CTS Corporation — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparisons are with Q1 2017. CTS designs and manufactures sensors, actuators, and electronic components for aerospace and defense, industrial, medical, telecom and IT, and transportation markets.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net sales | $113.5 million | $100.2 million | +13.4% |
| Gross margin | $38.4 million; 33.9% | $34.2 million; 34.2% | +12.3% in dollars |
| Operating earnings | $13.4 million; 11.8% of sales | $12.2 million; 12.2% of sales | +9.5% |
| Net earnings | $11.5 million | $8.5 million | +36.1% |
| Diluted EPS | $0.34 | $0.25 | — |
| Operating cash flow | $20.2 million | $9.8 million | +$10.4 million |
| Capital expenditures | $6.9 million | $3.8 million | +$3.1 million |
Operating cash flow less capital expenditures was $13.2 million in Q1 2018, versus $6.0 million in Q1 2017. The effective tax rate declined to 24.5% from 30.6%, primarily reflecting the Tax Cuts and Jobs Act.
Revenue and material changes
- Sales growth included an $2.6 million contribution from the Noliac acquisition, completed in May 2017, and $2.8 million from favorable foreign exchange. Automotive sales increased 11.9%; other sales increased 16.2%.
- Transportation was the largest market, with sales of $74.3 million versus $66.4 million. Medical sales rose to $9.2 million from $6.8 million; industrial sales rose to $20.4 million from $17.1 million. Telecom and IT sales declined to $4.5 million from $5.2 million.
- Gross margin and operating margin declined year over year. Restructuring charges increased to $1.2 million from $0.8 million; SG&A rose 13.9%, partly due to Noliac-related costs.
- Net earnings also benefited from total other income of $1.9 million, versus $0.03 million a year earlier. Other income included approximately $2.0 million of foreign-currency transaction gains; management cited currency movements as the principal driver.
Cash, debt, and liquidity
Cash and cash equivalents were $121.4 million at March 31, 2018, up $7.8 million from year-end; $115.2 million was held outside the United States. Long-term debt was $74.0 million, down from $76.3 million. The $300 million revolving credit facility had $223.9 million available, including the effect of standby letters of credit. The weighted-average interest rate was 2.90%, versus 2.30% at year-end. CTS reported compliance with its debt covenants. Working capital increased $8.9 million during the quarter.
Outlook, risks, and unusual items
- Management stated that operating cash flows and available revolver borrowings should be adequate for working capital, capital expenditures, and debt service for at least the next 12 months. The filing provides no specific revenue or earnings guidance.
- The June 2016 restructuring plan is expected to cost approximately $13.4 million and affect about 230 employees. Costs incurred through March 31, 2018 were $8.4 million; remaining restructuring liabilities across plans were $1.7 million.
- Environmental remediation reserves were $15.1 million. Management considers the reserve adequate but cautioned that ultimate environmental liabilities could materially exceed it.
- Customer concentration is notable: Cummins represented 14.2% of sales, Toyota 11.2%, and Honda 10.8% in Q1 2018. The filing identifies customer reliance, market conditions, pricing and demand, acquisition integration, foreign exchange, and international risks among factors that could affect results.
- CTS adopted revenue recognition Topic 606 in January 2018 with no significant change to past practices and no opening retained-earnings adjustment. Management said the adoption’s ongoing net-income impact is expected to be immaterial. Disclosure controls were assessed as effective; the filing reported no significant risk-factor changes or material changes in market risk.
Important facts for investors to verify
- How much of sales growth and earnings improvement is recurring, given acquisition contribution, favorable currency effects, and the sizeable foreign-exchange gain?
- Whether margin pressure, higher restructuring costs, and Noliac integration expenses persist as sales grow.
- Progress and remaining costs under the restructuring plan, including the planned Elkhart production transition and facility consolidation.
- Whether environmental remediation liabilities or customer concentration create material changes in risk or cash requirements.
- Future cash availability and borrowing costs, especially with most reported cash held outside the United States and the revolver carrying a higher weighted-average rate than at year-end.