CTS Corp (CTS) 2014 Q1 法說會逐字稿

Good day and welcome to the CTS Corporation Q1 2014 earnings release conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Kieran O'Sullivan. Please go ahead, sir.

Thank you. Good morning and thank you for joining us today and welcome to CTS' first-quarter 2014 conference call. In 2014, our focus remains on continued strong commercial and operational performance as well as strengthening our core business to generate future profitable growth.

Join me today is Ashish Agrawal, our Chief Financial Officer. So before I begin, Ashish will take us through the Safe Harbor statement. Ashish?

Before beginning the business discussion, I would like to remind our listeners that this 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 is contained in our press release issued yesterday, 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 Reg G that require explanations and reconciliation are available in the Investor Relations section of the CTS website.

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

Thank you Ashish. CTS again delivered incremental performance and improved our adjusted EPS in the first quarter of 2014 over the same period in 2013. We continue to simplify, focus and drive profitable growth as we transition our company. In the last quarter, we continued to execute our strategic plan, while also adding key competencies and talent. We are strengthening our focus on organic growth and continue to drive our operational performance, which is reflected in our margin improvement. A careful focus and improvement in other operating costs are also enhancing our performance. Our strategy is delivering results and we expect to continue this improvement trend as we build our foundation for innovation to support organic growth.

Additionally, we continue to refine our focus on potential inorganic opportunities around our core sensor capabilities.

Last evening, we reported our first-quarter 2014 financial results. Our component and sensor sales of $100.7 million increased by 2.7% from the same period last year. Our automotive products grew at 6% as we saw OEM market growth of 6% in North America production, 7% in Europe, and 9% in Asia.

Despite the harsh North American winter, on-hand days of vehicle supply declined to 63 days. Our component product growth declined by 4%, driven mainly by softness in our frequency products and HDD sales. We expect some softness in the HDD sales for the year due to delayed new product introductions in our clients.

The first-quarter GAAP earnings from continuing operations were $0.15 per diluted share compared to $0.09 per diluted share for the first period of 2013. Adjusted net earnings from continuing operations in the first quarter were $0.19 per diluted share compared to $0.11 per diluted share in the first quarter of 2013.

Overall gross margins were 30.4% in the first quarter, an improvement of 3.1% from the same period last year from continuing operations. Operating expenses were 19.6%, an improvement of 5% from the same period last year. Ashish will expand on the improvements and some one-time benefits impacting our operating costs.

SG&A costs were 13.5% in the first quarter, down from 18% in 2013. We maintained our debt to capitalization at 20.2%. Controllable working capital was 12.6% in the first quarter, an improvement from 18% from the first quarter of 2013.

We continue to make progress on our future product pipeline as we secured new business sales awards of $136 million in the quarter. We continue to expand our automotive megatronics growth, which includes pedals, haptic pedals and actuators. We expanded our piezo powered sonar buoy programs with share growth and added one new program. Additionally, we added a new customer in ultrasound imaging. Our ClearPlex technology continues to make progress in the predevelopment phase.

We continue to progress on our strategic plan of simplifying, focusing on the core while driving profitable growth. Most recently, we announced the closure of our Canadian operations with these products being transferred to our Mexico and Asian locations. We continue to execute well on the simplification, while not losing focus on future new business wins. We have specific organic innovation investments in the pipeline, and you can expect to hear more about these programs in the coming quarters as we support our R&D spend and increase our sales and marketing regionally.

While we are adding key talent, we are also being careful to stabilize the organization as we manage several location transitions, including the transfer of corporate employees to our sensors and megatronics building in Elkhart, Indiana. I'm excited by our progress towards our future as we shape the identity of CTS. We continue to amalgamate our changes of last year and are actively planning our future while enabling the organization to stabilize, gain bandwidth, and at the same time going deeper to drive certain initiatives around our culture of development.

Looking forward, as we move through this transitional year for CTS, we are continuing to forecast sales growth in the range of 4% to 6%, earnings-per-share expected to be in the range of $0.96 to $1.02, with a stronger second half.

