CTS Corporation — FY2014 Form 10-K Summary
Business context and reporting period
CTS designs, manufactures, and sells sensors, electronic components, and actuators to OEMs in automotive, communications, computer, medical, industrial, and defense and aerospace markets. This filing covers the fiscal year ended December 31, 2014. The 2013 sale of its Electronics Manufacturing Solutions business means the reported continuing-operations results reflect CTS’s remaining businesses; EMS results are classified as discontinued operations in prior-period comparisons.
Automotive represented 67% of 2014 continuing-operations sales, up from 66% in 2013. CTS reported 2,948 employees at year-end, 76% located outside the United States.
Financial results and liquidity
| Metric | FY2014 | FY2013 |
|---|---|---|
| Net sales from continuing operations | $404.0 million | $409.5 million |
| Operating earnings from continuing operations | $42.3 million (10.5% margin) | $17.7 million (4.3% margin) |
| Earnings from continuing operations | $26.5 million | $2.0 million |
| Net earnings (loss), including discontinued operations | $26.5 million | $(3.9) million |
| Basic / diluted EPS from continuing operations | $0.79 / $0.78 | $0.06 / $0.06 |
| Capital expenditures | $12.9 million | $14.0 million |
Sales declined approximately 1.3% year over year, while operating earnings rose substantially and operating margin improved by 6.2 percentage points. The filing excerpt does not provide a clear value for operating cash flow or free cash flow.
At December 31, 2014, current assets were $240.4 million and current liabilities were $80.0 million, for a 3.0 current ratio and $160.4 million of working capital. Long-term debt was $75.0 million, unchanged from 2013, and consisted of borrowings under the revolving credit facility. CTS had $75.0 million of interest-rate swaps matching that debt; cash and total liquidity availability are not clear in the supplied text.
Material changes versus the prior comparable period
- Operating earnings increased from $17.7 million to $42.3 million; SG&A fell from $65.0 million to $54.9 million, and restructuring and goodwill impairment charges declined from $10.5 million to $5.9 million.
- Income tax expense declined from $16.1 million to $12.8 million. The filing’s selected data show 2013 continuing-operations earnings of $2.0 million, but a total net loss of $3.9 million after discontinued operations.
- Working capital rose to $160.4 million from $141.1 million, while total assets declined to $456.9 million from $480.3 million.
- Backlog at January 25, 2015 was $61.8 million, up from $55.8 million a year earlier; CTS cautions that backlog may not indicate future revenue and orders can be changed or canceled.
Outlook, commentary, risks, and unusual items
The filing does not provide a specific revenue or earnings forecast. Management expected restructuring actions to be substantially complete in 2015. The amended June 2013 plan added approximately 130 job eliminations and costs to settle the U.K. pension plan; a separate plan to consolidate Canadian operations was expected to eliminate approximately 120 positions. Restructuring plans may create execution disruption or additional costs.
- Customer concentration is significant: the 15 largest customers represented 60.9% of sales in 2014; one customer accounted for 10.8%. Reduced or delayed orders, pricing pressure, or customer payment problems could materially affect results.
- CTS faces cyclical end markets, competition, rapid technological change, short customer commitments, and risks of order cancellations, underutilized capacity, and product defects.
- Thirty-one lawsuits naming CTS as a co-defendant were reported in connection with Toyota accelerator-pedal recalls. Toyota agreed to indemnify CTS for certain third-party claims, subject to stated exceptions; CTS cannot assure that indemnification or insurance will cover all potential costs.
- Environmental matters include potential responsibility for contamination at several sites, including Superfund sites. Management stated that other ordinary-course claims were either adequately provided for or not expected to materially affect the company, based on currently available information.
- International operations expose CTS to currency, geopolitical, regulatory, and supply-chain risks. No foreign-currency forward contracts were outstanding at year-end. Interest-rate swaps were in place for the full reported debt balance.
- Management reported effective disclosure controls and internal control over financial reporting as of December 31, 2014; no material change in internal control was reported during the year.
Important facts for investors to verify
- Review the incorporated annual-report MD&A, financial statements, and notes for cash flow, cash balances, credit-facility capacity and covenants, detailed tax items, and restructuring charges and cash payments; those details are not provided clearly in the supplied filing text.
- Assess whether the improved operating margin is sustainable given the slight sales decline, customer concentration, and automotive exposure.
- Track completion costs and expected benefits of the restructuring plans, including the U.K. pension settlement and Canadian consolidation.
- Monitor developments in the Toyota-related lawsuits, indemnification scope, insurance coverage, and environmental contingencies.
- Confirm that dividend and repurchase plans remain supported by cash generation and the revolving credit facility’s restrictions.