CTS Corporation — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2016, compared with the periods ended September 27, 2015. Financial statements are unaudited. Dollar amounts below are in millions unless stated otherwise.
Business context
CTS designs and manufactures sensors, actuators and electronic components for markets including automotive, medical, industrial, aerospace, communications and defense. In March 2016, CTS acquired CTG Advanced Materials, a producer of single-crystal piezoelectric materials, for $73.1 million net of cash acquired. The acquired business contributed $7.1 million of sales and $0.3 million of net earnings from acquisition through September 30.
Key financial results
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $99.7 | $90.6 | $295.1 | $289.0 |
| Gross margin | $36.6 (36.8%) | $31.4 (34.7%) | $104.6 (35.4%) | $97.0 (33.5%) |
| Operating earnings (loss) | $12.5 | $(3.9) | $49.0 | $17.2 |
| Net earnings (loss) | $3.7 | $(4.8) | $26.1 | $20.6 |
| Diluted EPS | $0.11 | $(0.15) | $0.79 | $0.61 |
| Operating cash flow | Not stated separately | Not stated separately | $31.6 | $24.1 |
Q3 sales increased 10.0%; year-to-date sales increased 2.1%. Management attributed sales growth to higher automotive volumes, CTG-AM, and stronger demand for electronic components in certain end markets. Currency movements reduced sales by approximately $0.6 million in Q3 and $1.7 million year to date. Gross-margin improvement reflected productivity and restructuring savings, favorable mix, acquisition sales and currency effects. R&D investment rose year to date to $18.4 million from $16.4 million.
Year-to-date operating earnings benefited from an $11.5 million gain on the sale of a Canadian building. The prior-year comparison included a $14.5 million environmental charge for the Asheville site; that charge did not recur in 2016. Q3 2016 also included $2.0 million of restructuring and impairment charges. SG&A increased, partly due to acquisition-related costs and amortization, timing of expenses, and an early lease termination fee associated with a planned Illinois facility consolidation.
Cash, debt and liquidity
- At September 30, cash and cash equivalents were $114.4 million, down $42.5 million from year-end 2015; $113.4 million was held outside the United States.
- Operating activities generated $31.6 million in the first nine months. Investing used $75.3 million, including the $73.1 million acquisition payment and $14.5 million of capital expenditures, partly offset by $12.2 million in asset-sale proceeds.
- Long-term debt was $96.0 million, versus $90.7 million at year-end. The revolving facility was expanded to $300 million; reported availability was $201.8 million. The weighted-average borrowing rate was 1.9%. CTS reported compliance with its debt covenants.
- Management stated that operating cash flows and available facility borrowings should be adequate for working capital, capital expenditures and debt service for at least the next 12 months. Total debt as a percentage of debt plus equity was 23.9%.
- CTS declared dividends of $0.04 per share in Q3 and $0.12 per share year to date.
Material changes, outlook and risks
- Restructuring: The June 2016 plan phases out production at the Elkhart facility by mid-2018 and converts it to an R&D center, with other organizational changes. Estimated total cost is approximately $16.0 million; $2.2 million had been recorded through September 30, affecting approximately 230 employees. Further equipment-relocation, impairment and other costs are expected to be expensed as incurred.
- Taxes: The Q3 effective tax rate was 68.3%, and the nine-month rate was 43.2%. CTS cited valuation allowances, deferred-tax revaluation associated with restructuring, earnings mix, and taxes related to foreign earnings. The unusually high current-period tax expense affected earnings.
- Environmental and other contingencies: CTS reported $18.9 million in remediation reserves within accrued liabilities. Management considers reserves adequate based on available information but cautioned that ultimate environmental costs could materially exceed current reserves. Ordinary-course claims are also pending; management does not expect them to materially affect results based on current information.
- Market and operating risks: The filing identifies customer reliance, demand and pricing, acquisition integration, foreign exchange and international operations, technology changes, and environmental, litigation and product-liability matters as risks. Honda accounted for 10.5% of Q3 sales; Toyota and Cummins each represented less than 10% in Q3.
- Guidance: The filing provides no specific revenue or earnings guidance. Management’s liquidity outlook is stated above; actual results remain subject to the cited risks.
Important facts for investors to verify
- How much of sales and margin growth is attributable to CTG-AM versus organic demand, and how the acquisition performs relative to expected benefits.
- Whether the $16.0 million restructuring estimate remains sufficient, and whether the Elkhart transition proceeds on schedule.
- Potential changes to Asheville and other environmental remediation costs beyond the $18.9 million recorded reserve.
- How the Canadian building-sale gain and absence of the prior-year environmental charge affect comparisons of underlying operating performance.
- Future effective tax rates, foreign cash availability and repatriation costs, as well as continued covenant compliance and borrowing capacity.