Kieran O’Sullivan - Chairman, President and Chief Executive Officer Ashish Agrawal - Chief Financial Officer

John Franzreb - Sidoti & Company Hendi Susanto - Gabelli Ian Gilson - Zacks Investment Research

Thank you, Ashley. Good morning.

Thank you for joining us today and welcome to CTS’ fourth quarter and full year 2017 conference call. We had good growth in the fourth quarter.

Sales were up 9.2% versus the same period in 2016 and we added 6 new customers. Sales for the quarter were $111 million.

Full year sales were $423 million, up 6.6% from $397 million in 2016. We continue to make progress on profitable growth around products that sense, connect and move.

We ended the year with total booked business of $1.737 billion, up 14.4% from $1.518 billion at the start of 2017. Fourth quarter adjusted gross margins were 34%.

Full year adjusted gross margins were 34.3%, down from 35.4% in 2016 driven primarily by the rework we discussed earlier in 2017. We need to get back to executing at improved gross margin levels.

Fourth quarter adjusted earnings per share of $0.39 were up from $0.29 in the fourth quarter of 2016. Full year adjusted earnings per share of $1.23 were up from $1.08 in 2016.

Our 2018 tax rate is expected to be in the range of 26% to 27%. We continue to advance initiatives to further improve our tax rate beyond 2018.

Cash flow from operations for 2017 was $58 million, up 23% from $47 million in 2016. As highlighted in the last earnings calls, our capital spending will increase in 2018 driven by our investments for growth, site consolidations and the introduction of a new ERP system.

These investments are an essential part of building the foundation for the future of our company. Our simplification focus remains on track in the first half of 2018.

We will consolidate the single crystal manufacturing operation into our new corporate location here in Lisle, the transition of Elkhart manufacturing continues finishing in the second half of 2018. Ashish Agrawal, our CFO was joining me on today’s call.

Ashish 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 relative to 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 O’Sullivan.

Thanks, Ashish. As I mentioned earlier, we ended the year with total booked business of $1.737 billion, up from $1.518 billion at the end of 2016 demonstrating our progress on growth.

In the fourth quarter, we added 6 new customers and for the full year we added more than 20 new customers across several end markets. Our sales grew 6.6% in 2017.

We ended the last quarter with 9.2% growth, of which 6.2% was organic. We are excited by our progress as we ramp up shipment of ceramic products for our first customer, with a mobile haptic application.

Our growth with defense and aerospace customers continues to show progress as we increased sales last year by 9%. Our single crystal product line is performing well and growing at double-digit levels.

New applications in the pipeline include hearing aids and pacemakers as well as continuing sales growth in defense. We are advancing our tape cast technology and in the last quarter have added one new customer for our sensor application in water pumps.

We also have two tape cast applications in the prototype phase. We are seeing continued growth of our RF filter product sales and have also shipped approval samples to a new Asian customer with the potential to grow to 500K in 2018.

Other new products include additional haptic applications, sensor applications in security and the next generation of existing products. Sales of current products grew with the first shipment of OCXOs to a customer in Turkey building to an annual run rate of 1 million.

We are also seeing increasing demand for an appliance sensor growing to 1 million run rate. The transportation front in the fourth quarter, we were awarded wins with eight accelerator pedal programs, five in China, two in North America and one in Europe.

We were also awarded 1 right hype-sensing application in North America. Most recently we signed a long-term agreement to provide piezoceramic product for a device security application, low-volume shipments will begin in 2018 and are expected to increase over time.

Our progress continues to be guided by our strategy and focus on technologies and products that sense, connect and move. The integration and performance of our European ceramic acquisition from last year is tracking to our operating plan contributing $7.1 million in sales in 2017.

We continued to work our M&A pipeline, in line with our strategy to add technology and diversify our end market profile. Although we saw increasing sales, earnings and cash flow in 2017, our operational performance could have been better.

We are handling several priorities with the implementation of a new ERP system and the ongoing simplification of our business. Our teams remain engaged in dedicated to improving our operational performance, in particular our gross margins.

