UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
☒ | |
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2021
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 1-4639
CTS CORPORATION
(Exact name of registrant as specified in its charter)
Indiana | 35-0225010 | |||||
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification Number) | |||||
4925 Indiana Avenue Lisle IL | 60532 | |||||
(Address of principal executive offices) | (Zip Code) |
Registrant's telephone number, including area code: 630-577-8800
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Trading Symbol(s) | Name of Each Exchange on Which Registered | ||
Common stock, without par value | CTS | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☒Yes
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. ☐Yes
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒Yes
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer", "accelerated filer"filer," "smaller reporting company," and "smaller reporting"emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☒ | Accelerated filer | ☐ | Non-accelerated filer | ☐ | Smaller reporting company | |
☐ | Emerging growth | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13 (a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐Yes
The aggregate market value of the voting and non-voting stock held by non-affiliates of CTS Corporation, based upon the closing sales price of CTS common stock on June 30, 2018,2021, was approximately $1,176,000,000. $1,185,691,656.There were 32,734,22732,152,367 shares of common stock, without par value, outstanding on February 19, 2019.
DOCUMENTS INCORPORATED BY REFERENCE
(1) | |
Portions of the Proxy Statement to be filed for the annual meeting of shareholders to be held on or about May |
TABLE OF CONTENTS
ITEM |
|
| PAGE |
1. |
| 4 | |
1A. |
| 8 | |
1B. |
| 16 | |
2. |
| 17 | |
3. |
| 17 | |
4. |
| 17 | |
5. |
| 18 | |
6. |
| 18 | |
7. |
| Management's Discussion and Analysis of Financial Condition and Results of Operations | 19 |
7A. |
| 25 | |
8. |
| 26 | |
9. |
| Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 64 |
9A. |
| 64 | |
9B. |
| 66 | |
9C. |
| Disclosure Regarding Foreign Jurisdictions that Prevent Inspections | 66 |
10. |
| 66 | |
11. |
| 66 | |
12. |
| Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters | 66 |
13. |
| Certain Relationships and Related Transactions, and Director Independence | 67 |
14. |
| 67 | |
15. |
| 68 | |
|
| 70 |
CTS CORPORATION 2
ITEM | PAGE | ||||
Safe Harbor
Forward-Looking Statements
This document contains statements that are, or may be deemed to be, forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, any financial or other guidance, statements that reflect our current expectations concerning future results and events, and any other statements that are not based solely on historical fact. Forward-looking statements are based on management's expectations, certain assumptions and currently available information. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof and are based on various assumptions as to future events, the occurrence of which necessarily are subject to uncertainties. These forward-looking statements are made subject to certain risks, uncertainties and other factors, which could cause ourCTS’ actual results, performance or achievements to differ materially from those presented in the forward-looking statements. Examples of factors that may affect future operating results and financial condition include, but are not limited to: the ultimate impact of the COVID-19 pandemic on CTS’ business, results of operations or financial condition; changes in the economy generally and in respect to the business in which CTS operates; unanticipated issues in integrating acquisitions; the results of actions to reposition ourCTS’ business; rapid technological change; general market conditions in the transportation, telecommunications, and information technology industries, as well as conditions in the industrial, aerospace and defense, and medical markets; reliance on key customers; unanticipated public health crises, natural disasters or other events; environmental compliance and remediation expenses; the ability to protect ourCTS’ intellectual property; pricing pressures and demand for ourCTS’ products; and risks associated with ourCTS’ international operations, including trade and tariff barriers, exchange rates and political and geopolitical risks. Many of these, and other risks and uncertainties, are discussed in further detail in Item 1A. of this Annual Report on Form 10-K. We undertake10-K and other filings made with SEC. CTS undertakes no obligation to publicly update ourCTS’ forward-looking statements to reflect new information or events or circumstances that arise after the date hereof, including market or industry changes.
CTS CORPORATION 3
PART I
Item 1.
BusinessCTS Corporation ("CTS", "we", "our", "us" or the "Company") is a global manufacturer of sensors, electronicconnectivity components, and actuators. CTS was established in 1896 as a provider of high-quality telephone products and was incorporated as an Indiana corporation in February 1929. Our principal executive offices are located in Lisle, Illinois.
We design, manufacture, and sell a broad line of sensors, electronicconnectivity components, and actuators primarily to original equipment manufacturers ("OEMs") and tier one suppliers for the aerospace and defense, industrial, information technology, medical, telecommunications, and transportation markets. Our vision is to be a leading provider of sensing and motion devices as well as connectivity components, enabling an intelligent and seamless world. These devices are categorized by their ability to Sense, Connect or Move. Sense products provide vital inputs to electronic systems. Connect products allow systems to function in synchronization with other systems. Move products ensure required movements are effectively and accurately executed. We are committed to achieving our vision by continuing to invest in the development of products, technologies, and technologiestalent within these categories.
We operate manufacturing facilities in North America, Asia, and Europe. Sales and marketing are accomplished through our sales engineers, independent manufacturers' representatives, and distributors.
See the Consolidated Financial Statements and Notes included in Part II, Item 8 of this Annual Report on Form 10-K for financial information regarding the Company.
PRODUCTS BY MAJOR MARKETS
Our products perform specific electronic functions for a given product family and are intended for use in customer assemblies. Our major products consist principally of sensors and actuators used in passenger or commercial vehicles, electronicconnectivity components used in telecommunications infrastructure, information technology and other high-speed applications, switches, temperature sensors, and potentiometers supplied to multiple markets, and fabricated piezoelectric materials and substrates used primarily in the medical, industrial, and aerospace and defense markets.
The following table identifies major products by industry. Products are sold to several industry OEMs, tier one suppliers, and information technology markets.distributors.
