CTS Corporation 10-Q Summary: Quarter Ended September 28, 2008
Business Context and Reporting Period
CTS Corporation is a global manufacturer of components, sensors, and electronic manufacturing services (EMS) serving automotive, communications, computer, industrial, medical, and defense markets. This report covers the quarterly period ended September 28, 2008, and the nine-month period ended on that date. The company operates two reportable segments: Components and Sensors, and Electronics Manufacturing Services (EMS).
Key Financial Metrics
| Metric | Q3 2008 | Q3 2007 | 9M 2008 | 9M 2007 |
|---|---|---|---|---|
| Net Sales ($ millions) | $170.0 | $174.8 | $528.9 | $507.7 |
| Operating Earnings ($ millions) | $4.9 | $9.9 | $27.1 | $22.8 |
| Net Earnings ($ millions) | $7.6 | $7.8 | $24.2 | $17.7 |
| Diluted EPS ($) | $0.21 | $0.20 | $0.65 | $0.46 |
| Gross Margin (%) | 19.6% | 19.3% | 20.3% | 19.1% |
| Operating Margin (%) | 2.9% | 5.7% | 5.1% | 4.5% |
| Cash and Equivalents ($ millions) | $53.7 | $45.0 (Q3 07) | $53.7 | $45.0 (Q3 07) |
| Total Debt ($ millions) | $100.1 | $73.0 (Year-end 07) | $100.1 | $73.0 (Year-end 07) |
| Free Cash Flow ($ millions) | N/A | N/A | $6.3 | $21.9 |
Material Changes vs. Prior Period
- Revenue: Q3 sales decreased 2.7% year-over-year, driven by an 8.0% decline in the EMS segment due to end-of-life (EOL) products for a major customer (Hewlett-Packard) and a one-time industrial build in 2007. This was partially offset by a 5.4% increase in the Components and Sensors segment, aided by the acquisition of Tusonix and strong automotive sensor sales.
- Profitability: Operating earnings dropped significantly in Q3 (down 50.7%) primarily due to a $3.2 million restructuring charge. However, for the nine-month period, operating earnings increased 18.8% due to higher gross margins and volume, despite restructuring costs.
- Tax Benefit: Net earnings were bolstered by a discrete $4.0 million tax benefit in Q3 related to the release of a valuation allowance in a non-U.S. jurisdiction, resulting in an effective tax rate of 4.1% for the nine months ended September 28, 2008.
- Acquisitions: The company completed two acquisitions in 2008 (Tusonix and Orion Manufacturing) for a total cost of $20.8 million, funded by cash and increased debt.
- Debt: Total debt increased to $100.1 million from $72.0 million at year-end 2007, primarily to finance acquisitions. The company utilized its revolving credit facility, increasing the balance to $40.1 million.
Guidance, Outlook, and Risks
- Outlook: Management expects a modest full-year 2008 sales increase over 2007. Full-year 2008 diluted EPS is projected to be in the range of $0.74 to $0.79.
- Restructuring: In September 2008, the company initiated restructuring actions to consolidate operations, eliminating approximately 60 positions. Total planned costs are approximately $4.4 million, with $3.5 million incurred through September 28, 2008.
- Debt Management: The company purchased $24.0 million of its 2.125% convertible debentures in the fourth quarter of 2008 at a discount. It intends to fund the potential redemption of the remaining $36.0 million of these notes in May 2009 using its revolving credit facility.
- Risks and Contingencies:
- SEC Inquiry: The SEC is conducting an informal inquiry regarding accounting misstatements at the company's Moorpark and Santa Clara, California facilities. Management is cooperating fully.
- Environmental: The company faces potential liability for hazardous waste remediation at various sites, though management believes reserves are adequate.
- Market Conditions: Risks include reliance on key customers, pricing pressures, and demand fluctuations in the automotive and computer markets.
Key Facts for Investor Verification
- Verify the status and potential financial impact of the SEC informal inquiry regarding accounting misstatements at California facilities.
- Monitor the execution of the restructuring plan and the realization of anticipated cost savings.
- Assess the sustainability of the Components and Sensors segment growth, particularly in the automotive sector, to offset EMS declines.
- Review the company's liquidity position given the increased debt load ($100.1M) and the upcoming potential redemption of convertible debentures in May 2009.
- Confirm the impact of the discrete $4.0 million tax benefit on the reported effective tax rate and future tax provisions.