Kieran O’Sullivan - President and Chief Executive Officer Ashish Agrawal - Chief Financial Officer and Vice President.

John Franzreb - Sidoti & Company Hendi Susanto - Gabelli & Company Lisa Thompson - Zacks Investment Research.

Please stand by. Good day, everyone, and welcome to the CTS Corporation Fourth Quarter and Full Year 2014 Earnings Conference Call. Today’s call is being recorded. And at this time I would like to turn the conference over to the CEO, Mr. Kieran O’Sullivan. Please go ahead, sir..

Thank you. Good morning. Thank you for joining us today. And welcome to the CTS fourth quarter and full year 2014 conference call. I’m pleased with the results we delivered in 2014 despite softer sales and the progress we’ve made with our strategy to simply, focus and drive growth. 2013 and 2014 were transition years for CTS.

We made solid advancements and are successfully executing towards strategic plan. 2014 results were within guidance and we achieved strong new business wins in the fourth quarter in the year, which will fuel future growth.

Although sales were relatively flat in 2014, we were able to improve gross margins, reduce our operating expenses and expand operating earnings to meet our profit objectives for the year. We will continue to make targeted investments in selling and marketing, and R&D, to add new customers and products. Driving growth remains our top priority in 2015.

Joining me today on the call is Ashish Agrawal, our Chief Financial Officer. Ashish will take us through the Safe Harbor statement..

Before beginning the business discussion, I would 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 yesterday and more information can be found in the company’s SEC filings.

To the extent that today’s discussions refer to any non-GAAP measures relative to Regulation G, the required explanations and reconciliations are available in the Investor Relations section of the CTS website.

On this call, we will refer to 2013 financials on a continuing operations basis, excluding results from the EMS segment, which was divested in the fourth quarter of 2013. I will now turn the discussion back over to our CEO.

Kieran?.

Thank you, Ashish. Yesterday, we reported our fourth quarter and full year 2014 financial results. Fourth quarter sales were a little over $100 million, down 2% compared to the same quarter last year. Adjusted earnings per share were $0.24, which is flat with the fourth quarter of 2013.

Full year 2014 sales were $404 million, a decrease of 1.3% from last year. It’s important to note that 2013 sales included $5.5 million for a special one-time order to an automotive customer. Excluding this order, sales were flat in 2014 compared to 2013.

Adjusted earnings per share were $0.97 for the full year 2014, up from $0.75 in 2013, an increase of 29%. Our strategy to simplify, focus and drive profitable growth is gaining traction. On the simplification front a number of planned closures and transitions have been completed, as well as the corporate restructuring.

Currently, we are focused on the transfer of all product lines to the Canadian facility, to locations in Mexico and China, and expect to be completed in the second-half of 2015. Simplification will continue to be an ongoing initiative for our company going forward. We continue to focus and refine our strategy and business plans by product line.

This is part of a larger plan to clarify our future identity around sensing, connecting and motion. These themes capture the confidence and value we provide for our customers. Internally, they capture potential linkages to enhance our organic growth initiatives, improve our overall effectiveness, and provide a unifying path forward.

Driving profitable growth is progressing. We generated $171 million in new business awards in the fourth quarter, which represents that largest amount we’ve achieved in any one quarter since we began reporting new business wins six quarters ago.

Included in the fourth quarter wins, is an accelerator module program with a German OEM that we announced earlier this week. We are excited to partner with this important new customer and to expand our presence in the European market. So this is proof that our strategy is gaining traction.

There were several other sizeable wins during the quarter with a number of customers as we continue to make progress towards building backlog that will increase growth in future years. We launched a new line of rotary switches with applications from HVAC to elevator controls.

In our Piezo product line we added two new customers with sales starting in 2015. Our ClearPlex product line is expected to begin generating sales in 2015 for a small cell filter application. Additionally, we secured another RFO to win with annual revenues of $1 million. We are also in qualification with new customers for our OCXO products.

We had a number of design registrations in the fourth quarter for Xilinx thermal products with first revenues in 2015. Our automotive wins, as already mentioned greatly improved with the addition of a new European OEM. In total we secured a $145 million in automotive new business wins across North America, Europe and Asia in the fourth quarter.

During the third quarter earnings call, I touched on the rebranding effort at CTS. This project is well underway and I still expect to update you in the second-half of this year on how we plan to reshape our company identity. The outcome would further clarify how we invest for future growth in terms of sense, connect and move.