Product Description | Transportation | Industrial | Medical | Aerospace and Defense | ||||
SENSE | • | • | • | • | ||||
(Controls, Pedals, Piezo Sensing Products, Sensors, Switches, Transducers) | ||||||||
CONNECT | • | • | • | |||||
(EMI/RFI Filters, Capacitors, Frequency Control, Resistors, RF filters) | ||||||||
MOVE | • | • | ||||||
(Piezo Microactuators, Rotary Actuators) |
The following table provides a breakdown of net sales by industry as a percent of consolidated net sales:
|
| 2021 |
|
| 2020 |
|
| 2019 |
| |||
Industry |
|
|
|
|
|
|
|
|
|
|
|
|
Transportation |
| 55% |
|
| 57% |
|
| 64% |
| |||
Industrial |
| 27% |
|
| 25% |
|
| 20% |
| |||
Medical |
| 9% |
|
| 9% |
|
| 9% |
| |||
Aerospace and Defense |
| 9% |
|
| 9% |
|
| 7% |
| |||
% of consolidated net sales |
| 100% |
|
| 100% |
|
| 100% |
|
2018 | 2017 | 2016 | |
Industry | |||
Transportation | 64% | 65% | 66% |
Industrial | 18% | 18% | 17% |
Medical | 9% | 8% | 7% |
Aerospace and Defense | 5% | 4% | 4% |
Telecommunications and IT | 4% | 5% | 6% |
% of consolidated net sales | 100% | 100% | 100% |
In the above table, identifies major products by industry. ProductsTelecommunications & IT are sold to several industry OEMs and through distributors.
MARKETING AND DISTRIBUTION
Sales and marketing to OEMscustomers is accomplished through our sales engineers, independent manufacturers' representatives, and distributors. We maintain sales offices in China, Czech Republic, Denmark, Germany, India, Japan, Scotland, Singapore, Taiwan, and the United States. Approximately 89%92% of 20182021 net sales were attributable to our sales engineers.
CTS CORPORATION 4
Our sales engineers generally service our largest customers with application-specific products. A vast majority of our products are engineered solutions. The sales engineers work closely with major customers in designing and developing products to meet specific customer requirements.
In 2021, independent distributors accounted for approximately 6% of net sales. Weuse distributors for a small portion of our product portfolio that are standard and require less design support, to service smaller customers, and to provide supply chain fulfillment for certain customers. Our key distribution partners include large global and regional distributors such as Avnet, Inc., Digi-Key Electronics, Master Electronics, Future Electronics, and TTI, Inc. In addition, we also utilize the services of independent manufacturers' representatives for customers not serviced directly by our sales engineers. Independent manufacturers' representatives receive commissions from us. During 2018,2021, approximately 5%2% of net sales were attributable to independent manufacturers' representatives. We also use independent distributors. Independent distributors purchase products from us for resale to customers. In 2018, independent distributors accounted for approximately 6% of net sales.
RAW MATERIALS
We utilize a wide variety of raw materials and purchased parts in our manufacturing processes. The following are the most significant raw materials and purchased components:
Conductive inks and contactors, passive electronicconnectivity components, integrated circuits and semiconductors, certain rare earth elements ("REEs"), ceramic
These raw materials and parts are purchased from a number of suppliers, and we generally do not believe we are dependent upon one or a limited number of suppliers. Although we purchase all of our semiconductors, REEs, conductive inks, and silver pastes from a limited number of suppliers, alternative sources are generally available.
Lead times between the placement of orders for certain raw materials and purchased parts and actual delivery to us may vary. Occasionally, we may need to order raw materials in greater quantities and at higher prices to compensate for the variability of lead times for delivery.
Because of the COVID-19 pandemic, we have experienced supply chain disruptions as well as supply inflationary pressures in fiscal 2021. In particular, semiconductor and resin shortages have impacted our OEM customers’ ability to finish assembly of vehicles, which in turn have adversely impacted our results of operations and cash flows. These pressures are expected to continue in fiscal 2022.
PATENTS, TRADEMARKS, AND LICENSES
We maintain a program of obtaining and protecting U.S. and non-U.S. patents relating to products that we have designed and manufactured, as well as processes and equipment used in our manufacturing technology. We were issued 107 new U.S. patents and 19 non-U.S. patents in 20182021 and currently hold 147134 U.S. patents and 159126 non-U.S. patents. We have 910 registered U.S. trademarks, 2024 registered foreign trademarks and 4 international trademark registrations. We have licensed the right to use several of our patents. In 2018,2021, license and royalty income was less than 1% of net sales.
MAJOR CUSTOMERS
Years Ended December 31, | |||
2018 | 2017 | 2016 | |
Total of 15 largest customers / net sales | 63.7% | 64.4% | 63.1% |
Our net sales to significant customers as a percentage of total net sales were as follows:
|
| Years Ended December 31, |
| ||||||
|
| 2021 |
|
| 2020 |
|
| 2019 |
|
Cummins Inc. |
| 15.0% |
|
| 13.1% |
|
| 16.1% |
|
Toyota Motor Corporation |
| 12.4% |
|
| 13.4% |
|
| 11.6% |
|
Years Ended December 31, | |||
2018 | 2017 | 2016 | |
Cummins Inc. | 15.2% | 13.4% | 9.9% |
Honda Motor Co. | 10.5% | 11.2% | 10.7% |
Toyota Motor Corporation | 10.5% | 10.2% | 10.4% |
We sell automotive parts to these threetwo transportation customers for certain vehicle platforms under purchase agreements that have noprogram lifetime volume commitmentsestimates and are subject to purchase orders issued from time to time.
No other customer accounted for 10% or more of total net sales during these periods.
CTS CORPORATION 5
Changes in the level of our customers' orders have, in the past, had a significant impact on our operating results. If a major customer reduces the amount of business it doestransacts with us, or substantially changes the terms of that business, there could be an adverse impact on our operating results.
ORDER BACKLOG
Order backlog is comprised of firm open purchase orders we have received from our customers and generally represents 1one to 2two months of sales for certain products. Our business is a mix of purchase order basedorder-based business, shorter-term contracts, and multi-year awards, such as with customers who serve the automotive end market. As such, order backlog does not provide a meaningful indication of future sales.
