Good day, everyone, and thank you for standing by. Welcome to the CTS Corporation Fourth Quarter and Full Year 2020 Earnings Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Kieran O'Sullivan. Please go ahead..

Thank you, Hanna. Good morning, and thank you for joining us today, and welcome to CTS' Fourth Quarter and Full Year 2020 Conference Call. Sales in the fourth quarter were $123 million, up 7% compared to the same period in 2019. Full year sales were $424 million compared to $469 million last year, impacted by the pandemic in 2020.

Today, all of our plants are operational with varying levels of capacity from 85% to 100%. Fourth quarter gross margin was up 110 basis points to 34.7% from the same period last year. EBITDA margin of 21.4% was up from 20.3% in the fourth quarter of 2019.

Fourth quarter adjusted earnings per share of $0.43 were up 16% from $0.37 in the fourth quarter of 2019. Full year adjusted earnings per share of $1.12 were down from $1.45 last year. New business wins for the year were $442 million, down from the prior year as several OEMs pushed out sourcing decisions in 2020.

Operating cash flow for 2020 was $77 million, up 19% from $64 million in 2019. In the fourth quarter, we acquired Sensor Scientific, a temperature-sensing company, primarily serving medical customers. Ashish Agrawal, our CFO, is with me for today's call as usual and will take us through the safe harbor statement.

Ashish?.

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 today 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 under Regulation G, the required explanations and reconciliations are available in the Investors section of the CTS website. I will now turn the discussion back over to our CEO, Kieran..

10% annualized profitable growth with active portfolio management; working more closely with our customers, building relationships and aligning our technology and product road maps. Number three, building the foundation of CTS' operating system to execute globally on a consistent basis while we enhance our continuous improvement capabilities.

And finally, advancing organizational capability through leadership and culture aligned to our customers' needs, our business performance, our core values, supporting our communities and environmental priorities. At this time, Ashish will take us through the financial performance.

Ashish?.

Thank you, Kieran. Fourth quarter sales were $123 million, up 7% compared to last year and up 8% sequentially. Sales to transportation customers increased by 12% versus the fourth quarter of 2019. Sequentially, we were up 17% in sales to transportation customers. Sales to other end markets were essentially flat year-over-year.

We saw solid growth in sales to both the industrial and defense end markets and softness continued in the medical end markets. Our gross margin was 34.7% for the fourth quarter, up 230 basis points compared to last quarter and up 110 basis points compared to last year.

Adjusted EBITDA in the fourth quarter was 21.4%, up 240 basis points sequentially and up 110 basis points from last year. Fourth quarter 2020 earnings were $0.46 per diluted share. Adjusted earnings per diluted share were $0.43 compared to $0.37 last year and $0.34 last quarter. For full year 2020, sales were $424 million, down 10% from 2019.

Sales to transportation customers declined 19% and sales to other end markets increased by 7%. Industrial and aerospace and defense end markets sales experienced double-digit growth. Medical end market was soft, with sales down 7%. Our gross margin was 32.8% for the year, down from 33.6% last year.

The major driver was lower volume attributable to COVID-19, which was partially offset by temporary and other cost reductions implemented throughout the year. Our focus is to drive improvements and move towards the higher end of our target range of 34% to 37% gross margin.

In the second half of 2020, we generated $0.05 of EPS in savings from our restructuring program announced in July 2020. Foreign currency rates impacted gross margin favorably in 2020 by approximately $3 million. Based on recent exchange rates, currency could impact our 2021 gross margin unfavorably by approximately 100 basis points.

SG&A and R&D expenses were $92.1 million or 21.7% of sales for the year. Consistent with prior communications, we expect 2021 operating expenses to be higher as a result of the reinstatement of temporary cost measures. Our 2020 tax rate was 23.7%. We anticipate our 2021 tax rate to be in the range of 23% to 25%, excluding the discrete items.

This is subject to change due to the impact of any changes that may be introduced by the new U.S. administration. 2020 earnings were $1.06 per diluted share. Adjusted earnings per diluted share were $1.12 compared to $1.45 last year. Now I'll discuss the balance sheet and cash flow.

Our controllable working capital as a percentage of sales was 15.5% in the fourth quarter, improved slightly from the third quarter. We have made progress over the last couple of quarters, but still have more work to do. We are balancing improvements in working capital with having some safety stock to minimize risk of supply chain disruptions.