Diversification is important to us to reduce our exposure to light vehicle cycles. And at the same time, we’re stepping up our focus internally in innovation. Acquisitions will play an important part in our growth strategy. We continue to seek out and evaluate potential acquisitions that fit well with our strategic plan and are reasonably priced.

In terms of guidance for 2015, we expect sales to be in the range of $400 million to $430 million and adjusted EPS in the range of $0.98 to $1.10. We are concerned about currency headwinds related to the euro and the Chinese currency. The potential impact could be as much as 2% to 3% of sales in 2015.

Ashish will discuss the risks - the earnings risk in a few minutes. As we have mentioned in the past weaker new business wins a few years back presented a challenge for growth into 2014, and we continue to pressure growth in 2015.

We have been very focused on the new business wins in 2013 and 2014, and the progress we have made here should begin to lift sales in 2017. We would continue to focus on improving our order intake to drive growth. Sales in 2016 are anticipated to grow in the mid-single digits.

We will look to add to that in 2015 and in 2016 with the right acquisitions that fit our strategy. We continue to simplify everything we do, focus on the right priorities and drive growth. We’ve made solid progress with our transition, managing our operating costs and improving our profitability.

The management team is excited about our journey forward as we build the foundation for growth. I want to thank and recognize our employees worldwide for their support this past year. I would now like to hand the call over to Ashish and he will take us through more detail on our results.

Ashish?.

Thank you, Kieran. Beginning with the quarter results, fourth quarter 2014 sales were $100.4 million, down 2% compared to the same quarter last year. Sales increased slightly from the third quarter to the fourth quarter. Gross margin for the fourth quarter of 2014 was 32.9% versus 29.5% in the same quarter a year ago.

Margins increased year-over-year as we continue to achieve efficiency gains and implement material and labor productivity projects. In addition, we realized margin improvements from our restructuring projects as anticipated. Operating expenses in the fourth quarter of 2014 were 22.6% of sales, compared to 24.6% in the same period last year.

Operating expenses for the fourth quarter of 2014 included $1.1 million in restructuring charges compared to $2.3 million in restructuring charges and $1.8 million in CEO transition cost in the fourth quarter of 2013.

Providing some breakdown on the operating expenses, SG&A expenses were $15.8 million, down $1.5 million from the fourth quarter of 2013. The main drivers for this reduction were lower pension expense in 2014 and CEO transition costs recorded in 2013, partially offset by higher selling and marketing costs in 2014 as we continue to invest for growth.

R&D expenses were $5.8 million in the fourth quarter of 2014, compared to $5.5 million in the fourth quarter of 2013. R&D expenses were slightly higher than last year. We are making progress in repositioning our R&D resources and investing in new products to drive organic growth.

Net interest cost was lower than the fourth quarter of 2013 due to higher interest income as a result of higher cash balances. In the fourth quarter of 2014, other expense was $1.8 million versus other income of $1.4 million in the fourth quarter of 2013. Foreign exchange was the major driver for the swing year-over-year.

In the fourth quarter of 2014, we incurred foreign currency translation losses as the dollar has appreciated compared to the Chinese renminbi. However, in the same quarter of 2013, we experienced FX gains. The effective tax rate in the fourth quarter was 20.5%, which includes the impact of restructuring charges and one-time items.

In the fourth quarter of last year, the effective tax rate was 36.1%. In the fourth quarter of 2014, our GAAP earnings were $0.21 per diluted share. Fourth quarter of 2014 earnings included $0.03 in restructuring and related charges. Excluding these items, adjusted earnings per diluted share were $0.24 in the fourth quarter of 2014.

GAAP earnings were $0.12 per diluted share in the fourth quarter of 2013. Included in the fourth quarter of 2013 were $0.09 in charges for restructuring and related expenses and a $0.03 charge for CEO transition expenses. Excluding these items adjusted earnings per diluted share were $0.24 in the fourth quarter of 2013.

Turning now to the full year results, full year 2014 sales were $404 million, a decrease of 1.3% from 2013. Prior year sales included $5.5 million for a special one-time order from an automotive customer. Excluding this order, sales were flat in 2014, compared to 2013. The gross margin for 2014 was 32.2% versus 29.6% last year.

