Q3 2022 CTS Corp Earnings Call
Ceramic technologies.
Are a key competitive advantage, enabling us to develop new material formulations, such as textured and lead free in addition, with our global foundry footprint, we are well positioned to support our customers.
With the completion of the FERC Quorum acquisition, we enhanced our medical product portfolio offerings, as well as industrial and defense capabilities.
In industrial in the industrial market demand for micro actuators used in industrial printing applications were down marginally from prior quarters.
Across temperature sensing hot and cold applications, we continue to see good momentum with awards for H back in demand for industrial and appliances.
We saw a slowdown in the pool and spa area for temperature sensing products down from the pandemic record peak.
We added two new customers in industrial applications, one for nano positioning and another for an EMC application in rail transportation.
While distribution sales were up year over year sales were down low single digits sequentially.
We expected after the higher demand periods, we have seen for several successive quarters.
Across medical we see continued momentum and long term growth opportunities building, our targeted business development efforts continue to deliver resulting in an expanding customer base.
We were awarded two new pre development ultrasound contracts.
One for application in drug delivery for liver Appalachian and another for minimally invasive surgery.
We continue to see solid growth across multiple customers for our traditional medical ultrasound products.
More recently, we displaced a competitor true advances with our single Crystal ultrasound capabilities.
The sample qualification for handheld medical ultrasound that we discussed in the last quarter is proceeding as planned with our customer expecting completion of the FDA approval process in the next six months.
The precision insulin pump application previously discussed gained customer approval and we expect the first shipments to begin early in 2023.
Further we received multiple temperature sensing awards from existing customers ranging from incubator to critical freezer monitoring and disposable applications.
We also had a new temperature sensing win for application in heart and liver transplant equipment support.
In aerospace and defense, we remain confident in the long term prospects for this market driven by the geopolitical environment.
And our enhanced capabilities with new material formulations.
We continue to see solid growth in sooner and guided torpedo applications for several contracts were renewed.
And we are now engaged more cohesively and the European defense market with the capabilities of the FERC FERC team.
For unmanned underwater vehicles, we received a new customer contract for our single Crystal product and expect to build on this win to advance our growth momentum in new defense applications.
We were awarded a preproduction contract for a multi layer munitions application with a tier one defense contractor and had a design win with a new customer for an RF filter product with application in tactical radar or.
Our temperature portfolio continues to support our growth with repeat orders across several customers and a new order for low orbit satellite application.
Finally, we had wins with two tier ones one for our high precision frequency products and the second for a thermal application.
We continue to advance our M&A strategy, which is focused on expanding our geographic reach diversification of our end market profile and increasing the broadness of our products and customer base.
This is becoming more visible with the recent FERC <unk> acquisition, where we now have the capability to develop and deliver both diagnostic and therapeutic products.
We continue to focus on complementary materials.
Transducer acquisition opportunities to increase our non transportation growth while at the same time seeking to expand the portfolio of electrification products for broader mobility applications.
Strengthening our M&A pipeline of opportunities to meet our overall growth target remains a priority.
With a strong balance sheet and cash position, we have the capability to make a meaningful impact on our inorganic growth initiatives.
As already mentioned our goal remains to accelerate inorganic revenue growth by deploying capital in a disciplined way to expand our range of technologies products customers and geographic reach we believe this strategy continues to bear fruit as we are seeing the diversification of our business progressing with <unk>.
Third quarter sales at approximately 48% of our total revenue in non transportation markets and the overall enhancement of the quality of earnings.
Our acquisitions of <unk> <unk>.
Demonstrating the execution of our strategic plan and track record of thoughtfully expanding ceramic technology to support diversification.
At the same time, leveraging our ceramic expertise to build and scale our temperature sensing platform.
We continue to focus on acquisition targets 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 as our team continues to develop our pipeline of prospects.
In transportation, we continued to perform in an environment, where Oems and tier one suppliers are navigating challenging supply issues. We continue to see robust demand in commercial vehicles and while headwinds are already visible with a slowdown in freight.
<unk> fleet still require replacement and our increasing backlogs.
We expect this replacement demand to extend into 2023.
We are seeing some challenging supply constraints on semiconductor parts that may temporarily impact our revenues in the fourth quarter and into the first quarter of 2023.
On the light vehicle front volume growth remains a challenge given the supply side issues across the industry.