CapEx was $14.9 million for the full year, down from $21.7 million in 2019. We continue to manage CapEx carefully given the current environment. In 2021, we are expecting CapEx to be in the range of 4% to 4.5% of sales with primary focus being on growth-related projects. We finished 2020 with a healthy balance sheet and a strong liquidity position.

Our operating cash flow in the quarter was $26 million. For the full year, operating cash flow was $77 million compared to $64 million in 2019. We ended the year with $92 million in cash compared to $100 million in December 2019.

In the fourth quarter, we reduced our long-term debt balance to $55 million from $106 million at the end of the third quarter. Our debt-to-capitalization ratio was at 11.4% at the end of 2020 compared to 19.7% at the end of 2019.

The combination of a strong balance sheet with a net cash position and access to over $240 million through our credit facility gives us the flexibility to appropriately deploy capital towards our strategic objectives. We are progressing on our SAP implementation.

As we communicated earlier, more than 80% of our revenue comes from sites that are running on SAP. We expect to complete the implementation in the second half of 2021. However, COVID-related restrictions could cause some delays. This concludes our prepared comments. I'd like to open the line for questions at this time..

[Operator Instructions]. And we'll go first to Justin Long from Stephens..

And congrats on the solid quarter. And so maybe to start with the question on the 2021 guidance. I was wondering if you could help us think through the cadence on a quarterly basis of revenue and earnings, if there's any color you can provide there.

There are just a lot of swing factors with the macro environment, the restructuring that you've talked about. So just curious if you could give us a little bit more color as we think through updating our models..

Yes. And Justin, maybe not on a quarterly basis, but just in total, because we guided for the year. The way I would look at it is, if you look at the lower end of the range, we're still concerned about some pandemic disruptions. We've seen a second wave in the European region.

Fortunately, we haven't seen it here yet, but we're concerned that there could be some things there. So far, we haven't seen anything. The second thing is if you get towards the mid of the range, you can see good, healthy, just above single-digit or mid-single-digit growth.

And obviously, we're aiming to do a bit better than that with organic growth and acquisitions at the higher end. The other things on our mind are you're hearing in the automotive market with a shortage on semiconductors. We've been monitoring that pretty closely.

I would say at this point in time, we see that the number of units has gone up from about 650,000 vehicles impacted to maybe 850,000. And our impact in the first quarter so far is minimal. It's less than maybe $0.5 million in revenue. So we've got those things going on in the background.

And as you can imagine, we're also dealing with some supply chain disruptions. This pandemic has hurt the supply base, and we've got to make sure we can currently navigate through that as well..

Okay. And thinking about the first quarter, you mentioned you're off to a strong start.

Any kind of directional commentary you could help us out with as we think about first quarter versus the fourth quarter? Do you think sequentially revenue and earnings can be flat to up? Or any thoughts around that?.

Yes. I would say flat, and it could be plus or minus a little bit, just depending on how things evolve here in February and March..

Okay. Very helpful. And last one for me. I wanted to ask about the acquisition pipeline. I know you just closed the deal at the end of the year.

But any commentary on the level of activity you're seeing out there, the likelihood that we see another deal here in the near term? And is that something that's baked into this forecast?.

Justin, what I would say is, obviously, this is our -- this one recently with Sensor Scientific, which we really like for its technical skills and capabilities and end markets, especially in the medical. It's our second temperature acquisition.

So you can tell, we've got some strategic plans in this area as we scale the product and the platform globally. Our pipeline, we're active in our pipeline. It's a bit more challenging because of COVID-19. We're not likely to do a deal without being on the ground and seeing everything, but certainly active.

We've got a strong balance sheet, and we want to deploy it for the right fit and the right valuation as well..

And we'll go next to Karl Ackerman with Cowen..

For my first question, could you discuss your order bookings on a year-over-year basis? I asked because if you shipped March quarter based on just orders on hand, that would imply sales down kind of mid-teens.

I appreciate the full year outlook, but could you just comment again on, I guess, your order momentum heading into the March quarter?.

Yes, certainly. Ashish, if you want to add to it, please. First of all, we reported -- I'm taking it that you're looking at the new business wins of '04. That was a little softer than we normally would have. And let me tell you that we had several OEMs push decisions out on the transportation side primarily.

