Q1 2022 CTS Corp Earnings Call
Operating cash flow was 19 million compared to $20 million in the first quarter of last year.
During the quarter, we acquired Tos temperature sensors at temperature sensing company based in Lublin, Poland, We expect the <unk> acquisition to be accretive in 2022.
In addition, we recently signed an agreement to acquire FERC Tas of ceramics and developer of high performance.
Electric ceramic components for medical industrial and defense applications based in Denmark.
Completion of the acquisition is subject to obtaining regulatory approvals and the satisfaction of other customary closing conditions.
Based on ordinary approval time timetables and the nature of the closing conditions.
We estimated closing to occur in the next few months.
The FERC firm acquisition is expected to be accretive in 2023, Ashish will take us through the safe Harbor statement Ashish.
I'd 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 the.
Press release issued today and more information can be found in the company's SEC filings to.
To the extent that today's discussion refers to any non-GAAP measures under regulation G.
The required explanations and reconciliations are available in the investors section of the Cts website.
I'll now turn the discussion back over to our CEO Kieran Osullivan.
Thank you Ashish, we had another strong quarter with sales, increasing 15% to $148 million versus the first quarter of 2021.
Demand remained solid across all end markets, especially in medical industrial and defense. Our global team continues to execute well and is dedicated to operational excellence and achieving our long term goals.
Our investments in business development in front end sales are enabling us to expand our customer base and to cross sell our products.
Adjusted gross margin for the first quarter was 37% up 400 basis points from 33% in the prior year, which was supported by the momentum we're gaining from diversifying our business.
Operationally, we're seeing savings materialize from our restructuring activities.
<unk> will provide more color on this in a moment.
As we move forward, we will continue to evaluate and refine our footprint to optimize our ability to serve our customers.
And to deliver improved operating leverage.
We are also gaining traction with our Cts operating system with over 50 continuous improvement projects driving incremental value.
Adjusted EBITDA margin was 23, 5% was up 350 basis points from 20% in the first quarter of 2021.
Inflationary pressures and supply challenges negatively impacted our earnings in the first quarter.
While we continue to be impacted by rising commodity prices as well as increased freight costs, we have been working alongside our customers to offset our share these cost increases.
We remain confident in our ability to navigate this dynamic environment.
With our diversified portfolio, even though we expect margin headwind pressure to persist.
New business awards in the quarter totaled $117 million below our expectation due to the timing of certain awards from transportation customers.
We remain confident in our robust pipeline of opportunities and see good momentum for awards in the coming quarters.
Further by continuing to focus on growth and diversification.
We added four new customers in the quarter.
Two new industrial customers for temperature sensing, a new medical customer for ultrasound imaging and a defense customer for an antitank missile applications.
We remain well positioned in multiple end markets that offer attractive growth prospects.
In the industrial market, we continue to see very good traction.
In inkjet printing products that are used for industrial applications, such as printing on textile ceramic tiles and packaging materials.
<unk> materials currently an area that is providing particularly strong growth momentum for inkjet printing products.
Robust demand for temperature products across pool, and spa refrigeration and heat pumps resulted in several new business Awards.
And we had multiple awards in various applications for electromagnetic ceramic products.
RF filters timing products micro actuators, and transducers with application to measure flow and temperature for predictive maintenance.
In the quarter, we shipped samples to a new customer for our flow meter transducer application.
We are expanding our applications and cold and hot temperature sensing and we added new customers and new applications from rapid Cook ovens to commercial dishwashers.
By combining our traditional direct sales model with Tia was distribution strength, we anticipate sales growth synergies in the industrial end market.
We experienced double digit growth in distribution sales, where we see inventory levels up 20% from prior year period and getting to more normal levels.
In medical we are seeing increasing momentum and long term growth opportunities our targeted business development efforts continue to deliver resulting in an expanding customer base.
Some examples include a qualification order with a new customer for handheld medical ultrasound and a precision insulin pump dispensing application in clinical trials with another new customer.
We see strong mid to long term growth driven by traditional ultrasound technologies with wins across all regions in the first quarter.
We also secured a new award for a drug delivery application and an award for a hearing aid product.
Further we received multiple temperature sensing awards with existing customers ranging from incubators to critical freezer monitoring disposable applications and data loggers.
