CTS Corporation — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; fourth-quarter results are also summarized. Unless noted, amounts are U.S. dollars in millions. CTS designs and manufactures sensors, electronic components and actuators for OEMs across transportation, industrial, medical, aerospace and defense, and telecommunications/IT markets. Transportation represented 64% of 2018 sales.
Financial results and liquidity
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Net sales | $470.5 | $423.0 |
| Gross profit / margin | $165.0 / 35.1% | $140.4 / 33.2% |
| Operating earnings / margin | $61.0 / 13.0% | $38.5 / 9.1% |
| Net earnings | $46.5 | $14.4 |
| Diluted EPS | $1.39 | $0.43 |
| Cash from operations | $58.2 | $58.0 |
| Capital expenditures | $28.5 | $18.1 |
- Sales rose 11.2% year over year. Transportation sales increased 9.0%; sales to other markets increased 15.3%. The 2017 Noliac acquisition contributed $9.5 million of 2018 sales. Foreign exchange added $3.2 million to annual sales.
- Operating margin improved mainly due to savings from product-line transfers under the restructuring plan and favorable foreign exchange, partly offset by higher material costs. 2017 earnings were burdened by a $13.5 million non-cash pension settlement charge, including $4.8 million in cost of goods sold, and an $18.0 million non-cash tax charge related to U.S. tax reform.
- FY 2018 income tax expense was $11.6 million, an effective rate of 19.9%, compared with $25.8 million and 64.1% in 2017. The 2018 rate included a one-time tax benefit from tax-accounting method changes, partly offset by withholding tax on repatriated earnings.
- Fourth-quarter sales were $120.1 million, up 8.3% year over year. Gross margin was 35.5% versus 29.6%; operating earnings were $17.0 million versus an operating loss of $0.02 million; net earnings were $17.6 million versus a net loss of $13.6 million. The comparison reflects the 2017 pension settlement and tax-reform charges.
- Year-end cash was $100.9 million, including $96.8 million held outside the U.S.; debt was $50.0 million, down from $76.3 million. Current assets were $239.4 million and current liabilities $104.0 million (current ratio 2.3). Working capital was $135.4 million. Operating cash flow less capital expenditures was approximately $29.7 million.
- CTS repaid $26.3 million of net debt, spent $9.4 million repurchasing shares, and paid $5.3 million in dividends. The $300 million revolving facility had $248.1 million available at year-end; CTS was in covenant compliance. A new five-year $300 million facility was entered into in February 2019, with a potential $150 million increase subject to approval.
Material changes, outlook and risks
- The June 2016 restructuring plan had incurred $11.7 million of its estimated $13.4 million total cost by year-end 2018; management expected completion in mid-2019. Total restructuring and impairment charges were $5.1 million in 2018.
- Capital expenditures increased to $28.5 million from $18.1 million. The company said operating cash and available credit should meet working-capital, capital spending and debt-service needs for at least the next 12 months. No specific revenue or earnings guidance was provided.
- CTS adopted ASC 606 revenue recognition in 2018; management reported no significant change to prior revenue-recognition practices or material impact on ongoing net income. The company expected adoption of the new lease standard in 2019 to increase reported lease assets and liabilities; estimated lease liability was $24–$28 million.
- Customer concentration is significant: Cummins generated 15.2% of sales, Honda 10.5%, and Toyota 10.5%. Their purchase agreements have no volume commitments. The 15 largest customers represented 63.7% of sales.
- Key risks include customer order reductions or delays, cyclical end markets and competition, technology changes, international and foreign-exchange exposure, raw-material availability and costs, product defects and warranty claims, pension assumptions, and environmental remediation. Environmental remediation reserves were $11.3 million; management stated actual obligations could exceed the reserve. Other ordinary-course legal claims were pending; management believed provisions adequate and did not expect a material impact based on available information.
- Management and the auditor reported effective internal control over financial reporting; the financial-statement audit opinion was unqualified. The global ERP rollout was continuing through 2019, with management stating that implementation had not materially affected controls to date.
Important facts for investors to verify
- Whether 2018 sales and margin gains persist after restructuring savings and favorable currency effects, and whether material-cost pressure intensifies.
- Developments in orders, pricing and payment performance at Cummins, Honda and Toyota, and the implications of their lack of volume commitments.
- Cash conversion and working-capital needs, particularly rising inventory and receivables; follow capital spending, debt repayment and share repurchases.
- Progress and remaining costs of the restructuring and ERP rollout, and the balance-sheet impact of lease accounting adoption.
- Changes in environmental remediation estimates, pension assumptions and tax-credit recoverability, alongside foreign-exchange and international operating exposures.