By Ian Gilson, PhD, CFA

As expected the third quarter (CTS) was impacted by currency fluctuations, with a weak Euro reducing revenue by $1.7 million. There will also be a negative impact in the fourth quarter.

Weak sales to the auto industry and an inventory adjustment by hard drive manufacturers also had a negative effect so revenue was below our estimate. Despite these problems operating income before other charges was ahead of expectations at $13.3 million versus our estimate of $12.5 million. After adjustments for all non-reoccurring charges net EPS was $0.23 just a penny short of our estimate.

Gross margins improved on a sequential basis, helped by manufacturing operations but no sales in countries with weak currencies. The charges for closing the Canadian facilities include severance pay. These charges should decline in the 4Q15.

Sales to the automobile sector declined partly because some products are being phased out whilst their newer products are replacing them plus the seasonality of the auto industry. These newer products are, usually, more profitable than the older ones they replace. Although the auto industry in the USA has shown above average growth over the last few years, demand in Europe has been soft. Hopefully this will change for the better in 2016 and 2017.

In the HDD business there has been a small inventory adjustment at the customer level. The good news here is that CTS is launching new products which should have a positive impact in 2016.

A $14.5 million charge was taken in the third quarter for remediation of facilities operated by CTS over 10 years ago. Remediation work is expected to start next year. It is difficult to estimate the total cost but CTS has discussed all of the requirements with the EPA and it thinks the charge is sufficient to cover all expenses.

Management expects a sequential increase in revenue in the fourth quarter, followed by single digit growth in 2016 with an increasing growth rate in 2017. Although potential acquisition candidates do exist the prices are high at this point in time. We have not included any acquisitions in our current estimates.

Orders in the 3Q15 were $95 million, $71 million in the auto sector and $24 million in the other businesses. Cash on the balance sheet increased slightly from the 2Q15, to $150.8 million and the stock buy-back continued ($4.3 million in 3Q15).

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