it has got to fit in with the strategy where we simplify, focus and drive profitable growth. So the fit is extremely important for us whether it is in the censor side of it, the actuator, the component side of it. And the piezo, that part of it is all very, very important to us. We are not going to rush into anything. And it has got to be the right price.

So we are very clear we have milestones laid out by quarter with what we want to do right out to 2017. We have reviewed these thoroughly as a management team but also with the Board. And we are checking in to make sure we have got the homework done. So the real answer to the question is, we are still investigating and taking the time to make sure we get it right.

Okay. And then I think the market has been pushing the pension to industrial automation and at home automations. I wonder whether you have any insight on existing products that address those markets and how we should view those opportunities with respect to CTS.

I think when you look at (inaudible) after we divested the EMS business we got a few questions about, wow, you have 65% of your business is automotive. And the other thing you've got to think about is that within the sensors, actuators components, they are not all in the automotive business.

We have products that go into industrial markets, into other markets and of course one of the focuses I have going forward is that we balance the overall Company with different end market not just a focus on automotive. So you will see us tap into those things but it will take time for it to emerge and we want to make sure we get the long-term growth right, not just a quick win here and there.

And then, Kieran, may I know what the current status of smart actuators and its progress?

We talked last year; we said the sales were going to be in the range of $22 million to $25 million. And we talked about the margin improvement. We have improved the margins and the revenues going forward are in the $25 million plus range. So we made progress and we continue to focus on that to just get those last pieces of the margin profile better.

Okay. And then Ashish and Kieran, when we think about the 4% to 6% sales growth for 2014, could you break that down between automotive sensors and actuators and any electronic components separately?

We have normally not given that detailed breakdown, Hendi.

Okay. Or could you indicate which ones will have like higher growth in that assumption?

If you look at it in terms of when you asked about the actuators you remember the previous years we were starting to ramp up. Now we have stabilized on the current actuator family in the $25 million plus range. The component side of it is growing well. And we have got some interesting things happening there with the different products. And on the sensors and mechatronics more on the automotive side of it. We have got solid growth as well, more in line with the industry growth rates.

I mean if you look you will see that Europe is still pretty muted on the automotive side going from about $19 million just up. There is US we expect to go from just over 16 million to maybe a little north of 16.5 million vehicles out there, China going from maybe 20.3 closer to 22 plus. So they're the kind of growth rates you can correlate back to our sensors and mechatronics.

Okay. And then, Ashish, (inaudible) how should we think of capital allocation strategies for 2014?

So for 2014 you can expect us to spend in the range of 4% on our capital expenditures. And we will continue to look at share buybacks as well as the dividend is obviously set at just about $5 million for the year.

Okay. And then what are the tax rate that we can expect after the EMS transaction versus before the EMS transaction historically?

Hendi, I will hand this over to Ashish. But you can expect a change in the tax profile as the mix of products and the locations now with the new profile of the Company. Ashish.

So, Hendi, the tax rate for 2013 was impacted favorably as we had some unusual items in the first quarter related to the R&D credit in the US as well as the China high-technology tax credit which was delayed from 2012 into 2013.

So taking that into account I would expect our tax rate to shift upward. That combined with the mix in shift of mix in our income we would be generating more US-based income going forward and that will also drive our tax rate higher. I expect the ongoing tax rate to be in the 30% to 32% range.

Hendi Susanto) Thank you and all the best for your 2014.

Lisa Thompson, [Zacks].

I was hoping if you could talk a little bit about when we look at going forward now with the new Company, with the product lines you have now, is there any customer or product, something that we can look at, to predict how well you are going to do based on how well they are doing?

Well, let me answer that first of all by saying we are not giving you a lot of information yet until we get deeper into some of the products. And we have done a lot of that work, but we want to position it correctly.

Probably the best way to answer your question, because that data will emerge over the next few quarters, the best way to look at it will be we are very strong with the Japanese, we are very strong with some other customers in the HDD side of it. We are looking to add new customers on the (technical difficulty) on the piezo side of it.

We are also looking to improve our footprint in Europe and Asia. You heard me talk about, number one, a little uptick in spending in R&D and we are also focused on our sales and marketing. One of the things we're doing is getting our sales and marketing people out to the customer locations not just in North America but in Europe and in Asia. That is very much important for us going forward.

I will tell you we are working on new products in the pipeline, we have got very clear plans around those, but it is a bit early to talk to you about what they are going to be. But be aware that it is active at the moment and that is why you are seeing a little change in the -- a little uptick in the R&D spend.

Okay, great. Thank you.

John Franzreb, Sidoti & Company.

A couple here. The $78 million of new awards, what is the timing of revenue recognition on them?

Most I would say, a chunk of that is out in 2016 and 2017 because of the profile of the customers in the development cycle. There are some other pieces that will be hitting in the end of this year and fourth quarter this year. But it is too early to give you color in terms of some of the other awards we talked about that are in the pipeline.

As an example, the ClearPlex technology, we have got predevelopment agreements, but they are not going to show up until later this year and it is too early to say how extensive they will be. But the majority of it is out in 2016 and 2017.

Okay. And, Kieran, in your new sales effort and maybe going out to the customer, are you looking to improve the gross margin profile of the business when you are looking for these new awards? Is there any active management's been trying to change or improve the gross margin or the win rate on maybe higher price point type products? Can you talk to that a bit?

Well, think back to the strategy, first of all, we say simplify, focus to drive profitable growth. We are looking to be very clear in terms of the future identity of the Company and you heard me talk about that and that is something we are still working through with the Board.

But I will tell you that we are always focused on margins whether it is an (multiple speakers) view, a casual meeting with one of the staff members it is a constant part of the culture. We are changing the culture in terms of being a lean corporate as well.

And in terms of our overhead costs. And so you can expect us to take the margin profile we have and obviously drive for improvements. And we will add products that don't dilute the margin profile.

Okay. I was also thinking about one of your comments earlier about pricing pressures. I was wondering if you are trying to move away from markets where pricing pressures via competition or the customer base is driving those pressures. I was wondering if you are trying to actively move away from some of those more aggressive market prices?

Probably what I was saying there is we recognize there are pricing pressures, that differ in every one of our end markets. At the same time we have got some interesting technology within the Company and it is looking for the best places to apply that and expand it and maximize then the return for shareholders. So we will continue on and there are some new things that will emerge.

Okay. Two quick questions. The $1.4 million in other income, what was that?

The other income, John, it is made up of two components. One is our interest income and interest expense as well as foreign currency gains or losses. And in the numbers that we gave out the biggest drivers of the change was related to currency.

Okay. And of the $124 million in cash, how much is domiciled in the US?

About --.

It is pretty small.

Yes, it is relatively small number.

Most of it is a relatively small number. Most of it is overseas, John.

Got it. And one last question. Regarding the divestiture of the EMS business, has there been any thought of putting out an 8-K? Will you restate all of last year's numbers so we can kind of look at the Company on a going-forward apples-to-apples basis?

We will be doing those disclosures along with our 10-K filing. Should be coming out in the next few weeks.

Okay. Thank you very much, guys, thank you for taking my questions.

And at this time there are no further questions in queue.

We will give it a minute just to see if there is any more questions.

(Operator Instructions).

Okay, I think we have exhausted everything on the question side. So thank you all for joining us this morning. And we look forward to talking to you again in the next quarter and in the months ahead. Thank you very much.

Again, ladies and gentleman, thank you for your participation. This will conclude today's conference.