CTS Corporation — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. CTS designs and manufactures sensing, motion and connectivity products for transportation, industrial, medical, and aerospace and defense markets. Unless otherwise noted, amounts below are in millions of dollars.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $151.9 | $122.4 | $444.6 | $380.4 |
| Gross margin | $53.3; 35.1% | $45.7; 37.3% | $159.5; 35.9% | $135.9; 35.7% |
| Operating earnings | $22.6; 14.9% | $19.0; 15.5% | $71.4; 16.1% | $58.0; 15.3% |
| Net earnings (loss) | $11.8 | $(63.9) | $44.6 | $(51.0) |
| Diluted EPS | $0.37 | $(1.97) | $1.38 | $(1.58) |
Q3 sales increased 24.1%; nine-month sales rose 16.9%. For the first nine months, sales growth included $14.1 million from the TEWA and Ferroperm acquisitions, while foreign exchange reduced sales by $6.7 million. Transportation remained the largest market, contributing $232.2 million of nine-month revenue; industrial revenue was $125.3 million, medical $49.3 million, and aerospace and defense $37.8 million.
Operating cash flow was $95.7 million for the first nine months, versus $60.1 million a year earlier. Capital expenditures were $9.3 million, implying approximate free cash flow of $86.5 million before other investing activity. Operating cash flow included $34.0 million received from the U.S. pension plan termination. Investing cash outflow was $105.8 million, including $96.5 million of acquisition payments. Financing cash inflow was $15.6 million, including net borrowing of $35.5 million, partly offset by $13.4 million of share repurchases and $3.9 million of dividends.
At September 30, cash was $147.9 million and long-term debt was $85.5 million. The company had $312.9 million of revolving-credit availability, subject to covenants, and reported compliance with all debt covenants. Current assets were $326.4 million and current liabilities $121.9 million. The quarterly dividend declared was $0.04 per share.
Changes, outlook and notable items
- Sales growth reflected higher volume and mix across transportation and non-transportation markets, including acquisition contributions. Q3 gross margin percentage declined 2.2 percentage points year over year, with higher material and freight costs, foreign exchange effects, and $2.2 million of Ferroperm inventory step-up amortization among the offsets to volume and mix.
- CTS acquired TEWA, a temperature-sensor business, in February for $24.5 million, and Ferroperm, a piezoceramics business, in June for $72.0 million. Purchase-price allocations remained preliminary; acquired goodwill and intangible valuations could change.
- Reported earnings comparisons are substantially affected by the U.S. pension-plan termination. Q3 2021 included a $106.2 million noncash pension settlement charge; Q3 2022 included $6.8 million of excise tax related to the termination. 2022 other expense also included $1.8 million of acquisition-related derivative losses for the nine-month period.
- Management cited ongoing semiconductor and other component shortages, OEM production interruptions, inflation in materials and freight, and risk of excess inventory from short-notice customer order changes. It expected these challenges to affect results through the remainder of 2022 and remained cautious about potential impacts into 2023. The filing gives no specific numerical earnings or revenue guidance.
- The September 2020 restructuring program is estimated to cost $3.5–$4.5 million; $1.8 million had been incurred through September 2022. Management said some projects were delayed amid strong demand and COVID-related limitations.
- Cummins represented 15.6% of Q3 sales and Toyota 11.6%, creating customer concentration exposure. Environmental remediation reserves were $10.6 million; CTS noted that environmental, legal, or warranty claims could ultimately exceed recorded accruals. No significant changes to previously disclosed risk factors were reported.
Key facts for investors to verify
- Whether supply constraints, customer shutdowns, and input-cost inflation persist, and how they affect gross margins and inventory.
- Acquisition integration, realized growth and synergies, and final purchase-price allocations for TEWA and Ferroperm.
- Cash generation excluding the $34.0 million pension-plan receipt, and the use of cash and revolving-credit capacity.
- Exposure to Cummins and Toyota, foreign exchange movements, and environmental and other claims relative to recorded reserves.
- Progress and remaining costs of restructuring, and any subsequent developments affecting the company’s cautious 2023 outlook.