CTS Corporation — FY 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. CTS manufactures electronic components and sensors for automotive, communications, computer, medical, industrial, and defense and aerospace markets.
Business context and material changes
- CTS sold its Electronics Manufacturing Services (EMS) business to Benchmark Electronics on October 2, 2013, for approximately $75 million in cash. EMS is reported as discontinued operations; continuing operations comprise Components and Sensors.
- Automotive accounted for 66% of continuing-operations sales, up from 59% in 2012. The 15 largest customers represented 59.8% of sales, versus 59.5% in 2012; no single customer exceeded 10%.
- CTS had 2,918 employees at year-end, down from 4,264 at year-end 2012. The filing attributes the EMS sale to the change in business scope.
Financial performance and liquidity
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Continuing-operations net sales | $409.5 million | $304.5 million |
| Operating earnings from continuing operations | $17.7 million; 4.3% margin | $15.1 million; 4.9% margin |
| Earnings from continuing operations | $2.0 million | $13.5 million |
| Net earnings (loss) | $(3.9) million | $20.3 million |
| Current assets / current liabilities | $236.3 million / $95.1 million | $309.6 million / $115.0 million |
| Current ratio | 2.5 to 1 | 2.7 to 1 |
| Year-end debt | $75.0 million | $153.5 million |
- Sales increased about 34% year over year. Cost of goods sold was 70.4% of sales, compared with 70.0%; gross margin therefore declined to 29.6% from 30.0%.
- Continuing-operations earnings fell despite higher operating earnings. Income tax expense rose to $16.1 million from $1.0 million, a major factor in the decline.
- Discontinued operations recorded a $5.9 million loss, including a $5.1 million after-tax loss on the EMS sale. Total net loss was $3.9 million.
- Year-end working capital was $141.1 million, down from $194.5 million. Capital expenditures were $14.0 million, compared with $16.3 million in 2012.
- The $75.0 million revolving-credit balance was matched by interest-rate swaps that fixed interest cost. Operating cash flow and cash balances are not clearly stated in the supplied filing text; the filing incorporates the full cash flow statements and MD&A by reference.
- CTS raised its quarterly dividend to $0.04 per share in Q4, from $0.035, and repurchased shares during the quarter. Q4 continuing-operations diluted EPS was $0.12, versus $0.17 in Q4 2012; total diluted EPS was $(0.09), versus $0.25.
Outlook, risks, and unusual items
- No quantified forward guidance is provided in the supplied text. Management describes the EMS divestiture as sharpening focus on Components and Sensors and providing capital for growth and shareholder value.
- A 2013 restructuring plan is intended to eliminate approximately 350 positions globally and was expected to be completed by the end of 2014. Restructuring and goodwill impairment charges totaled $10.5 million in 2013, versus $3.4 million in 2012.
- Key risks include customer concentration and short-term or changeable orders; competitive pricing and technology obsolescence; cyclical end markets, particularly automotive; international and foreign-currency exposure; and raw-material supply and price risk.
- CTS remained a co-defendant in 42 open lawsuits related to Toyota vehicle accelerator-pedal claims and had been dismissed from 31 others. Toyota agreed to indemnify CTS for certain third-party claims, subject to stated exceptions and limitations; CTS noted that outcomes and coverage cannot be assured.
- Environmental matters, tax uncertainties, pension assumptions, and credit-facility covenants are additional risks. Management reported effective disclosure controls and internal control over financial reporting as of year-end.
Important facts for investors to verify
- Review the incorporated annual-report MD&A and financial statements for operating cash flow, cash balances, and the drivers of the unusually high 2013 tax expense.
- Assess the continuing business’s sales growth and margins after the EMS divestiture, including the contribution of acquisitions and shifts in market mix.
- Monitor restructuring execution, related costs, and whether the planned workforce reductions deliver expected savings.
- Track customer concentration, automotive exposure, and developments in Toyota-related litigation and indemnification.
- Confirm current debt, covenant headroom, and the sustainability of dividends and share repurchases.