Kieran O’Sullivan - President and CEO Ashish Agrawal - Chief Financial Officer

Hendi Susanto - Gabelli & Company

Thank you. Good morning and thank you for joining us today and welcome to CTS’ first quarter 2014 conference call.

In 2014, our focus remains on continued strong commercial and operational performance as well as strengthening our core business to generate future profitable growth. Joining me today is Ashish Agrawal, our Chief Financial Officer.

So before I begin, Ashish would take us through the Safe Harbor statement. Ashish?

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 our press release issued yesterday and more information can be found in the company’s SEC filings. To the extent that today’s discussion refers to any non-GAAP measures relative to Reg G, the required explanations and reconciliations are available in the Investor Relations section of the CTS website.

I will now turn the discussion back over to our CEO, Kieran O’Sullivan.

Thank you, Ashish. CTS again delivered incremental performance and improved our adjusted EPS in the first quarter of 2014 over the same period in 2013.

We continue to simplify, focus and drive comparable growth as we transition our company. In the last quarter, we continued to execute to our strategic plan while also adding key competencies and talent.

We are strengthening our focus on organic growth and continue to drive our operational performance which is reflected in our margin improvement. The careful focus and improvement in other operating costs are also enhancing our performance.

Our strategy is delivering results and we expect to continue this improvement trend as we build our foundation for innovation to support organic growth. Additionally, we continue to refine our focus on potential inorganic opportunities around our core sensor capabilities.

Last evening, we reported our first quarter 2014 financial results. Our component and sensor sales of $100.7 million increased by 2.7% from the same period last year.

Our automotive products grew at 6% as we saw OEM market growth at 5% to 6% in North American production, 7% in Europe and 9% in Asia. Despite the harsh North American winter on hand days of vehicle supply declined to 63 days.

Our component product growth declined by 4% driven mainly by softness in our frequency products and HDD sales. We expect some softness in the HDD sales for the year due to delayed new product introductions in our (inaudible).

The first quarter GAAP earnings from continuing operations were $0.15 per diluted share compared to $0.09 per diluted share for the first period of 2013. Adjusted net earnings from continuing operations in the first quarter were $0.19 per diluted share compared to $0.11 per diluted share in the first quarter of 2014.

Overall gross margins were 30.4% in the first quarter, an improvement of 3.1% for the same period last year from continuing operations. Operating expenses were 19.6%, an improvement of 5% from the same period last year.

Ashish will expand on the improvements and some one-time benefits impacting our operating costs. SG&A costs were 13.5% in the first quarter, down from 18% in 2013.

We maintained our debt to capitalization of 20.2%. Controllable working capital was 12.6% in the first quarter, an improvement from 18% in the first quarter of 2013.

We continued to make progress on our future product pipeline as we secured new business sales awards of $136 million in the quarter. We continued to expand our automotive mechatronics growth, which includes pedals, haptic pedals and actuators.

We expanded our piezo-powered sonar buoy programs which share growth and added one new program. Additionally, we added a new customer in ultrasound imaging.

Our ClearPlex technology continues to make progress in the pre-development phase. We continued to progress on our strategic plan of simplifying, focusing on the core while driving profitable growth.

Most recently, we announced the closure of our Canadian operations with these products being transferred to our Mexico and Asian locations. We continued to execute well on the simplification, while not losing focus in future new business wins.

We have specific organic innovation investments in the pipeline. And you can expect to hear more about these programs in the coming quarters as we support our R&D spend and increase our sales and marketing regionally.

While we are adding key talent, we are also being careful to stabilize the organization as we manage several location transitions including the transfer of corporate employees to our Sensors & Mechatronics building in Elkhart, Indiana. I'm excited by our progress towards our future as we shape the identity of CTS.

We continue to amalgamate our changes of last year and are actively planning our future, while enabling the organization to stabilize, gain bandwidth and at the same time going deeper to drive certain initiatives around our cultural development. Looking forward, as we move through this transitional year for CTS, we are continuing to forecast sales growth in the range of 4% to 6%, the earnings per share are expected to be in the range of $0.96 to $1.02 with a stronger second half.

