CTS Corporation — FY 2017 Form 10-K Summary
Business context and reporting period. CTS designs and manufactures sensors, electronic components and actuators for OEMs across transportation, industrial, medical, defense and aerospace, IT, and communications markets. This annual report covers the fiscal year ended December 31, 2017; fourth-quarter results are also summarized below. Transportation represented 65% of annual sales. CTS acquired piezoelectric-products maker Noliac in May 2017 for approximately $19.3 million.
Key financial results
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Net sales | $423.0 million | $396.7 million |
| Gross margin | $140.4 million; 33.2% | $140.4 million; 35.4% |
| Operating earnings | $38.5 million; 9.1% | $63.2 million; 15.9% |
| Net earnings | $14.4 million | $34.4 million |
| Diluted EPS | $0.43 | $1.03 |
| Cash from operations | $58.0 million | $47.2 million |
| Capital expenditures | $18.1 million | $20.5 million |
| Cash and cash equivalents | $113.6 million | $113.8 million |
| Total debt | $76.3 million | $90.1 million |
| Current ratio | 2.3 to 1 | 2.2 to 1 |
Operating cash flow less capital expenditures was approximately $40.0 million in 2017. Cash exceeded debt by approximately $37.3 million, although $112.5 million of cash was held outside the United States. The company had $221.6 million available under its $300 million revolving credit facility and was in compliance with its debt covenants. The annual dividend was $0.16 per share.
Fourth quarter
Q4 sales rose 9.2% year over year to $110.9 million, but gross margin declined to 29.6% from 35.3%. CTS reported an operating loss of $0.02 million and a net loss of $13.6 million, or $0.41 per diluted share, versus net earnings of $8.3 million, or $0.25 per share, in Q4 2016.
Material changes and unusual items
- Annual sales increased 6.6%; Noliac contributed $7.1 million of 2017 sales. CTS also cited growth in transportation and other markets.
- Operating earnings fell 39.1% and net earnings fell 58.0%. Margin pressure reflected a roughly $13.4 million non-cash pension settlement charge in Q4, production rework costs, unfavorable foreign-exchange effects, and higher SG&A. The pension charge was triggered by lump-sum pension benefit elections.
- The 2017 tax provision included a provisional $18.0 million, non-cash charge related to the U.S. Tax Cuts and Jobs Act: $6.3 million from deferred-tax remeasurement and $11.7 million for the transition tax on foreign earnings. The company said these estimates could be adjusted in 2018.
- The 2016 comparison included an $11.5 million gain on sale of a former Canadian facility, which also contributed to the year-over-year decline in operating earnings.
- CTS recorded $4.1 million in 2017 restructuring and impairment charges under its 2016 plan. The plan was estimated to cost about $13.4 million in total; $7.2 million had been incurred through year-end. It includes phasing out production at Elkhart by mid-2018, transitioning the site to R&D, and relocating headquarters and Bolingbrook operations.
Outlook, risks and contingencies
Management provided no specific financial guidance in the supplied filing text. It said operating cash flows and available revolver borrowings should be adequate for working capital, capital expenditures and debt service for at least the next 12 months. Management cited growth opportunities in sensing, motion and connectivity applications, while noting challenges from market softness, competition, technology changes and new-customer and product execution.
Key risks include customer concentration and order volatility: Cummins, Honda and Toyota accounted for 13.4%, 11.2% and 10.2% of sales, respectively, and the top 15 customers represented 64.4%. Customer agreements generally lacked volume commitments. Other risks include transportation-market cyclicality, pricing and technology competition, international and foreign-exchange exposure, component sourcing, pension assumptions, and the potential effects of tax-law changes.
Environmental remediation reserves were $17.1 million at year-end, including exposures at several sites, some designated Superfund sites. Management stated that provisions for probable and estimable costs had been recorded, but could not assure that ultimate costs would not materially exceed reserves. Other ordinary-course legal claims were pending; management did not expect them to materially affect the consolidated financial statements. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether the provisional $18.0 million Tax Act charge and related deferred-tax and foreign-earnings estimates were revised in 2018, including the treatment of GILTI and foreign cash.
- Whether margin recovery and earnings improvement offset the pension settlement, rework costs, acquisition-related costs and the 2016 asset-sale comparison.
- Execution, costs and timing of the Elkhart transition and other restructuring actions, including completion of the remaining planned work.
- Ongoing sales exposure to major customers and the transportation market, and the effect of changes in customer production orders or purchasing terms.
- Environmental remediation developments and whether the $17.1 million reserve remains adequate as site estimates and regulatory requirements evolve.