We probably had something in the region of $50 million of decisions not made. Let me kind of add a bit of color on that by saying we're off to a good start in January. We didn't report -- if you look at the new business wins, we didn't report it year-over-year because a year ago, we were recording our book business and backlog, what we had there.

So we just want to make sure we're sticking consistently with what we've done in the past. We'd like to get back into reporting our backlog later this year as we get through the pandemic and things stabilize. But we feel pretty good.

That was a little soft in the fourth quarter, but it's not unusual, and we've seen it, I think, twice in 2020 where some large OEMs in the transportation market just were slow with making decisions and they're deciding on platforms and what they're going to do. We're not at all panicked about it. We feel like we're on a good trend.

And as I said, we're already off to a good start in January. And we've got some really good things working in the pipeline that are promising for our future as well..

Karl, the other thing to keep in mind is the new business awards that we are reporting here are not the short-term purchase orders what you would normally look at as a book-to-bill type of ratio.

These are containing long-term contracts that go out 2 to 3 years in terms of generating revenue and then giving us revenue for the next 4 to 5 years beyond that. So most of these wins that we are reporting are more longer-term in nature. So a fluctuation in any given quarter doesn't really get us to worry.

We do want to make sure it stays healthy for the long run..

I appreciate that. For my follow-up question, ASPs are clearly benefiting from some supply chain tightness for discrete and passive devices. And several of your component peers have raised prices quite a bit, which I think should provide a strong umbrella to use against normalized price decline.

So in that context, you've also spoken about higher input costs in your prepared remarks. So I guess in that context, how are these dynamics driving your discussions on both pricing and volume commitments with your customers..

Karl, I would say, first of all, on the ASP side of it with our customers, we're not seeing anything significant in terms of ASP erosion that we would have seen in normal years. On the supply side of it, we've -- this past year, in 2020, we've actually raised prices with a number of different end markets.

And we're also seeing, as you pointed out, some semiconductor price increases. And as they happen, therefore, we will have discussions with our customers to share the load..

And Karl, to your point, we've seen some commodity price increases as well that we are working with our customers to work through that equation..

We'll go next to John Franzreb with Sidoti..

Yes. To some last comment, Ashish on commodity pricing. How much are you taking into account for the full year? Do you think you will pass it completely through. And you have also I think mentioned something about currency could work against you. I think you said to the tune of 100 basis points.

Is that something, is it near-term impact or later in the year?.

John, the 100 basis points on currency that we talked about, it's for the full year based on what we have seen recently in the exchange rates.

The biggest impact is from the appreciation of Mexican peso and to smaller extent, but also important is the Taiwanese dollar, both of those currencies have appreciated quite a bit compared to 2020 averages, and that's what we are talking about.

And the commodity pricing is important, but the impact is not quite as large as the currency impact can be..

And John, I'd like to just reinforce that message that we expect to stay within our gross margin range that we've published out there, too..

Okay. Regarding the guide, the high end is better than you were able to do in '18 and '19. But it's also pretty much the run rate of the fourth quarter.

When I think about the high end of the revenue guidance, am I thinking that the current transportation outlook is stable and the balances of the business is stable? Or are we thinking that maybe there'll be a step down in the transportation market and maybe we'll see a pickup in -- well, either aero and industrial since you indicated that medical's first half will be soft?.

John, the way we are looking at it is we have been improving our exposure to industrial, defense, medical, those end markets and that will continue to provide -- our expectation is that, that will continue to provide good momentum into 2021.

And the range, the higher end of the range will be influenced probably more by how the transportation end market performs and probably on the low side as well, it will be more influenced by the performance in the transportation end markets..

Got it. And regarding your targeted gross margin.

Can you just talk about the ability to achieve it when you've completed all your cost-saving actions by next year?.

Let me make sure I understand your question.

Are you asking where the gross margin is expected to be after the completion of the restructuring action?.

Yes, sir..

So the range that we talk about, John, is the 34% to 37%. And in my comments, I mentioned that we want to get towards the higher end of that range. And once we get through all the restructuring actions, the timing is getting slightly impacted because of COVID-related small delays and stuff, but our goal is to be towards that higher end of that range.

Like we talked about currency, commodities, some of those things can either help us or hurt us depending on how things are going..

[Operator Instructions]. We'll go next to Hendi Susanto with Gabelli Funds..

