CTS Corporation — FY2020 Form 10-K
Business context and reporting period. CTS designs and manufactures sensors, connectivity components and actuators for transportation, industrial, medical, aerospace and defense, and telecom/IT markets. This filing reports the fiscal year ended December 31, 2020; the company operates as one reportable segment. Amounts below are in millions of dollars unless stated otherwise.
Financial performance and liquidity
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue | $424.1 | $469.0 |
| Gross profit / margin | $139.1 / 32.8% | $157.6 / 33.6% |
| Operating earnings / margin | $45.1 / 10.6% | $53.8 / 11.5% |
| Net earnings | $34.7 | $36.1 |
| Diluted EPS | $1.06 | $1.09 |
| Operating cash flow | $76.8 | $64.4 |
| Capital expenditures | $14.9 | $21.7 |
| Cash and cash equivalents at year-end | $91.8 | $100.2 |
| Debt at year-end | $54.6 | $99.7 |
| Current assets / current liabilities | $233.2 / $104.9 | $237.5 / $96.9 |
| Current ratio | 2.2:1 | 2.4:1 |
Operating cash flow exceeded net earnings; reported cash flow included $26.7 million of depreciation and amortization. Cash declined $8.5 million, primarily reflecting $45.1 million of net debt repayments, capital spending, acquisitions, share repurchases and dividends, partly offset by operating cash generation. Working capital was $128.3 million, down from $140.5 million. The company reported $243.7 million of unused revolving-credit capacity, subject to covenants, and stated that cash and available credit should cover anticipated needs for at least 12 months. It was in compliance with debt covenants at year-end.
FY2020 dividends were $0.16 per share. CTS repurchased 342,731 shares for approximately $8.1 million; approximately $5.7 million remained under its repurchase authorization.
Material changes versus the prior comparable period
- Revenue fell 9.6%, mainly because of lower transportation volumes amid COVID-19 disruptions. Transportation sales declined 19.3%; sales to other markets rose 7.4%.
- Transportation represented 57% of sales versus 64% in 2019. Industrial rose to 22% from 17%; aerospace and defense rose to 9% from 7%.
- Gross margin declined 0.8 percentage points, primarily due to lower volume, partly offset by cost reductions. Operating earnings fell 16.1%; net earnings declined 4.0%.
- SG&A decreased 3.7% in dollars but rose to 16.0% of sales from 15.0%. Restructuring charges decreased to $1.8 million from $7.4 million.
- Net debt declined $45.1 million. Operating cash flow increased from $64.4 million to $76.8 million.
- Q4 2020 revenue was $123.0 million, versus $115.0 million in Q4 2019; net earnings were $14.9 million versus $10.1 million, and diluted EPS was $0.46 versus $0.31.
Outlook, commentary, risks and unusual items
- Management described the outlook as cautious. It expected COVID-19-related social distancing, absenteeism, plant labor restrictions, and reduced customer and supplier capacity could affect operations into 2021. No numerical revenue or earnings guidance was provided.
- In September 2020, CTS began a plan to optimize its manufacturing footprint and improve efficiency. It estimated restructuring charges of $4.6–$6.0 million and additional related costs of $4.0–$5.1 million, including training, employee overlap and capital spending.
- CTS acquired Sensor Scientific, Inc. on December 30, 2020 for a stated purchase price of $10.3 million, including contingent consideration. The purchase-price allocation was preliminary; SSI contributed no revenue or earnings to FY2020.
- CTS initiated termination of its U.S. pension plan. Management expected completion during 2021 and reported that plan assets significantly exceeded estimated liabilities, so it did not expect company cash contributions from the termination. Pension-related 2021 noncash expense estimates are presented differently in the filing: one discussion cites $10–$20 million of settlement charges, while another estimates $110–$135 million of pre-tax noncash settlement charges and approximately $125 million of pension losses to be recognized. The ultimate amount depends on settlement conditions.
- Customer concentration remains significant: the 15 largest customers generated 59.4% of sales. Toyota accounted for 13.4%, Cummins 13.1%, and Honda 8.0%; customer agreements generally do not provide firm volume commitments.
- Environmental remediation reserves were $10.6 million. The company disclosed potential environmental and other legal claims, but stated that final outcomes could exceed recorded accruals; the filing does not provide a clear estimate of any additional exposure.
- Other notable risks include COVID-19 impacts, cyclical end markets, customer order cancellations or delays, component availability and pricing, foreign exchange, international operations, technology and competition, and pension assumptions. Goodwill of $109.5 million passed the October 2020 impairment test; the auditor identified that assessment as a critical audit matter.
- The financial statements received an unqualified audit opinion, and management and the auditor concluded internal control over financial reporting was effective as of December 31, 2020.
Important facts for investors to verify
- Whether transportation demand, customer orders, and production conditions recovered or remained disrupted after year-end.
- Execution costs, timing, and expected savings from the September 2020 restructuring plan.
- Final SSI purchase accounting and whether contingent consideration becomes payable.
- The final U.S. pension-plan termination cost and the reconciliation of the filing’s differing 2021 noncash charge estimates.
- Customer concentration, receivable collectability, and the extent to which major customers’ purchase orders translate into sustained sales.
- Environmental remediation exposure relative to the $10.6 million reserve, and liquidity and covenant headroom as debt, capital spending, and acquisition needs evolve.