I will now turn the call over to Ashish Agarwal to provide additional details on our results. Ashish?

Thank you Kieran. As Kieran already mentioned, our first-quarter 2014 sales were $100.7 million, up 2.7% compared to last year's sales from continuing operations. Gross margin for the first quarter of 2014 was 30.4% versus 29.5% from continuing operations in the last quarter and 27.3% in the first quarter of a year ago. Margins increased as we made progress in improving performance in certain product lines and additional improvements from material and labor productivity projects.

Our first-quarter SG&A expenses were $13.6 million, down $4.1 million from continuing operations in the first quarter of 2013. This reduction from 18% in the first quarter of 2013 to 13.5% in the first quarter of 2014 is the result of cost savings generated from restructuring actions, a reduction in pension expenses, and a gain on sale of certain assets as we outsourced some production.

The first quarter of 2013 also included $700,000 in CEO transition expenses. We do not have any CEO transition expenses in 2014.

In line with our strategy, we are enhancing our sales and marketing capabilities by adding resources closer to our target customers. This resulted in higher selling and marketing costs in the first quarter this year. This cost increase was more than offset by the reduction in general and administrative expenses.

R&D expenses were $5.6 million in the first quarter of 2014, compared to $6.3 million in the first quarter of 2013. R&D expenses were lower compared to the first quarter of 2013 due to timing of expenses as we repositioned R&D resources. We remain committed to investing in new products for organic growth and as Kieran pointed out, are making good progress.

In the first quarter, net interest and other expenses were unfavorable by $800,000 compared to the first quarter of 2013. Our interest cost was lower due to reduced borrowings. However, we recorded a loss of $1.8 million on currency primarily due to the weakness of the Chinese renminbi versus the US dollar. The effective tax rate in the first quarter was 43.7% compared to a negative 77.7% in the first quarter of 2014.

In 2014, we recorded one-time charges of approximately $700,000 mostly related to restructuring actions. We also had an unfavorable impact on the tax rate from currency losses in the first quarter of 2014.

In the first quarter of 2013, we had recorded a $1.6 million industry tax benefit -- sorry, discrete tax benefits from the retroactive application of the US Research Tax Credit signed into law in January 2013 and granting of the China high technology incentive tax credit. In 2014, for the full year, we expect our effective tax rate to be in the low 30s%, excluding the impact of one-time charges.

In the first quarter of 2014, our GAAP earnings were $0.15 per diluted share compared to earnings from continuing operations of $0.09 per diluted share in the same period last year. Included in the first-quarter 2014 earnings were $0.02 in restructuring charges as well as $0.02 for restructuring related tax charges. Excluding these items, adjusted earnings per diluted shares were $0.19. The adjusted earnings per diluted share for the first quarter of 2013 were $0.11, excluding a $0.01 charge for restructuring and a $0.01 charge for CEO transition expenses.

Moving next to the balance sheet, cash and cash equivalents were $119 million compared to $124 million in December 2013. The debt balance was $76.6 million in March 2014, up slightly from December 2013. Controllable working capital comprised of Accounts Receivable plus inventory minus Accounts Payable was 12.6% of sales compared to 18% in the first quarter of last year. The improvement reflects ongoing working capital improvements as well as a change in the mix of businesses since the sale of EMS. In particular, our operations teams achieved significant reductions in inventory balances.

We had a cash outflow from operations of $6.1 million in the first quarter of 2014 compared to a cash outflow of $3.5 million in the first quarter of last year. It is normal for CTS to have a cash outflow in the first quarter of the year due to timing of payroll and related items. In the first quarter of 2014, we also had some cash outflows related to restructuring charges.

Capital expenditures were $2.8 million in the first quarter of 2014, slightly lower than anticipated due to the timing of various projects.

We repurchased approximately 28,000 shares of CTS stock for $495,000 during the first quarter. We will continue to buy back additional shares during the year as part of our share repurchase program.

This concludes our prepared comment. We would now like to open the call for questions.