Once we are able to complete the FERC <unk> acquisition, we expect further growth momentum from its customer base for medical is the largest end market as well as from our expanded technical capabilities and European footprint.
In aerospace and defense.
We are all reading about increasing defense budgets across the globe due to the current geopolitical environment and we are well positioned to address the increased demand anticipated from this end market over the next several years.
We continue to see growth in undersea solar products in North America.
Additionally, we received a prototype order for a mine avoidance stoner product and our quoting new unmanned underwater automaton autonomous applications.
We had an RF filter program award for GPS Andy Janet application.
And temperature wins in aerospace.
In Europe , we are seeing initial growth traction in sooner and we successfully developed initial samples for our microwave bandpass filter for military applications with a new customer.
As we have discussed we continue to advance our M&A strategy, which is focused on expanding our geographic reach adding momentum to our end market profile and increasing the richness of our customer base.
As already mentioned during the quarter, we acquired <unk> temperature sensors the.
The addition of the <unk> acquisition strengthens our fast growing temperature sensing platform in industrial applications.
Also expanding our reach into the European market.
We're excited to welcome the <unk> team to Cts on.
On a challenging note we are all deeply impacted by the destruction, we see perpetrated on the people of Ukraine.
<unk> recent acquisition sorry.
On my recent visit to the Tijuana facility in Lublin, Poland, I was able to connect with one of our team members there.
Our teammate as living.
This tragedy daily as our parents reside in Ukraine.
Our Cts cares initiative, we were able to the need funds to provide medical and other support directly to our hometown.
Earlier this month, we announced our agreement to acquire FERC Perm piece of ceramics.
Subject to obtaining regulatory approvals and the satisfaction of other customary closing conditions.
<unk> specializes in the design and manufacturer of high performance <unk>.
As a ceramic components for use in complex and demanding medical industrial aerospace and defense applications.
The company is recognized for its high quality and innovative ph of ceramic technology.
And Kevin chart, Denmark for Perm has established a strong customer base across Europe , and North America and its presence in medical therapeutics is complementary to our existing focus on medical imaging and diagnostics.
We look forward to the FERC term team joining Cts and are excited about the growth prospects.
As we have discussed before our long term strategic plan is focused on diversifying our end market profile.
We plan to achieve this by expanding our range of technologies products customers and geographic reach to accelerate the revenue growth of our non transportation business, while also strategically growing our transportation business.
We believe this strategy is bearing fruit.
As we are seeing the diversification of our business enhancing our quality of earnings despite the challenging macroeconomic factors we are facing.
The <unk> acquisition and the anticipated FERC Perm transaction will further advance these efforts by supporting the growth of our non transportation revenue with the potential of expanding this portion of the business.
Closer to 50% of total revenues in the year ahead.
We remain focused on continuing to strengthen our M&A pipeline.
In an environment, where one might anticipate more reasonable valuations in the years ahead, given higher interest rates and the potential for a recession.
Our track record of thoughtfully, expanding ceramic technology to support diversification, while at the same time, leveraging our ceramic expertise to build and scale a temperature sensing platform demonstrate the execution of our strategic plan.
Adding technology that will enhance our <unk> offering also remains a priority.
We continue to focus on acquisitions in the range of up to $50 million a year in sales, but we remain open to the right larger opportunities that will advance our long term strategy.
Deploying capital in line with our allocation framework is important in.
In the quarter, we repurchased approximately $4 million of Cts stock.
In transportation, we continue to outperform the market.
We are seeing robust demand in commercial vehicles, which we expect to extend into 2023.
On the light vehicle side, while the sales softness remains given the supply side challenges across the industry, our positioning from a product and geographic standpoint has propelled us forward.
We continue to focus on strengthening our light vehicle sensor portfolio, especially around EV platforms.
<unk> electric vehicle revenue ranges in the high single digit percentage of our total light vehicle revenue.
Our goal is to have greater than 25% of our light vehicle revenue coming from easy platforms by 2025.
This goal is supported by our ability to transfer our legacy accelerator module and sensor products to electric and hybrid electric vehicle applications.
We are also developing new products to.
To integrate into existing and future EV architectures, such as our E brake product, which has been prototype and represents a tremendous future growth opportunity similar in magnitude to the existing accelerator module market.
