CTS Corporation — 2022 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2022. The filing reports annual results; it does not provide a clear standalone fourth-quarter financial summary. Unless noted otherwise, amounts below are in U.S. dollars.
Business context
CTS designs and manufactures sensors, connectivity components and actuators for transportation, industrial, medical, and aerospace and defense markets. Transportation represented 52% of 2022 sales; industrial 29%, medical 10%, and aerospace and defense 9%. Cummins accounted for 15.3% of sales and Toyota for 11.5%.
CTS acquired temperature-sensor maker TEWA in February 2022 for approximately $24.5 million and piezoceramics maker Ferroperm in June 2022 for approximately $72.3 million. Together, the acquisitions contributed $23.5 million of 2022 sales. CTS acquired maglab for $4.2 million in February 2023, after year-end.
Financial results and liquidity
| Metric | 2022 | 2021 |
|---|---|---|
| Net sales | $586.9 million | $512.9 million |
| Gross margin | $210.5 million; 35.9% | $184.6 million; 36.0% |
| Operating earnings | $93.0 million; 15.8% of sales | $76.5 million; 14.9% of sales |
| Net earnings (loss) | $59.6 million | $(41.9) million |
| Diluted earnings (loss) per share | $1.85 | $(1.30) |
| Cash from operating activities | $121.2 million | $86.1 million |
| Cash and cash equivalents at year-end | $156.9 million | $141.5 million |
| Debt at year-end | $83.7 million | $50.0 million |
Sales grew 14.4%, with increases across all end markets. Sales growth included acquisition contributions, while foreign exchange reduced sales by approximately $11.0 million. Gross margin dollars rose 14.0%, but the margin rate edged down 0.1 percentage point, reflecting material and freight inflation, foreign exchange, and $4.0 million of acquired-inventory step-up charges. SG&A was $91.5 million, or 15.6% of sales, versus $82.6 million, or 16.1%; R&D was $24.1 million, or 4.1%, versus $23.9 million, or 4.7%.
Operating cash flow increased to $121.2 million and included $34.0 million received from the U.S. pension plan termination. Investing activities used $111.2 million, primarily for the acquisitions and $14.3 million of capital expenditures. Financing activities provided $4.3 million; CTS repurchased $21.4 million of stock and paid $5.1 million in dividends. The declared dividend was $0.16 per share.
CTS had $314.7 million available under its $400 million revolving facility, subject to covenant restrictions; the facility matures December 15, 2026. Its weighted-average borrowing rate was 2.96%, and it was in compliance with covenants at year-end. Management said cash from operations and available borrowing capacity should fund expected needs for at least the next 12 months and the foreseeable future.
Material changes, outlook and risks
- Net earnings returned to profit from a 2021 loss. The comparison was materially affected by $126.3 million of U.S. pension settlement charges recorded in 2021. In 2022, other expense included $6.8 million of excise taxes tied to the pension plan termination and $1.8 million of derivative losses associated with the Ferroperm acquisition.
- CTS said semiconductor and resin shortages, supply-chain disruption, OEM production interruptions, and higher material and freight costs pressured operations and cash flows. It expected these disruptions and inflationary pressures to continue in 2023; no specific financial guidance was provided.
- Customer concentration and the cyclical transportation market expose CTS to order reductions, cancellations, delayed production, and pricing pressure. The two largest customers represented 26.8% of sales combined.
- Other cited risks include acquisition integration and purchase-accounting estimates, foreign exchange, geopolitical tensions, inflation and recession, cybersecurity, product liability, and environmental obligations.
- CTS recorded $11.0 million in remediation reserves. In February 2023, the EPA sought $10.0 million of past response costs and interest related to the Asheville Superfund site from three potentially responsible parties, including CTS. CTS said it could not yet reasonably estimate its exposure and recorded no additional accrual for the demand in its 2022 statements.
- Goodwill was not impaired in the 2022 annual assessment. The purchase-price allocations for TEWA and Ferroperm remained subject to finalization. The financial statement and internal-control audits received unqualified opinions; CTS’s internal-control assessment excluded the acquired companies, which represented 15% of consolidated assets and 4% of revenue.
Most important facts for investors to verify
- How much of sales growth and future profitability is organic versus attributable to acquisitions, and whether the acquisitions meet expected integration and return targets.
- Whether supply constraints, freight and material inflation, and OEM production interruptions ease or continue to affect margins, working capital, and cash conversion.
- Customer exposure, particularly to Cummins and Toyota, and any changes in their production schedules, orders, or pricing terms.
- The eventual cost and allocation of the Asheville EPA demand, and whether other environmental contingencies cause additional expense beyond recorded reserves.
- Debt, covenant headroom, cash deployment, and the sustainability of dividends and share repurchases as acquisition-related borrowing increases.
- Final acquisition accounting for Ferroperm and TEWA, including intangible-asset valuations and amortization.