CTS Corporation — Q1 2023 Form 10-Q
Business context and period. CTS designs and manufactures sensors, actuators and connectivity components for transportation, industrial, medical, and aerospace and defense markets. This unaudited report covers the three months ended March 31, 2023, compared with Q1 2022. Unless noted, amounts below are in millions of dollars.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net sales | $146.0 | $147.7 | Down 1.2% |
| Gross profit / margin | $51.7 / 35.4% | $54.3 / 36.8% | Down $2.7; down 1.4 percentage points |
| Operating earnings / margin | $22.2 / 15.2% | $26.0 / 17.6% | Down 14.9% |
| Net earnings / net margin | $18.3 / 12.6% | $20.2 / 13.7% | Down 9.4% |
| Diluted EPS | $0.58 | $0.63 | Down $0.05 |
| Operating cash flow | $11.2 | $19.3 | Down $8.1 |
| Capital expenditures | $4.5 | $3.4 | Up $1.1 |
Transportation sales fell 6.1% to $74.3 million; non-transportation sales rose 4.6%. By market, industrial revenue was $40.7 million, medical $17.3 million, and aerospace and defense $13.7 million. Foreign exchange reduced year-over-year sales by $2.3 million.
At March 31, cash and equivalents were $143.5 million, versus $156.9 million at year-end 2022. Long-term debt was $80.3 million, down from $83.7 million. The $400 million revolving facility had $318.1 million available, subject to covenants; CTS reported compliance with all debt covenants. The weighted-average borrowing rate was 5.47%, versus 2.96% at year-end.
Material changes and drivers
- Gross margin declined as higher material and freight costs and unfavorable foreign exchange effects (reported at $1.8 million) outweighed the modest sales decline. CTS also cited continuing material-cost inflation and some supply interruptions.
- Operating earnings were pressured by lower gross profit, higher R&D expense ($6.6 million versus $6.2 million), and increased restructuring charges ($0.9 million versus $0.3 million). SG&A was broadly stable.
- Other income improved to $0.5 million from a $0.3 million expense, primarily because interest income on cash equivalents increased. The effective tax rate fell to 19.2% from 21.4%, mainly due to tax benefits from vesting restricted stock units.
- Cash from operations was lower, with management citing the annual bonus payout and higher accounts receivable among working-capital outflows. Cash used in investing was $7.9 million, including acquisition-related payments and capital expenditures. Financing cash outflow was $16.6 million, including $8.8 million of share repurchases and $1.3 million of dividends.
Outlook, risks and unusual items
- No specific financial guidance or quantified outlook is provided. Management said operating cash flow and available credit should fund working capital, capital expenditures, investments and debt service for at least the next 12 months and the foreseeable future, while noting it may seek additional financing.
- CTS acquired Maglab AG on February 6, 2023, adding magnetic-system design and current-measurement capabilities for e-mobility, industrial automation and renewable energy. The preliminary purchase price allocation is $7.7 million, including $4.2 million in cash and $3.6 million of contingent consideration; the valuation remains preliminary.
- CTS announced closure of its Juarez facility and consolidation into its expanded Matamoros facility, expected to be completed in 2024. Total expected costs are estimated at $1.5–$3.0 million; $0.1 million was incurred in Q1. Total Q1 restructuring charges were $0.9 million.
- Environmental remediation reserves were $11.1 million. CTS received an EPA letter seeking $10.0 million in past response costs and interest related to the Asheville site, among three potentially responsible parties. CTS said it could not reasonably estimate its potential liability and recorded no accrual for that letter as of March 31. Other ordinary-course legal claims and product warranty exposures also remain.
- Management highlighted risks including supply-chain disruptions, inflation or recession, customer reliance, transportation-market conditions, acquisition integration, pricing and demand, technology changes, environmental costs, and foreign-exchange and geopolitical risks. The filing reports no significant changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether transportation demand, material and freight costs, and foreign-exchange effects continue to pressure sales and gross margins.
- Operating cash conversion and working-capital trends, particularly receivables and inventory, as well as the impact of annual incentive payments.
- Maglab integration and final purchase accounting, including the contingent consideration tied to integration and future revenue and order targets.
- The potential CTS share of the EPA’s $10.0 million Asheville response-cost demand; the filing does not provide a clear estimate of that exposure.
- Juarez closure costs and timing, the pace of repurchases under the new $50 million authorization, and liquidity and covenant headroom as borrowing costs change.