I will now turn the call over to Ashish Agrawal to provide additional details on our results. Ashish?

Thank you, Kieran. As Kieran already mentioned, our first quarter 2014 sales were $100.7 million, up 2.7% compared to last year’s sales from continuing operations.

Gross margin for the first quarter of 2014 was 30.4% versus 29.5% from continuing operations in the last quarter and 27.3% in the first quarter over year ago. Margins increased as we made progress in improving performance in certain product lines and additional improvements from material and labor productivity projects.

Our first quarter SG&A expenses were $13.6 million, down $4.1 million from continuing operations in the first quarter of 2013. This reduction from 18% in the first quarter of 2013 to 13.5% in the first quarter of 2014 as a result of cost savings generated from restructuring actions, a reduction in pension expenses and a gain on sale of certain assets as we outsourced some production.

The first quarter of 2013 also included $700,000 in CEO transition expenses. We do not have any CEO transition expenses in 2014.

In line with our strategy, we are enhancing our sales and marketing capabilities by adding resources closer to our target customers. This resulted in higher selling and marketing costs in the first quarter this year.

This cost increase was more than offset by the reduction in general and administrative expenses. R&D expenses were $5.6 million in the first quarter of 2014 compared to $6.3 million in the first quarter of 2013.

R&D expenses were lower compared to the first quarter of 2013 due to timing of expenses as we repositioned R&D resources. We remained committed to investing in new products for organic growth and as Kieran pointed out are making good progress.

In the first quarter, net interest and other expenses were unfavorable by $800,000 compared to the first quarter of 2013. Our interest cost was lower due to reduced borrowings; however we recorded a loss of $1.8 million on currency, primarily due to the weakness of the Chinese renminbi versus the U.S.

dollar. The effective tax rate in the first quarter was 43.7% compared to a negative 77.7% in the first quarter of 2013.

In 2014, we recorded one-time charges of approximately $700,000 mostly related to restructuring actions. We also had an unfavorable impact on the tax rate from currency losses in the first quarter of 2014.

In the first quarter of 2013, we had recorded a $1.6 million in discrete tax benefits from the retroactive application of the U.S. research tax credit signed into law in January 2013 and granting of the China high technology incentive tax credit.

In 2014 for the full year, we expect our effective tax rate to be in the low 30s excluding the impact of one-time charges. In the first quarter of 2014, our GAAP earnings were $0.15 per diluted share compared to earnings from continuing operations of $0.09 per diluted share in the same period last year.

Included in the first quarter 2014 earnings were $0.02 in restructuring charges, as well as $0.02 for restructuring related tax charges. Excluding these items adjusted earnings per diluted share were $0.19.

The adjusted earnings per diluted share for the first quarter of 2013 were $0.11 excluding a $0.01 charge for restructuring and $0.01 for CEO transition expenses. Moving next to the balance sheet; cash and cash equivalents were $119 million compared to $124 million in December 2013.

The debt balance was $76.6 million in March 2014, up slightly from December 2013. Controllable working capital comprised of accounts receivable plus inventory, minus accounts payable was 12.6% of sales compared to 18% in the first quarter of last year.

The improvement reflects ongoing working capital improvements as well as a change in the mix of businesses since the sale of EMS. In particular our operations teams achieved significant reductions in inventory balances.

We had a cash outflow from operations of $6.1 million in the first quarter of 2014 compared to a cash outflow of $3.5 million in the first quarter of last year. It is normal for CTS to have a cash outflow in the first quarter of the year due to timing of payroll and related items.

In the first quarter of 2014 we also had some cash outflows related to restructuring charges. Capital expenditures were $2.8 million in the first quarter of 2014, slightly lower than anticipated due to the timing of various projects.