Consistent with what we have been highlighting throughout the year, margins increased year-over-year due to efficiency gains and material and labor productivity projects. Restructuring projects have resulted in savings and margin gains ahead of expectations. Operating expenses for the full year 2014 were 21.7% of sales compared to 25.3% in 2013.

This improvement was driven by a reduction in G&A expenses related to restructuring savings, lower pension expenses, cost containment and CEO transition costs incurred in 2013. These cost reductions were partially offset by an increase in selling and marketing expenses as we enhanced our capabilities in this area.

R&D costs were $22.6 million in 2014, down slightly from 2013, but we expect to continue ramping up our investment in R&D to launch new products and drive organic growth in future years. Restructuring costs were much lower in 2014. Operating earnings were 10.5% in 2014, an increase of 620 basis points from 4.3% in 2013.

Net interest cost was $1.8 million lower in 2014 versus the prior year related to lower borrowings and higher cash balances. Other expense for full year 2014 was $3.4 million versus other income of $1.7 million in 2013. As was the case for the quarter, foreign currency again was the major driver for the swing year-over-year.

In 2014, we incurred foreign exchange transition losses as the dollar appreciated compared to Chinese renminbi and the euro. Conversely, in 2013, the U.S. dollar depreciated against these foreign currencies causing a currency gain. The effective tax rate in 2014 was 32.6% which includes the impact of restructuring charges and one-time items.

In 2013, the effective tax rate was 88.9%. The high tax rate in 2013 was primarily due to the non-cash tax expenses recorded for cash repatriation and restructuring related tax asset impairment. In 2015, we expect our effective tax rate to be in the low 30s range. GAAP earnings for 2014 were $0.78 per diluted share.

2014 earnings include $0.19 in restructuring and related charges. Excluding these items, adjusted earnings per diluted share were $0.97.

In 2013, GAAP earnings were $0.06 per diluted share, included in 2013 were $0.31 in charges for restructuring and related expenses, $0.31 related to the cash repatriation I mentioned earlier, and a $0.07 charge for CEO transition expenses. Excluding these items, adjusted earnings per diluted share were $0.75 in 2013.

Our expected EPS for 2015 is in the range of $0.98 to $1.10. As Kieran mentioned, we are concerned about the strength of the U.S. dollar, especially against the euro and the Chinese renminbi. This could have an adverse impact on our 2015 EPS of as much as $0.08 to $0.12.

In terms of the balance sheet, cash and cash equivalents were $134.5 million at the end of fourth quarter 2014, compared to $124.4 million at the end of 2013. Our debt balance was $75 million as of both December 31, 2014 and December 31, 2013. Debt to capitalization was 20.6% at year-end, up slightly from 20.2% at the end of last year.

Controllable working capital comprised of accounts receivable, plus inventory, minus accounts payable was 10.3% of sales at the end of the fourth quarter, compared to 11.7% in the same quarter a year ago. The improvement reflects ongoing working capital initiatives, which resulted in inventory reductions and a decrease in receivables.

For fourth quarter 2014, operating cash flow was $17.1 million versus $12.1 million in the same period last year. Capital expenditures were $3.9 million in the fourth quarter of 2014 and $3.1 million in the fourth quarter of 2013. For the full year 2014, operating cash flow was $32.4 million and capital expenditures were $12.9 million.

During the years, our cash flow was negatively impacted by several one-time items, including SERP payments, CEO transition costs, and restructuring-related expenses. In 2013, operating cash flow was $37.6 million and capital expenditures were $14 million.

We repurchased 460,000 shares of CTS stock for $8 million in 2014, including dividend payment, we have returned $13.4 million to shareholders in 2014. We will continue to buyback additional shares in 2015 as part of our share repurchase program. This concludes our prepared comments. We would like to open the line for questions at this time..

Thank you. [Operator Instructions] And we will take our first question today from John Franzreb with Sidoti & Company. Please go ahead..

Good morning, guys..

Good morning, John..

Good morning, John..

Okay. Kieran, I guess, I would like to start with your sales initiatives. You mentioned $170 million in the last quarter. I wonder if you could put that in context, I really was trying to recapture some lowest opportunities form 2011 to 2012.

How did 2014 finish as a whole relative to 2013 as far as new business wins, what kind of percentage up or down we’re looking at?.

John, when we start reporting six quarters ago, so we don’t have a full clean year for comparison for 2013 to 2014. But I would tell you, it’s a substantial improvement again, and if you look at over prior years, it’s quite a bit up. So we’re very pleased with the progress we are making and we had a very strong fourth quarter.

