CTS Corporation — Q2 2021 Form 10-Q
Business context and reporting period. CTS designs and manufactures sensing, motion and connectivity products for transportation, industrial, medical, aerospace and defense, telecom and IT markets. This filing covers the quarter and six months ended June 30, 2021; amounts below are in millions of dollars unless stated otherwise.
Financial performance and liquidity
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $129.6 | $84.2 | $258.0 | $187.3 |
| Gross margin | $47.7; 36.8% | $26.6; 31.6% | $90.3; 35.0% | $59.5; 31.8% |
| Operating earnings | $20.6; 15.9% | $6.2; 7.4% | $39.1; 15.1% | $14.7; 7.9% |
| Net earnings | $0.9 | $4.9 | $12.9 | $8.7 |
| Diluted earnings per share | $0.03 | $0.15 | $0.39 | $0.27 |
- Q2 sales grew 53.9% year over year; first-half sales grew 37.8%. Transportation sales rose 87.7% in Q2 and 47.9% for the first half. The filing attributes growth primarily to economic recovery and higher volume; SSI contributed $1.6 million in Q2 and $3.5 million year to date. Foreign exchange added $2.7 million and $5.2 million, respectively.
- Despite higher operating earnings, Q2 net earnings fell because other expense included a $20.1 million noncash pension settlement charge. First-half net earnings rose 48.5%, notwithstanding the charge.
- Six-month operating cash flow was $38.8 million, versus $23.7 million in 2020. Investing cash outflow was $4.2 million, including $4.0 million of capital expenditures; financing cash outflow was $9.0 million. Cash increased $25.6 million to $117.4 million.
- At June 30, cash was $117.4 million, current assets $263.3 million and current liabilities $102.3 million. Long-term debt was $50.0 million, down from $54.6 million at year-end. The $300 million revolving facility had $248.3 million available, subject to covenants; CTS reported compliance with all debt covenants.
- Quarterly dividends declared were $0.04 per share. A new $50 million repurchase authorization was approved in May; no shares were repurchased in the first half.
Material changes versus prior comparable periods
- Sales and operating margins increased substantially compared with 2020, when Q2 activity was significantly affected by COVID-19. Management said higher volume drove improved gross margin.
- Q2 SG&A rose to $20.9 million from $14.7 million, reflecting restoration of prior cost reductions and higher incentive compensation; SG&A as a share of sales decreased to 16.2% from 17.4%. First-half R&D declined to $11.7 million from $12.9 million.
- The effective tax rate was 245.6% in Q2 2021, versus 17.6% in Q2 2020, primarily reflecting the pension settlement charge. The first-half rate was 9.3%, versus 27.1%.
- CTS completed a partial settlement of its U.S. pension plan in Q2: approximately 365 participants received lump-sum payments of $35.6 million from plan assets. Final settlement through annuity purchases was expected in Q3, with additional pension losses potentially reclassified to earnings.
Outlook, commentary and risks
- The filing gives no specific quantitative revenue or earnings guidance. Management said operating cash flows and available revolving-credit borrowings should fund working capital, capital expenditures, debt service and dividends for at least the next 12 months.
- Management warned that semiconductor-chip and resin shortages, OEM shutdowns, and material and freight cost inflation could adversely affect the remainder of 2021; the impact was not quantifiable. COVID-19-related uncertainty and effects on suppliers and customers, particularly in transportation, remained risks.
- Other risks include customer concentration, competition, technology changes, acquisition integration, foreign exchange and international risks, and environmental and legal exposures. Cummins represented 14.3% of Q2 sales and Toyota 13.3%.
- Environmental remediation reserves were $10.3 million at June 30. CTS disclosed potential liability at several current or former sites, including two Superfund sites, and cautioned that ultimate environmental, legal or warranty costs could exceed accruals.
- CTS acquired Sensor Scientific in December 2020 and made another small acquisition in Q2 2021. The SSI purchase-price allocation remained preliminary; contingent consideration had a $1.5 million fair value at June 30.
Important facts for investors to verify
- Whether supply constraints, OEM shutdowns and input-cost inflation materially affect future deliveries, margins or demand, and whether management can quantify those effects.
- The final pension-plan settlement charge, timing of the expected annuity purchase, and any impact on earnings; management did not expect company cash contributions because plan assets significantly exceeded estimated liabilities.
- Whether the reported cash generation and credit-facility availability remain adequate, including compliance with borrowing covenants.
- Developments in environmental remediation and other legal or warranty contingencies, where ultimate costs may exceed recorded reserves.
- Whether customer concentration and the recovery in transportation markets persist, and the performance and final purchase accounting of the acquisitions.