COMPETITION
We compete with many domestic and foreign manufacturers principally based on the basis of product features, technology, price, quality, reliability, delivery, and service. Most of our product lines encounter significant global competition. The number of competitors varies from product line to product line. No one competitor competes with us in every product line, but manysome competitors are larger and more diversified than we are.
Some customers have reduced or plan to reduce their number of suppliers, while increasing their volume of purchases. Customers demand lower cost and higher quality, reliability, and delivery standards from us as well as from our competitors. These trends create opportunities for us, but also increase the risk of loss of business to competitors. We are subject to competitive risks that are typical within the electronics industry,in our end markets, including in some cases short product life cycles and technical obsolescence.
We believe we compete most successfully in custom engineered products manufactured to meet specific applications of major OEMs.
NON-U.S. REVENUES AND ASSETS
Our net sales to customers originating from our non-U.S. operations as a percentage of total net sales were as follows:
|
| Years Ended December 31, |
| ||||||
|
| 2021 |
|
| 2020 |
|
| 2019 |
|
Net sales from non-U.S. operations |
| 42.0% |
|
| 43.0% |
|
| 40.3% |
|
Years Ended December 31, | |||
2018 | 2017 | 2016 | |
Net sales from non-U.S. operations | 33% | 32% | 30% |
Years Ended December 31, | |||
2018 | 2017 | 2016 | |
Total assets at non-U.S. operations | 46% | 49% | 48% |
We believe the business risks to our non-U.S. operations, though substantial, are normal risks for global businesses. These risks include currency controls and changes in currency exchange rates, longer collection cycles, political and transportation risks, economic downturns and inflation, government regulations, and expropriation. Our non-U.S. manufacturing facilities are located in China, Czech Republic, Denmark, India, Mexico, Philippines, and Taiwan.
CTS CORPORATION 6
HUMAN CAPITAL MANAGEMENT AND OUR CULTURE
We employed 3,2303,820 people atas of December 31, 2018,2021, with 81%86% of these employees located outside the U.S. We employed 3,2223,786 people at December 31, 2017. Approximately 11 employees at one location in the United States were covered by two collective bargaining agreements as of December 31, 2018. Both agreements2020, with 87% of these employees located outside the U.S.
We are scheduledcommitted to expire upon completionbuilding a diverse, inclusive and engaged workforce across our organization. We have a global business, and our employees reflect the diversity of our 2016 Restructuring Plangeographic footprint. We promote and maintain a culture of respect and appreciation of differences in our employees. Our management teams and all of our employees are expected to exhibit the principles of fairness, honesty and integrity in the actions we undertake. Our employees must adhere to a Code of Ethics that sets standards for appropriate behavior and includes required annual training on preventing, identifying, reporting and stopping any type of unlawful discrimination or unethical actions. A copy of our Code of Ethics is available for review on our Company’s website ctscorp.com.
We have a global talent review and succession planning process designed to align our talent plans with the current and future strategies of the business. This includes the identification of key positions, assessment of internal talent and potential successors and plans for talent acquisition and development.
We strive to align compensation with the external market and maintain equity within the organization. In addition, we offer a broad range of company-paid benefits, which we believe are competitive in our industry.
The safety and well-being of our employees is a priority and vital to our success. Our health and safety activities are overseen by our corporate environmental, health and safety function and are managed by employees in our locations, who coordinate on-site safety programs, resources, reporting and training in our locations. Our employees are regularly trained on safety-related topics and we monitor and measure the effectiveness of our programs at all of our locations.
Throughout the ongoing COVID-19 pandemic we have taken action to protect our employees’ safety and health, including equipping employees with personal protective equipment, establishing minimum staffing and social distancing policies, sanitizing workspaces more frequently, adopting alternate work schedules including remote work arrangements, and instituting other measures aimed at minimizing the transmission of COVID-19 while sustaining production and related services. In addition, we modified the way we conduct many aspects of our business to reduce the number of in-person interactions. For example, we significantly expanded the use of virtual interactions in many aspects of our business, including customer facing activities.
We recognize that we have a responsibility to be a positive influence in the communities in which we do business around the world. In the past most of our community involvement and charitable programs has been organized by our locations, which has helped to ensure that our efforts are working in support of the local communities in which our employees live and work. However, in 2021, we further enhanced our commitment to community outreach and support through the launch of CTS CARES – our global program designed to support our charitable giving and community involvement initiatives. The CTS CARES platform advanced this past quarter as our employees across the globe participated in several community activities and contributed to community projects.
EXECUTIVE OFFICERS OF THE COMPANY
Executive Officers. The following serve as executive officers of CTS as of December 31, 2021.
Name | Age | Positions and Offices | ||
Kieran O'Sullivan | 59 | President, Chief Executive Officer and Chairman of the Board | ||
Ashish Agrawal | 51 | Vice President and Chief Financial Officer | ||
Scott D’Angelo | 51 | Vice President, General Counsel and Secretary |
Kieran O’Sullivan – 59 – President, Chief Executive Officer and Chairman of the Board. Mr. O’Sullivan joined CTS on January 7, 2013. Before joining CTS, Mr. O’Sullivan served as Executive Vice President of Continental AG’s Global Infotainment and Connectivity Business and led the NAFTA Interior Division, having joined Continental AG, a global automotive supplier, in 2006. Mr. O’Sullivan is a member of the board of directors of LCI Industries, a supplier of engineered components for manufacturers of recreational vehicles, manufactured homes, marine applications, and for the related aftermarkets, serving as the chairperson of the risk committee, and as a member of the corporate governance, nominating and sustainability and audit committees.
