CTS Corporation — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. CTS designs and manufactures sensors, actuators and electronic components for automotive, communications, industrial, medical, defense and other markets.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $105.7 million | $98.7 million | $205.8 million | $195.4 million |
| Gross margin | $35.8 million; 33.9% | $34.5 million; 34.9% | $70.0 million; 34.0% | $67.9 million; 34.8% |
| Operating earnings | $13.2 million | $24.1 million | $25.4 million | $36.5 million |
| Net earnings | $10.0 million | $14.5 million | $18.5 million | $22.4 million |
| Diluted EPS | $0.30 | $0.44 | $0.55 | $0.67 |
For the first half, operating margin was 12.3% versus 18.7%, and net margin was 9.0% versus 11.4%. Q2 net margin was 9.5% versus 14.7%. The filing reports no segment results in the provided text.
- Cash flow: First-half operating cash flow was $23.3 million, versus $16.2 million. Investing used $28.4 million, including $19.3 million for Noliac and $9.1 million in capital expenditures. Financing used $0.5 million. Cash declined $6.0 million to $107.8 million. Operating cash flow less capital expenditures was approximately $14.2 million.
- Liquidity and debt: Current assets were $222.6 million and current liabilities $94.6 million at June 30. Cash was $107.8 million; long-term revolving-credit debt was $92.8 million, up from $89.1 million at year-end. Of the $300 million facility, $205.1 million was available. CTS reported compliance with its debt covenants.
- Capital returns: Dividends declared were $0.04 per share in Q2 and $0.08 for the first half. No shares were repurchased in the first half.
Changes versus prior comparable periods
- Sales rose 7.1% in Q2 and 5.3% in the first half. Automotive sales increased 5.6% in Q2 and 3.0% year to date; other sales increased 9.9% and 10.2%, respectively. Noliac contributed $1.5 million in reported sales. Foreign-exchange movements reduced sales by $0.8 million in Q2 and $1.6 million for the first half.
- Gross margin declined 1.0 percentage point in Q2 and 0.8 point for the first half, which management attributed mainly to production-rework costs identified in Q2 and unfavorable foreign exchange.
- Operating earnings fell 45.2% in Q2 and 30.5% for the first half; net earnings fell 31.2% and 17.4%, respectively. Comparisons were affected by a $11.6 million gain on a Canadian building sale in Q2 2016 ($11.4 million for the first half). Higher 2017 restructuring charges also weighed on results: $0.7 million in Q2 and $1.5 million year to date.
- Other income was favorable in 2017, principally due to foreign-currency translation gains; 2016 had translation losses. Interest expense declined, primarily because of lower costs related to interest-rate swaps. The effective tax rate fell to 28.4% in Q2 and 29.4% for the first half, from 34.7% and 34.5%, respectively.
Outlook, risks and unusual items
- The filing provides no specific revenue or earnings guidance. Management said operating cash flows and available credit should be sufficient for working capital, capital expenditures and debt service for at least the next 12 months; it may pursue additional financing for liquidity or acquisitions.
- CTS acquired Noliac A/S on May 15, 2017, for $19.3 million net of cash acquired. Purchase-price allocation remained preliminary, including $7.8 million each of goodwill and intangible assets.
- The June 2016 restructuring plan is expected to cost approximately $12.3 million and affect about 230 employees; $4.6 million had been incurred through June 30, 2017. The plan includes phasing out production at the Elkhart facility by mid-2018 and converting it to an R&D center.
- Environmental remediation reserves were $18.4 million. The company described environmental sites and ordinary-course claims, and cautioned that ultimate environmental costs could exceed reserves. Management said other pending claims were not expected to have a material impact based on available information.
- Principal stated risks include customer concentration and reliance on key customers, acquisition integration, market and economic conditions, pricing and demand, foreign exchange and other international risks, technology and intellectual property, and litigation, environmental and product-liability matters. Cummins represented 13.2% of Q2 sales; Toyota 10.0% and Honda 10.7%.
- The company expects to adopt the revenue-recognition standard on January 1, 2018, using the modified retrospective method; it anticipates minor timing differences, primarily related to variable consideration, but had not determined the final impact. Management reported disclosure controls were effective and no significant change in risk factors since year-end.
Important facts for investors to verify
- Whether sales growth and acquired Noliac revenue translate into sustained organic growth, and how customer concentration affects that outlook.
- Whether production-rework costs are resolved and gross margins recover, while tracking foreign-exchange effects and restructuring expense.
- How preliminary Noliac purchase accounting, integration, and the remaining restructuring plan affect future earnings and cash generation.
- Cash availability and location: $106.4 million of the $107.8 million cash balance was held outside the United States; confirm any constraints or tax implications relevant to U.S. liquidity.
- Changes in remediation exposure, the $18.4 million reserve, and the final impact of adopting the new revenue standard.