We repurchased approximately 28,000 shares of CTS stock for $495,000 during the first quarter. We will continue to buyback additional shares during the year as part of our share repurchase program.

This concludes our prepared comments we would now like to open the call for questions.

Kieran and Ashish good morning and thank you for taking my questions. My first question is CTS is targeting to grow the manufacturing footprint from 50% in best cost location to more than 80% by 2017.

Given the already announced restructuring plans, where do you see your best cost location manufacturing footprint by the end of 2014? And furthermore, what does it take to bring it up to 80% in the long run?

I would tell you Hendi, first of all thanks for your question, we're well on the way in the simplification phase, we’ve announced several locations and Carol Stream, we've announced other locations in Scotland and transfers obviously now with the Canadian change as well. And so, we would see our sales substantially along the way.

And most of the work is in progress and of course we've been very careful to make sure we don't interrupt our customers as we go through this transition as well and keep our quality levels right there. This will take us probably just north of 70% in terms of the desktops, so you can see that we're substantially on the way.

Okay. And then Ashish, would you be able to share how should we be thinking of operating expenses for the remainder of the year?

Specifically, I'm wondering whether CTS may see like further increase in sales and marketing.

Hendi, thanks for the question. The sales and marketing expenses will generally grow some more as we add resources in those areas throughout the year.

But as we did in the first quarter, we expect savings from G&A expenses to more than offset the increase in sales and marketing cost. So I'm not expecting a significant increase in the overall operating expenses of the business.

Now, keep in the mind in the first quarter, we did have a gain on sale of some assets that was recorded. So you will see SG&A expenses overall in the second quarter increased slightly from the first quarter.

And is fair that it will further increase in the second half of 2014?

In the second half of 2014, I expect that the savings from our restructuring actions that were announced in June last year, we will start realizing those savings. So I would expect that we should maintain or reduce our SG&A expense.

Okay, yes. And then Kieran, I would like to inquire more insights into your end market.

First, may I know in which markets frequency products were [sold] and whether there is some visibility into like when it’s going to see some recovery?

Yes. Really on the component side, Hendi, we had 4% drop in sales.

We’d already been seeing that the high precision frequency products in the portfolio were losing some demand. So we've already got new products in the portfolio that were working on low power and OCXOs and also integrated subsystems that we're expanding in.

So you're going to see them come into our product portfolio overtime here. And then the other thing that you would have seen is we talked last year but HDD, we had some delays there, we still have those delays.

Two things I would say about that are one, our customers delaying the conversion of some platforms, it’s not that they’re not going to do what they are. And also remember in terms of where they are in their process, they are probably 50%, 60% to the way, so we still have some growth there as well.

Okay. Are you still maintaining the expectation that the delay in HDD will clear out by the end of the first half of 2014?

I think we have some softness for the overall year and we need to get clear signals in terms of when the launch dates are going to be. So that's probably best information I can give you at the moment.

Okay. And then perhaps…

So just to answer to you, you are not going to see any drop off in the levels we are running out at the moment.

Okay. And then in terms of exposure to the HDD market, I am now considering that you have given like percent of sales for like various markets in your 10-K, but I am wondering like what’s your exposure to HDD market in general?

We were very focused just in terms of the [Tierra] Solutions and that are part of the conversion at fuel stage actuation arm. So, our suppliers are the sub-suppliers of the Western digital’s and other companies out there that play in that space.

And so, the range of the sales is probably -- Ashish have you got the number besides or closer to….

We have normally not guided Hendi, specifically on the volume of our HDD sales. But they can range anywhere from $10 million to $20 million.

Okay, got it. Per year or per quarter?

Per year.

Okay, got it. Thank you.

You are welcome Hendi.

I’d just like to thank everybody for joining and we emphasize that we are extremely dedicated to our strategy to simplify focus and drive profitable growth. Everybody in the management team our locations are driving in this direction, so you can be assured that we will continue to drive improvement in all aspects of our business.

And look forward to talking to you on the next earnings call. Thank you.