Ashish Agrawal - 51 - Vice President and Chief Financial Officer. On November 11, 2013, Mr. Agrawal was elected Vice President and Chief Financial Officer of CTS. Mr. Agrawal joined CTS in June 2011 as Vice President, Treasury and Corporate Development, and was elected as Treasurer on September 1, 2011. Before joining CTS, Mr. Agrawal was with Dometic Group AB, a manufacturer of refrigerators, awnings and air conditioners, as Senior Vice President and Chief Financial Officer, Americas, beginning in 2007. Prior to that, Mr. Agrawal was with General Electric Co. in various positions beginning in December 1994.
CTS CORPORATION 7
Scott D’Angelo - 51 - Vice President, General Counsel and Secretary. Mr. D’Angelo joined CTS in February 2021 and was elected General Counsel and Secretary on February 11, 2021. Prior to joining the Company, Mr. D’Angelo was a member of the International Commercial and Trade Practice Group of Baker McKenzie, LLP from March 2019, and served as Vice President, Deputy General Counsel & Chief Compliance Officer of Fortune Brands Home & Security, Inc., a leading home and security products company, from May 2015 and, prior to that, served in several senior roles with McDonald’s Corporation.
Information with respect to the Company’s Directors and corporate governance policies and practices may be found in our definitive proxy statement to be delivered to shareholders in connection with our 2022 Annual Meeting of Shareholders. Such information is incorporated herein by reference.
ADDITIONAL INFORMATION
We are incorporated in the State of Indiana. Our principal corporate office is located at 4925 Indiana Avenue Lisle, ILIllinois 60532.
Our internet address is www.ctscorp.com. We make available free of charge through our website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission ("SEC"). Other than the documents that we file with or furnish to the SEC that are incorporated by reference herein, the information contained on or accessible through our website is not part of this or any other report we file or furnish to the SEC.
Investors and others should note that we announce material financial information to our investors using the Investors section of our website (ctscorp.com/investors), SEC maintains an internet site that contains reports, proxyfilings, press releases, public conference calls and information statementswebcasts. We use these channels as well as social media and blogs to communicate with our investors and the public about our company, our services and other issues. It is possible that the information regarding our filings at www.sec.gov.
Item 1A.
Risk FactorsThe following are certain risk factors that could affect our business, financial condition and operating results. These risk factors should be considered in connection with evaluating forward-looking statements contained in this Annual Report on Form 10-K or in any other reports filed or furnished by us, because these factors could cause our actual results and financial condition to differ materially from those projected in any such forward-looking statements. Before you invest in us, you should know that making such an investment involves risks, including the risks described below. Although the risks are organized by headings, and each risk is discussed separately, many are interrelated. You should not interpret the disclosure of any risk factor to imply that the risk has not already materialized. The risks that are highlighted below are not the only ones that we face. If any of the following risks occur, our business, financial condition orand operating results could be negatively affected.
Risks Related to Our Business and Industry
Because we currently derive a significantsubstantial portion of our revenues from a small number of customers, any decrease in orders from these customers could have an adverse effect on our business, financial condition and operating results.
We depend on a small number of customers for a largesubstantial portion of our business, and changes in the level of our customers' orders have, in the past, had a significant impact on our results of operations. If a major customer significantly delays, reduces, or cancels the level of business it does with us, there could be an adverse effect on our business, financial condition and operating results. Significant pricing and margin pressures exerted by a major customer could also materially adversely affect our operating results. In addition, we generate significant accounts receivable from sales to our major customers. If one or more of our major customers were to become insolvent or otherwise unable to pay or were to delay payment for our products, our business, financial condition and operating results could be materially adversely affected.
Our customers may cancel their orders, change production quantities or locations or delay production.
We generally doreceive volume estimates, but not obtain firm long-term purchasevolume commitments from our customers, and regularlymay experience reduced or extended lead times in customer orders. Customers may cancel orders, change production quantities and delay production for a number of reasons. Uncertain economic and geopolitical conditions may result in some of our customers delaying the delivery of some of the products we manufacture for them and placing purchase orders for lower volumes of products than previously anticipated. Cancellations, reductions or delays by a significant customer or by a number of customers may harm our results of operations by reducing the volumes of products we manufacture and sell, as well as by causing a delay in the recovery of our expenditures for inventory in preparation for customer orders, or by reducing our asset utilization, resulting in lower profitability.
CTS CORPORATION 8
In addition, customers may requirerequest that manufacturing of their products be transitioned from one of our facilities to another to achieve cost reductions and other objectives. Such transfers may result in inefficiencies and costs due to resulting excess capacity and overhead at one facility and capacity constraints and the inability to fulfill all orders at another. In addition, we make key decisions based on our estimates of customer requirements, including determining the levels of orders that we will seek and accept, production schedules, component procurement commitments, personnel needs and other resource requirements. The short-term nature of our customers' commitments and the changesChanges in demand for theirour customers’ products may reduce our ability to estimate future customer requirements accurately. This may make it difficult to schedule production and maximize utilization of our manufacturing capacity. Anticipated orders may not materialize and delivery schedules may be deferred as a result of changes in demand for our products or our customers' products. We often increase staffing and capacity, and incur other expenses to meet the anticipated demand of our customers, which causes reductions in our gross margins if customer orders are delayed or canceled. On occasion, customers may require rapid increases in production, which may stress our resources and reduce margins. We may not have sufficient capacity at any given time to meet our customers' demands. In addition, because many of our costs and operating expenses are relatively fixed over the short-term, a reduction in customer demand could harm our gross margin and operating income until such time as adjustments can be made to activity and operating levels or to structural costs.
We sell products to customers in cyclical industries that are subject to significant downturns that could materially adversely affect our business, financial condition and operating results.
We sell products to customers in cyclical industries that have experienced economic and industry downturns. The markets for our products have softened in the past and may again soften in the future. We may face reduced end-customer demand, underutilization of our manufacturing capacity, changes in our revenue mix and other factors that could adversely affect our results of operations in the near-term. results.
We cannot predict whether we will achieve profitability in future periods.
