CTS Corporation — 2021 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2021. This is an annual report, not a standalone fourth-quarter filing. CTS designs and manufactures sensors, connectivity components, and actuators for transportation, industrial, medical, and aerospace and defense markets.
Financial performance and position
Amounts below are in millions of dollars unless noted.
| Metric | 2021 | 2020 |
|---|---|---|
| Net sales | $512.9 | $424.1 |
| Gross margin | $184.6; 36.0% | $139.1; 32.8% |
| Operating earnings | $76.5; 14.9% of sales | $45.1; 10.6% of sales |
| Net earnings (loss) | $(41.9) | $34.7 |
| Diluted earnings (loss) per share | $(1.30) | $1.06 |
| Cash from operating activities | $86.1 | $76.8 |
| Capital expenditures | $15.6 | $14.9 |
| Cash and cash equivalents at year-end | $141.5 | $91.8 |
| Total debt at year-end | $50.0 | $54.6 |
- Sales increased 21.0%; transportation sales rose 17.7%, and sales to other markets rose 25.3%. The Sensor Scientific acquisition contributed $7.1 million of 2021 sales; currency movements added $6.9 million.
- Transportation accounted for 55% of sales, industrial 27%, medical 9%, and aerospace and defense 9%. Cummins and Toyota represented 15.0% and 12.4% of sales, respectively.
- Operating cash flow exceeded net income because it included substantial noncash pension expense. Investing cash outflow was $15.9 million; financing cash outflow was $20.7 million, including $8.8 million of share repurchases and $5.2 million of dividends.
- Working capital liquidity included $289.1 million in current assets and $114.1 million in current liabilities. The revolving credit facility had $348.3 million available, subject to covenant restrictions.
- The company reported $463.6 million of shareholders’ equity and debt equal to 9.7% of total capitalization. Its $0.16 annual dividend per share was unchanged from 2020.
Material changes versus 2020
- Sales, gross margin, and operating earnings improved as market activity and volumes recovered. Gross margin expanded 3.2 percentage points, primarily due to volume and mix.
- Despite stronger operating earnings, CTS recorded a net loss, chiefly because of $126.3 million in pension settlement charges associated with terminating its U.S. defined-benefit pension plan. The charges were noncash and non-operating; related pension losses were reclassified from accumulated other comprehensive loss.
- Other expense totaled $137.4 million, versus $0.4 million of other income in 2020. The 2021 amount was primarily driven by pension settlement charges and foreign currency translation losses.
- The revolving credit facility was amended in December 2021: capacity increased from $300 million to $400 million, maturity extended to December 15, 2026, and the primary benchmark changed from LIBOR to SOFR. CTS reported compliance with its debt covenants at year-end.
Outlook, commentary, and risks
- Management expects semiconductor and resin shortages, supply-chain interruptions, inflation in materials and freight, and related customer production disruptions to continue affecting results in 2022. It stated that the financial impact remains uncertain and that it is taking steps to mitigate disruptions.
- Management believes operating cash flow and available credit will fund working capital, capital expenditures, and debt service for at least the next 12 months and the foreseeable future. No specific 2022 revenue or earnings guidance is provided in the filing text.
- Key exposures include customer concentration and order variability, automotive and other end-market cyclicality, component availability and pricing, inflation and freight costs, COVID-19 effects, foreign exchange, international operations, competition and technology change, and environmental obligations.
- Environmental remediation reserves were $11.0 million at year-end. CTS disclosed pending ordinary-course legal claims and stated that final outcomes could exceed recorded accruals. It also identified cybersecurity, privacy, climate-related, and tax risks.
- The U.S. pension-plan termination process was expected to be completed in the first half of 2022. Remaining plan assets were expected to liquidate and revert to CTS after administrative completion, subject to income and excise taxes.
- The annual goodwill impairment test found no impairment. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting; goodwill impairment was identified as a critical audit matter.
Most important facts for investors to verify
- Whether supply constraints, OEM shutdowns, material inflation, and higher freight costs persist or worsen, and how effectively CTS can recover these costs.
- Whether sales growth and operating-margin improvement continue, particularly given transportation’s 55% share of revenue and two customers’ combined 27.4% share.
- The final cash, tax, and accounting effects of completing the U.S. pension-plan termination, including the expected release of remaining plan assets.
- Actual cash conversion and working-capital needs, including inventory growth and reserves, against management’s liquidity assessment and credit-facility covenants.
- Changes in environmental remediation exposure, pending legal matters, and the company’s ability to maintain its dividend and planned repurchases.