We also remain cautious in light vehicle demand going forward due more to weakness in consumer sentiment and supply disruptions.
And view demand trending flat going into the end of this year and into next year.
However longer term, we see the need for a growth cycle, given the recession level industry volumes of recent years.
We continue to focus on strengthening our light vehicle sensor portfolio, especially around EV platforms today.
Today electric vehicle revenue ranges approximately in the high single digits as a percentage of our total light vehicle revenue.
Our goal is to have greater than 25% of our light vehicle revenue coming from EP platforms by 2025.
Key drivers are.
Our ability to attain this goal will be our ability to transfer our legacy accelerated module and sensor products to electric and hybrid vehicle applications and new products being added to the portfolio.
We were selected by a north American OEM and funded for pre development of any break module. In addition, our new current sensing product will begin shipment in the fourth quarter of 2023 to support our European premium platform.
More recently, we began shipments of chassis sensing products for an EV platform in North America.
Overall, we're making solid progress towards our goal to achieve greater than 25% of our light vehicle sales from EV platforms.
Our value proposition that transportation has been built on our expertise in designing and packaging position sensing for safety critical in harsh environments for our teams that develop deep industry experience.
In the quarter, we had six EV platform wins across existing customers covering several products in our portfolio.
For chassis right height sensing, we had wins with a north American OEM and added a new <unk> customer in Asia. We also had accelerated module wins for rapidly for EV application with three existing customers for passive safety sensors, We had an award with a north American tier one.
Finally outside EV for commercial vehicle application, we had strong wins for exist for existing and new actuator products.
Looking ahead, we currently see good demand in medical and defense markets with some softness in industrial and distribution, where we see some increased inventory levels. We expect to see continued benefit from our recent acquisitions.
Momentum is solid with the FERC <unk> acquisition, and the excitement and momentum in our temperature platform continues to build.
Mobility demand currently remains solid.
In the light vehicle market the lots of vehicle bills. So far this year have been driven primarily by COVID-19, lockdowns with an impact of over 1 million reduced units.
And the semiconductor shortage impacting production volumes negatively by three to 4 million units this year.
We remain cautious in order demand going forward, given recent customer sentiment and higher interest rates, we expect incremental volume gains in the years ahead due to the recent recessionary volumes in transportation markets.
We expect U S light vehicle production to be in the 13 five to 14 million unit range. This year.
European production has been revised down and is now forecasted in the 15 to 16 million unit range.
The Chinese market is expected to be flat this year and the 24, 5% to 25 million unit range.
Marshall vehicle demand as previously mentioned remains robust.
As I mentioned earlier, we expect some challenges in the commercial vehicle market due to a temporary issue with a semiconductor supplier, which is likely to unfavorably impact our revenues in the next two quarters.
Overall, we expect some softness in the short term driven by macroeconomic factors such as inflation high interest rates and the geopolitical challenges.
Despite the near term economic headwinds, we feel confident in the long term prospects for the business driven by our strategic focus on diversification electrification and our strong balance sheet. Our teams are creatively navigating the current environment to ensure supply for our customers.
While at the same time, maintaining a strong focus on strengthening our go to market capabilities and adding new customers globally.
We were able to maintain operations this past quarter, while ensuring a safe working environment for our employees.
We experienced continued lockdowns in the Asian market.
As always we are monitoring the macro environment very closely and remain concerned by recent developments.
I'm pleased to say in this very challenging environment. Our teams are working and adapting with speed and agility to support our customers demonstrating the strength of our underlying culture leadership and core values.
In terms of the financial outlook for the full year 2022, our guidance is now for sales to be in the range of 585 million to $595 million adjusted earnings per share are expected to be in the range of $2 40 to $2 55 now.
Now I'll turn it over to Ashish, who will walk us through our financial results in more detail Ashish. Thank you Kieran third quarter sales were $152 million.
Up 24% compared to the third quarter of 2021 and up 5% sequentially from the second quarter of 2022.
Foreign currency exchange rates impacted revenue unfavorably by approximately $4 1 million in the quarter as the euro and Chinese renminbi depreciated versus the U S. Dollar most of this impact was related to sales in the transportation market sales.
Sales to non transportation end markets increased 22, 5% year over year.
Supported by another quarter of double digit growth in the industrial and medical end markets. Our two acquisitions added $8 6 million in sales during the quarter sales to transportation customers increased 25, 7% compared to the third quarter of 2021.