Factors negatively affecting thesethe industries we serve and the demand for their products alsocould negatively affect our business, financial condition and operating results. Any adverse occurrence, including among others, industry slowdown, recession, public health crisis, political instability, costly or constraining regulations, increased tariffs, reduced government budgets and spending, armed hostilities, terrorism, excessive inflation, including the current high inflationary environment, prolonged disruptions in one or more of our customers' production schedules or labor disturbances, that results in a decline in the volume of sales in these industries, or in an overall downturn in the business and operations of our customers in these industries, could materially adversely affect our business, financial condition and operating results. These industries are generallymay be unionized and some of our customers have experienced labor disruptions in the past. Furthermore, these industries arecan be highly cyclical in nature and sensitive to changes in general economic conditions, consumer preferences and interest rates. The failureinsolvency of manufacturerscustomers that we serve may result in the failure to receive payment in full for products sold in the past and an abrupt cancellationreduction in demand for certain products. Weakness in demand, the insolvency of manufacturerscustomers that we serve or their suppliers, and constriction of credit markets may negatively and materially affect our facility utilization, cost structure, financial condition, and operating results.
Our operating results may vary significantly from period to period.
We experience fluctuations in our operating results. Some of the principal factors that contribute to these fluctuations are: changes in demand for our products; our effectiveness in managing manufacturing processes, costs and timing of our component purchases so that components are available when needed for production, while mitigating the risks of purchasing inventory in excess of immediate production needs; the degree to which we are able to utilize our available manufacturing capacity; changes in the cost and availability of components, which often occur in the electronics manufacturing industry and which affect our margins and our ability to meet delivery schedules; general economic and served industry conditions; and local conditions and events that may affect our production volumes, such as labor conditions or political instability.
We face risks relatingmay experience shortages and increased costs of raw material and required electronic components.
Unanticipated raw material or electronic component shortages may prevent us from making scheduled shipments to customers. Our inability to make scheduled shipments could cause us to experience a shortfall in revenue, increase our costs and adversely affect our relationship with affected customers and our reputation as a reliable supplier. We may be required to pay higher prices for raw materials or electronic components in short supply and order these raw materials or electronic components in greater quantities to compensate for variable delivery times. We may also be required to pay higher prices for raw materials or electronic components due to inflationary trends regardless of supply, including the current high inflationary environment. We are also dependent on our suppliers' ability to supply and deliver raw materials on a timely basis at negotiated prices. Any delay or inability to deliver raw materials by our suppliers may require that we attempt to mitigate such failure or fail to make deliveries to our international operations.
CTS CORPORATION 9
In particular, the COVID-19 pandemic and subsequent supply chain uncertainties have had a significant negative impact on the global economy in 2020 and 2021, including negatively impacting the global supply chain and increasing the cost of others),materials and operations, particularly within the global automotive industry. Key semiconductor chip and other critical part shortages continue to force original equipment manufacturers (“OEMs”) to shut down production, often on short notice. With customers changing orders on short notice, we run the risk of carrying excess inventory in these situations. In addition, the supply chain shortages have negatively impacted, and could suffer from criminal or civil penalties or other sanctions, which could have a material adverse effect on our business.
We may pursue acquisition opportunities that complement or expand our business as well as divestitures that could impact our business operations. We may not be able to complete these transactions, and these transactions, if executed, may pose significant risks that could materially adversely affect our business, financial condition and operating results.
On an ongoing basis we explore opportunities to buy other businesses or technologies that could complement, enhance or expand our current business or product lines or that might otherwise offer us growth opportunities. We may have difficulty finding suitable opportunities or, if we do identify these opportunities, we may not be able to complete the transactions for any number of reasons including a failure to secure financing. In addition, we may not be able to successfully or profitably integrate, operate, maintain and manage our newly acquired operations or employees. Any transactions that we are able to identify and complete may involve a number of risks, including: the diversion of management's attention from our existing business to integrate the operations and personnel of the acquired or combined business; possible adverse effects on our operating results during the integration process; difficulties managing and integrating operations in geographically dispersed locations; increases in our expenses and working capital requirements, which could reduce our return on invested capital; exposure to unanticipated liabilities of acquired companies; and our possible inability to achieve the intended objectives of the transaction. Even if we are initially successful in integrating a new operation, we may not be able to maintain uniform standards, controls, procedures and policies, and this may lead to operational inefficiencies. In addition, future acquisitions may result in dilutive issuances of equity securities or the incurrence of additional debt. These and other factors could harm our ability to achieve anticipated levels of profitability from acquired operations or realize other anticipated benefits of an acquisition and could adversely affect our business and operating results.
We have in the past, and may in the future, consider divesting certain business operations. Divestitures may involve a number of risks, including the diversion of management's attention, significant costs and expenses, the loss of customer relationships and cash flow, and the disruption of operations in the affected business. Failure to timely complete or consummate a divestiture may negatively affect valuation of the affected business or result in restructuring charges.
We may restructure our operations or fail to execute capital projects as planned, which may materially adversely affect our business, financial condition and operating results.
We have announced and initiated restructuring plans or capital projects at various times in the recent past designed to revise and consolidate certain aspects of our operations for the purpose of improving our cost structure and operational efficiency. We may incur restructuring and impairment charges in the future if circumstances warrant. Additionally, if we are unsuccessful in implementing restructuring plans or in executing capital projects, we may experience disruptions in our operations and higher ongoing costs, which may materially adversely affect our business, financial condition and operating results.
We may be unable to compete effectively against competitors.
The industries in which we operate are highly competitive and characterized by price erosion and rapid technological change. We compete against many domestic and foreign companies, some of which have substantially greater manufacturing, financial, research and development, and marketing resources than we do. If any customer becomes dissatisfied with our prices, quality, or timeliness of delivery, among other things, it could award business to our competitors. Moreover, some of our customers could choose to manufacture and develop particular products themselves rather than purchase them from us. Increased competition could result in price reductions, reduced profit margins and loss of market share, each of which could materially adversely affect our business, financial condition and operating results. These developments also may materially adversely affect our ability to compete successfully going forward. We cannot assure you that our products will continue to compete successfully with our competitors' products.