And I will tell you - the goals that we’ve set internally are very aggressive for 2015 as well..

Okay, fair enough.

Regarding the restructuring actions you took in the most recent quarter, can I just - can you kind of just walk us through what you are doing? And secondly, can you talk about the incremental margin opportunity or lower costs that you expect in 2015 versus 2014?.

John, so from a restructuring perspective, I’ll let Ashish go through the details in a second, but just as a very high level, we said in the - last year were savings in the range of $8 million to $10 million on an annual basis, would probably 90% plus of that already completed, so we are making good progress there.

I did see in the prepared remarks that simplification is still going on with the Canadian facility coming online with transfer products, so making good progress. Margins and operating costs, I will tell you, we’ve done most of the work there. There maybe a little bit of fine tuning. But we set margins - gross margins in the low 30s.

We’re still on track there and obviously always looking to improve what we can, and some of the - outside of R&D, the other costs tracking closer and SG&A to about 15%. Ashish, would you like to comment..

Yes. So, John, just to elaborate on what Kieran said earlier on restructuring related savings. We are slightly north of 90% in capturing the savings that we anticipated last year in 2014, which is ahead of our expectations. And we expect a small amount to come through in the first half of 2015.

The savings from Canada restructuring will come towards the tail end of 2015 and mostly into 2016..

And how much is the Canadian restructuring going to benefit the op line?.

It will be smaller than what we had from the initial restructuring that was started in the middle of 2013. I’m expecting an incremental gross margin improvement as a result, but it’s not going to be a significant number..

Okay.

And regarding the guidance, I’m curious, it seems to me that you didn’t include the currency impact in your guidance 2%, 3%, hey, I want to make sure, I’m understanding that properly and if so why not?.

So John, we guided on the top line $400 million to $430 million, on the EPS from $0.98 to $1.10, and we said we got headwinds.

We’ve seen a very - if you look even at our last two quarters or take the fourth quarter and how we were compared to the fourth quarter of 2013, we had some help in the fourth quarter of 2013, and we’ve had some hurt in the fourth quarter of 2014 on FX basis.

If you look at 2014, we had some effort in the first-half of the year, it seem to do okay in the third quarter and got some hit again in the fourth quarter. So we’re just calling it as separate, we - it’s - we don’t have control of that 100% as you know, and we’re just being very care in terms of where it sit..

Okay. So - go ahead..

I will tell you, I would like to add on to that.

And the big focus for us is to run the operation well, but they get that road engine going, because back to your first question, and I think it’s a little bit of a testament to the strategy we always said, it’s going to take us a year or two to expand in sales and marketing, to get business wins in, in the different regions, and then obviously takes two to four years for revenue.

And we are starting to see that now with some of those first big OEM wins in Europe. So, I know, I gave you two answers there to your questions, but I want you….

Okay.

Though I’m going to bring it back, so just to be clear, at current exchange rates, you would expect EPS to be roughly $0.10 lower than your initial guide?.

So, John, the way we are looking at is the range we are anticipating for currency impact of $0.08 to $0.12. At current exchange rates, it would be approximately half of that number compared to our guidance..

That helps a lot. I appreciate it. Thank you. I’ll let someone else ask some questions..

Thanks, John..

We’ll take the next question from Hendi Susanto with Gabelli & Company..

Kieran and Ashish, good morning..

Good morning..

Please pardon me for some background noise here. My first question, the 2015 revenue guidance has a wide range.

What are the drivers that can deliver upside growth in 2015 or 2016, including reaching the high-end of your 2015 guidance?.

So I think, we’ve been talking about the transition in 2013 and 2014 in two ways. But when it comes to the revenue side of this repositioning, refining the product portfolio, automotive markets, obviously, the biggest part of our revenue. And you’ve seen in the last year or two, we haven’t moved a lot 3%, 4% growth at most.

So to move that up, Hendi, next year, we don’t see the automotive markets moving substantially. To help us grow it would be faster take rate in some of the new component products, but that takes a little bit of time. I mentioned, we’ve added three new customers, the rate that they accelerate if they go faster, they can take us up to the higher end.

But normally, the take rate is a kind of a slow ramp and then goes up. So that’s what we’re looking at..

Okay..

