CTS Corporation — Q3 2020 Form 10-Q
Business context and reporting period. CTS designs and manufactures sensing, motion, and connectivity products for transportation, industrial, medical, aerospace and defense, and telecom and IT markets. This filing covers the quarter and nine months ended September 30, 2020. Financial amounts below are in U.S. dollars; millions are used unless otherwise noted.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $113.8m | $115.7m | $301.0m | $354.0m |
| Gross margin | $36.9m; 32.4% | $37.1m; 32.0% | $96.4m; 32.0% | $118.9m; 33.6% |
| Operating earnings | $13.3m; 11.7% of sales | $10.1m; 8.8% | $28.0m; 9.3% | $41.4m; 11.7% |
| Net earnings | $11.1m | $2.7m | $19.7m | $26.1m |
| Diluted EPS | $0.34 | $0.08 | $0.61 | $0.79 |
- Cash flow: Nine-month operating cash flow was $49.3m, versus $40.7m. Capital expenditures were $10.4m, versus $15.3m; operating cash flow less capital expenditures was $38.9m, versus $25.4m.
- Liquidity and debt: Cash was $131.7m at September 30, 2020, compared with $100.2m at year-end 2019. Long-term debt was $106.3m, up from $99.7m; CTS reported net cash of $25.4m and $192.0m of additional credit-facility availability, subject to covenants. The $300m revolving facility carried a 2.00% weighted-average rate, versus 3.25% at year-end 2019. CTS was covenant-compliant.
- Other: Current assets were $263.7m and current liabilities $95.1m. Dividends declared were $0.04 per share in Q3 and $0.12 for the nine months. CTS repurchased $8.1m of shares during the nine months.
Material changes versus comparable periods
- Q3 sales declined 2.0% year over year; nine-month sales declined 15.0%. The transportation market fell 8.8% in Q3 and 28.5% for the nine months. Other markets collectively increased in both periods.
- Q3 operating earnings and net earnings improved despite slightly lower sales, reflecting cost reductions, lower SG&A, and lower restructuring charges. Other income also benefited from foreign-currency translation gains; Q3 2019 had reported other expense.
- For the nine months, operating earnings fell 32.4% and net earnings fell 24.3%. Lower sales volume reduced gross margin, while cost reductions partly offset the pressure.
- The July 2019 Quality Thermistor acquisition contributed $6.6m of Q3 2020 sales and $17.6m for the first nine months of 2020; the corresponding 2019-period contribution was $3.7m.
- Nine-month interest expense rose to $2.6m from $1.7m, primarily reflecting acquisition-related debt and additional precautionary borrowing.
Outlook, commentary, risks, and unusual items
- Management reported a significant Q3 revenue recovery from Q2 levels but remained cautious about the coming quarters. It said the duration and magnitude of COVID-19 effects were uncertain and not currently quantifiable. Risks include demand weakness, facility labor restrictions, production interruptions, and supply-chain disruption, with potential material effects on results, financial position, and cash flows.
- CTS initiated a September 2020 restructuring plan to optimize manufacturing locations and improve efficiency. Estimated restructuring charges are $5m–$6m, with an additional $5m–$6m of related costs not classified as restructuring, including training, employee overlap, and capital expenditures. The filing provides no quantified revenue or earnings guidance.
- A Q3 interim impairment assessment recorded a $2.2m impairment of in-process research and development; a $1.9m revaluation of associated contingent liabilities resulted in a net $0.3m restructuring expense effect.
- CTS set a July 31, 2020 effective termination date for its U.S. pension plan. The process is expected to take 12–18 months and requires regulatory approvals. The company expects no cash contribution because plan assets exceed estimated liabilities; settlement would move related accumulated pension losses into earnings.
- Environmental remediation reserves were $9.3m. CTS faces environmental and other legal claims and cautioned that ultimate costs could exceed recorded accruals and adversely affect financial results or cash flows.
- Customer concentration is notable: Cummins represented 11.8% of Q3 sales and Toyota 14.4%.
Important facts for investors to verify
- Whether transportation demand, COVID-related operating restrictions, and supplier disruptions improved or worsened after September 30, 2020.
- Actual costs, timing, and savings from the September 2020 restructuring, including the separately estimated costs outside restructuring charges.
- Credit-facility covenant headroom, future borrowing needs, and the sustainability of cash generation and dividends if demand remains weak.
- Approvals, settlement timing, and earnings effects of the U.S. pension plan termination.
- Changes in environmental, legal, and product-related exposures relative to the recorded reserves, and developments in major-customer concentration.