We may be unable to keep pace with rapid technological changes that could make some of our products or processes obsolete before we realize a return on our investment.
The technologies relating to some of our products have undergone and are continuing to undergo changes. End markets for our products are characterized by technological change, frequent new product introductions and enhancements, changes in customer requirements, and emerging industry standards. The introduction of products embodying new technologies and the emergence of new industry standards could render our existing products obsolete and unmarketable before we can recover any or all of our research, development and commercialization expenses, or our capital investments. Furthermore, the life cycles of our products and the products we manufacture for others vary, may change, and are difficult to estimate.
CTS CORPORATION 10
We may experience difficulties that could delay or prevent the successful development, introduction and marketing of new products or product enhancements and our new products or product enhancements may not adequately meet the requirements of the marketplace or achieve market acceptance. If we are unable, for technological or other reasons, to develop and market new products or product enhancements in a timely and cost-effective manner, our business, financial condition and operating results could be materially adversely affected.
Products we manufacture may contain design or manufacturing defects that could result in reduced demand for our products or services and liability claims against us.
Despite our quality control and quality assurance efforts, defects may occur in the products we manufacture due to design or manufacturing errors, supplier quality issues, or component failure. Product defects could result in delayed shipments and reduced demand for our products. We may be subject to increased costs due to warranty claims on defective products. Product defects could result in product liability claims against us where defects cause, or are alleged to cause, property damage, bodily injury or death. As we grow our business, the risk of exposure to product liability litigation increases. We may be required to participate in a recall involving products which are, or are alleged to be, defective. We carry insurance for certain legal matters involving product liability; however, costs related to product defects and the costs of such claims, including costs of defense and settlement, may exceed our available coverage. Accordingly, our results of operations, cash flow and financial position could be adversely affected.
We are subject to government regulations, including environmental, health, and safety laws and regulations, that expose us to potential financial liability.
Our operations are regulated by a number of federal, state, local and foreign government regulations, including those pertaining to environmental, health, and safety (“EHS”) that govern, among other things, air and water emissions, worker protection, and the handling, storage and disposal of hazardous materials. Compliance with EHS laws and regulations is a major consideration for us because we use hazardous materials in our manufacturing processes. If we violate EHS laws and regulations, we could be liable for substantial fines, penalties, and costs of mandated remedial actions and we could suffer reputational damages due to any such violations. Our environmental permits could also be revoked or modified, which could require us to cease or limit production at one or more of our facilities, thereby materially adversely affecting our business, financial condition and operating results. EHS laws and regulations have generally become more stringent over time and could continue to do so, imposing greater compliance costs and increasing risks and penalties associated with any violation, which also could materially affect our business, financial condition and operating results.
We have been notified by the U.S. Environmental Protection Agency, state environmental agencies and, in some cases, groups of potentially responsible parties, that we are potentially liable for environmental contamination at several sites currently and formerly owned or operated by us, including sites designated as National Priorities List sites under the U.S. Environmental Protection Agency’s Superfund program. Superfund liability is joint and several and we may be held responsible for more than our share of contamination at a site. Although we estimate our potential environmental liability and reserve for such matters, we cannot assure you that our reserves will be sufficient to cover the actual costs that we incur as a result of these matters.
Future events, such as the notification of potential liability at new sites, the discovery of additional contamination or changes to an approved remedy at existing sites, changes to existing EHS laws and regulations or their interpretation, and more rigorous regulatory action by government authorities, may require additional expenditures by us, which could have a negative impact on our operations.
In addition, we could be affected by future laws or regulations imposed in response to climate change concerns. Such laws or regulations could have a material adverse effect on our business, financial condition, and results of operations. Climate change initiatives may result in significant operational changes and expenditures, reduce demand for our products and adversely affect our business. We recognize that climate change is a global environmental concern. Continuing political and social attention to the issue of climate change has resulted in both existing and pending international agreements and national, regional or local legislation and regulatory measures to limit greenhouse gas emissions. These agreements and measures may require equipment modifications, operational changes, taxes, or purchase of emission credits to reduce emission of greenhouse gases from our operations, which may result in substantial capital expenditures and compliance, operating, maintenance and remediation costs. Regulatory initiatives to reduce greenhouse gas usage may also adversely impact some of the industries we serve and our supply chain, adversely impacting our sales and the value of our business.
Regulations related to conflict minerals could adversely impact our business.
The Dodd-Frank Wall Street Reform and Consumer Protection Act contains provisions to improve transparency and accountability concerning the supply of certain minerals, known as conflict minerals, originating from the Democratic Republic of Congo ("DRC") and adjoining countries. As a result, the SEC adopted annual disclosure and reporting requirements for those companies who may use conflict minerals mined from the DRC and adjoining countries in their products. There have been and will continue to be costs associated with complying with these disclosure requirements, including diligence costs to determine the sources of minerals used in
CTS CORPORATION 11
our products and other potential changes to products, processes or sources of supply to the extent necessary as a consequence of such verification activities. These rules could adversely affect the sourcing, supply and pricing of materials used in our products. As there may be only a limited number of suppliers offering conflict-free minerals, we cannot be sure that we will be able to obtain necessary conflict-free minerals from such suppliers in sufficient quantities or at competitive prices. Also, we may face reputational challenges if we determine that certain of our products contain conflict minerals or if we are unable to sufficiently verify the origins for all minerals used in our products through the procedures we may implement.
Negative or unexpected tax consequences could adversely affect our results of operations.
We operate globally and changes in tax laws could adversely affect our results. The international tax environment continues to change as a result of both coordinated actions by governments and unilateral measures enacted by individual countries, such as the comprehensive tax reform enacted in the U.S. in 2017, which could significantly impact our effective tax rate, tax liabilities, and ability to utilize deferred tax assets.