(Operator Instructions). Hendi Susanto, Gabelli and Company.

Kieran, Ashish, good morning and thanks for taking my questions. My first question is CTS is targeting to grow the manufacturing footprint from 50% in best cost locations to more than 80% by 2017. Given the already announced restructuring plans, where do you see your best cost location manufacturing footprint by the end of 2014? And furthermore what does it take to bring it up to 80% in the long run?

I would tell you -- first of all, thanks for your question -- we are well on our way in the simplification phase. We've announced several locations -- Carol Stream. We've announced other locations in Scotland and transfers obviously now with the Canadian change as well. So we would see ourselves substantially along the way. And most of the work is in progress and of course we are being very careful to make sure that we don't interrupt our customers as we go through this transition as well and keep our quality levels right there. This will take us probably just north of 70% in terms of the best cost, so you can see we are substantially on the way.

Okay. And then Ashish, would you be able to share how should we be thinking of operating expenses for the remainder of the year? Specifically, I am wondering whether CTS may see further increase in sales and marketing.

Thanks for the question. The sales and marketing expenses will generally grow some more as we add resources in those areas throughout the year. But as we did in the first quarter, we expect savings from G&A expenses to more than offset the increase in sales and marketing costs. So, I am not expecting a significant increase in the overall operating expenses of the business. Now, keep in mind, in the first quarter, we did have a gain on sale of some assets that was recorded, so you will see SG&A expenses overall in the second quarter increase slightly from the first quarter.

Okay. And is it fair that it will progress in the second half of 2014?

In the second half of 2014, I expect that the savings from our restructuring actions that were announced in June last year, we will start realizing those savings. So, I would expect that we should maintain or reduce our SG&A spend.

Okay, yes. And then Kieran, I would like to inquire more insights into your end market. For instance, I know in which markets engineer and frequency products were soft and whether they are self visible to when it's going to see some recovery.

Yes. Really on the component side, we had a 4% drop in sales, and we had already been seeing the high precision frequency products in the portfolio were losing some demand, so we've already got new products in the portfolio that we are working on, low power and OCXOs and also integrated subsystems that we are expanding in. So, you're going to see them come into our product portfolio over time here.

And then the other thing that you would have seen is we talked last year about HDD. We had some delays there. We still have those delays. Two things I would say about that are, one, our customer is delaying the conversion of some platforms. It's not that they are not going to do it; they are. And also remember in terms of where they are in their process, they are probably 50%, 60% of the way. So we still have some growth there as well.

Okay. Are you still maintaining the expectation that the delay in HDD will clear out by the end of the first half of 2014?

I think we have some softness for the overall year. And we need to get clearer signals in terms of when the launch dates are going to be, so that's probably the best information I can give you at the moment.

Okay. And then --

Sorry, I was going to answer to you you're not going to see anything drop-off in the levels we are running at at the moment.

Okay. And then in terms of exposure to the HDD market, I know, considering that you have given like percent of sales for like various markets in your 10-K, but I'm wondering what's your exposure to the HDD market in general.

We are very focused just in terms of the piezo solutions that are part of the conversion to smooth stage actuation arm, so our suppliers are the sub suppliers of the Western Digitals, and there are companies out there that play in that space. And so the range of the sales is probably -- Ashish, have you got the number beside you closer to --

We have normally not guided specifically on the volume of our HDD sales, but they can range anywhere from $10 million to $20 million.

Okay, got it. Per year or per quarter?

Per year.

Per year.

Okay, got it. Thank you.

(Operator Instructions). Mr. O'Sullivan, we have no further questions at this time. I would like to turn the call back over to you for any closing remarks.

I would just like to thank everybody for joining and reemphasize that we are extremely dedicated to our strategy to simplify, focus, and drive profitable growth. Everybody on the management team, our locations are driving in this direction so you can be assured that we will continue to drive improvement in all aspects of our business. I look forward to talking to you on the next earnings call. Thank you.

Ladies and gentlemen, this does conclude today's conference. We appreciate your participation.