CTS Corporation 10-Q Summary: Period Ended June 29, 2008
Business Context and Reporting Period
This is a Quarterly Report (Form 10-Q) for CTS Corporation, a global manufacturer of components, sensors, and electronic manufacturing services. The report covers the three and six-month periods ended June 29, 2008. The company operates through two reportable segments: Electronics Manufacturing Services (EMS) and Components and Sensors.
Key Financial Metrics
| Metric | Three Months Ended June 29, 2008 | Six Months Ended June 29, 2008 |
|---|---|---|
| Net Sales | $186.1 million | $358.8 million |
| Gross Margin | 21.6% of sales | 20.6% of sales |
| Operating Earnings | $13.8 million | $22.2 million |
| Net Earnings | $10.0 million | $16.6 million |
| Diluted EPS | $0.27 | $0.45 |
| Cash and Equivalents | $45.4 million (Balance Sheet) | $45.4 million (Balance Sheet) |
| Long-Term Debt | $92.3 million | $92.3 million |
| Free Cash Flow | N/A | $2.6 million |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 9.7% in Q2 2008 and 7.8% in the first six months of 2008 compared to the prior year. Growth was driven by the Components and Sensors segment (up 18.8% in Q2) and the EMS segment (up 3.2% in Q2).
- Profitability: Operating earnings rose 74.4% in Q2 and 72.5% for the six-month period. Net earnings increased 68.6% in Q2 and 67.0% for the six-month period.
- Acquisitions: The company completed two acquisitions in the first half of 2008 for a total cost of $20.7 million: Tusonix, Inc. (Components and Sensors) and Orion Manufacturing, Inc. (EMS). These contributed significantly to sales growth.
- Debt Levels: Total debt increased to $92.3 million from $73.0 million at year-end 2007, primarily to finance the recent acquisitions.
- Restructuring: The company incurred $0.1 million in restructuring charges in Q2 and $0.3 million for the six-month period, related to a realignment plan announced in late 2007.
Guidance, Outlook, and Risks
- Full-Year 2008 Guidance: Management expects full-year sales to grow 5% to 8% over 2007. Diluted earnings per share are projected to be in the range of $0.79 to $0.84.
- Management Commentary: Improved margins were attributed to favorable segment mix, product mix, and operational efficiencies. SG&A expenses as a percentage of sales decreased due to expense control and the absence of unusual audit fees recorded in the prior year.
- Risks and Contingencies:
- SEC Inquiry: The company is cooperating with an informal SEC inquiry regarding accounting misstatements at its Moorpark and Santa Clara, California facilities.
- Environmental: CTS is a Potentially Responsible Party for hazardous waste remediation at several non-CTS sites, though management believes reserves are adequate.
- Market Risks: Exposure to rapid technological change, pricing pressures, and international trade barriers.
Investor Verification Checklist
- Verify the final purchase price allocation for the Tusonix and Orion acquisitions, which is expected to be finalized by the end of 2008.
- Monitor the outcome of the SEC's informal inquiry into accounting misstatements at specific manufacturing locations.
- Track the integration progress of the two new acquisitions and their impact on future operating margins.
- Review the company's ability to maintain the projected 5-8% sales growth given the cyclical nature of the automotive and computer markets.
- Confirm compliance with debt covenants, specifically the maximum total leverage ratio and minimum fixed charge coverage ratio under the revolving credit agreement.