In addition, we are getting traction with our current sensing products and we're working on potential position sensing products for EV motor applications.
Our value proposition transportation is built on packaging position sensing for safety critical in harsh environments.
For chassis right height sensing during the first quarter, we obtained awards from North American and Japanese Oems.
For passive safety sensors, we had wins with several tier one customers.
On current sensing product, which is in development for one of our customers. It is also gaining traction as we secured another current sensing award earlier this month.
In the accelerator module product lines, we had wins with customers in North America, Europe and Asia.
For commercial vehicle applications, we increased business with an existing customer.
As you can see we are also winning new EV platform business with our legacy portfolio. So far we have won new business awards for 2006, EV platforms five of which we secured this past quarter.
Looking ahead the supply chain shortages are expected to reduce vehicle builds by two to 3 million units this year.
For the U S light vehicle transportation market, we expect approximately a 13, 5% to 14 million unit range. This year.
On hand days of supply are not closer to 26 days.
European production has been revised down by almost 10% since the start of the Ukraine War and is now forecasted in the 15 to $15 5 million unit range. This year.
The Chinese market is expected to be flat this year in the 24% to 25 million unit range with COVID-19 related impacts, creating further uncertainties.
Commercial vehicle demand remains solid and is likely to remain robust throughout 2022.
As I mentioned earlier, we continue to see solid growth in industrial and defense markets as well as improved improvements in the medical market and expect further benefit from the integration of our newest acquisitions.
Overall demand remains robust across all end markets and we feel confident in the long term prospects for the business.
While the supply chain showed some improvement this past quarter recent events in Ukraine, as well as the Covid lockdowns in China impacted the industry.
More recently, we have experienced challenges at the Mexico border impacting supply.
Our teams are creatively navigating the current environment to ensure supply for our customers and Fortunately, we were able to maintain full operations this past quarter, while ensuring a safe work environment for our employees during the Lockdowns.
All our plans remain fully operational.
These supply disruptions when combined with significant inflation and the end of government stimulus have the potential to reduce demand.
We are not seeing a reduction play out at this point other than the returned to more normal inventory levels in distribution, which represents less than 10% of our sales in fact, some industrial and automotive customers have confirmed demand through 2022 and into 2023.
As always we are monitoring the macro environment very closely.
I'm proud to say in this very challenging supply chain backdrop, our teams are working and adapting with speed and agility to support our customers.
In terms of guidance for the full year 2022, we are updating our guidance to include the <unk> acquisition.
Subject to my earlier comments on timing conditions, we estimate the closing of the FERC from acquisition to occur in the next few months.
And therefore are not reflecting it in our current guidance.
Our updated guidance is for sales to be in the range of $550 million to $580 million up from $525 million to $550 million.
Adjusted earnings per share are now expected to be in the range.
Of $2 20 to $2 45, compared to the previous range of $2 to $2 25.
Now I'll turn it over to Ashish to walk us through our first quarter financial results.
Thank you Karen.
First quarter sales were $147 7 million.
Up 15% compared to the first quarter of 2021.
And up 11% sequentially from the fourth quarter of 2021 sales to non transportation end markets increased 30% year over year as the industrial and medical end markets exhibited double digit growth excluding sales from our recent acquisition to your temperature sensors sales to non transportation.
<unk> end markets were up 28%.
Sales to transportation end markets.
<unk> increased 4% compared to the first quarter of 2021, we had strong momentum in our <unk>.
Smart actuated products, which primarily go into commercial vehicle application exclude.
Excluding sales of smart actuators.
Through the transportation end market were up 40 basis points.
Sales through the transportation end market increased 6% sequentially.
The sequential increase was driven by continued robustness in orders from our customers and some improvement in supply environment.
Our adjusted gross margin was 37, 2% in the first quarter up 400 basis points compared to the first quarter of 2021, and up 50 basis points compared to the fourth quarter of 2021 strong execution by our global team during the quarter helped mitigate margin pressure.
From inflationary factors and supply challenges.
We continue to actively work with our customers to share the burden of cost inflation.
During the quarter, we also had approximately $1 5 million.
Or four tenths of EPS of unusual items, which had a favorable impact on gross margin.
