CTS Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless otherwise noted. CTS designs and manufactures sensors, actuators, and electronic components for aerospace and defense, industrial, medical, telecom and IT, and transportation markets. Amounts below are in U.S. dollars; financial statement amounts are shown in millions unless stated otherwise.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $117.6 | $113.5 | +3.6% |
| Gross profit / margin | $40.6 / 34.5% | $38.4 / 33.9% | Margin +0.6 percentage points |
| Operating earnings / margin | $14.2 / 12.1% | $13.4 / 11.8% | +6.4% earnings |
| Net earnings / diluted EPS | $11.4 / $0.34 | $11.5 / $0.34 | Net earnings -1.1% |
| Operating cash flow | $9.6 | $20.2 | Down $10.6 |
| Capital expenditures | $5.3 | $6.9 | Down $1.6 |
Cash flow from operations less capital expenditures was $4.3 million, compared with $13.2 million in Q1 2018. The filing attributes the lower operating cash flow in part to an $11.1 million net cash outflow from changes in assets and liabilities. Cash and cash equivalents were $100.7 million at quarter-end, compared with $100.9 million at December 31, 2018.
At March 31, 2019, long-term debt was $50.0 million, unchanged from year-end; debt was 11.4% of total capitalization. CTS had $248.1 million available under its $300 million revolving facility, net of outstanding borrowings and standby letters of credit. The weighted-average borrowing rate was 3.60%, versus 3.10% at year-end. CTS was in compliance with debt covenants.
Current assets were $242.2 million and current liabilities were $97.5 million. The company reported $386.9 million in shareholders’ equity. The filing does not provide a separately labeled current ratio.
Changes and business drivers
- Transportation sales rose 6.1% to $78.8 million; aerospace and defense sales increased to $7.5 million. Industrial sales declined to $18.2 million, telecom and IT to $3.4 million, while medical sales increased to $9.7 million.
- Foreign exchange reduced year-over-year sales by $1.8 million, chiefly reflecting U.S. dollar appreciation against the Chinese renminbi and euro.
- Gross margin improvement reflected cost savings and the manufacturing transition from Elkhart, partly offset by higher material and wage costs.
- Restructuring charges increased to $2.1 million from $1.2 million, mainly for building and equipment relocation, severance, and travel under the 2016 plan. The company also recorded $0.9 million of impairment charges related to that plan.
- Other income, net, fell to $0.1 million from $2.0 million. Q1 2018 included substantially higher foreign currency transaction gains; the filing reports gains of $0.5 million in Q1 2019 versus $2.0 million in Q1 2018.
- The effective tax rate decreased to 20.0% from 24.5%, primarily due to tax benefits upon vesting of restricted stock units.
Liquidity, outlook, and risks
Management said operating cash flows and available revolver borrowings should be adequate to meet working capital, capital expenditure, and debt service needs for at least the next 12 months. CTS noted that it may pursue additional debt or equity financing for liquidity or acquisitions. The filing provides no specific revenue or earnings guidance.
CTS entered a new five-year, unsecured $300 million revolving credit agreement on February 12, 2019, replacing its prior facility; the $50 million borrowing was refinanced. The facility may be increased by up to $150 million with agent approval and includes leverage and fixed-charge-coverage covenants.
CTS adopted the lease accounting standard in January 2019, recognizing a $24.8 million lease liability and a $22.1 million right-of-use asset, with no opening retained-earnings adjustment. At quarter-end, operating lease liabilities totaled $27.2 million; management expected the standard to have an immaterial effect on ongoing net income.
Environmental remediation reserves were $10.9 million at March 31, 2019. Management considered reserves adequate based on available information but cautioned that ultimate environmental liabilities could materially exceed current reserves. Other ordinary-course claims were pending; management did not expect them to materially affect financial position, results, or cash flows. No significant changes to previously disclosed risk factors or market risks were reported. Risks discussed include customer reliance, pricing and demand, foreign exchange and international operations, technology change, and environmental, litigation, and product-liability matters.
Customer concentration is notable: Cummins represented 18.7% of sales, Toyota 10.4%, and Honda 10.3% in Q1 2019. CTS repurchased 31,500 shares for $0.8 million and had approximately $24.7 million remaining under its new $25 million repurchase authorization.
Important facts for investors to verify
- Whether transportation-market growth and margin gains persist, and how material and wage inflation affects profitability.
- The reasons for the sharp year-over-year reduction in operating cash flow and whether working-capital movements reverse.
- Exposure to major customers, particularly Cummins, and the effect of currency movements on sales and earnings.
- Progress, remaining costs, and expected benefits of the 2016 restructuring, including the recorded impairment charges.
- Adequacy of environmental remediation reserves and compliance with credit-facility covenants.