We resolved our supply base issues from last year’s hurricanes. Our end markets remain steady.

Medical, industrial and commercial vehicle markets remain robust as telecom infrastructure continues to be soft. We have a strong order backlog for transportation.

And we remain cautious in our outlook especially in the North American market where we saw the first decline in several years. Industry wide on-hand days of automotive inventory were reduced in the fourth quarter which is a positive.

Both Europe and China markets continue with a positive trend, which should provide overall market balance. We expect full year 2018 sales to be in the range of $435 million to $455 million.

Adjusted earnings are expected to be in the range of $1.32 to $1.44. I will hand over to Ashish to take you through the results in some more detail.

Ashish?

Thank you, Kieran. Fourth quarter sales were $110.9 million, up 9.2% versus the prior year and up 4.4% from the third quarter.

Foreign currency impacted sales favorably by $1.2 million in the fourth quarter due to the U.S. dollar weakening against the RMB and euro.

Organic sales growth was 6.2% year-over-year excluding sales from the European ceramic acquisition. Sales to automotive customers increased by 7.3%.

And sales of electronic components increased by 12.7%. In the fourth quarter we completed a lump-sum window offering to participants in our pension plan.

Related to this, we took an accounting charge of $13.4 million. The entire charge is non-cash and the pension plan continues to be over funded.

$4.8 million of the charge is reflected in gross margin and the balance $8.6 million is reflected in operating expenses. Excluding the impact of the pension charge, our gross margin for the fourth quarter was 34%.

In the fourth quarter we took a one-time charge of $18 million related to the impact of the U.S. tax reform.

This charge is our best estimate based on the information we have today. The impact is anticipated to be non-cash for us as we expect to utilize our foreign tax credit to offset the tax liability.

We saw a reduction in our tax rate for 2017 as a result of certain discrete items. Due to the U.S.

tax reform, we do not expect to enjoy the benefit of some of these items in 2018. However, we will still see an improvement in our 2018 tax rate, which is expected to be in the range of 26% to 27%.

This is an improvement of approximately 5% to 6% against our 2017 tax rate, excluding discrete items and reflects the global nature of our business. We reported a loss of $0.41 per share in the fourth quarter.

Excluding the impact of currency gains, restructuring costs and one-time items related to tax and pension, adjusted earnings per diluted share were $0.39 compared to adjusted earnings of $0.29 per share in the fourth quarter of 2016. The EPS improvement is driven in large part from our revenue growth as well as certain favorable tax items.

Now, I will discuss the full year results. Full year 2017 sales were $423 million, up 6.6% from 2016.

Organic sales grew mid single-digits year-over-year, excluding sales from the European ceramic acquisition, sales to automotive customers increased by 4.8% and sales of electronic components increased by 10.2%. Excluding the impact of the pension charge that I discussed earlier, gross margin for the year were 34.3% compared to 35.4% in 2016.

The gross margin was negatively impacted primarily by production rework issues that were resolved in 2017 and by foreign exchange. Our adjusted EBITDA in 2017 was $80 million, representing 18.9% of sales.

We are continuing to work on projects that will help us further improve our tax rate. In 2018, we expect to spend in the range of $1 million to $2 million in fees related to these projects and will show this is an adjustment to our earnings as we report results throughout the year.

We expect these projects to improve our effective tax rate starting in 2019. We reported earnings of $0.43 per share in 2017 adjusted earnings per diluted share were $1.23, an improvement of 14% from the 2016 adjusted earnings of $1.08 per share.

Now, I will discuss the balance sheet and cash flow. Cash and cash equivalents were $113.6 million at December 31, 2017 compared to $113.8 million at the end of 2016.

Our long-term debt balance was $76.3 million, down from $89.1 million at December 31, 2016. The U.S.

tax reform gives us the flexibility to bring cash back to the U.S. without significant additional tax penalty.

We will have approximately $50 million of foreign cash that can be brought back to the U.S. We remain consistent in our intent to use the cash to fund domestic and foreign acquisitions.

