CTS Corporation — Q2 2023 Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2023; comparisons are to the same periods in 2022. CTS designs and manufactures sensing, motion and connectivity products for transportation, industrial, medical, and aerospace and defense markets.
Financial performance
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Net sales | $145.2 | $145.0 | $291.2 | $292.7 |
| Gross margin | $50.7 | $51.8 | $102.4 | $106.2 |
| Gross margin percentage | 35.0% | 35.8% | 35.2% | 36.3% |
| Operating earnings | $18.4 | $22.7 | $40.6 | $48.7 |
| Operating margin | 12.7% | 15.6% | 13.9% | 16.7% |
| Net earnings | $12.9 | $12.6 | $31.2 | $32.8 |
| Diluted earnings per share | $0.41 | $0.39 | $0.98 | $1.02 |
| Cash from operating activities | — | $34.6 | $35.4 |
Changes and operating drivers
- Q2 sales were nearly unchanged year over year; first-half sales declined 0.5%. Transportation sales rose 10.0% in Q2, while non-transportation sales fell 10.3%, primarily reflecting inventory-reduction softness in distribution and industrial markets.
- For the first half, transportation sales increased 1.7%, while non-transportation sales decreased 2.9%. Foreign-exchange movements reduced sales by $1.1 million in Q2 and $3.4 million for the first half.
- Gross margin declined in both periods, reflecting sales mix, higher material and freight costs, and unfavorable foreign-exchange effects of $1.7 million in Q2 and $3.5 million in the first half.
- Operating earnings fell 18.8% in Q2 and 16.7% in the first half. Higher SG&A, R&D and restructuring costs contributed; SG&A also included higher environmental costs, and first-half SG&A included acquisition-related expenses.
- Net earnings increased 2.4% in Q2 despite lower operating earnings, supported by lower total other expense and a lower effective tax rate. Higher interest income contributed to the reduction in other expense; the 2022 comparison also included $1.8 million of derivative losses related to the Ferroperm acquisition.
Cash, liquidity and capital
- Cash and cash equivalents were $150.9 million at June 30, 2023, compared with $156.9 million at year-end 2022. Cash from operations was $34.6 million; capital expenditures were $8.5 million.
- Investing activities used $11.8 million, including $3.4 million for the Maglab acquisition and TEWA working-capital settlement. Financing activities used $30.0 million, including $17.6 million of share repurchases, $6.6 million of net debt repayment, and $2.5 million of dividends.
- Long-term debt was $77.0 million, down from $83.7 million at December 31, 2022. The $400 million revolving facility had $321.3 million available, subject to covenant restrictions; its weighted-average interest rate was 5.74%. CTS reported compliance with all debt covenants.
- Management stated that operating cash flow and available facility borrowings should be adequate for working capital, capital expenditures, investments and debt service for at least the next 12 months. The facility matures December 15, 2026.
- CTS repurchased 395,987 shares for $17.6 million in the first half under a new $50 million authorization; approximately $36.6 million remained available at June 30. The quarterly dividend was $0.04 per share.
Outlook, risks and unusual items
- The filing provides no specific financial guidance. Management noted that supply conditions had eased but material shortages could still affect CTS or customer production schedules; short-notice order changes may result in excess inventory.
- CTS acquired Maglab in February 2023. The purchase price was $7.7 million, including $3.6 million of contingent consideration tied to integration, revenue and customer-order targets through 2025.
- CTS is consolidating its Juarez manufacturing operations into its expanded Matamoros facility, with completion expected in 2024. Estimated costs are $1.5 million to $3.0 million; $0.3 million had been incurred through June 30. Total first-half restructuring charges were $2.8 million, including a $1.3 million asset impairment.
- Environmental exposure remains a material contingency. Following an EPA request for $10.0 million of past Asheville Site response costs and interest from three potentially responsible parties, CTS estimated its potential exposure at $1.9 million to $10.0 million. No point in the range was considered more likely, and CTS recorded $1.9 million. Remediation reserves totaled $12.8 million at June 30.
- Key stated risks include market softness, supply-chain disruption, inflation or recession, customer concentration, pricing and demand, acquisition integration, environmental remediation, foreign-exchange movements, and international trade and geopolitical risks. Cummins represented 18.6% of Q2 sales and Toyota 12.6%.
- Management reported effective disclosure controls and no significant changes to risk factors since the 2022 Form 10-K.
Important facts for investors to verify
- Whether the industrial and distribution inventory correction continues and how quickly non-transportation demand recovers.
- Whether gross-margin pressure from mix, input costs and foreign exchange moderates, and whether restructuring produces expected savings.
- Potential additional Asheville environmental costs beyond the $1.9 million accrual, and developments in the company’s other remediation matters.
- Maglab earnout performance conditions, integration progress, and the financial impact of Juarez consolidation costs.
- Debt costs and covenant headroom as interest rates change, alongside cash needs for repurchases, dividends and investment.