CTS Corporation — FY2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016, with fourth-quarter results also reported. CTS designs and manufactures sensors, electronic components, and actuators for transportation and other markets. Transportation represented 66% of annual sales.
Financial performance
| Metric | FY2016 | FY2015 |
|---|---|---|
| Net sales | $396.7 million | $382.3 million |
| Gross margin | $140.4 million; 35.4% | $127.1 million; 33.2% |
| Operating earnings | $63.2 million; 15.9% | $18.1 million; 4.7% |
| Net earnings | $34.4 million; diluted EPS $1.03 | $7.0 million; diluted EPS $0.21 |
| Operating cash flow | $47.2 million | $39.2 million |
| Capital expenditures | $20.5 million | $9.7 million |
| Cash and cash equivalents | $113.8 million | $156.9 million |
| Debt at year-end | $89.1 million | $90.7 million |
Cash flow from operations less capital expenditures was approximately $26.7 million. The current ratio was 2.2, down from 2.5, and working capital was $117.6 million, down from $151.3 million. The $300 million revolving facility had $208.7 million available; CTS reported compliance with its covenants. The quarterly dividend was $0.04 per share ($0.16 annualized).
Material changes and notable items
- Annual sales grew 3.8%; higher automotive sensor volumes and the single-crystal materials acquisition contributed, while foreign exchange reduced sales by $2.7 million. High-density disk-drive component sales fell 30%.
- Gross margin improved 2.2 percentage points, which management attributed to efficiency and productivity gains, restructuring savings, favorable mix, acquisition sales, and currency effects on manufacturing costs.
- Operating earnings included an $11.45 million gain on asset sales, principally the sale of a former Canadian manufacturing facility. FY2015 included a $14.54 million environmental charge and $14.56 million of restructuring and impairment charges, versus $3.05 million of restructuring and impairment charges in FY2016. These items materially affect year-over-year comparability.
- CTS acquired CTG Advanced Materials for approximately $73.1 million net cash in March 2016. The acquired business contributed $12.3 million in sales and $1.4 million in earnings from acquisition through year-end.
- Cash decreased $43.1 million, principally reflecting the acquisition payment and higher capital expenditures, partly offset by operating cash flow and asset-sale proceeds. Debt declined modestly.
- FY2016 effective tax rate was 39.9%, compared with 43.3% in FY2015; the reported rates include jurisdictional mix, valuation allowance changes, and other discrete items.
Fourth-quarter results
Fourth-quarter 2016 sales were $101.6 million, up 8.9% year over year. Net earnings were $8.3 million, or $0.25 per diluted share, versus a $13.7 million loss, or $0.42 loss per share, in fourth-quarter 2015. Gross margin increased to 35.3% from 32.3%. The comparison also reflects much lower restructuring charges; fourth-quarter 2015 included an $8.28 million non-cash charge related to winding up the U.K. pension plan.
Outlook, risks, and contingencies
- No specific financial guidance or quantified forecast is provided. Management said operating cash flow and available revolving-credit borrowings should be adequate for working capital, capital expenditures, and debt service for at least the next 12 months.
- The June 2016 restructuring plan phases out production at Elkhart by mid-2018 and converts the facility to a research and development center. Estimated plan cost is approximately $16 million; $3.05 million had been recorded through year-end 2016.
- Environmental remediation reserves were $18.18 million at year-end. The company faces potential responsibility at multiple contaminated sites, including Superfund sites; actual costs could exceed reserves. The Asheville site drove the $14.54 million charge in 2015.
- Key business risks include customer concentration and short-term order commitments, cyclicality and price competition, technological change, foreign exchange and international operations, raw-material availability, product liability, pension assumptions, and environmental obligations. Honda and Toyota each represented over 10% of sales; together they accounted for 21.1%.
- Most cash was held outside the U.S. ($112.7 million of $113.8 million). CTS reported approximately $133.1 million of foreign earnings as permanently reinvested, for which no U.S. tax provision was recorded.
Investor verification priorities
- Assess earnings quality and comparability, particularly the asset-sale gain, prior-year environmental charge, restructuring costs, and acquisition contribution.
- Review the Elkhart transition plan’s remaining costs, execution, and expected savings, as well as the integration and performance of CTG Advanced Materials.
- Evaluate environmental reserve adequacy and potential changes in remediation scope or cost.
- Monitor customer exposure, order changes, and automotive demand, alongside the decline in HDD sales.
- Check cash availability and location, revolving-credit covenants, foreign tax exposure, and the impact of pension and currency assumptions.
The independent auditor issued an unqualified opinion on the financial statements, and management and the auditor concluded internal control over financial reporting was effective as of December 31, 2016.