CTS Corporation — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Unaudited consolidated results; dollar figures below are in millions unless noted.
Business context
CTS designs and manufactures sensors, actuators, and connectivity components for transportation, industrial, medical, and aerospace and defense markets. It operates in North America, Europe, and Asia. The quarter’s sales weakness was concentrated in non-transportation markets, where distributor customers continued reducing inventory.
Financial performance
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Net sales | $134.6 | $151.9 | $425.7 | $444.6 |
| Gross margin | $46.4 | $53.3 | $148.8 | $159.5 |
| Gross margin rate | 34.5% | 35.1% | 35.0% | 35.9% |
| Operating earnings | $18.2 | $22.6 | $58.8 | $71.4 |
| Operating margin | 13.5% | 14.9% | 13.8% | 16.1% |
| Net earnings | $14.0 | $11.8 | $45.2 | $44.6 |
| Diluted EPS | $0.44 | $0.37 | $1.43 | $1.38 |
| Operating cash flow | Not presented quarterly | $56.7 | $95.7 |
Q3 sales fell 11.4% year over year; gross margin dollars declined 13.0% and operating earnings fell 19.7%. Net earnings rose 18.4%, helped by lower other expense than in the prior-year quarter, which included $6.8 million of excise taxes associated with termination of the U.S. pension plan. For the first nine months, sales decreased 4.2%, while net earnings increased 1.3%; diluted EPS was $1.43 versus $1.38.
Q3 transportation sales were $75.9 million (down 3.2%); industrial sales were $28.7 million versus $43.9 million; medical sales were $17.8 million versus $16.4 million; and aerospace and defense sales were $12.2 million versus $13.3 million. For the nine months, transportation sales were essentially flat, while non-transportation sales declined 8.9%. Management attributed lower gross margin primarily to reduced volume and unfavorable foreign exchange effects ($1.8 million in Q3 and $5.3 million for nine months).
Cash, debt, and liquidity
- Cash and equivalents were $160.1 million at September 30, 2023, versus $156.9 million at year-end 2022; $111.8 million was held outside the U.S.
- Long-term debt was $76.7 million, down from $83.7 million. The revolving facility has a $400 million commitment, with $321.7 million available subject to covenants; weighted-average borrowing rate was 5.93%. The facility matures December 15, 2026. CTS reported covenant compliance.
- Nine-month operating cash flow was $56.7 million, compared with $95.7 million. The filing cites the 2022 annual bonus payout and inventory builds associated with plant consolidation among working-capital cash uses.
- Investing cash outflow was $14.6 million, including $11.2 million of capital expenditures and $3.4 million for acquisition-related payments. Financing cash outflow was $39.9 million, including $25.9 million of share repurchases, $7.0 million of net debt paydown, and $3.8 million of dividends.
- Quarterly dividends declared were $0.04 per share. The company repurchased 584,645 shares for $25.9 million during the nine months; $28.4 million remained authorized for repurchases at quarter-end.
Outlook, changes, and key risks
CTS provided no specific financial guidance in the filing. Management said operating cash flows and available revolving-credit borrowings should fund working capital, capital expenditures, investments, and debt service for at least the next 12 months and foreseeable future.
Restructuring charges were $3.2 million in Q3 and $6.0 million for nine months, versus $0.5 million and $1.4 million in the comparable 2022 periods. The Juarez facility closure and transfer of operations to Matamoros are expected to be completed in 2024. Estimated restructuring costs are $3.0–$4.5 million, plus $1.5–$2.5 million of related costs not classified as restructuring. A separate $1.3 million asset impairment was recorded in Q2.
Environmental remediation reserves were $12.0 million. For the Asheville site, the company estimates potential exposure of $1.9–$10.0 million and recorded $1.9 million because no amount within the range was considered more likely. Management cautions that final environmental, legal, or warranty outcomes could exceed recorded accruals. Other cited risks include market softness, distributor inventory reductions, customer concentration, competition, supply-chain disruptions, foreign exchange, environmental costs, and international and geopolitical risks. Cummins represented 16.9% of Q3 sales and Toyota 12.2%.
Other items: the February 2023 Maglab acquisition included $3.6 million of contingent consideration tied to integration and future revenue and customer-order targets. The filing reported no significant change in risk factors from the 2022 Form 10-K and no material change in market-risk exposure during the quarter.
Important facts for investors to verify
- Whether distributor inventory reductions and weakness in industrial and other non-transportation markets persist, and how they affect sales and margins.
- Progress and total cost of the Juarez closure and Matamoros consolidation, including costs outside restructuring charges.
- Resolution and cash impact of Asheville and other environmental matters relative to the recorded $12.0 million remediation reserve.
- Operating cash flow recovery, inventory levels, borrowing costs, and continued compliance with revolving-credit covenants.
- Achievement of Maglab earnout conditions and the impact of ongoing share repurchases on cash and share count.