CTS Corporation — Q1 2015 Form 10-Q
Business context and period: CTS is a global manufacturer of electronic components and sensors, primarily serving automotive, communications, defense and aerospace, medical, industrial, and computer markets. This unaudited report covers the three months ended March 29, 2015; comparisons are with the three months ended March 30, 2014. Dollar amounts below are in millions unless otherwise noted.
Financial performance and position
| Metric | Q1 2015 | Q1 2014 / comparison |
|---|---|---|
| Net sales | $98.3 | $100.7; down 2.4% |
| Gross profit / margin | $32.1 / 32.7% | $30.6 / 30.4% |
| Operating earnings / margin | $10.5 / 10.7% | $10.8 / 10.8% |
| Net earnings | $6.3 | $5.1; up 23.8% |
| Diluted earnings per share | $0.19 | $0.15 |
| Effective tax rate | 30.2% | 43.7% |
| Operating cash flow | $0.5 | $(6.1) |
| Capital expenditures | $1.2 | $2.8 |
| Cash and cash equivalents | $138.3 at March 29 | $134.5 at December 31, 2014 |
| Long-term debt | $83.2 at March 29 | $75.0 at December 31, 2014 |
Cash exceeded debt by approximately $55.1 million at quarter-end. CTS had $114.3 million available on its $200 million revolving credit facility, which matures in January 2017; the weighted average borrowing rate was 1.4%. Debt was 22.1% of total capitalization, versus 20.6% at year-end. CTS reported compliance with all debt covenants. Working capital increased $11.4 million from year-end.
Changes, management commentary, and outlook
- Automotive sales fell $3.7 million, including an estimated $2.3 million adverse effect from U.S. dollar appreciation against the euro and Chinese renminbi. Other sales rose $1.3 million, mainly from higher piezo-product shipments.
- Gross margin improved 2.3 percentage points, which management attributed to efficiency gains, productivity projects, restructuring savings, and favorable currency effects on manufacturing costs. SG&A rose 15.2% to $15.7 million, principally due to selling and marketing spending for growth initiatives; R&D declined 7.6% to $5.2 million, reflecting project timing.
- Net earnings increased despite slightly lower sales and operating earnings, primarily alongside a lower effective tax rate. The rate reflected a change in the jurisdictional mix of earnings and discrete-period items; Q1 2014 had included a discrete tax expense that raised its rate.
- Operating cash flow was modestly positive, as earnings and noncash items were largely offset by $11.6 million of net cash use from changes in current assets and liabilities, primarily a $10.9 million increase in accounts receivable. Financing cash flow was $4.1 million, including $8.2 million of net borrowings, partly offset by $2.9 million of share repurchases and $1.3 million of dividends.
- Restructuring and impairment charges were $0.7 million, plus $0.1 million of restructuring-related charges in cost of goods sold. Existing footprint-consolidation plans were expected to be substantially completed in 2015 and include workforce reductions. The filing reports $3.5 million of restructuring liabilities at quarter-end.
- No specific financial guidance was provided. Management said operating cash flows and available borrowings were expected to be adequate for working capital, capital expenditures, and debt service for at least the next 12 months; additional equity or debt financing could be pursued for liquidity or acquisitions.
Risks, contingencies, and other items
- CTS recorded a $1.7 million foreign-currency transaction loss in “Other” expense. Management cited dollar appreciation as a driver of foreign-exchange losses. Other comprehensive income also included a $1.1 million translation loss.
- CTS remains a co-defendant with Toyota in 31 U.S. and Canadian lawsuits related to unintended-acceleration allegations. Toyota’s indemnity agreement covers certain third-party civil claims, subject to stated limitations; CTS cautioned that Toyota could seek recovery of recall-related costs and that insurance may be insufficient. The filing also describes environmental remediation matters and related reserves; management considers provisions adequate based on available information.
- Foreign-exchange movements, customer reliance, market conditions, pricing and demand, international risks, and litigation and environmental contingencies are among the stated risks. One customer represented 9.5% of sales, compared with 10.0% a year earlier. The company reported no significant changes to risk factors or market risk, and management concluded disclosure controls were effective.
- CTS repurchased 164,852 shares for $2.9 million, at an average $17.55 per share; 423,767 shares remained available under the authorization at quarter-end. The declared dividend was $0.04 per share.
Important facts for investors to verify
- Whether the improvement in gross margin and earnings can continue despite lower sales, elevated SG&A, and currency-related pressures.
- Whether receivables and working-capital needs normalize and operating cash flow becomes more consistent with reported earnings.
- Progress, remaining costs, workforce effects, and completion timing for the restructuring plans.
- Revolver availability, covenant headroom, and debt levels as borrowings and capital returns evolve.
- Developments in Toyota-related litigation and environmental matters, including the scope and practical coverage of indemnification, insurance, and recorded reserves.