CTS Corporation — 2011 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2011. This is an annual filing, not a quarterly report; the supplied text does not provide a standalone fourth-quarter income statement or cash-flow statement.
Business context
CTS designs and manufactures electronic components and sensors and provides electronics manufacturing services (EMS) to OEMs in automotive, communications, computer, medical, industrial, and defense and aerospace markets. In 2011, Components and Sensors generated 47% of consolidated sales and EMS generated 53%, compared with 51% and 49%, respectively, in 2010. Automotive represented 29% of total sales, and the 15 largest customers represented 48%.
Financial performance and position
Amounts below are in millions of dollars except per-share data. The supplied filing text presents selected financial data; detailed financial statements and MD&A are incorporated by reference and are not reproduced here.
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Net sales | $588.5 | $552.6 | Up 6.5% |
| Operating earnings | $25.2 | $27.8 | Down 9.3% |
| Operating margin | 4.3% | 5.0% | Down 0.7 percentage points |
| Net earnings | $21.0 | $22.0 | Down 4.9% |
| Diluted earnings per share | $0.60 | $0.63 | Down $0.03 |
| Capital expenditures | $15.6 | $13.3 | Up 17.3% |
| Research and development expense | $20.0 | $18.3 | Up 9.2% |
- 2011 reported cost of goods sold was $478.7 million, or 81.3% of sales, compared with 78.3% in 2010. The filing also reports $4.1 million in business-interruption insurance recovery and $6.1 million in property-damage insurance recovery in 2011.
- Cash flow from operations and free cash flow: the supplied filing text does not provide clear values.
- At year-end, current assets were $283.4 million, current liabilities $124.2 million, working capital $159.1 million, and the current ratio 2.3:1. Cash and cash equivalents are not stated in the supplied text.
- Long-term debt was $74.4 million, all under the revolving credit facility, versus $70.0 million in 2010. Total assets were $480.8 million and shareholders’ equity was $263.3 million.
- Inventory increased to $92.5 million from $76.9 million. The filing cites a 37% share of sales from non-U.S. operations, down from 44% in 2010.
Material changes and unusual items
- Sales grew, but operating earnings, operating margin, net earnings, and diluted EPS declined year over year. EMS represented a larger share of sales than in 2010.
- Two restructuring plans eliminated approximately 130 positions; implementation was substantially completed by year-end. Restructuring and goodwill impairment charges were $2.9 million, compared with $1.4 million in 2010.
- The Japan earthquake reduced demand for some automotive products. Flooding affected CTS’s Thailand factory; the company had an ongoing insurance claim and said recovery could affect 2012 financial performance.
- The quarterly dividend increased in the fourth quarter to $0.035 per share from $0.03, a stated annualized rate of $0.14 versus $0.12. CTS also repurchased 256,743 shares during the fourth quarter.
- January 2012 order backlog was $124.6 million, down from $138.2 million a year earlier; EMS backlog fell to $84.0 million from $99.3 million.
Outlook, risks, and contingencies
- No specific financial guidance or quantified outlook is included in the supplied text. Management’s detailed discussion is incorporated by reference, so the filing text provided here does not establish a clear forecast.
- Key risks include dependence on major customers and short-term, cancellable orders; cyclicality and competition; pricing and margin pressure; technology changes; foreign-exchange exposure; and possible shortages or cost increases for electronic components, rare earth elements, and other materials.
- CTS faces product-liability and litigation exposure related to Toyota accelerator-pedal recalls. Toyota agreed to indemnify CTS for certain third-party claims, subject to stated exceptions; government-related costs and some other liabilities are not covered by that agreement. The filing reports approximately 31 open lawsuits in which CTS was named as a co-defendant.
- Environmental remediation matters and other ordinary-course claims are pending. Management stated that provisions were adequate or that ultimate costs were not expected to materially affect the company, based on information then available.
- The revolving credit agreement restricts certain activities, including additional debt, asset dispositions, acquisitions, investments, and stock repurchases or dividends. A one-percentage-point increase in interest rates was estimated to increase annual interest expense by approximately $744,000.
- Management and the auditor reported effective internal control over financial reporting as of December 31, 2011. CTS cautioned that insurance recovery for the Thailand flood and future availability or cost of property and business-interruption coverage remained uncertain.
Important facts for investors to verify
- Review the incorporated 2011 Annual Report for full segment results, margins, cash flows, cash balance, debt terms, and management’s explanation of the year-over-year margin decline.
- Check subsequent disclosures on the Thailand flood insurance claim, recovery amounts, and any related business interruption or property losses.
- Monitor developments in Toyota-related litigation, indemnification coverage, insurance limits, and any potential effect on CTS’s sales to Toyota.
- Assess customer concentration, backlog conversion and cancellation risk, and the change in segment sales mix.
- Verify liquidity and credit-covenant headroom, including how debt maturities, interest rates, dividends, and repurchases affect financial flexibility.