The restructuring plan announced in 2020, we have achieved 19 cents of EPS improvement so far as previously communicated.
We are on target to achieve the lower end of the 22 to 26 of savings by the end of 2022. Some projects will continue into 2023, as we balanced growth and project completion.
In the first quarter, we implemented SAP.
In the Philippines dislocation and team came with the acquisition of sensor scientific in December 2020.
We continue working on developing enhanced data capabilities to optimize operation and increase efficiency as part of our focus 2025 initiative. We are working on implementing the Cts operating system focused on enhancing our continuous improvement capabilities.
As Kieran mentioned.
We are getting good traction with numerous continuous improvement projects underway across the company.
The tax rate for the first quarter was 21% and we expect the full year 2022 tax rate to be in the range of 21% to 23% excluding discrete items.
In the first quarter 2022, we reported earnings of 63 per diluted share adjusted earnings for the first quarter was <unk> 67 per diluted share compared to 46 per diluted share for the same period last year.
49 <unk>.
Last quarter.
Moving on to the balance sheet, we generated $19 3 million in operating cash flow for the first quarter of 2022.
Incentive payout impacted the first quarter operating cash flow unfavorably compared to the first quarter of 2021.
Our cash position remains strong with a balance of $126 million as of March 31, 2022 up from 103 million on March 31 2021.
Long term debt balance was $50 million.
Our debt to capitalization ratio was at nine 4% at the end of the first quarter compared to 10, 3% at the end of the prior year period.
Working capital efficiency remains a key focus area and we ended the quarter with 14, 8% in controllable working capital.
We repurchased 116000 shares of Cts stock during the first quarter and.
And in total we returned approximately $5 million to shareholders through dividends and buybacks.
Continued strong cash generation and a healthy balance sheet.
Enable our focus on organic growth and strategic acquisitions, we expect to pay approximately $77 million for the fairborn acquisition roughly half using cash balances we hold outside the U S.
And the other half through borrowings from our existing credit facility.
This concludes our prepared comments, we would like to open the line for questions at this time.
Thank you.
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We are of course for amendment to allow questions keeping your participant.
Our first question comes from the line of Justin Long from Stephens, Inc. Justin. Please go ahead.
Thanks, Good morning, and congrats on the quarter.
Thanks, Justin Thank you Justin.
I guess to start on that 2022 EPS guidance revision. If you look at what it implies for the rest of the year, it's around 55.
And EPS per quarter versus the 67 since you just posted in the first quarter.
So can you help us think through what you're expecting to drive sequential pressure and how we should think about the quarterly cadence of earnings for the rest of the year because when I just take a step back and think about the demand commentary it all sounds pretty strong.
Yes, Justin I'll make a few comments and I'll hand, it over to Ashish because he talked about some one time items as well I think Justin we talked back in January on the last earnings call. We said we are cautious about softness in the second half of the year, we still have that caution and it's not as you said because of demand demand is there.
But we've got these lockdowns that are going on in China at the moment.
The port situation over there is not very good we've got the situation in Europe with the Ukraine.
Its got some impact for the transportation side of the business going forward.
So you'll see this and you look at the demand environment and inflation. There is a lot of uncertainty out there and we will do everything we can to execute and do better than what we've guided there, but its theres things to be managed here and it's not that easy Ashish yes.
Justin.
In the first quarter, we had some unusual items related to.
Sales of high margin products and.
Some recovery of bad debt, which helped us.
That was roughly one 5 million.
So that's obviously something that gives us a little bit of a competitive headwind.
And then going back to the comments Kevin mentioned, we continue to see pressure from.
Inflationary factors on raw material.
Right.
That combined with the logistics uncertainty that we're seeing coming out of the shutdowns lockdowns in China.
And the demand uncertainty all of those factors are baked into how we are looking at the.
Outlook for the rest of the.
Okay got it and maybe just to circle back on the quarterly cadence part of the question. So it sounds like this caution is mainly around the back half of the year. So is the right way to think about the second quarter that it should look pretty similar to the first.
Quarter absent the unusual items you called out.
I would be a little cautious just when I look at the situation in China.
We could see some impact from that more in the short term, but generally your comment would be.
Reasonable to say that we are more concerned about the back half, although we do see some pressure in the second quarter from the China Covid.
Covid related lockdowns.
