Sifting Through the CTS Quarter We Find Two Nuggets

On July 27th 2010, CTS Corp. (CTS) announced results for the second quarter of fiscal year 2010 ending June 2010. Revenue for the period was $138.9 million, up 7.3% sequentially from $129.4 million and up 15.4% year over year.

While the firm reported strength across the board, we note two items from the conference call that we feel are key to long-term growth:

  • The ramp of free cash flow over the next two quarters
  • Sensor technology expanding to newer areas

CTS expect global cash from operations to improve through the second half of 2010, and to generate positive free cash flow in the range of $20 to $25 million for 2010 (from essentially breakeven in the first half of 2010). The explanation lies in the timing of cash increases in working capital.

The profitability was high in the first half, but because the firm sales were ramping up predominately, all cash went towards funding working capital. Once sales levels are high and sustained with a relatively small uptick in growth, working capital should begin to generate. The firm also had unusually low accounts payable at the end of the second quarter.

CTS has sensor technology, and strongly desires to diversify its base. The firm has been going beyond the traditional pedal-modules of position sensors, and has endeavored to convince its customers that they should be looking at a broader array of sensors from the company. The most recent appraisal CTS did on a brand new sensor application (albeit with small volumes) was significant because it represented taking its sensing technology to a newer application.

The second opportunity is CTS sensors going into diesel engines, which are taking CTS into on-and-off highway diesel engines and trucks. This introduces the firm to commercial applications like construction, mining and agriculture.

Finally in electronic components, CTS employs a similar strategy. The firm is taking its piezoceramic product, which traditionally was only used in ultrasonic medical application, commercial inkjet applications or energy exploration, and applying it to a high-density disc-drive actuation application.
 
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