CTS Corporation ( CTS)

Q3 2010 Earnings Call

October 27, 2010 11:00 am ET

Executives

Mitch Walorski - Director, IR

Vinod Khilnani - Chairman of the Board, CEO

Donna Belusar - SVP, CFO

Analysts

John Franzreb - Sidoti & Company

Hendi Susanto - Gabelli & Company

Presentation

Operator

Ladies and gentlemen, thank you for standing by and welcome to the CTS Corporation third quarter earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will be given at that time. (Operator Instructions)

I would like to now turn the conference over to your host, Mr. Mitch Walorski, Director of Investor Relations. Please go ahead, sir.

Mitch Walorski

Thank you, Carolyn. I'm Mitch Walorski, Director of Investor Relations, and I will host the CTS Corporation third quarter 2010 earnings conference call. Thank you for joining us today. Participating from the company today are Vinod Khilnani, Chairman of the Board and CEO, and Donna Belusar, Senior Vice President and Chief Financial Officer.

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 reconciliation are available on our website in the Investor Relations section.

I will now turn the discussion over to our Chairman and CEO, Vinod Khilnani.

Vinod Khilnani

Thanks, Mitch, and good morning, everyone. Last evening, we released our third quarter financial results for 2010. I'm pleased to report that total sales and earnings in the third quarter improved sequentially and year-over-year from the third quarter of 2009. As expected, stronger growth in our Components and Sensors segment sales resulted in higher gross margins in the quarter compared to last year, driven primarily by favorable segment mix, with Components and Sensors segment representing 51% of total CTS sales in the third quarter of 2010 versus 44% in the same quarter last year.

Earnings per share also came in better than expected. Overall, it was an excellent quarter with strong financial results, increased level of research and development activities, higher number of patent filings and grants of new patents, new business awards and design wins, and on schedule launch and new product testing activities for major programs like Smart Actuators for diesel engines and new piezoceramic products for high density disk drive markets.

We continue to diversify our business model with new products, new customers and a presence in new growth markets like India. Total sales in the third quarter of 2010 at $139.4 million went up 10% from the third quarter of 2009, driven by a strong 29% year-over-year increase in our Components and Sensors segment sales.

Within this segment, sales of automotive sensors and actuators, which represent 31% of total CTS sales, increased by 20% from the third quarter of 2009. Automotive industry's global vehicle production volumes in the third quarter were up only 10.5% year-over-year. New products and increased market share with customers like Nissan and Honeywell turbochargers allowed us to grow our sensors and actuator sales at roughly twice the underlying market growth rate.

Our success in turbocharger sensors arena is also beginning to contribute to our growth through diversification strategy. The macro trend driving turbocharger growth results from tightening global fuel economy and emission standard. Lean Six Sigma and our enhanced focus on quality is further improving our global operations and helping us improve our cost, quality and delivery performance.

Continuing with the Components and Sensors segment, sales of electronic components represented 21% of our total sales in the third quarter of 2010. Sales of these electronic components in the third quarter were up a strong 44% year-over-year, as we saw a broad base recovery continue in our served markets.

Within electronic components, wireless infrastructure sales were up 20%, while our higher margin piezoceramic sales were up 93%, surpassing pre-recession levels of third quarter 2008. Key served markets for piezo products, including applications such as medical ultrasound, commercial inkjet printers and hydrophone all recorded strong sales increases driven by improved demand and favorable impact from our new product introductions.

Sales of electronic and electro components through our distribution channels increased 29% year-over-year. We expect distribution channel sales to moderate in the fourth quarter but still be up 10% or so year-over-year.

Overall, strength in our Component and Sensor business not only reflected improved macroeconomic conditions worldwide, but also the impact of our increased new product introductions and higher market penetration.

Our EMS segment sales were 49% of total CTS sales in the third quarter of 2010 versus 56% in the same quarter last year. EMS sales have been weak in the last several quarters due to timing of new programs and a less than robust new business pipeline. However, recent green product wins in the area of charging stations for electric vehicles as well as biometric personal identity systems will allow our fourth quarter EMS sales to grow by approximately 10% sequentially.

In addition, recent design engineering wins in medical ultrasound and secure surveillance give us confidence that our enhanced design engineering strategy is working and will bring our annual EMS sales growth rate back to approximately 7% to 10% in 2011 and onwards.

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