CTS Corporation — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Financial statements are unaudited; dollar amounts 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 acquired temperature-sensor maker TEWA in February 2022 and piezoceramics maker Ferroperm on June 30, expanding its European presence and end-market capabilities.
Financial performance
| Metric | Q2 2022 | Q2 2021 | First half 2022 | First half 2021 |
|---|---|---|---|---|
| Net sales | $145.0 | $129.6 | $292.7 | $258.0 |
| Gross margin | $51.8 (35.8%) | $47.7 (36.8%) | $106.2 (36.3%) | $90.3 (35.0%) |
| Operating earnings | $22.7 (15.6%) | $20.6 (15.9%) | $48.7 (16.7%) | $39.1 (15.1%) |
| Net earnings | $12.6 | $0.9 | $32.8 | $12.9 |
| Diluted EPS | $0.39 | $0.03 | $1.02 | $0.39 |
- Q2 sales increased 11.9%; first-half sales rose 13.4%. First-half non-transportation sales grew 25.5%, while transportation sales increased 4.4%.
- Q2 gross margin fell year over year as material and freight costs increased; first-half margin improved on sales volume and mix, partly offset by those costs.
- Operating cash flow was $35.4 in the first half, versus $38.8 a year earlier. Capital expenditures were $7.0; operating cash flow less capital expenditures was $28.4.
- Investing cash outflow was $103.5, including $96.5 of acquisition payments and $7.0 of capital expenditures. Financing cash inflow was $24.4.
- Cash was $98.7 at June 30, down from $141.5 at year-end 2021. Long-term debt was $91.0, up from $50.0. The $400.0 revolving facility had $307.3 available, subject to covenants; CTS reported covenant compliance.
- Current assets were $278.6 and current liabilities $115.4. The company declared dividends of $0.04 per share in Q2 and repurchased 332,428 shares for $11.7 in the first half; $29.5 remained under the $50.0 repurchase authorization.
Changes, outlook and risks
- Growth included $4.1 of Q2 and $5.5 of first-half TEWA sales. Foreign exchange reduced Q2 sales by $2.2 and first-half sales by $2.5. Ferroperm closed on June 30, so the filing does not report post-acquisition operating contribution.
- Net earnings comparisons reflect a major prior-year pension item: Q2 2021 included a $20.1 non-cash pension settlement charge. Q2 2022 also included $1.8 of derivative losses related to the Ferroperm purchase and foreign-exchange losses. The Q2 effective tax rates were 25.6% in 2022 and 245.6% in 2021; the prior-year rate was affected by the pension charge.
- Management said COVID-related disruption, semiconductor and other component shortages, OEM production shutdowns, and inflation in materials and freight were expected to affect results for the remainder of 2022. It cautioned that the financial impact remained uncertain; the filing provides no specific numerical earnings or revenue guidance.
- Acquisition purchase-price allocations for TEWA and Ferroperm remained preliminary, including valuations of acquired intangible assets and goodwill.
- Environmental remediation reserves were $11.3. CTS disclosed potential environmental liabilities at several sites, including Superfund sites in Asheville, North Carolina, and Mountain View, California, along with ordinary-course legal and product-warranty claims. The company cautioned that final outcomes could exceed accrued amounts.
- Other risks cited include customer reliance, acquisition integration, market conditions, foreign exchange, international and geopolitical risks, technology changes, and continued supply-chain disruption. Cummins represented 15.9% and Toyota 11.3% of Q2 sales.
Important facts for investors to verify
- Whether semiconductor shortages, OEM shutdowns, and material and freight inflation persist or further pressure margins and cash conversion.
- Acquired-business contributions, integration progress, and final purchase accounting for TEWA and Ferroperm.
- Debt, interest costs, covenant headroom, and cash requirements following the acquisitions and share repurchases.
- Developments in environmental remediation and other claims relative to the $11.3 remediation reserve.
- Customer concentration and the pace of diversification beyond transportation markets.