Ken Nagy, CFA
Growth Picks up at CTS Corporation
CTS Corporation (CTS) designs, manufactures, assembles, and sells electronic components and sensors worldwide. The company has diversified its EMS business over the past several years to markets such as medical, defense and aerospace, and industrial. The faster growing Components and Sensors segment has found new customers and new markets for existing products. This should be a tail wind for CTS.
On April 26, 2011 the firm announced its first quarter earnings and on April 27, 2011 CTS hosted a conference call. Results were strong despite some push outs due to Japan and higher commodity prices. Revenue for the period was $151.5 million up 4.5% sequentially from $145.0 million and up 17.1% year over year.
Components and sensors sales decreased $1.4 million, or 2%, year-over-year. Automotive sensor and actuator product sales decreased over the year while strength was seen in electronic component product demand. Sequentially the components and sensors segment top-line increased $6.6 million or 10%. The increase was a result of increased demand in both automotive sensor and actuator products and electronic components. Operating profit on a year-over year basis fell by $3.3 million due to the impact of lower sales, unfavorable product mix, higher commodity prices, higher R&D expenses and launch related costs for programs due to start in 2011. Sequentially operating profit fell $0.9 million due to higher R&D expenses for the firms new growth initiatives.
EMS first quarter 2011 sales increased $23.5 million, or 42%, on a year-over-year basis, due to higher demand and new customers in the defense and aerospace, industrial, and communications markets. Sequentially EMS sales were virtually flat ($79.5 million versus $79.6 million), reflecting strength in communications, computer, and industrial, offset by weakness in defense and aerospace markets. While last quarters EMS operating profit was $1.0 million the segment operating profit for the first quarter was zero. This was a result if unusual ramp activity among several customers in EMS.
CTS Expands Into Growth Markets
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. In short the firm has found new customers and industries for its products.
CTS is in the process of ramping the new piezoceramic component for the next generation of high density, hard disk drive application. A 10,000 square foot plus 1K level clean room has been commissioned in Tianjin, China. The estimate is that the facility has the capacity to support $15 million in annual sales of this new Piezoceramic component. This initiative is expected to incur net expenditures in hiring, training and depreciation in the second quarter, and become breakeven to the bottom-line in the third quarter. The component will be a net positive contributor with $2 million to $3 million in sales and approximately $1 million in margins in the fourth quarter of 2011. This translates to incremental annualized Piezoceramic sales of approximately $10 million and $3 million to $4 million in additional gross margin contributions in 2012 for the electronic components business from a new product and new customer standpoint.
On March 22nd the firm announced that CTS Automotive Products has launched its first smart actuator production program for use on heavy-duty industrial engines that are produced by a major heavy equipment manufacturer. This low volume, highly-engineered smart actuator was launched after extensive testing for use on a series of heavy-duty industrial engines for pumps and power generation. This program was awarded two years ago and becomes the first brushless DC smart actuator for the commercial market to go to production. CTS’ diversification into new markets and customers will be further enhanced when production of the high-volume smart actuator programs for light and medium-duty trucks are launched in late 2012.
Smart Actuators in the commercial market is an area where CTS has great potential to tap a very large market. In the second half of 2010 the firm penetrated two of the largest diesel manufacturers with smart actuators for trucks and industrial engines. There were four wins in all prior to the March Announcement. This takes CTS into on-and-off highway diesel engines and trucks. This introduces the firm to commercial applications like construction, mining, and agriculture.
The total commercial market looks to be between $750 million to $1 billion. CTS target market share is 10%. Management sees projected sales at 90 million through 2015 with the first year of significant sales in 2013. ($20 million)
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