Adverse changes in the underlying profitability and financial outlook of our operations in several jurisdictions could lead to changes in our valuation allowances against deferred tax assets and other tax accruals that could materially and adversely affect our results of operations. In addition, acquisitions or divestitures may cause our effective tax rate to change.
We base our tax positions upon the anticipated nature and conduct of our business and upon our understanding of the tax laws of the various countries in which we have assets or conduct activities. However, our tax positions are subject to review and possible challenge by taxing authorities and to possible changes in law, which may have a retroactive effect.
Future dividends on our common stock may be restricted or eliminated.
Dividends are declared at the discretion of our Board of Directors, and future dividends will depend on our future earnings, cash flow, financial requirements and other factors. Our ability to pay cash dividends on our common stock is limited under the terms of our credit agreements. Under the most restrictive terms of our credit agreements, our ability to pay cash dividends on our common stock is limited, as described under “Risks Related to Indebtedness and Financing.” There can be no assurance that we will continue to pay dividends in the future.
Risks Related to Indebtedness and Financing
Our indebtedness may adversely affect our financial health.
Our indebtedness could, among other things: increase our vulnerability to general economic and industry conditions, including recessions; require us to use cash flow from operations to service our indebtedness, thereby reducing our ability to fund working capital, capital expenditures, research and development efforts and other expenses; limit our flexibility in planning for, or reacting to, changes in our business and the industries in which we operate; place us at a competitive disadvantage compared to competitors that have less indebtedness; or limit our ability to borrow additional funds that may be needed to operate and expand our business.
Our credit facility contains provisions that could materially restrict our business.
Our revolving credit facility contains restrictions limiting our ability to: dispose of assets; incur certain additional debt; repay other debt or amend subordinated debt instruments; create liens on assets; make investments, loans or advances; make acquisitions or engage in mergers or consolidations; engage in certain transactions with our subsidiaries and affiliates; repurchase stock; or make dividend payments above a certain amount.
The restrictions contained in our credit facility could limit our ability to plan for or react to changes in market conditions or meet capital needs or could otherwise restrict our activities or business plans. These restrictions could adversely affect our ability to finance our operations, make strategic acquisitions, fund investments or other capital needs or engage in other business activities that could be in our interest.
Further, our ability to comply with our loan covenants may be affected by events beyond our control that could result in an event of default under our credit facility, or documents governing any other existing or future indebtedness. A default, if not cured or waived, may permit acceleration of our indebtedness. In addition, our lenders could terminate their commitments to make further extensions of credit under our credit facility. If our indebtedness is accelerated, we cannot be certain that we will have sufficient funds to pay the accelerated indebtedness or that we will have the ability to refinance accelerated indebtedness on terms favorable to us, or at all.
The discontinuation of London Interbank Offered Rate (“LIBOR”) and the replacement of LIBOR with an alternative reference rate may negatively impact our liquidity, financial condition, and results of operations.
CTS CORPORATION 12
Borrowings under our amended and restated unsecured Revolving Credit Facility may bear interest, at our election, at a rate per annum that is based upon the Secured Overnight Financing Rate (“SOFR”). Although SOFR has been endorsed by the Alternative Reference Rates Committee as its preferred replacement for LIBOR, it remains uncertain whether or when SOFR or other alternative reference rates will be widely accepted by lenders as the replacement for LIBOR. This may, in turn, impact the liquidity of the SOFR loan market, and SOFR itself. Since the initial publication of SOFR, daily changes in the rate have, on occasion, been more volatile than daily changes in comparable benchmark or market rates, and SOFR over time may bear little or no relation to the historical actual or historical indicative data. Additionally, our Revolving Credit Facility includes a credit adjustment on SOFR due to LIBOR representing an unsecured lending rate while SOFR represents a secured lending rate. The possible volatility of and uncertainty around SOFR as a LIBOR replacement rate and the applicable credit adjustment could result in higher borrowing costs for us, which would adversely affect our liquidity, financial condition, and results of operations.
In addition, our Revolving Credit Facility provides the ability to borrow in alternative currencies to the us dollar. These borrowings would also be at alternative reference rates to LIBOR that, in some cases, are still being developed. In each case, the funds are subject to an applicable rate as well as an applicable credit adjustment. If funds are drawn under these currencies, it may also result in higher borrowing costs for us, which would adversely affect our liquidity, financial condition, and results of operations.
Risks Related to COVID-19 Pandemic and Other External Factors
Public health issues such as the COVID-19 pandemic have adversely affected, and could in the future, adversely affect our business or financial results.
Any outbreaks of contagious diseases and other adverse public health developments in countries where we operate could have a material and adverse effect on our business, operations, financial condition, liquidity and results of operations. For example, the COVID-19 pandemic has affected our offices and manufacturing facilities throughout the world, as well as the facilities of our suppliers, customers and their customers. The COVID-19 pandemic caused widespread disruptions to our Company during the first half of 2020, and to a lesser extent, those disruptions continued during the second half of 2020 and throughout all of 2021. As of December 31, 2021, we continue to experience some disruptions, and at a minimum, particularly given the surge of COVID-19 cases resulting from the Omicron variant, we expect those disruptions to continue into 2022 and potentially beyond. These disruptions have included and may continue to include government regulations that inhibit our ability to operate certain of our facilities in the ordinary course, travel restrictions, supplier constraints, supply-chain interruptions, logistics challenges and limitations, labor disruptions and reduced demand from certain customers. During 2021 and into 2022, there have been resurgences in COVID-19 cases in several regions around the world, particularly related to new variant strains, including Delta and Omicron. The extent to which the COVID-19 pandemic will continue to impact our business and financial results going forward will be dependent on future developments such as the length and severity of the crisis, the impact of the recent resurgence of the crisis due to the Omicron variant, as well as any additional future resurgences from known or new variants, future government regulations and actions in response to the crisis, the timing, availability, effectiveness and adoption rates of vaccines and treatments, and the overall impact of the COVID-19 pandemic on the global economy and capital markets, among many other factors, all of which remain highly uncertain and unpredictable. In addition, the COVID-19 pandemic could impact the health of our management team and other employees. Given these uncertainties, we expect the pandemic to continue to have an impact on our business, operations, financial condition, liquidity and results of operations in 2022 and potentially beyond. There can be no assurance that the COVID-19 pandemic will not have a material and adverse effect on our business, operations, financial condition, liquidity and results of operations in the future.
