CTS Corporation — 2015 Form 10-K
Business context and period. CTS designs and manufactures sensors, electronic components and actuators for transportation, communications, IT, medical, industrial, and defense and aerospace markets. This annual report covers the year ended December 31, 2015; quarterly comparisons below cover the three months ended December 31. Transportation generated 67% of 2015 sales. The company reported one operating segment following its 2013 sale of the EMS business.
Financial performance and liquidity
| Metric | 2015 | 2014 |
|---|---|---|
| Net sales | $382.3 million | $404.0 million |
| Gross margin | $127.1 million; 33.2% | $130.0 million; 32.2% |
| Operating earnings | $18.1 million; 4.7% of sales | $42.3 million; 10.5% of sales |
| Net earnings | $7.0 million; diluted EPS $0.21 | $26.5 million; diluted EPS $0.78 |
| Cash from operating activities | $38.6 million | $32.4 million |
| Capital expenditures | $9.7 million | $12.9 million |
Sales declined 5.4% for the year. Cash and cash equivalents were $156.9 million, including $156.3 million held outside the U.S. Total debt was $90.7 million, up from $75.0 million; the revolving facility had a 1.5% weighted-average rate, $107.0 million of availability, and a January 2020 maturity. CTS was in compliance with its debt covenants. The current ratio was 2.5 and working capital was $150.6 million. The annual dividend was $0.16 per share.
Fourth quarter: Sales were $93.3 million, down 7.1% year over year; gross margin was 32.3%, and operating earnings were $0.9 million. CTS recorded a net loss of $13.7 million, or $0.42 per diluted share, versus net earnings of $7.0 million, or $0.21 per share, in Q4 2014.
Changes, unusual items, outlook and risks
- Annual operating earnings fell 57.2% and net earnings fell 73.8%, despite gross margin improving by one percentage point. Lower sales, environmental and restructuring charges, and higher other expense contributed to the decline. Automotive sales fell $14.9 million, including an estimated $7.8 million unfavorable currency impact; communications and hard-disk-drive demand also weakened.
- A $14.5 million non-recurring environmental expense was recorded for remediation at an Asheville, North Carolina site. The remediation reserve increased to $20.6 million from $3.9 million. Management said reserves were adequate based on available information but cautioned that ultimate costs could exceed the reserve.
- Restructuring and impairment charges were $14.6 million, including an $8.3 million non-cash loss on settlement of the U.K. pension plan. Restructuring actions included closing Canadian operations and relocating production; the plans were substantially completed in 2015.
- Annual income tax expense was $5.3 million, an effective rate of 43.3%. Q4 tax expense was $13.0 million despite a pre-tax loss, reflecting repatriation-related and other discrete tax items. CTS expects withholding-tax expense on Chinese earnings not retained in China to increase its ongoing effective tax rate. The filing provides no specific earnings or revenue guidance.
- Management stated that operating cash flow and available credit should fund working capital, capital expenditures, and debt service for at least the next 12 months. Strategy emphasizes developing sensing, motion and connectivity products, supported by continued R&D investment and the 2015 acquisition of Filter Sensing Technologies.
- Key risks include customer concentration and order volatility (the 15 largest customers generated 61.4% of sales; Honda and Toyota generated 10.7% and 10.1%), automotive and other market cyclicality, pricing and technology competition, foreign-exchange exposure, environmental liabilities, and international operations. The auditor gave unqualified opinions on the financial statements and internal controls; management also reported effective controls.
Investor verification priorities
- Track remediation progress, cash spending and reserve adequacy for the Asheville site and other environmental matters.
- Assess whether sales and margins stabilize, particularly in automotive, communications and HDD markets, and whether restructuring savings persist.
- Review the composition and sustainability of the unusually high 2015 tax expense, tax-credit utilization, and future withholding taxes on Chinese earnings.
- Monitor customer order commitments and concentration, foreign-exchange effects, debt availability, and covenant headroom.
- Check pension assumptions and funding needs, and confirm that the company’s stated 12-month liquidity expectations remain supported by cash generation.