Our controllable working capital as a percentage of sales was 13.1% in the fourth quarter of 2017, up from 12.6% a year ago. The primary driver of the increase is the build of safety stock related to our manufacturing transfers.

We expect to work our inventory levels down towards the end of 2018 as we complete the transfers. Cash flow from operations for 2017 was $58 million, up 23% from $47 million in 2016.

Capital expenditures were $18.1 million. CapEx was lower than expected in 2017 as the timing of certain investments shifted into 2018.

The various projects are on track and we expect our 2018 CapEx to be in the range of 7% to 9% of sales. Total debt to capitalization was 18.2% at the end of 2017, down from 22.1% at the end of 2016.

The ERP implementation project is progressing. Our team is working hard to design and test the system.

We expect to rollout the SAP system to our sites in phases starting in the second quarter of 2018. This concludes our prepared comments.

We would like to open the line for questions at this time.

Good morning, everybody. Can you hear me?

Yes, John, we can hear you.

Okay. Karen, I guess, my first question is the organic growth numbers that we have just presented out there.

I just want to make sure I understand what’s going on. I think you said a 6.2% organically and 7% of that was auto and 12% was electronic components, what’s the negative number that’s bringing down the blended number to 6%?

John, let me address that. This is Ashish.

The 12.7% for electronic components includes the acquisition.

Okay.

So, the total organic is the 6% that you mentioned, but the individual numbers that we talked about they are total growth.

Total growth. Okay, so I got it, okay.

And when you think about the changes you are making as far as rolling out the ERP system and you said that there has been a pushback in some of the CapEx. Could you talk a little bit about timing of the ERP rollout, you mentioned since start in second quarter, when is it going to end, what do you think the total budget is for the entire project?

So, John, the ERP implementation will start in the second quarter. For most of our sites, the implementation will be completed in 2018.

Some of the smaller locations, especially acquisition-related sites we might push that into 2019. The overall project expense we haven’t really talked about that, but it is included in our overall CapEx number, which as I mentioned earlier on the call we are expecting it to be in the 7% to 9% of sales, that includes the ERP project, various growth projects, the transition of manufacturing from Elkhart, the Lisle building consolidation, all of those items.

Yes, this is such a sizable jump in the CapEx, I was wondering if you could kind of size how much of this was one-time versus the other? I would expect to drop back to the normal 5% or so in ‘19 than it’s the old number ‘18 is that a fair assumption?

Yes, John, if you look at it in the last few calls, we have been signaling that we were going to be increasing the spend this year and getting back to more normal rates next year.

Got it. And Karen, when we look at the booked business number, we have got about a year of data behind us, how should we think about that?

Should we think about that on more a sequential basis, it’s up 2% sequentially or we think about it more year-over-year, it’s up 14%, what do you want us to take out of that number?

I think John what you can take out of the number is first of all, it was a robust year in terms of competing in the marketplace and winning new business. And on the backlog side of that, our total booked business, it’s extending out several years some of the orders are out beyond 2022.

We feel really good. A large portion of that is transportation a large portion of the ceramics gets into the backlog as well.

And as you can see, we are adding new applications and new products, which we feel is very good about. So, we are signaling we feel like we had a very strong year and it feels good about it and obviously you want to keep executing at this level.

So, is this some point – when you start shipping these orders, is it tied on us to be hit down as you start to ship out into revenue? Is that how it’s going to play?

Well, if you look at it, John and you will probably see it in our updated investor presentation as well. If you look at 2018, the shippable portion of that backlog is already $351 million.

So, that’s a very solid start into the year and of course we have a chunk of that in other years subsequent to that as well.

Okay. I will get back into queue.

I will let someone else ask the question. Thanks.

Thanks, John.

Good morning, Kieran and Ashish.

Hi, Hendi

Good morning, Hendi.

So, Ashish and Kieran, as we look into 2018, what kind of gross margin trajectory we should expect considering like many variables, including transitions and you also have like new products?