And congratulations on strong Q4 performance.

Kieran, may I ask what products are you excited in 2021 and then could you also talk about your EV exposure in terms of how much exposure you have to pure EV? And then how much exposure you have to products that are agnostic when we look at your like transportation market segment?.

Yes. Yes, Hendi, in terms of the year ahead, the ceramics business has been on a good trend. I think if you remember last year, we had some challenges with the foundry, which the team has been making really good progress on. And we've got a lot more -- you hear me talk about the front end of the business.

We put a lot of emphasis on and improving the front end of the business or go to market. And so it's not just the products, it's our ability to work with the customers and get new accounts. And we've been making changes in the organization and leadership in those areas, too, across all CTS, not just one area. So we see some good things happening there.

It's good to see things sold in aero and defense. When we look at the automotive side of it, obviously, we're watching the market side of the equation in terms of the rebound and staying robust. We've had a lot of good momentum on passive safety and that's extending into different regions of the world.

We feel good about that short term and as well the longer term from an accelerator module, with the increase in autonomous capabilities of cars. We see the braking system becoming more electronic and that's something we're working on already, but it's unlikely to even have a revenue benefit before 2024/'25. So those things are going.

On the temperature front, we've really been pleased with how we're performing and the acquisition from 2 years ago had a good growth year last year, continuing to expand into new products and new customers. And so there are just some of the things that we see out there as we move forward.

And then to your question on the EV side of it, I keep referencing, I think we said back in '17, '18, we said our exposure to products going away due to EV was probably in the high single digits and would be fully compensated or balanced by about '21/'22. So we're seeing that as a very, very low single-digit percentage at this point in time.

So not a concern..

Got it. And then Kieran, when we read the news about like shortages in automotive semiconductor, how should we relate that to CTS? Earlier, you mentioned that CTS exposure to European is less.

Like any guidepost on how we should think about the supply chain shortages in automotive semiconductor, if it's improved or if it gets worse?.

So Hendi, two things. First thing is we don't have any supplies ourselves for our products. That's the first thing I'd like to point out. So it's our OEM. So if they're getting the electronics or the semiconductors for their electronic control units and infotainment systems and other things, that's the watch. So we've seen things from General Motors.

We don't have any -- seen things from Ford. We don't have any big exposure with Ford. We've said so far in the first quarter, we would see that at this point in time, less than $0.5 million impact. So we haven't seen heavy impact.

We've seen the number of units impacted from the industry reports go from about 600,000 units to about 850,000, and that's something we're tracking live. And you may see the next report before we do. But I haven't heard anything.

We know there's a lot of pressure out there from the OEMs and back to the suppliers in Taiwan and other areas to ramp-up production, and I'm sure they're really focused on that at this point in time..

Okay. And then embedded in your 2021 guidance, you indicated that you expect like softness in medical market to continue in the first half of 2021.

What is your assumption in that guidance for medical market in the second half? Like do you expect like a gradual rebound? Or do you expect like a solid rebound?.

And we would say what we've seen in softness so far is a little bit higher than mid-single digits. We'd expect that to start flattening out in the second half of the year..

Got it. Yes. And then a question for Ashish.

Ashish, would you be able to share QTI sales contribution so that we know what kind of growth QTI is having?.

Hendi, we haven't disclosed that, but when you look at the run rate that that acquisition is delivering. It is strong improvement. And what really we are happy about is that is despite a good portion of their customer base the restaurants and the food-service industry being down last year.

So that business has done a good job of getting new customers online to continue providing the growth momentum. And as Kieran pointed out, that's what we are looking forward to in 2021 as well..

Okay. Yes.

And Ashish, with regard to your tax project, do you have any updates?.

So Hendi, we completed a big portion of it in 2020. And there are some other pieces that we are working on. The challenge on the tax side is the uncertainty with what we might see in terms of changes in the U.S. at this point in time. So we are watching that very, very carefully.

And we'll talk about it once things become a little bit more clear in terms of what impact it could have on us..

And that concludes today's question-and-answer session. I'd like to turn today's call back over to Mr. O'Sullivan for any additional or closing remarks..

Great. Thank you, Hanna, and thank you all for your participation on today's call. We look forward to updating you again in April. Be safe. Thank you very much..

And that concludes today's conference. Thank you for your participation. You may now disconnect..