CTS Corporation — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013, compared with the three months ended April 1, 2012. CTS manufactures electronic components and sensors and provides electronics manufacturing services (EMS), serving automotive, communications, defense and aerospace, and other markets. Figures below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial results and liquidity
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Net sales | $149.5 | $147.0 |
| Gross margin | $31.2; 20.9% | $22.0; 15.0% |
| Operating earnings | $3.0; 2.0% of sales | $1.9; 1.3% of sales |
| Net earnings | $3.6 | $2.3 |
| Diluted EPS | $0.10 | $0.07 |
| Cash used in operating activities | $3.5 | $4.1 |
| Capital expenditures | $4.7 | $4.4 |
- Cash and cash equivalents were $109.4 million at March 31, 2013, versus $109.6 million at year-end 2012. Working capital increased $12.4 million during the quarter.
- Debt was $164.0 million, up from $153.5 million at year-end. The revolving facility had $33.4 million available, net of standby letters of credit. The weighted-average rate was 1.8%; CTS reported compliance with debt covenants.
- Total debt was 37.8% of total capitalization, compared with 36.4% at year-end. The company paid $1.2 million in dividends and repurchased $1.0 million of stock during the quarter.
Material changes versus the comparable quarter
- Sales increased 1.7%, but segment trends diverged: Components and Sensors sales rose 28.3% to $98.1 million; EMS sales fell 27.1% to $51.5 million.
- Gross margin increased to 20.9% from 15.0%, primarily due to a higher share of Components and Sensors sales and the absence of roughly $6.2 million of flood- and fire-related expenses and lost margin from Q1 2012. Prior-year results also included $3.6 million of business-interruption insurance recovery and $1.8 million of property-damage recovery; there were no comparable recoveries in Q1 2013.
- SG&A increased to $21.4 million from $19.4 million, which CTS attributed mainly to the D&R acquisition and CEO transition costs. R&D was $6.3 million, broadly unchanged.
- Interest and other expense was $0.2 million, versus $0.4 million of income, reflecting higher net interest expense and unfavorable foreign exchange. The $0.8 million tax benefit included a $1.6 million discrete benefit associated with retroactive U.S. research tax-credit legislation and a China tax incentive.
- Operating cash use improved by $0.6 million year over year but remained negative. In Q1 2013, working-capital movements included increased receivables and lower accounts payable and accrued liabilities.
Outlook, management commentary and risks
- Management maintained full-year 2013 guidance: sales growth at the low end of a 12%–15% increase over 2012; adjusted diluted EPS of $0.73–$0.78. The EPS outlook excludes $0.02 per share of restructuring and related charges and includes $0.05 per share of CEO transition costs. The filing gives GAAP diluted EPS guidance of $0.71–$0.76.
- Management cited a cautious global economy, particularly affecting EMS, while expecting new programs and the D&R acquisition to support Components and Sensors earnings.
- The December 2012 realignment eliminated about 190 positions and was completed by March 31, 2013. Total restructuring and related costs were approximately $4.2 million, of which about $0.8 million was incurred in Q1; $0.4 million remained in the restructuring liability at quarter-end.
- D&R, acquired in December 2012 for $63.5 million, contributed $12.7 million of Q1 sales and $0.15 million of pretax income. Purchase-price allocations remained provisional and were expected to be finalized in 2013.
- CTS said expected operating cash flows and available borrowing capacity should fund working capital, capital expenditures and debt service for at least 12 months, while noting it may seek additional financing for liquidity or acquisitions. The facility’s variable rates, leverage and fixed-charge covenants, and restrictions on borrowing, acquisitions, dividends and repurchases are relevant constraints.
- Material risks discussed include uncertain market conditions and demand, pricing pressure, customer concentration, acquisition integration, technological change, and international, foreign-exchange and geopolitical risks. CTS was a co-defendant in approximately 39 open Toyota-related lawsuits; the company stated these were covered by Toyota’s indemnification agreement, subject to stated exceptions and insurance-related limitations. Other environmental and ordinary-course claims were also discussed; management said provisions were adequate or outcomes were not expected to be material.
- Management considered disclosure controls effective, but had not completed its evaluation of D&R’s internal controls over financial reporting. CTS reported no significant change in risk factors since its 2012 Form 10-K.
Important facts for investors to verify
- Whether Components and Sensors growth and new programs can offset continued EMS weakness and deliver the guided full-year sales increase.
- Whether the adjusted EPS outlook is achieved, including the treatment of restructuring and CEO transition costs and the effect of tax benefits recorded in Q1.
- Cash conversion and working-capital trends, given Q1 operating cash outflow and increased revolving debt.
- Remaining borrowing availability, covenant headroom, and exposure to floating interest rates despite interest-rate swaps.
- Final D&R purchase-price allocation, integration progress, and the acquired business’s contribution to earnings and controls.
- Developments in Toyota-related litigation and other contingencies, including the scope and limits of indemnification and insurance coverage.