And just to add onto that just from a demand perspective demand is there.
<unk>.
Okay helpful and I guess the last one for me is on the diversification efforts I know Thats a key.
Area of focus and we're seeing some nice progress.
To get closer to that 50, 50 split which it sounds like that's the target for this year you started the year in the first quarter with non transport being in that kind of 46% to 47% range. So it seems a pretty big pick up I know you've got the acquisitions Youre layering in.
Totally get that but could you maybe talk about what the top line guidance implies for revenue growth and non transportation and what it implies for growth in transportation or are you still expecting transportation revenue to grow meaningfully this year.
Yes, I think what we're going to see on transportation. Justin is mid single digits, just roughly from where we can see everything at the moment and when we go to our non transportation market, we've been seeing double digit demand growth. So that's how we feel about it.
Very helpful. I appreciate it.
Yes, Thank you Justin the movement closer to the 50%.
Split will be mostly from the acquisitions, helping us get there faster.
Okay got it thanks.
Sure.
Our next question comes from the non with many trailers from Cowen. Please go ahead.
Oh this is ronnie.
Okay.
Comparable profit ratio.
And our partnership with them.
Thank you Lenny.
Okay at Costco.
Thanks for Carnival.
<unk>.
Thanks, Paul.
I'll go back to more margin profiles or pull a question for.
<unk>.
We will try to model the performance I know you had mentioned.
Yeah.
For next year, but other local smartphone panels.
Yes go.
Go ahead.
So first of all on the <unk> side, we would see on an annual basis, the revenue being in the $12 million to $15 million range for that business and we really like it really extends our our path into Europe .
It gives us extra strength in industrial markets.
And.
When it comes to the distribution side, where more of that has been more of a direct OEM and this brings distribution strength as well. So there's a lot of things here to like about this acquisition and we're off to a very good start with the team integration is moving along very nicely.
So lenny.
And just to clarify.
We generally don't want to talk about gross margins in all for competitive reasons.
But we would be looking at as Kieran mentioned roughly $15 million a year in sales. So for 2022 will be in the $12 million to $13 million range.
And if you look at our earnings call slides, we are talking about expecting <unk> <unk> of accretion in 2022 so.
It's a good acquisition.
Had a good start in the month of March and.
And the federal farm acquisition.
Once we close.
Based on approval from the regulators.
We'll talk a little bit more about the financials of that business, but in terms of size, it's fairly similar too.
The <unk> acquisition, we did back in.
2019 for LTE in the low to mid 20 million type of sales range and let me just to add onto that what we like about the the.
The FERC <unk> acquisition is really complementary to our business and when you look at it as strong and medical.
Hence applications and some others in industrial.
We're strong in and.
Diagnostic and medical imaging, they're strong and medical therapeutics, whether it's at two different types of products with a nice customer mix that should be very complimentary for us after the acquisition closes.
Okay.
Hello.
Question on auto.
Yeah.
<unk>.
Sure.
Given the supply boats.
<unk> other than <unk>.
Also worth of available homes over the past quarter.
Alright.
Yes.
Definitely.
Yes, I think.
When you look at Youll see the comments, we made on each of the regions. So.
We've trimmed a little bit in North America. There is I think I mentioned them.
Close to a 10% correction in Europe , and China flat and that's how we see it and that's the view we have at the moment.
Obviously, we're watching that very carefully the China situation is pretty important what's going on in Europe . We've had a few customers in Europe that ship into the Russian market and obviously, you've got other countries they ship into as well and when you look at Europe for us in the transportation business, our geographic sales, it's the smallest portions but maybe.
13% or so but the.
The revised numbers is probably the best guide that we can give you at the moment.
And Larry the way, we build our range of guidance is.
If there's a little bit more softness that'll be pushing us towards the lower end of our guidance range and if it's a bit stronger than what we are looking at and Thats what takes us to the higher end.
Got it okay.
Just one last question from me for now.
One topic also Michael.
Alright.
Additional color in Colorado.
Bye.
<unk>.
Uh huh.
Baird.
<unk>.
Oh.
Okay.
<unk>.
Our supply chain also concur local lockdowns around the world. Thank you.
Lenny, we would've said coming into the year debt.
