CTS Corporation 10-Q Summary: Period Ended September 27, 2009
Business Context and Reporting Period
CTS Corporation is a global manufacturer of components and sensors, primarily for automotive and communications markets, and provides electronic manufacturing services (EMS). This report covers the quarterly period ended September 27, 2009, and the nine-month period ended on the same date. The company operates two reportable segments: Components and Sensors, and Electronic Manufacturing Services (EMS).
Key Financial Metrics
| Metric | Q3 2009 | Q3 2008 | 9 Months 2009 | 9 Months 2008 |
|---|---|---|---|---|
| Net Sales | $126.6 million | $170.0 million | $365.1 million | $528.9 million |
| Gross Margin % | 20.7% | 19.6% | 18.6% | 20.3% |
| Operating Earnings (Loss) | $6.3 million | $4.9 million | ($26.1 million) | $27.1 million |
| Net Earnings (Loss) | $4.5 million | $7.2 million | ($38.2 million) | $23.1 million |
| Diluted EPS | $0.13 | $0.21 | ($1.13) | $0.65 |
| Cash from Operations (9mo) | $34.1 million (vs $20.1 million in 2008) | |||
| Total Debt | $49.5 million | $80.0 million (Year-end 2008) | Decreased due to debt repayment | |
| Cash & Equivalents | $40.3 million | $44.6 million (Year-end 2008) | Working capital decreased $19.4 million |
Material Changes vs. Prior Period
- Revenue Decline: Sales decreased 25.6% in Q3 and 31.0% for the nine months compared to 2008, driven by the global recession, lower automotive volumes, and end-of-life product cycles (specifically Hewlett-Packard sales in the EMS segment).
- Goodwill Impairment: A non-cash goodwill impairment charge of $33.2 million was recorded in the first quarter of 2009 due to a decline in market capitalization. This charge eliminated the company's entire goodwill balance.
- Restructuring: Restructuring charges were $2.2 million for the nine months of 2009, compared to $3.5 million in the same period of 2008. No restructuring charges were incurred in Q3 2009.
- Debt Reduction: In May 2009, the company settled the remaining $32.5 million of its 2.125% convertible senior subordinated debentures, significantly reducing interest expense and total debt.
- Cost Management: SG&A and R&D expenses decreased significantly year-over-year due to proactive cost-cutting measures and restructuring benefits.
Guidance, Outlook, and Risks
- Outlook: Management anticipates gradual improvements in 2009, primarily driven by automotive volumes. Full-year 2009 adjusted diluted EPS is projected in the range of $0.27 to $0.31.
- GAAP vs. Adjusted: Projected full-year GAAP EPS is a loss of $(1.02) to $(0.98). The adjusted figure excludes the impact of the goodwill impairment ($0.97/share), restructuring charges ($0.05/share), and tax expense related to cash repatriation ($0.27/share).
- Risks: Key risks include reliance on key customers, general market conditions in automotive and communications industries, pricing pressures, and international operational risks (exchange rates, trade barriers).
- Legal Proceedings: The company is cooperating with an informal SEC inquiry regarding 2006 accounting misstatements at specific manufacturing facilities. Environmental remediation liabilities are reserved but not expected to be material.
Investor Verification Checklist
- Verify the sustainability of the sequential sales improvement noted in Q3 2009 versus Q2 2009.
- Confirm the status of the SEC inquiry regarding 2006 accounting misstatements.
- Monitor the recovery of automotive sales volumes, which are cited as the primary driver for future growth.
- Review the company's ability to maintain debt covenant compliance given the reduced leverage ratio (17.0% debt-to-capitalization).
- Assess the impact of the $9.1 million discrete tax expense related to cash repatriation on future liquidity.