CTS CORP quarterly report, Q1 FY2021

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CTS Corporation — Q1 2021 Form 10-Q

Reporting period: Three months ended March 31, 2021. CTS designs and manufactures sensors, actuators and connectivity components for transportation, industrial, medical, aerospace and defense, and telecom and IT markets. Financial amounts below are in U.S. dollars; figures are in millions unless stated otherwise.

Financial performance and position

  • Revenue: $128.4 million, up 24.6% year over year. Transportation revenue rose 23.3%; revenue in other markets rose 26.6%. The SSI acquisition contributed $1.8 million, and foreign exchange added $2.5 million.
  • Profit and margins: Gross profit was $42.6 million, with gross margin of 33.2% versus 31.9%. Operating earnings were $18.5 million, or 14.4% of sales, versus $8.5 million, or 8.2%. Net earnings were $12.0 million versus $3.8 million; diluted EPS was $0.37 versus $0.12.
  • Cash flow: Operating cash flow was $20.1 million versus $11.9 million. Capital expenditures were $1.6 million, producing approximately $18.5 million of operating cash flow less capital expenditures. Cash increased $11.6 million to $103.4 million.
  • Liquidity and debt: Current assets were $246.6 million and current liabilities $106.7 million. Long-term debt was $50.0 million, down from $54.6 million at year-end. The $300 million revolving facility had $248.3 million available, subject to covenants; CTS reported covenant compliance.
  • Other metrics: Effective tax rate declined to 18.9% from 36.4%. The quarterly dividend declared was $0.04 per share. Two customers, Cummins and Toyota, represented 15.7% and 13.4% of sales, respectively.

Material changes versus Q1 2020

  • Revenue growth and higher volume helped lift gross margin by 1.3 percentage points and more than double operating earnings. SG&A declined as a share of sales, while R&D expense fell 23.2%, primarily due to project timing and mix.
  • Other expense increased to $3.7 million from $2.5 million, principally reflecting higher pension expense and unfavorable foreign-exchange effects. Net foreign-exchange transaction losses were $1.3 million.
  • Operating cash flow improved by $8.2 million. Capital expenditures decreased to $1.6 million from $4.6 million; financing cash flow shifted to a $7.3 million use of cash, versus $43.0 million provided in Q1 2020.

Outlook, commentary, risks and unusual items

  • Management gave no specific financial guidance. It said it remained cautious about COVID-19’s effects for the remainder of 2021 and could not quantify future impacts.
  • Management cited material inflation and supply-chain interruptions, particularly semiconductor-chip shortages, and warned these could adversely affect the rest of 2021, potentially materially. The filing also identifies customer demand, market conditions, competition, technology changes, and reliance on key customers as risks.
  • The U.S. pension plan termination is progressing. CTS estimated non-cash settlement charges of $10–$20 million in Q2 2021, with additional accumulated pension losses to be recognized upon final settlement. The ultimate cost remained uncertain; CTS expected no company cash contributions because plan assets significantly exceeded estimated liabilities.
  • The December 2020 SSI acquisition expanded temperature-sensing capabilities and medical-market presence. Purchase accounting remained preliminary; up to $2.0 million of contingent consideration was recorded, with $0.15 million due based on revenue targets achieved.
  • The September 2020 restructuring plan was expected to cost $4.6–$6.0 million in restructuring charges, plus $4.0–$5.1 million of other related costs. Environmental remediation reserves were $10.4 million; CTS cautioned that environmental, legal or warranty outcomes could exceed accruals and adversely affect results or cash flows.

Important facts for investors to verify

  • Whether semiconductor and raw-material shortages, cost inflation, and COVID-19 effects constrain sales or margins over the remainder of 2021.
  • The actual pension settlement charges, timing of final settlement, and recognition of remaining accumulated pension losses.
  • Final SSI purchase-price allocation and performance-based contingent consideration payments.
  • Progress and total costs of the restructuring plan, and any changes in remediation or other legal and warranty exposures.
  • Customer concentration and the company’s ability to maintain growth and cash generation while funding investment and dividends.