And increased four 9% sequentially, driven by the robustness and demand, which Kevin mentioned.
Our adjusted gross margin was 36, 6% in the third quarter down 70 basis points compared to the third quarter of 2021, and up 50 basis points compared to the second quarter of 2022 ongoing commodity inflation and supply chain headwinds pressured margins during the quarter.
We're also seeing increases in energy and labor costs, we have been able to partially mitigate these impacts through pricing and operational improvements across our organization due to the significant movement in exchange rates, we saw an unfavorable impact of slightly more than $1 million on gross margin.
We realized 19 of savings to date from our 2020 restructuring program as previously communicated we still expect to achieve the lower end of the 22 to 26 cents of savings by 2023, as we balance growth with the completion of some of the restructuring projects.
We reported earnings of 37 per diluted share in the third quarter adjusted earnings for the third quarter was <unk> 62 per diluted share compared to 46 per diluted share at the same time last year and 62 per diluted share in the prior quarter.
Moving on to cash generation and the balance sheet.
We generated 64 million in operating cash flow for the third quarter of 2022 included in this number is approximately $34 million that we received during the quarter.
As part of the surplus cash from termination of our U S pension plan approximately $7 million of this cash gets used for excise tax payments in the fourth quarter.
Controllable working capital as a percentage of sales was 15, 6%.
At the end of the third quarter of 2022.
We are carefully watching our working capital, especially inventory levels across different parts of our business as a key area to improve efficiency strong cash generation and maintaining a healthy balance sheet is an important priority for us to support the continued focus on organic growth and strategic acquisitions.
<unk>.
During the quarter, we repurchased approximately 52000 shares of Cts stock totaling $1 8 million in total this year, we have returned over $17 million to shareholders through dividends and buybacks.
We ended the third quarter.
With a cash balance of $148 million.
And our long term debt balance was $85 million.
Our debt to capitalization ratio was at 14, 8% at the end of the third quarter compared to nine 9% at the end of Q3 of 2021. This concludes our prepared comments, we would like to open the line for questions at this time.
Thank you if you would like to ask a question. Please press star one on your telephone keypad. If you would like to withdraw your question. Please press star two.
First question comes from Joshua <unk> from Cowen. Please go ahead.
Hey, guys. Thanks for taking my question and congrats on the solid results.
The guidance implies a sequential decline in the fourth quarter in total we recognize the prudent conservatism in much of your commentary.
But anything you can share on expectations by end market.
In particular, you know auto re accelerated in the third quarter. So I'm wondering is that do you feel that is related directly to end demand or is it more.
GM called out completing some vehicles that had been partially completed unlocks last quarter or is it sort of that dynamic or do you feel like youre shipping to end demand more comfortably. Thank you.
Hey, Joshua and good morning, and thanks for your question.
A few things obviously, we had a strong third quarter, but in my prepared comments I mentioned that we were having challenges with a semiconductor supplier impacting our commercial vehicle volumes.
And thats, something thats going to impact us temporarily.
In the fourth quarter and the first quarter of next year, and then should be corrected so thats.
Mid single digits and that value, we would think and then we're just watching the softness in the industrial market, we've seen some strength and some softness in trying to balance that out so.
Other end markets are seem to be doing well.
Thank you for that.
I know you mentioned, a bunch of inflationary cost pressures, but your margins were still hung in pretty nicely.
Any changes to I guess your ability to pass on cost cost.
A rising input cost to customers and being really tone changes at your customers that we should be aware of in light of whats objectively.
Weakening macro data points and softer industrial demand, thanks, and congrats on the results again.
Josh.
Pricing environment, we've talked about in the past.
It's always a tough discussion.
The first round is tough the second round is tougher by far.
That's what we are seeing we continue having those discussions.
We are able to get some pricing, obviously not enough to offset all of our cost increases.
But we are finding a reasonable balance of sharing that burden between us and our customers and maintaining long term relationships.
No significant change to that environment.
But as you pointed out.
As the macroeconomic situation gets more challenging it is possible that we might see.
Stock facing some of those pressures than we are keeping a very close eye on that our goal will be to also obtain material cost savings to help balance that equation. So I would look at those.
Mutually going together in terms of price pressures and material cost improvements.
