CTS(CTS) - 2024 Q1 - Quarterly Results

Executive Summary & Q1 2024 Highlights CTS Q1 2024 performance met expectations, driven by operational improvements and early industrial market recovery CEO Commentary CEO reported Q1 sales and earnings met expectations, noting operational improvements, early industrial market recovery, and focus on diversified growth - CTS achieved sales and earnings in line with expectations, with operational improvements helping to offset the unfavorable impact from lower volumes[2] - Early signs of recovery are being observed in the industrial end market, as anticipated[2] - The company is focused on future growth through continued diversification of its customer base, building its pipeline of opportunities, and maintaining a disciplined capital structure to support organic growth, strategic acquisitions, and returning cash to shareholders[2] Q1 2024 Financial Highlights Q1 2024 financial results showed decreased sales and net income year-over-year, while operating cash flow significantly improved Q1 2024 Financial Highlights (Millions $) | Metric | Q1 2024 (Millions $) | Q1 2023 (Millions $) | YoY Change | Sequential Change (vs Q4 2023) | | :-------------------------- | :------------------- | :------------------- | :--------- | :----------------------------- | | Sales | $125.7 | $146.0 | -14% | +1% | | Net Income | $11.0 | $18.0 | -39% | N/A | | Net Income (% of sales) | 9% | 13% | -4 ppts | N/A | | Diluted EPS | $0.36 | $0.58 | -38% | N/A | | Adjusted Diluted EPS | $0.47 | $0.61 | -23% | N/A | | Operating Cash Flow | $18.0 | $11.0 | +64% | N/A | | Adjusted EBITDA Margin | 20.3% | 21.9% | -1.6 ppts | N/A | - Sales to non-transportation end markets decreased 17% year-over-year but increased 7% sequentially. Sales to the transportation end market decreased 10% year-over-year and 4% sequentially[26] 2024 Financial Guidance CTS maintains full-year 2024 guidance for sales and adjusted diluted EPS, reflecting anticipated performance 2024 Guidance Range | Metric | 2024 Guidance Range | | :---------------------- | :------------------ | | Sales | $530 - $570 million | | Adjusted Diluted EPS | $2.10 - $2.35 | Company Overview CTS Corporation is a global designer and manufacturer of custom engineered solutions that "Sense, Connect and Move," serving diverse markets - CTS Corporation is a leading designer and manufacturer of products that Sense, Connect and Move[30] - The company manufactures sensors, actuators, and electronic components in North America, Europe, and Asia, serving the aerospace/defense, industrial, medical, and transportation markets[30] Condensed Consolidated Financial Statements (Unaudited) Unaudited condensed consolidated financial statements provide a snapshot of the company's earnings and balance sheet for the period Condensed Consolidated Statements of Earnings Q1 2024 statements show a year-over-year decrease in net sales, gross margin, operating earnings, and net earnings Condensed Consolidated Statements of Earnings (in thousands) | Metric (in thousands) | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Net sales | $125,750 | $145,994 | | Cost of goods sold | $80,660 | $94,342 | | Gross margin | $45,090 | $51,652 | | Selling, general & admin expenses | $22,260 | $21,979 | | Research & development expenses | $6,601 | $6,586 | | Restructuring charges | $1,693 | $912 | | Operating earnings | $14,536 | $22,175 | | Earnings before income taxes | $13,657 | $22,709 | | Income tax expense | $2,539 | $4,365 | | Net earnings | $11,119 | $18,344 | | Diluted EPS | $0.36 | $0.58 | Condensed Consolidated Balance Sheets As of March 31, 2024, total assets, liabilities, and shareholders' equity saw minor sequential decreases Condensed Consolidated Balance Sheets (in thousands) | Metric (in thousands) | March 31, 2024 | December 31, 2023 | | :------------------------------------ | :------------- | :---------------- | | ASSETS | | | | Cash and cash equivalents | $162,425 | $163,876 | | Accounts receivable, net | $80,663 | $78,569 | | Inventories, net | $57,784 | $60,031 | | Total current assets | $318,218 | $319,349 | | Property, plant and equipment, net | $91,626 | $92,592 | | Goodwill | $156,330 | $157,638 | | Total Assets | $732,840 | $741,167 | | LIABILITIES AND SHAREHOLDERS' EQUITY | | | | Accounts payable | $45,609 | $43,499 | | Total current liabilities | $95,948 | $97,039 | | Long-term debt | $67,500 | $67,500 | | Total Liabilities | $211,555 | $214,345 | | Total shareholders' equity | $521,285 | $526,822 | Non-GAAP Financial Measures and Reconciliations This section explains and reconciles non-GAAP financial measures to provide a clearer view of core financial performance Explanation of Non-GAAP Measures Non-GAAP measures supplement GAAP results by excluding non-recurring expenses to enhance understanding of core performance - CTS believes that non-GAAP financial measures are commonly used by financial analysts and investors to provide useful information by supplementing GAAP results[15] - Non-GAAP measures exclude non-recurring operating expenses such as restructuring charges, environmental charges, acquisition-related costs, inventory fair value step-up costs, foreign exchange (gains) losses, non-cash pension expenses (income), and certain discrete tax items[15] - Non-GAAP measures should not be used as the sole basis for investment decisions, as they may exclude important cash and non-cash items[15] Adjusted Net Earnings Adjusted net earnings for Q1 2024 decreased year-over-year, reflecting adjustments for non-recurring items Adjusted Net Earnings (in millions) | Metric | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :-------------------------------------- | :-------------------------------- | :-------------------------------- | | Net earnings | $11.1 | $18.3 | | Per share | $0.36 | $0.58 | | Total pretax adjustments | $3.7 | $1.5 | | Income tax effect of adjustments | $(0.6) | $(0.3) | | Total adjustments, tax affected | $3.1 | $1.3 | | Tax adjustments | $0.3 | $0.0 | | Adjusted net earnings | $14.6 | $19.6 | | Adjusted net earnings per share | $0.47 | $0.61 | | Net sales | $125.7 | $146.0 | | Adjusted net earnings as a % of net sales | 11.6% | 13.4% | Adjusted Operating Earnings Adjusted operating earnings for Q1 2024 decreased year-over-year after accounting for specific non-recurring costs Adjusted Operating Earnings (in millions) | Metric | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :-------------------------------------- | :-------------------------------- | :-------------------------------- | | Operating earnings | $14.5 | $22.2 | | Operating earnings as a % of net sales | 11.6% | 15.2% | | Total adjustments to reported operating earnings | $2.2 | $1.7 | | Adjusted operating earnings | $16.7 | $23.8 | | Adjusted operating earnings as a % of net sales | 13.3% | 16.3% | Adjusted EBITDA Adjusted EBITDA and its margin decreased in Q1 2024 compared to the prior year, after relevant adjustments Adjusted EBITDA (in millions) | Metric | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :-------------------------------------- | :-------------------------------- | :-------------------------------- | | Net earnings (loss) | $11.1 | $18.3 | | Depreciation and amortization expense | $7.3 | $6.9 | | Interest expense | $0.8 | $0.7 | | Tax expense (benefit) | $2.5 | $4.4 | | EBITDA | $21.8 | $30.3 | | Total adjustments to EBITDA | $3.7 | $1.6 | | Adjusted EBITDA | $25.5 | $31.9 | | Adjusted EBITDA Margin | 20.3% | 21.9% | Adjusted Gross Margin Adjusted gross margin percentage increased in Q1 2024, reflecting adjustments for restructuring-related charges Adjusted Gross Margin (in millions) | Metric | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :-------------------------------------- | :-------------------------------- | :-------------------------------- | | Gross margin | $45.1 | $51.7 | | Restructuring-related charges | $0.5 | $0.0 | | Adjusted gross margin | $45.6 | $51.7 | | Adjusted gross margin as a % of net sales | 36.2% | 35.4% | Controllable Working Capital Controllable working capital decreased year-over-year and sequentially, with its percentage of annualized sales remaining consistent Controllable Working Capital (in millions) | Metric (in millions) | March 31, 2024 | March 31, 2023 | December 31, 2023 | | :---------------------------------------- | :------------- | :------------- | :---------------- | | Net accounts receivable | $80.7 | $97.7 | $78.6 | | Net inventory | $57.8 | $63.5 | $60.0 | | Accounts payable | $(45.6) | $(53.4) | $(43.5) | | Controllable working capital | $92.8 | $107.8 | $95.1 | | Annualized sales | $503.0 | $584.0 | $498.8 | | Controllable working capital as a % of annualized sales | 18.5% | 18.5% | 19.1% | Free Cash Flow Free cash flow significantly increased in Q1 2024, primarily due to improved operating cash flow Free Cash Flow (in millions) | Metric (in millions) | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :---------------------------------------------- | :-------------------------------- | :-------------------------------- | | Net cash provided by operating activities | $18.3 | $11.2 | | Capital expenditures | $(4.0) | $(4.5) | | Free cash flow | $14.3 | $6.6 | | Operating cash flow as a percentage of net earnings | 165% | 61% | | Free cash flow as a percentage of adjusted net earnings | 98% | 34% | Supplemental Financial Information This section provides additional financial details on capital expenditures, depreciation, amortization, and stock-based compensation Capital Expenditures Capital expenditures for Q1 2024 slightly decreased year-over-year, remaining a consistent percentage of net sales Capital Expenditures (in millions) | Metric (in millions) | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :-------------------------- | :-------------------------------- | :-------------------------------- | | Capital expenditures | $4.0 | $4.5 | | Net sales | $125.7 | $146.0 | | Capex as % of net sales | 3.2% | 3.1% | Depreciation, Amortization, and Stock-based Compensation Depreciation and amortization expense increased in Q1 2024, while stock-based compensation expense decreased Depreciation, Amortization, and Stock-based Compensation (in millions) | Metric (in millions) | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :------------------------------------ | :-------------------------------- | :-------------------------------- | | Depreciation and amortization expense | $7.3 | $6.9 | | Stock-based compensation expense | $1.2 | $1.6 | Forward-Looking Statements This section outlines forward-looking statements and associated risks, cautioning against undue reliance on future projections - The document includes forward-looking statements concerning future performance, financial condition, strategy, and management objectives, which are not guarantees of future results[7] - Readers are cautioned against undue reliance on these statements, as actual results may differ materially due to various risks and uncertainties[7] - Key risk factors include supply chain disruptions, economic conditions (inflation/recession), acquisition integration issues, rapid technological change, market conditions in various sectors (transportation, industrial, aerospace/defense, medical), reliance on key customers, and geopolitical risks[7][44] Conference Call & Contact Information Details for the Q1 2024 conference call, webcast access, and investor contact information are provided - A conference call was scheduled for May 1, 2024, at 10:00 a.m. (ET) with specific dial-in numbers for U.S. (+1-833-470-1428) and international participants, using passcode 494524[29] - A supplemental slide presentation and a live audio webcast of the conference call were accessible via CTS' investor relations website[29] - Contact for inquiries is Ashish Agrawal, Vice President and Chief Financial Officer, CTS Corporation, at +1 (630) 577-8800 or ashish.agrawal@ctscorp.com[31]