CTS Corporation — Q1 2017 Form 10-Q
Business context and reporting period. CTS designs and manufactures sensors, actuators and electronic components for OEMs in aerospace, communications, defense, industrial, IT, medical and transportation markets. This unaudited quarterly report covers the three months ended March 31, 2017; comparisons are with Q1 2016 unless noted. Dollar figures below are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Net sales | $100.2 | $96.7; up 3.6% |
| Gross margin | $34.2; 34.2% of sales | $33.5; 34.6% |
| Operating earnings | $12.2; 12.2% of sales | $12.4; 12.9% |
| Net earnings | $8.5 | $7.9; up 7.9% |
| Diluted EPS | $0.25 | $0.24 |
| Operating cash flow | $9.8 | $2.8 |
| Cash and cash equivalents | $121.8 at March 31 | $113.8 at December 31, 2016 |
| Long-term debt | $94.0 at March 31 | $89.1 at December 31, 2016 |
Capital expenditures were $3.8 million, making operating cash flow less capital expenditures approximately $6.0 million. Investing cash outflow was $3.8 million; financing cash inflow was $2.0 million, including $4.9 million of net borrowings, offset by dividends and taxes paid on equity awards. Cash increased $8.0 million during the quarter. The company had $203.8 million available under its $300 million revolving facility and was in compliance with its debt covenants. Working capital rose $16.6 million. Of cash on hand, $120.2 million was held outside the United States.
Material changes versus the prior period
- Sales growth reflected $3.2 million of higher “other” sales, including the single-crystal materials acquisition and stronger demand in certain electronic-component end markets; automotive sales rose $0.2 million. Foreign exchange reduced year-over-year sales by $0.9 million.
- Gross margin declined 0.4 percentage points, primarily because of production rework issues that management said were resolved during the quarter. Operating margin declined 0.7 percentage points, with $0.8 million of restructuring and impairment charges contributing to the comparison.
- Operating earnings fell 1.9% despite sales growth. Net earnings increased as lower income tax expense and improved other income more than offset lower operating earnings.
- Q1 2016 investing cash flow included a $72.8 million acquisition payment; there was no acquisition payment in Q1 2017.
Outlook, management commentary and risks
- Management said operating cash flow and available revolving-credit borrowings should be adequate to fund working capital, capital expenditures and debt service for at least the next 12 months. No specific revenue or earnings guidance was provided in the filing.
- The June 2016 restructuring plan is expected to cost approximately $12.3 million and affect about 230 employees. It includes phasing out production at the Elkhart facility by mid-2018 and converting it to an R&D center. Costs incurred through March 31, 2017 were $3.8 million; the Q1 charge was $0.8 million.
- Environmental remediation reserves were $17.9 million. CTS stated that ultimate environmental liability could materially exceed the reserve; it also reported ordinary-course claims and said it had made adequate provision based on available information.
- Key disclosed risks include economic and end-market conditions, customer reliance, pricing and product demand, acquisition integration, technology change, foreign exchange and other international risks, and litigation, environmental and product-liability contingencies. The company reported no significant risk-factor changes since its 2016 Form 10-K and no material changes in market risk.
- CTS prospectively changed its method for calculating U.S. pension and post-retirement service and interest costs in 2017. The change reduces those cost components, offset by a reduction in actuarial losses in accumulated other comprehensive loss; management said it does not affect the benefit obligation.
- The company expects to adopt the new revenue-recognition standard on January 1, 2018 using the modified retrospective method. It anticipates minor timing differences, principally from estimating variable consideration; the total impact had not yet been determined.
Important facts for investors to verify
- Whether sales growth and the single-crystal acquisition contribution persist, and whether production rework remains resolved.
- Progress, remaining costs and execution risks for the $12.3 million restructuring plan.
- Operating cash conversion, capital spending, and the effect of cash held outside the United States on liquidity and potential repatriation.
- Debt levels, borrowing availability and continued compliance with revolving-facility covenants.
- Environmental remediation developments and whether reserves remain adequate given the stated uncertainty over ultimate exposure.
- The eventual financial-statement effects of adopting the revenue-recognition standard.