And Josh just one point to add we've got a long way to go on the material deflation from where we were two years ago. So it's still.
Still quite a bit of pressure we're carrying.
Alright. Thank you and then if I could squeeze one more in just towards the end of the prepared remarks, you mentioned, you're sort of taking a close look at inventory levels have been roughly stable the last several quarters.
Is roughly in the 50.
<unk> hundred 60 <unk>.
Days range sort of where you're comfortable on where you'll be managing the business.
The next several quarters in this environment. Thank you.
Yes, I mean, the inventory levels have gone up.
And we are managing that our biggest concern is that if there is a slower.
Demand environment, we don't want to be sitting on a lot of excess inventory and we are continuing to manage that through our throughout our supply chain.
Also keeping track of inventory levels at our customers and that our suppliers. So.
Not not a huge area of concern, we just don't want to be.
Be sitting on a lot of excess inventory if you go into a slower environment.
Got it thanks, Ashish Thanks Garrett.
Yeah.
Thank you.
Our next question comes from John France Rep from Sidoti. Please go ahead.
Good morning, guys. Thanks for taking my questions.
Hi, Karen I wanted to you said at the beginning of your.
Prepared remarks about energy costs in Europe .
Could you talk a little bit about how that's maybe kind of be embedded into your guidance right now for the fourth quarter versus how you were thinking about it a quarter ago, and maybe how we should be thinking about it.
Into the first quarter also.
John I would say.
The materiality of it currently is on the lower end and really it's more of an issue going into next year is where we see the bigger challenge on that with our operations in Czech Republic.
Denmark, and some other areas as well.
But more of an issue going into next year than this year, some some impact but not the more significant issues next year.
Okay and.
And.
You talk a little bit about the <unk>.
Go to hit 25% of sales in EV market.
Curious as you're starting to see this transition materialize and become a greater part of your revenue profile are you seeing increased dollar content on EV vehicles versus.
Ice or are you seeing better margin profile or neither.
I would say John is we.
With <unk>, we see an opportunity to increase the content and I mentioned in the prepared remarks that we had been funded for a pre development.
Of an EBIT products. So that's obviously another production win yet but doing the engineering work on this and Thats a market of maybe some <unk> $700 million. So at being a player in that market is going to add content significantly for us going forward, but we've got to turn that pre development into a win to get that content out there and.
And we like the new EV products that we're bringing to the market and they've got.
We've got to be competitive of course, but we don't see it as changing our profile dramatically.
Got it got it and I might have missed this but what was the transportation.
<unk> as a percentage of total volume in the third quarter.
It would be approximately 52%.
Okay. So it's kind of flat compared to the previous quarter.
Okay.
Alright, and one last thing you talked about the opportunity.
Most of chips being about three to 4 million units.
Guessing youre thinking that Thats, the North American number you're putting out is the global number and with this when is your best guess Kieran when that kind of uses out.
Yes, John that the chip number is.
Probably more of a global number.
<unk>.
I think it ranges somewhere from three to about $4, two or $3 million. This year that will be the final kind of trend rate it's going.
And.
So.
We see that improving as we go into next year, but probably still a challenge through the first quarter.
Because that I did highlight again on the commercial vehicle front, we have a supply issue there that impacts us in the fourth and first quarters of that the next two quarters.
Okay.
Archie Dunham squeeze one more in regarding.
Yes.
2020 restructuring program that you've got 19 from year to date.
The timing of realized and the balance of the savings of 22 to 2006.
Being at the low end.
Is that going to be first half of 'twenty three second half of 'twenty three mid what are your thoughts there.
John .
We are really looking at the demand environment in terms of how quickly we can move.
So if things are a little bit softer in the first part of 'twenty three than I would expect us to move more quickly.
If the demand environment continues to remain robust then it might slip a little bit later on but I would expect.
By Q3 timeframe, we should be done with those transitions that we were targeting as part of the 2020 plan.
Okay. Thanks, guys I appreciate you taking my questions.
Thanks, John .
Our next question is from Justin Long Stephens. Please go ahead.
Yes. Good morning, everyone. This is brady on for Justin.
I know there is theres a lot of cross currents and some uncertainties in the macro environment right now, but if you were to kind of look across your end markets and think about the outlook for 2023.
What are you kind of see as the up arrows and the Downer Roes at this point in time.
Yes, we feel good about medical we feel good about certain parts of industrial.