Yes, I would expect, Hendi for us to get back to more normal levels, where we have been running in the past. We said we were impacted by rework issues, so you can see that’s more than a point of gross margin.

So, we would expect to get back to those normal levels. And obviously, we want to do a little better too?

Hendi the costs related to the restructuring activities we will be excluding them from our adjusted EPS, so you will see those numbers excluded from the adjusted numbers.

So can we expect gross margin improvement as early as Q1?

We should see a positive trend throughout the whole year.

So, it’s gradually quarter-after-quarter?

Yes. You should see – you should start seeing an improvement in Q1.

And then as Kieran mentioned a gradual improvement as we go along the year.

Okay. And Ashish may I inquire organic growth rates of the electronics segment?

Hendi, could you ask your question again?

May I inquire organic growth rates of the electronic segments alone?

It’s slightly over 4% Hendi, excluding the Noliac acquisition that we did back in May and this is for the fourth quarter.

Okay. Kieran, you mentioned several security application in your prepared remarks, could you share what kind of end products your product go to?

Sorry, Hendi what was the first part of that question?

You mentioned several security applications and I am wondering what kind of end products?

Yes. It’s a new multi-year contract that we signed.

And the customer at this stage is modest to disclose any more information on it. But think about it in terms of some kind of portable applications.

Could you mention its industry?

It’s actually going to have applications in several end markets, but this one will certainly be more and more about communications.

And then I see – when I look at the latest corporate presentation, CapEx was estimated at 6% to 8% for 2018 and today it is like 7% to 9%, I am wondering what caused they increased to 7% and 9%, I am wondering whether it is associated with growth investment that Kieran mentioned?

So Hendi there are two aspects of it, certain items that we were expecting the cash outflow to happen in 2017, those cash outflows are happening in Q1 of 2018 and balance of 2018, that’s what I referred to earlier in my comments. And then there will be some additional CapEx related to the growth projects, but the largest part of the 7% to 9% from an usual standpoint is related to the projects that we are working on which will help us the ERP, the Elkhart transition.

You should definitely see CapEx go back to normal levels in 2019.

Okay. And Ashish you have been working on tax projects that is independent of the U.S.

tax reform, I am wondering when we may see the outcome of that should we expect to see some of your tax projects to happen in 2018 or should we expect it will be beyond 2018?

Hendi there is a little bit of uncertainty on the timing because it involves government agencies in various countries for us to work through. My expectation is that we will make very good progress in 2018.

But I am hesitant to say that we will see a benefit in 2018, but we should definitely see a benefit in 2019.

Got it. Thank you.

Hello.

Hi.

Hi, I didn’t hear the announce me. Could you go through the impact on the line items of the pension adjustment?

So the pension adjustment there is a reflection of $4.8 million in the gross margin line. So the gross margin for Q4 and total year is understated by $4.8 million as a result of that.

And then between SG&A and R&D there is a total of $8.6 million between those two lines. And you will see in our Reg Gs adjusted gross margin as well as adjusted OpEx number that will be reflected in our Reg G.

Is the split between SG&A and R&D equal relative proportions of those two items?

Ian, could you ask your question again?

Is the cost and operating expenses split in portion to level of expenditures in R&D and SG&A or is it biased towards SG&A?

It’s $6.5 million in SG&A and $2.1 million in R&D.

Okay, okay. Going forward on the tax rate, you talked about the initiatives to reduce that as we move into 2019-2020?

That is correct.

In what areas, are we looking? Are we looking for that to occur outside of the U.S.

or rather gains that could be laid inside the U.S.?

The primary portion of the benefit will come from activities that we are undertaking outside the U.S. and the U.S.

portions will be pretty small.

Okay. And will those manage?

Can they be repatriated with no penalty?

We are subject to guilty as most of the companies that are operating internationally. So, there is a penalty in the U.S.

for foreign earnings, but beyond that, we anticipate that the – that there should be pretty minimal cost of bringing that cash back to the U.S.

Okay, great. Thank you very much.

