CTS Corporation — Q2 2014 Form 10-Q
Business context and period. The unaudited report covers the three and six months ended June 29, 2014, compared with the periods ended June 30, 2013. CTS manufactures electronic components and sensors for automotive and other markets; following its October 2013 sale of the EMS business, it reports one business segment. Financial amounts below are in millions of dollars unless noted.
Financial performance and liquidity
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Net sales | $102.980 | $105.381 | $203.686 | $203.443 |
| Gross margin | 32.8% | 30.7% | 31.6% | 29.1% |
| Operating earnings | $9.945 | $2.443 | $20.790 | $5.124 |
| Net earnings (loss) | $6.361 | $(11.335) | $11.441 | $(7.767) |
| Diluted EPS | $0.19 | $(0.34) | $0.33 | $(0.23) |
| Operating cash flow | Not separately stated | Not separately stated | $10.056 | $10.217 |
- Q2 operating margin was 9.7%, versus 2.3%; first-half operating margin was 10.2%, versus 2.5%.
- For the first half, cash from investing was $(4.081) million, including $5.991 million of capital expenditures and $1.910 million of fixed-asset sale proceeds. Financing used $3.675 million, including $3.732 million for repurchases and $2.693 million of dividends.
- At June 29, cash and equivalents were $127.230 million, total debt $76.200 million, and shareholders’ equity $305.245 million. The $200 million revolving facility had $121.239 million available; CTS reported compliance with its covenants. Cash was $124.368 million and debt $75.000 million at December 31, 2013.
- Current assets were $235.572 million and current liabilities $85.298 million, implying working capital of about $150.274 million. The filing reports working capital increased $9.125 million since year-end.
Material changes and management commentary
- Q2 sales declined 2.3%, primarily from lower shipments of frequency and HDD components; automotive sales rose, mainly on pedal modules and actuators. First-half sales were nearly flat: automotive sales increased $6.3 million, offset by a $6.057 million decline in other sales.
- Management attributed improved gross margin to productivity, product mix, and favorable foreign exchange. Lower SG&A and R&D expenses and reduced restructuring charges also contributed to higher operating earnings.
- Net earnings improved substantially versus 2013, when results included a $10.8 million tax expense related to repatriating $30 million from Singapore, plus a U.K. deferred-tax-asset write-off. The 2013 EMS business is reported as discontinued operations, so the periods are not fully comparable.
- CTS reported $2.733 million of Q2 restructuring and impairment charges and $3.236 million for the first half. A June 2013 restructuring plan targeted approximately 350 positions; an April 2014 plan to close the Canadian manufacturing operation targets approximately 120 positions and is expected to be completed in 2015. Planned costs for the April plan total $5.7 million; $2.405 million had been incurred by June 29.
- First-half other expense was $2.180 million, primarily attributed to the Chinese Renminbi’s depreciation. Interest expense declined, while interest income rose with higher cash balances.
Outlook, risks and contingencies
- Management stated operating cash flows and available borrowing capacity should fund working capital, capital expenditures, and debt service for at least the next 12 months. No specific revenue or earnings guidance was provided.
- $126.358 million of cash was held by foreign subsidiaries and intended to remain permanently invested abroad. Repatriation for U.S. use could require U.S. taxes; management said current U.S. liquidity needs do not require repatriation.
- CTS remained a co-defendant with Toyota in approximately 42 open lawsuits related to unintended-acceleration claims. Toyota agreed to indemnify and defend CTS for specified U.S. and Canadian third-party civil claims, subject to exceptions; CTS cannot assure Toyota will not seek recall-cost recovery or that insurance will be sufficient. Environmental remediation matters and other ordinary-course claims also remain; management said reserves or expected exposure were not material.
- Other cited risks include customer reliance, demand and pricing pressure, industry and economic conditions, technological change, international operations and currency exposure. One customer represented 10.5% of Q2 sales and 10.2% of first-half sales.
- The filing says there were no significant changes to risk factors or market-risk disclosures since year-end. Management assessed disclosure controls as effective and reported no materially affecting changes in internal control.
Investor verification points
- Verify whether automotive growth can offset continued weakness in frequency and HDD products, and whether margin gains persist without favorable mix or currency effects.
- Track delivery and total costs of both restructuring plans, including the planned Canadian closure and position eliminations.
- Assess the location, accessibility, and potential tax consequences of foreign-held cash, alongside domestic liquidity and credit-facility covenant headroom.
- Monitor the Toyota-related litigation, indemnification limitations, insurance coverage, and any environmental or other contingent liabilities.
- Reconcile earnings comparisons for the 2013 EMS disposal and unusual tax items; assess the quality of earnings given first-half operating cash flow was slightly below the prior-year period.