And <unk>.
Aero and defense is trending in a good direction, but it's probably at a slower pace and then on the transportation side, it's pretty mixed where we I said in my prepared remarks that we see a flattening a little bit there've been supply chain issues that I mentioned already but it's really we see that more and more of an issue with the consumer than <unk>.
Fly chain longer term in 2023 with the higher interest rates and we think that's going to be a bit more challenging.
Flat to up single digits would be very good.
Okay Awesome and then maybe if I could just get one follow up in here.
Could you talk a little bit about.
The level of activity in the acquisition pipeline versus a quarter ago have you seen any easing of valuation multiples given.
The uncertain macro environment.
And we're actively working the pipeline we've got a strong balance sheet. It's a key part of our growth trajectory as well as organic growth.
We haven't seen a softening in multiples, but we would expect the softening in multiples going forward.
Okay. That's helpful. Thanks, guys.
Thank you. Thank you.
Our next question comes from Hendi <unk> from Gabelli funds Andy. Please go ahead.
Good morning, Kieran and Ashish.
Yes.
Good morning, Hendi My handy.
First question is up so Kieran.
How much visibility and ability to Josh when it comes to managing softness in industrials and potentially significant improvement in the supply chain constraint in automotive after Q1 next year I.
I think what I would like to know is how in industrials.
<unk>.
I think there are some inventories in the channels and the del Sol and customer demands and then the two may.
May not move.
In the past.
At the same level, let's say, so I'm wondering like how.
How much visibility and then how you kind of just one way or another.
Yes. So hendi, we are as I mentioned, we've seen some increasing inventory in certain parts of industrial and distribution as well.
And on the transportation side inventory levels continue to be low and we havent seen big problems in medical or Aero and defense at this point in time.
And then in terms of adjusting I would say two things number one.
We were hit by Covid back in 2020.
And our automotive volumes went down by about 50%, we were able to flex pretty quickly and still maintained a profitable trajectory for the company and I think you know that we're pretty disciplined management team. We would have scenarios already prepared for how we would respond to a dip of 10% or greater than the market.
So just expect us to be disciplined on that as we go forward.
I see.
And then how much visibility.
How many weeks.
You have feasibility forward.
Customer demand pencil.
And fulfillment.
It varies across the different customers into different applications, but it varies from several weeks up to three months, but you always got to be careful in this type of environment, where demand corrections happen in the bank gets pushed out we haven't we haven't seen much of that but it's something that we're concerned about and watching.
And then second question for Ashish Ashish would you be able to share the breakdown of revenue contribution from <unk> and then Farrell from.
Andy Let me take a look at that and I'll come back to you obviously.
The contribution from federal firm is larger I'm expecting it in the $5 million to $6 million range.
And the balance coming from Tivo, but I can get back to you on the more precise numbers.
I see yes.
Last question for me, if I look at Capex.
Im wondering where those capex will be backend loaded in Q4, considering that you.
You have to spend like $9 3 million.
The first nine months and I believe that capex will be higher than that.
Normalized run rate yes.
From a cash flow standpoint, there are a couple of things.
Q4, Capex will is expected to be slightly higher Indiana.
Wording it that way because.
We generally say, we will spend and then we don't end up spending quite that much because generally the business.
Our leaders are very.
A prudent about their capex spending.
The other thing to watch for which I mentioned in the prepared remarks also is.
The cash that we caught back from the pension plan.
We will be.
<unk> $7 million out of that for excise taxes. So that'll also unfavourably impacted the fourth quarter cash flow.
That's very helpful. Thank you so much ashish thank you Kieran.
Thanks, Dan again.
As a reminder for any further questions. Please press star one on your telephone keypad.
We have no further questions on the call. So I will hand, the floor back to Karen.
Thanks, Deb and thank you for joining us today, everyone I want to thank our global teams for their dedicated efforts and driving strong execution and operational efficiency.
Like to reiterate that Cts is well positioned for the future and I am confident that our diversification strategy bolstered by our recent M&A activities and the breadth of our geographic footprint will enable cts's trajectory of profitable growth, while we navigate current macroeconomic uncertainty we have a strong team.
Aligned around common goals that continues to advance the business for long term value creation for our shareholders and for all our constituents. Thank you. This concludes our call.
Thank you for dialing into today's conference call you may now disconnect your lines.