CTS Corporation — FY2012 Form 10-K
Business context and reporting period. CTS is a global manufacturer of electronic components and sensors and a provider of electronics manufacturing services (EMS), serving automotive, communications, computer, medical, industrial, and defense and aerospace markets. This filing covers the fiscal year ended December 31, 2012; it is an annual report, not a standalone fourth-quarter filing. Financial statements are incorporated by reference from the 2012 Annual Report to Shareholders.
Key financial metrics
| Metric | FY2012 | FY2011 | Change / context |
|---|---|---|---|
| Net sales | $576.9 million | $588.5 million | Down 2.0% |
| Operating earnings | $26.7 million; 4.6% of sales | $25.2 million; 4.3% of sales | Up 5.7% |
| Net earnings | $20.3 million; 3.5% of sales | $21.0 million; 3.6% of sales | Down 3.0% |
| Diluted earnings per share | $0.59 | $0.60 | Down $0.01 |
| Capital expenditures | $16.3 million | $20.3 million | Includes $2.9 million to replace casualty-damaged property |
| Debt at year-end | $153.5 million | $74.4 million | Borrowings under revolving credit facility |
| Current assets / liabilities | $309.6 million / $115.0 million | $283.4 million / $124.2 million | Current ratio 2.7, versus 2.3 |
| Working capital | $194.5 million | $159.1 million | Up $35.4 million |
The provided filing text does not provide a clear value for operating cash flow, free cash flow, cash and cash equivalents, or detailed segment earnings. FY2012 segment sales mix was 53% Components and Sensors and 47% EMS. The company declared annual dividends of $0.14 per share, compared with $0.125 in 2011.
Material changes versus FY2011
- Sales declined by $11.6 million, while operating earnings increased by $1.4 million. Net earnings declined by $0.6 million.
- Automotive represented 32% of consolidated sales, up from 29%. Industrial rose to 24% from 19%; communications fell to 18% from 22%; defense and aerospace declined to 14% from 19%.
- Non-U.S. operations originated 37% of sales, compared with 44% in 2010; non-U.S. assets were approximately 41% of total assets at year-end.
- CTS acquired D&R Technology in December 2012. Acquired assets and liabilities were reported as $69.0 million and $5.5 million; D&R contributed approximately $0.3 million of 2012 sales after acquisition.
- Two restructuring plans eliminated approximately 440 positions and were substantially completed by year-end.
Outlook, commentary, risks, and unusual items
- Outlook: The provided filing text contains no quantified revenue or earnings guidance. Backlog was $123.3 million as of January 27, 2013, versus $124.6 million a year earlier: Components and Sensors backlog increased to $49.8 million from $40.6 million, while EMS backlog declined to $73.5 million from $84.0 million. CTS cautions that backlog may not predict revenue because orders can change or be canceled.
- Unusual items: FY2012 included $20.9 million in business-interruption insurance recovery, $1.8 million in property-damage insurance recovery, $6.4 million in restructuring and goodwill impairment charges, and a $10.3 million gain on sale-leaseback. These items affect comparability of reported operating results.
- Customer and market exposure: The 15 largest customers accounted for 50% of sales; no single customer exceeded 10%. Customer order changes, pricing pressure, and cyclical end markets could affect utilization and margins.
- Litigation and product risk: CTS reported approximately 36 open lawsuits related to Toyota vehicle acceleration allegations and had been dismissed from 33 others. Toyota agreed to indemnify CTS for certain third-party claims, subject to stated exceptions; government investigations and recall-related matters are not covered by that agreement.
- Debt and market risk: The revolving credit facility includes financial reporting and business restrictions. A one-percentage-point rise in interest rates was estimated to increase annual interest expense by approximately $0.8 million. CTS reported $75 million of interest-rate swaps at year-end to fix part of its interest cost.
- Other risks: Foreign exchange, raw-material availability and pricing, tax incentives and tax assessments, environmental liabilities, pension assumptions, and international operations are identified risks. CTS self-insures against future flooding at its Thailand facility because available insurance was limited and expensive.
- Controls and acquisition: Management concluded disclosure controls were effective at year-end. Its internal-control assessment excluded D&R, whose internal controls had not yet been assessed since acquisition.
Important facts for investors to verify
- Review the incorporated annual-report financial statements and notes for cash flow, cash balances, segment profitability, debt terms, covenants, and tax details not shown clearly in the provided filing text.
- Assess how much FY2012 operating performance depended on insurance recoveries and the sale-leaseback gain, and the ongoing savings and costs from restructuring.
- Monitor customer concentration, backlog conversion and cancellations, and changes in automotive, EMS, communications, industrial, and defense demand.
- Track debt levels, interest-rate exposure, covenant headroom, and the effect of future capital needs or distributions.
- Follow developments in the Toyota-related litigation and indemnification, environmental matters, and the integration and controls of D&R Technology.