Have you filed the K yet?

The K will be filed in later in February.

Okay, thank you.

Yes. I guess just first I want to follow-on on the last caller, if I call out the pension numbers on the SG&A line and the R&D line, I mean, the adjustment occurred in the fourth quarter only, if I am correct?

I am getting some strange numbers, I am getting SG&A is roughly $18.5 million, is that right?

John, there will be always some timing of SG&A expenses. The numbers that you are looking at should be right, once you exclude the pension charge.

And there is always because of how the accounting works, there is always a little bit extra cost in Q4 in SG&A.

Okay. And the R&D number drops to 4.6%, that’s usually large, it just seems like it was more than I would have expected in adjustment, I would expect less than $1 million actually?

R&D number was a little bit lower in Q4 than we anticipated and that can be influenced by the timing of certain reimbursements we get from our customers for various development projects that we are working on with them. So, that was the driver in Q4 of the lower R&D number.

And I guess I will get some of the other numbers, we received some follow-ups, but can you talk a little bit about M&A, you said that if you could repatriate sort of what’s the M&A environment and I can’t imagine with the economy firming that it’s the pricing has gotten any better for you?

So, John, we are still actively working our M&A pipeline across the different products in the portfolio. We have got the cash.

And obviously, we can deploy that for acquisitions overseas or in the U.S. and it will be in line with our strategy around products that sense, connect and move.

We have certain things where we are focused on and as we renew and refresh different parts of the portfolio, so nothing more to report other than that.

Okay. Do you see potential acquisition more on the domestic front or more likely to be a foreign operation?

John, we are looking at opportunities in all regions. So, it’s all matter of timing.

Okay. Regarding your exposure, you kind of suggested earlier that growth in China and possibly Europe could offset your exposure to be North American – to the economy of the automotive market, can you kind of refresh our memories of what your exposure is to those three different geographies going forward?

So I think overall our total sales in North America are over 50%, probably 54% or 55%. And John the reason why we focused on that Europe is up I should say from about the last 2 years by 12% to 14%, 15% range in the balance than is Asia, primarily in China.

And the reason why we remain cautious on the U.S. is on the transportation front last year was the first year we saw a decline in unit volume coming down from $17.5 million to $17.2 million.

We would be pretty pleased this year to see a transportation number in the North American region outfield high $16.7 million to $17 million, that would be a good year and where our gain shares we should at the offset some softness.

John just to clarify Kieran’s comment, the split of sales is for our total business, not just for the automotive end market. We do not disclose regional splits by end market.

Okay, I was quite of surprised by some of those. Okay, alright.

Thank you, guys. Thanks for taking my questions.

You’re welcome.

Hi, again. Kieran, would you share what growth areas that may drive your revenue towards the upper end of your guidance?

Yes. Mostly on some of the newer ceramic products is where we are seeing a lot of traction.

We have still got good growth on the other areas as well, but we are having more new products in that area and that’s where we see that we have got some opportunity. On top of that that backlog that we have been building over the last number of years is pretty robust that we feel good about that as well to offset softness and it can give us some momentum with share gains.

So it’s mainly newer ceramic products aside from your backlog, Kieran?

Newer ceramic products and newer electronic components in that area as well where we are doing some things, but also on the transportation side where we have got that backlog built up and we feel good about the organic growth rate and across the different markets.

Got it. And then one more question, so when transition of Elkhart finished in the second half 2018, is there any estimate how much basis point you may see improvement?

The way we have communicated that Hendi is where we are finishing in the second half of the year. If you remember last year we said we have won product line that was delayed by three months, but still we will finish in the second half.

And we said the savings are going to be in the region of $6 million to $8 million on a full and year basis, so the first full year would be 2019, so that should give you some sense of it.

Okay, got it. Okay.

Thank you.

Thanks Hendi.

Great, I just want to thank everybody for your participation on today’s call. We have made a lot of progress in several areas with some areas we need to focus on.

So it’s back to work here in Lisle and look forward to talking to you next quarter. Thank you.