CTS Corporation — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 29, 2013. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise. The quarter covered two segments: Components and Sensors and Electronics Manufacturing Services (EMS).
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $159.6 | $137.4 | $460.6 | $438.6 |
| Gross margin, as reported | $37.5; 23.5% | $26.6; 19.4% | $104.2; 22.6% | $74.6; 17.0% |
| Operating earnings | $10.1 | $6.8 | $14.8 | $14.4 |
| Net earnings/(loss) | $6.8 | $5.9 | $(0.9) | $11.5 |
| Diluted EPS | $0.20 | $0.17 | $(0.03) | $0.33 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $25.5 | $25.0 |
- Segment trends: Q3 Components and Sensors sales rose 37.1% to $103.6 million, while EMS sales fell 9.5% to $55.9 million. For the first nine months, Components and Sensors sales increased 34.2% to $307.1 million; EMS sales declined 26.8% to $153.6 million. Nine-month EMS segment operating results were a $1.2 million loss, versus $5.5 million of earnings in 2012.
- Margins and earnings drivers: Management attributed improved gross margin primarily to a higher Components and Sensors share of sales. Q3 sales growth reflected automotive demand, including D&R Technology, smart actuators and accelerator pedals. EMS weakness reflected uncertain economic conditions and exited customer relationships.
- Cash, liquidity and debt: Cash was $96.7 million at September 29, versus $109.6 million at year-end 2012. Operating cash flow of $25.5 million was largely offset by investing outflows of $10.3 million and financing outflows of $28.4 million; cash decreased $12.8 million. Revolving debt was $128.6 million, down from $153.5 million; $68.8 million remained available under the $200 million facility, net of letters of credit. CTS reported compliance with debt covenants. Current assets were $307.8 million and current liabilities $121.8 million.
- Other measures: Capital expenditures were $10.9 million for the first nine months. Dividends declared were $0.035 per share in Q3 and $0.105 for the nine-month period.
Material changes and unusual items
- Nine-month net income turned to a $0.9 million loss despite higher sales and operating earnings. Income tax expense was $14.9 million, including a $10.8 million charge related to repatriating approximately $30 million from Singapore, and a $1.0 million charge for writing off UK deferred tax assets. The nine-month effective tax rate was 106.8%.
- Q3 2012 included a $4.2 million Thailand flood business-interruption insurance recovery; no such recoveries were recorded in Q3 2013. The first nine months of 2012 also included casualty-related insurance recoveries, including $15.2 million for business interruption and $1.8 million for property damage.
- Restructuring and impairment charges were $8.8 million in the first nine months of 2013, versus $3.4 million in 2012. The June 2013 plan targets approximately 350 position reductions, facility consolidation and Singapore manufacturing discontinuation; completion was expected in 2014. Charges incurred through September 29 under that plan totaled $9.2 million, including related costs.
- After quarter-end, on October 2, CTS sold its EMS business to Benchmark Electronics for $75 million cash, including five facilities and approximately 1,000 employees. The gain or loss was not finalized in this filing. Management said the sale sharpens focus on Components and Sensors and provides capital for growth and shareholder value.
Outlook, commentary and risks
- Management forecast full-year 2013 sales of $555 million to $560 million, reflecting the EMS divestiture, and maintained adjusted EPS guidance of $0.78 to $0.83. The filing reconciles this to estimated GAAP diluted EPS of $0.03 to $0.08 by excluding restructuring and related charges, CEO transition costs, and specified tax charges. Adjusted EPS is a non-GAAP measure.
- Management expected operating cash flows and available credit to fund working capital, capital spending and debt service for at least 12 months. It also noted that $95.5 million of cash was held by foreign subsidiaries and intended to remain permanently invested outside the U.S.
- Risks identified include economic and end-market conditions, customer reliance, pricing and product demand, technology change, acquisition integration, restructuring execution, international operations, foreign exchange, and natural disasters. CTS reported no material change to previously disclosed risk factors or market-risk disclosures.
- CTS remained a co-defendant in approximately 38 open Toyota-related lawsuits; 34 additional suits had been dismissed. Toyota’s indemnification applies to specified third-party civil claims, subject to stated exceptions and insurance-related limits. Environmental remediation matters and other ordinary-course claims were also disclosed; management said reserves were adequate or ultimate costs were not expected to be material.
Important facts for investors to verify
- Final accounting for the EMS sale, including recognized gain or loss, transaction costs, proceeds received and use of cash or debt repayment.
- Post-divestiture revenue, earnings, cash generation and concentration in Components and Sensors, compared with the pro forma figures in the filing.
- Actual restructuring charges, timing, savings and execution of the planned facility consolidations and approximately 350 position reductions.
- Subsequent tax effects and the availability and intended use of foreign-held cash, tax attributes and credit-facility capacity.
- Developments in Toyota-related litigation, environmental matters and compliance with revolving-credit covenants.