And on - back again on the automotive side really, I said in the prepared statement as well, it’s not going to lift us substantially in 2015 or 2016, you are going to see that in 2017..

I see.

And then you - to reiterate your [indiscernible] acquisition as part of your growth strategy, do you have like, more preference over automotive or electronic component?.

Kieran O’Sullivan:.

,:.

Okay.

And then do you have updates on [indiscernible] Smart Actuator?.

Yes, I would tell you that we improved in the revenue in that product in a nice way, so the Smart Actuator is moving up in line with our expectations, and we’re working hard to add other customers in that area too..

And, Hendi, I would just add to that and say that, we have also worked hard on improving the margin profile of that product line?.

I see.

And then any update on Piezo ceramic for HDD?.

Yes, if you remember last year we said we had - there were some inventory issues. We had a very soft second quarter, but we’ve seen the run rate come back in Q3 and Q4, so we are very satisfied with the run rate and looking off to a good start for the year..

Okay. Question for Ashish.

Ashish, how should we think of operating margin in 2015 compared to 2014? You touched upon this like earlier in part, so like how much of cost reductions will go over to bottom line and how much may go over to reinvestment?.

Hendi, we expect a slight improvement in gross margin year-over-year - year-over-year, not anything significant. We will continue to see some improvements in G&A expenses. But in 2015, we will see an additional increase in R&D investments and in sales and marketing expenses.

And as a result, the improvement on operating margin rate is expected to be a small incremental improvement. We won’t see a huge part of the gross margin growth flow through to the operating earnings line..

Got it.

And then last question, how should we think our share repurchase in 2015? Are you planning to reduce your share count, or are you planning to use yours share repurchase to offset some dilution?.

At this point in time, Hendi, my expectation is that, we will continue along the same lines as we hit in 2014. But that could change based on any discussions we have with the board..

Okay. Thank you..

Thank you, Hendi..

And we’ll take next question from Lisa Thompson with Zacks Investment Research. Please go ahead..

Good morning..

Good morning, Lisa..

Hi, Lisa..

I was hoping you could talk a little bit about how are the quarters going to run out - run this year now that you are kind of structured differently than before.

Is there going to be any big quarters, little quarters, any seasonality, you can kind of really flat for few quarters, is that - what is that going to change?.

So in terms of top line growth, we expect the automotive side of the business to be relatively consistent.

And as we are looking to grow the balance of the business which includes the piezo components, as well as other electronic component, if we would see a slight increase in sales as we go along during the year, so as a result, I would expect some improvement from that standpoint..

And Lisa to your question on seeing a big lift, you are not going to see that before 2017. We’ve been very clear that modest growth rates and that order intake before we can swing that bigger lift is coming in 2017 because of the backlog..

Okay.

So there is no seasonality here that it’s just a matter of adding more customers?.

Yes..

Okay.

And then going out to 2016, is there going to be any change in sort of the tax rate, because it’s moving Canada, or anything like that, do you see anything that far out?.

At this point we are not anticipating any major shift. We do continue to take a look at our structure, as well as ways for us to optimize our tax efficiency. And if we start doing something on that front, we will obviously be talking about it..

Okay.

Would - that would be something that would be affected more by acquisition?.

It could be, yes. But at this point in time, I’m not seeing any major changes in the next year or two years..

Okay. And going back to the cash you have a ton of cash, and I know most of it overseas.

Is there any of it here that you may consider increasing the dividend or something like that, because it just seems like you have so much and there is an awful lot of spend?.

So, Lisa, obviously we are - we evaluate the cash position with our board and lots of vesting to do for shareholders. We believe there is some interesting acquisitions out there for us, so that’s what where our first priority is, obviously to increase the value for our shareholders going forward.

We did increase the dividend to 14% in the last year and we’ll obviously evaluate this with our board on a regular basis..

Okay. All right, that’s good. Thank you. That’s all my questions..

Thank you, Lisa..

[Operator Instructions] And it appears there are no other questions. So Mr. O’Sullivan, I’ll turn it back to you for any additional or closing remarks..

Great. Well, thank you for joining us today. We will continue to drive forward with our emphasis on simplification, focus, and driving profitable growth with the support of our employee base, our suppliers and partnership with our customers and this concludes our call for today. Thank you..

Thank you..

Thank you very much. And that does conclude our conference for today. I would like to thank everyone for your participation, and have a great day..