CTS Corporation — Q1 2014 Form 10-Q
Business context and period. CTS is a global manufacturer of electronic components and sensors for automotive, communications, defense and aerospace, medical, industrial, and computer markets. The quarter ended March 30, 2014; comparisons are with the three months ended March 31, 2013. Following the October 2013 sale of its Electronics Manufacturing Services (EMS) business, CTS reported one business segment. Prior-year continuing-operations results exclude EMS.
Financial performance
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Net sales | $100.7 million | $98.1 million |
| Gross margin | 30.4% | 27.3% |
| Operating earnings | $10.8 million | $2.7 million |
| Continuing-operations earnings | $5.1 million; diluted EPS $0.15 | $3.0 million; diluted EPS $0.09 |
| Net earnings | $5.1 million | $3.6 million, including $0.6 million from discontinued operations |
| Operating cash flow | $(6.1) million | $(3.5) million |
Sales increased 2.7%, primarily from automotive sales, which rose $3.9 million; lower electronic-component shipments partly offset the gain. Gross margin improved with productivity improvements and favorable foreign exchange. Operating expenses fell 18%, with lower SG&A and R&D costs more than offsetting higher restructuring charges. SG&A benefited from an asset-sale gain, pension income, cost controls, and the absence of prior-year CEO transition costs. The effective tax rate was 43.7%, versus a 2013 tax benefit; management attributed the comparison partly to prior-year discrete tax credits and a higher 2014 rate from earnings mix and quarterly tax adjustments.
Cash, debt, and liquidity
- Cash and equivalents were $119.0 million at March 30, down from $124.4 million at year-end. Cash was largely held by foreign subsidiaries; CTS stated its intent to permanently reinvest those funds abroad.
- Debt was $76.6 million, up from $75.0 million. The $200 million revolving facility had $120.8 million available, net of letters of credit; it matures in 2017. The weighted-average borrowing rate was 1.6%, and CTS was in compliance with its covenants.
- Current assets were $231.5 million and current liabilities $83.2 million. Working capital increased $7.2 million from year-end, despite lower cash and inventory, mainly because accrued liabilities declined.
- Operating cash use reflected a $15.0 million net outflow from changes in current assets and liabilities, including incentive-plan and restructuring payments and lower payroll accruals. Investing cash use was $1.0 million, including $2.8 million of capital expenditures and $1.8 million of asset-sale proceeds. Financing provided $1.3 million, including $1.6 million of net borrowings, partly offset by dividends.
Material changes, outlook, and risks
- Restructuring: The June 2013 plan targets elimination of approximately 350 positions and was expected to be completed in 2014. Cumulative charges were $14.0 million through March 30, 2014; first-quarter charges were approximately $1.1 million. CTS described facility consolidations and planned to discontinue manufacturing in Singapore. A newly announced Canadian consolidation was not included in the disclosed costs, which were not yet determinable.
- Other items: Other expense increased to $1.8 million, principally due to foreign-exchange effects associated with depreciation of the Chinese Renminbi. The company also recorded $0.5 million in restructuring and impairment charges. The quarterly dividend declared was $0.040 per share, compared with $0.035 a year earlier.
- Outlook: No specific revenue or earnings guidance was provided. Management said operating cash flows and available credit were expected to fund working capital, capital expenditures, and debt service for at least the next 12 months; additional debt or equity financing remained an option.
- Contingencies and risks: CTS was named in approximately 42 open lawsuits related to Toyota vehicle recalls and unintended-acceleration claims; it reported Toyota indemnification for covered U.S. and Canadian third-party civil claims, subject to stated exceptions. Environmental remediation matters and ordinary-course claims were also disclosed; management said reserves were adequate or expected effects not material. Risks cited include customer reliance, automotive and other end-market conditions, pricing and demand, foreign exchange and international operations, technology change, and restructuring execution. One customer accounted for 10.0% of sales, versus 7.8% a year earlier.
Key facts for investors to verify
- Whether automotive-led sales gains and improved gross margins persist, and how lower electronic-component shipments develop.
- Whether earnings translate into stronger operating cash flow as receivables, accrued liabilities, and other working-capital balances change.
- Final costs and completion timing for the existing restructuring and the additional Canadian consolidation.
- Effects of foreign-exchange movements, tax-rate variability, and the foreign-held cash balance on liquidity and earnings.
- Scope and continuing status of Toyota-related litigation and the limits of the indemnification arrangement.