CTS Corporation — Q1 2022 Form 10-Q
Business context and reporting period
CTS designs and manufactures sensors, actuators and connectivity components for transportation, industrial, medical, and aerospace and defense markets. This unaudited report covers the three months ended March 31, 2022; comparative figures are for Q1 2021. Unless otherwise noted, amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Net sales | $147.7 million | $128.4 million | +15.0% |
| Gross margin | $54.3 million; 36.8% | $42.6 million; 33.2% | Margin +3.6 percentage points |
| Operating earnings | $26.0 million; 17.6% of sales | $18.5 million; 14.4% of sales | +40.8% |
| Net earnings | $20.2 million | $12.0 million | +68.8% |
| Diluted EPS | $0.63 | $0.37 | — |
| Operating cash flow | $19.3 million | $20.1 million | -$0.8 million |
Sales growth was broad-based: transportation revenue rose 4.3% to $79.1 million, while non-transportation markets grew 30.4% to $68.6 million. Industrial sales were $40.0 million, medical $15.9 million, and aerospace and defense $12.7 million. TEWA contributed $1.4 million of quarterly sales.
Cash and equivalents were $126.1 million at quarter-end, down from $141.5 million at December 31, 2021. Current assets were $292.0 million and current liabilities $115.0 million. Long-term debt was $50.0 million; the company reported $348.3 million available under its $400 million revolving facility, subject to covenants. It was in compliance with debt covenants. Cash and debt imply net cash of approximately $76.1 million, excluding other obligations.
Q1 investing cash outflow was $27.9 million, including $24.5 million for TEWA and $3.4 million in capital expenditures. Financing cash outflow was $6.8 million, including $3.9 million of share repurchases and $1.3 million of dividends paid. The declared dividend was $0.04 per share.
Material changes versus prior period
- Gross margin improved as a percentage of sales, which management attributed primarily to higher sales volume and favorable mix, despite inflation in materials and freight.
- SG&A increased 18.9% to $21.8 million, mainly due to acquisition-related costs and higher incentive compensation. R&D rose 8.9% to $6.2 million.
- Other expense declined to $0.3 million from $3.7 million, primarily reflecting lower pension expense following the U.S. pension plan termination. The prior-year quarter included pension expense of $2.0 million; Q1 2022 pension expense was $0.1 million.
- Operating cash flow was slightly lower, with working-capital changes producing a $10.9 million net cash outflow, including a $10.0 million use of cash from receivables.
Outlook, commentary, and risks
The filing provides no quantified full-year earnings or revenue guidance. Management expects COVID-related and supply-chain challenges to continue affecting results for the remainder of 2022 and remains cautious about their financial impact. Semiconductor and resin shortages, OEM production shutdowns and short-notice order changes are pressuring manufacturing costs and margins and may create excess inventory. Management said it is seeking to mitigate these impacts.
CTS acquired TEWA, a European temperature-sensor manufacturer, on February 28, 2022, for a net purchase price of $24.5 million. Purchase-price allocation remained preliminary; acquired inventory fair-value step-up charges of $0.6 million were recognized in Q1 cost of goods sold.
On April 12, 2022, after quarter-end, CTS agreed to acquire Ferroperm, a Danish piezoelectric-ceramics supplier, for DKK 525 million (approximately $76.8 million at the cited exchange rate), subject to customary adjustments, governmental approvals and other closing conditions. CTS hedged approximately DKK 400 million of the purchase price; the hedge does not qualify for hedge accounting.
Other matters to monitor include environmental remediation reserves of $11.1 million and pending environmental, legal and product warranty matters. The company warns that ultimate costs could exceed recorded accruals. Two environmental sites are on the EPA Superfund National Priorities List. Customer concentration remains notable: Cummins represented 15.7% of sales and Toyota 11.5% in Q1 2022. Management also cites risks from customer dependence, market conditions, acquisition integration, international operations and geopolitical events, including the Russia-Ukraine conflict.
Most important facts for investors to verify
- Whether supply constraints, OEM shutdowns and input-cost inflation continue to affect margins and cash conversion after Q1.
- Final TEWA purchase accounting, including intangible-asset valuation and the impact of acquired operations on earnings.
- Ferroperm closing conditions, final purchase price and funding, and the effect of the non-hedge-accounting currency hedge.
- Developments in environmental and other claims relative to the $11.1 million remediation reserve, and continued compliance with credit-facility covenants.
- Customer concentration and the sustainability of the Q1 improvement in gross and operating margins.