CTS Corporation — Q1 2012 Form 10-Q
Business context and reporting period. CTS is a global manufacturer of components and sensors, primarily for automotive, communications, and defense and aerospace markets, and provides electronic manufacturing services (EMS). This unaudited report covers the three months ended April 1, 2012, compared with the three months ended April 3, 2011.
Financial performance and position
| Metric | Q1 2012 | Q1 2011 / comparison |
|---|---|---|
| Net sales | $147.0 million | $151.5 million; down 3.0% |
| Gross margin | $22.0 million; 15.0% of sales | $29.2 million; 19.2% |
| Operating earnings | $1.9 million; 1.3% of sales | $5.8 million; 3.8% |
| Net earnings | $2.3 million | $5.1 million |
| Diluted EPS | $0.07 | $0.15 |
| Cash and cash equivalents | $84.4 million at April 1 | $76.4 million at December 31, 2011 |
| Debt | $108.7 million | $74.4 million at December 31, 2011 |
| Operating cash flow | $(4.1) million | $(2.5) million |
| Investing cash flow | $(18.6) million | $(6.1) million |
CTS reported $31.2 million of cash provided by financing activities, principally reflecting a $34.3 million net increase in long-term debt. Cash increased by $8.0 million during the quarter. Working capital was approximately $177.0 million, up $17.9 million from year-end 2011. The company declared dividends of $0.035 per share and repurchased 272,076 shares for approximately $2.7 million.
The revolving credit facility was increased to $200 million, with an accordion option to $300 million subject to bank approval, and extended to January 10, 2017. At quarter-end, $88.5 million was available after standby letters of credit. The weighted-average borrowing rate was 1.7%; CTS reported compliance with debt covenants.
Material changes and operating drivers
- Components and Sensors sales increased 6.1% to $76.4 million, while EMS sales fell 11.2% to $70.6 million. Components and Sensors operating earnings were $3.0 million; EMS recorded an operating loss of $1.1 million.
- Management attributed lower margins and earnings mainly to the Thailand facility flood and Scotland facility fire, including lost margin and related expenses estimated at $6–7 million, higher commodity prices, and lower pension income. Favorable segment mix partly offset these pressures.
- CTS recorded $3.6 million of business-interruption insurance recovery and $1.8 million of property-damage recovery in Q1. These recoveries partially offset casualty-related costs; insurance proceeds and accounting recoveries do not necessarily occur in the same period.
- SG&A rose to $19.4 million, or 13.2% of sales, from $18.4 million, or 12.1%. R&D increased to $6.1 million, or 4.2% of sales, from $5.0 million, or 3.3%, reflecting product development and growth initiatives.
- CTS acquired Valpey-Fisher in January for approximately $18.3 million, or $14.7 million net of cash acquired. The acquired business contributed $3.0 million of sales and $0.2 million of pretax earnings from the acquisition date. The purchase-price allocation remained subject to finalization by year-end 2012.
Outlook, risks, and unusual items
Management maintained its 2012 guidance for sales growth of 10%–13% over 2011 and diluted EPS of $0.75–$0.80. CTS expected to continue processing insurance claims for flood-related expenses and lost margin over the next two to three quarters; recovery timing may lag the costs incurred. Further Scotland fire-related expenses and recoveries were not expected to be significant for the remainder of 2012.
The quarter’s income-tax expense was $14,000, compared with $1.5 million in Q1 2011. Management said a $0.7 million discrete tax benefit from a favorable foreign judicial ruling largely offset the effect of a changed geographic earnings mix.
Key risks discussed include market and economic conditions, customer reliance, pricing and demand, technological change, international operations and currency exposure, and disruption from natural disasters. CTS remained a co-defendant in approximately 32 open Toyota-related lawsuits; Toyota’s indemnification agreement covers certain U.S. and Canadian third-party civil claims, subject to stated exceptions and limitations. Environmental remediation matters and other ordinary-course claims were also described; management said provisions were adequate or expected impacts would not be material. No significant changes to risk factors or market risk were reported. Management stated disclosure controls were effective, but its evaluation did not include Valpey-Fisher’s internal controls over financial reporting.
Important facts for investors to verify
- Whether the Thailand and Scotland disruptions, insurance recoveries, and EMS sales trends affect subsequent-quarter margins and cash flow as management expected.
- Whether CTS achieves its maintained 2012 sales-growth and diluted-EPS guidance despite the Q1 sales decline and lower earnings.
- Final purchase accounting and operating performance for Valpey-Fisher, including integration and contribution to Components and Sensors.
- Debt levels, borrowing availability, covenant compliance, and the effect of continued working-capital needs and capital spending.
- Developments in Toyota-related litigation, environmental matters, and CTS’s completion of its internal-control evaluation for Valpey-Fisher.