Were expecting good demand in all markets, we were concerned about the second half of the year and probably at that point in time back in January we would have said a bit more bullish on transportation a bit more concerned on inventory levels in the second half into non transportation side of it.
As we sit here today demand is still robust and so I said I think earlier double digit growth, we still see that but we're still keeping a very close watch and as I mentioned and distribution, while it's up double digit the inventory levels are back to more normal levels.
Less than 10% of our sales so strong demand still but we're still cautiously watching that macroeconomic environment.
As a reminder to ask any further questions. Please press star followed by the number one on your telephone keypad.
Our next question comes from the line of <unk> <unk> with Gabelli funds. Please go ahead.
Good morning, Ron Msas, and then a strong Q1 revenue congratulations.
Thank you Hendi. Thank you Randy.
And then would.
Would you be able to share how much revenue run rate and then what operating margin looks like for the federal federal from BSO ceramics business.
Yes.
Hendi.
Getting a little bit more detail into the financials I would want to wait till we have actually closed that acquisition, but as I mentioned earlier.
The revenue expectation would be in the low to mid $20 million type of range.
Yes.
And then and then in the MLP.
Typical acquisitions like federal firm or AOR.
How much do you usually give us Alex TTS.
Time in order to reach meaningful revenue synergies.
Typically.
Hendi, we have a pretty standard playbook of getting together I would tell you in the case of the <unk> acquisition. The team is already working on it and but we probably are prudent enough to say hey, it's going to take six to 12 months to get reasonable fraction and some of that so but I would tell you. We don't lose time in getting our teams together to look at the opportunities and make sure. We're aligned that we've got good plans in place.
Okay.
Ashish I would like to understand better.
Upward revisions on the revenue guidance.
You increased revenue by 25 million and 50 million would come from <unk>.
Acquisitions.
So the address the pan millions is it reasonable to assume that.
Given the current outlook.
Automotive market like this.
The incremental revenue guidance comes from industrial healthcare and aerospace and defense.
Hendi.
The revenue expectation from Tivo for the rest of the year will be closer to $10 million to $11 million.
We had them for March where we bought about.
A little over $1 million so.
The rest of the increase.
<unk> is based on the.
Performance in the first quarter, we are being cautious for the rest of the year to make sure that we continue seeing the evolution of.
The supply chain challenges that we continue experiencing and it's impacting.
Automotive, it's also impacting industrial.
The medical market as well.
The impact and the uncertainty is actually theyre in pretty much all the end markets.
We haven't seen any major impact of the supply chain challenges from China yet.
But that's something we keep watching very carefully to see how it's impacting our operations.
And then one last question for me.
Kieran.
Can you share some like what do you see the customer behaviors that customers may want to build more inventory of your components for like stronger supply chain management.
Practice, and then safety stocks, but on the other hand, you may see us like some customers push out orders because.
There are constraints on other components as well can you share some insights on customer behaviors.
Yes, I would say on the transportation side, it's a mix.
Demand is there in some cases, you get schedule changes on the light vehicle side and the commercial vehicle side, it's as robust as I've seen.
In quite some time and expect it to stay robust.
It's getting parts, it's all about just getting parts and the non transportation side, we're seeing good demand.
We've been very judicious about trying to find out if there is a buildup in inventory.
We haven't seen that in any of our end markets as except for distribution, where we've seen a little bit of an increase from last year getting back to more normal levels, but.
Thats.
The view at the moment.
Okay.
Okay. Thank you Kieran Thank you Andreas.
Thanks and extended.
We carry have Nathan asked the questions participants I'll now hand, you back to Mr. Kieran Osullivan for closing remarks.
Thanks, Lauren and thank you again for joining us today.
To thank our global teams for their dedicated efforts in driving strong execution and operational efficiency with our business.
At Cts, our top priority is to advance our business, while simultaneously working to improve and enhance the communities in which we operate.
I am confident that our diversification strategy bolstered by recent M&A activities and the breadth of our geographic footprint will position us for profitable growth, while mitigating supply chain and inflationary challenges.
<unk> industries globally in conclusion, Cts is well positioned for the future. We have a strong team aligned around our common goals that continues to advance the business for long term value creation for our shareholders. Thank you. This concludes our call.
This concludes today's call. Thank you for joining you may now disconnect your line.