CTS Corporation (CTS) - 10-Q Summary
Business Context and Reporting Period
Company: CTS Corporation, a global manufacturer of components, sensors, and electronic manufacturing solutions serving automotive, communications, defense, aerospace, and medical markets.
Reporting Period: Quarterly Report (Form 10-Q) for the three and six months ended July 4, 2010.
Segments: Components and Sensors; Electronic Manufacturing Solutions (EMS).
Key Financial Metrics
| ($ in thousands, except per share) | 3 Months Ended July 4, 2010 |
3 Months Ended June 28, 2009 |
6 Months Ended July 4, 2010 |
6 Months Ended June 28, 2009 |
|---|---|---|---|---|
| Net Sales | $138,851 | $120,398 | $268,254 | $238,529 |
| Gross Margin | $30,340 (21.9%) | $21,878 (18.2%) | $60,819 (22.7%) | $41,707 (17.5%) |
| Operating Earnings | $7,741 | $3,169 | $14,088 | $(32,371) |
| Net Earnings/(Loss) | $5,892 | $(7,025) | $10,323 | $(42,674) |
| Diluted EPS | $0.17 | $(0.21) | $0.30 | $(1.26) |
| Cash & Equivalents | $65,234 (as of July 4, 2010) | |||
| Long-Term Debt | $65,900 (as of July 4, 2010) | |||
| Operating Cash Flow (6mo) | $6,346 | $15,697 |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 15.3% in Q2 2010 and 12.5% for the six-month period compared to 2009. This was driven primarily by the Components and Sensors segment, which saw a 45.6% increase in Q2 sales due to strong global light vehicle production.
- Profitability Turnaround: The company returned to profitability in 2010. The prior year (2009) results were significantly impacted by a $33.2 million goodwill impairment charge and $2.2 million in restructuring charges, neither of which occurred in 2010.
- Segment Performance:
- Components & Sensors: Operating earnings improved to $7.9 million in Q2 2010 from $2.1 million in Q2 2009.
- EMS: Sales decreased 5.9% in Q2 2010, resulting in a slight operating loss of $0.2 million, compared to earnings of $1.1 million in Q2 2009. Declines were attributed to end-of-life products for a major customer (Hewlett-Packard) and lower demand in defense/aerospace.
- Tax Rate: The effective tax rate for Q2 2010 was 18.8%, a significant improvement from 359.8% in Q2 2009. The 2009 rate was distorted by a $9.1 million tax expense related to cash repatriation.
Outlook, Risks, and Contingencies
- Guidance: Management anticipates full-year 2010 diluted EPS in the range of $0.55 to $0.62 (up from previous guidance of $0.52 to $0.60). Full-year sales are estimated to increase 10%-15% over 2009.
- Toyota Recall Contingency: CTS manufactures accelerator pedals for Toyota. Following a recall of 2.3 million vehicles in early 2010, CTS is a co-defendant in approximately 44 lawsuits. However, CTS has an indemnification agreement with Toyota covering third-party civil claims, limiting CTS's liability to amounts collectible from its insurers. Management states costs to date have been immaterial.
- Liquidity: The company maintains a $100 million revolving credit facility (expandable to $150 million). As of July 4, 2010, $65.9 million was outstanding with $31.3 million available. The company is in compliance with all debt covenants.
- Capital Allocation: No shares were repurchased under the authorized buyback program in the first half of 2010. Dividends of $0.03 per share were declared in Q2.
Investor Verification Checklist
- Toyota Indemnification Scope: Verify the specific exclusions in the indemnification agreement with Toyota, particularly regarding government investigations and potential negligence claims where CTS had sole control over material selection.
- EMS Segment Recovery: Monitor the EMS segment's ability to offset the loss of Hewlett-Packard volume with growth in communications and other markets to return to profitability.
- Working Capital Trends: Review the increase in inventory ($14.7 million increase in 6 months) and accounts receivable ($13.8 million increase) to ensure these are aligned with sales growth and not indicative of slowing demand or collection issues.
- Debt Utilization: Track the utilization of the revolving credit facility, which increased from $50.4 million to $65.9 million to support working capital needs.