In addition, the COVID-19 pandemic has and continues to increase the likelihood and potential severity of other risks (some discussed separately within this Item 1A. Risk Factors), including but not limited to, the following:
• | Our efforts to comply with any legally required vaccine mandates amongst some or all of our employees, could lead to increased labor attrition, along with potential difficulties in attracting and recruiting personnel, which could have a negative impact on our business and operations. In addition, employees in certain geographies could choose to take legal action against the Company if we institute vaccine mandates. |
• | A scarcity of resources or other hardships caused by the COVID-19 pandemic may result in increased nationalism, protectionism and political tensions which may cause governments and/or other entities to take actions that may have a significant negative impact on the ability of the Company, its suppliers and its customers to conduct business. |
• | Certain subsets of our employee population continue to work in a “hybrid” or remote work environment in an effort to mitigate the spread of COVID-19. This change may exacerbate certain risks to our business, including an increased demand for information technology resources, an increased risk of phishing and other cybersecurity attacks, and an increased risk of unauthorized dissemination of sensitive personal information or proprietary or confidential information. |
• | Travel restrictions to certain countries have limited our executive management’s ability to visit certain operations during the last two years and such restrictions could remain in place for all of 2022 and beyond. |
• | Given the current inflationary wage environment and strong demand for skilled labor in many of the countries and regions in which we operate, the ability to identify and attract new talent, as well as retain existing talent, may prove to be difficult. In |
CTS CORPORATION 13
particular, as a result of the COVID-19 pandemic, many workers around the world have re-assessed their career plans and priorities, which could lead to increased difficulty of the Company in retaining its experienced team members. |
• | If there is a general market downturn and continued high degree of volatility in the financial markets, we may experience a material re-valuation and non-cash charge to our income statement relating to any of our critical accounting estimates, including, but not limited to, our inventory reserves or goodwill and long-lived assets. |
Natural disasters and adverse weather conditions may adversely impact our capability to supply product to our customers.
Natural disasters, such as storms, flooding and associated power outages, and adverse weather conditions (including that caused by climate change) occurring at any of our locations or supplier locations may lead to disruption of our manufacturing operations and supply chain, adversely impacting our capability to supply product to our customers. In the event of a natural disaster or adverse weather conditions, it may not be possible for us to find an alternate manufacturing location for certain product lines, further impacting our capability to recover from such a disruption.
Climate related events and climate change legislation could adversely impact our business.
The effects of climate change and the ongoing efforts to mitigate its impact, including through climate change-related legislation and regulation, could have a material adverse effect on our business, financial condition, and results of operations. The physical effects of climate change, including extreme weather and natural disasters (including those risks discussed under the heading “Natural disasters and adverse weather conditions may adversely impact our capability to supply products to our customers”) may disrupt our operations and those of our customers and suppliers. In addition, changes to laws or regulations enacted to address the potential impacts of climate change could have a material adverse impact on our business, financial condition, and results of operations. For example, continuing political and social attention to the issue of climate change has resulted in both existing and pending international agreements and national, regional, or local legislation and regulatory measures to limit greenhouse gas emissions. Any future increased regulation concerning greenhouse gas emissions and other climate-change related laws and regulations, may require equipment modifications, operational changes, taxes, or the purchase of emission credits to reduce the emission of greenhouse gases from our operations, which may result in us incurring substantial capital expenditures and compliance, operating, maintenance and remediation costs. In addition, any such future regulatory changes could result in transition risks to our business, including but not limited to (i) the nature and timing of any requirement to lower greenhouse gas emissions and adopt more energy-efficient energy use, which could result in changes or disruptions to the way we operate our business, (ii) the risk of lower demand for our products related to customers who experience business declines or disruptions due to the impact of any requirement to lower greenhouse gas emissions, (iii) financial risks where compliance with such regulations requires unforeseen capital expenditures, (iv) legal risks associated with the implementation of any new technologies required to comply with such regulations, which could impede our ability to innovate new products, meet customer and market demand or compete on pricing and quality in the market, and/or (v) reputational risks associated with our customers’ and investors’ perceptions of our business. We are not able to predict how any future definitive agreements, pacts and/or regulations, if and when they are adopted and required, and the commitments necessary to comply with such requirements, will affect our business, financial condition, and results of operations.
General Risk Factors
We face risks relating to our international operations.
Because we have significant international operations, our operating results and financial condition could be materially adversely affected by economic, political, health, regulatory and other factors existing in foreign countries in which we operate. Our international operations are subject to inherent risks, which may materially adversely affect us, including: political and economic instability in countries in which our products are manufactured; expropriation or the imposition of government controls; changes in government regulations; export license requirements; trade restrictions; earnings repatriation and expatriation restrictions; exposure to different legal standards, including related to intellectual property; health conditions and standards; currency controls; fluctuations in exchange rates; increases in the duties and taxes we pay; inflation or deflation; greater difficulty in collecting accounts receivable and longer payment cycles; changes in labor conditions and difficulties in staffing and managing our international operations; limitations on insurance coverage against geopolitical risks, natural disasters, and business operations; and communication among and management of international operations. In addition, these same factors may also place us at a competitive disadvantage compared to some of our foreign competitors.
We may face risks associated with violations of the Foreign Corrupt Practices Act and similar anti-bribery laws (collectively, "Anti-Bribery Laws"). Anti-Bribery Laws generally prohibit companies and their intermediaries from making improper payments to government officials for the purpose of obtaining or retaining business. Our Code of Ethics mandates compliance with these Anti-Bribery Laws. We operate in many parts of the world where strict compliance with Anti-Bribery Laws may conflict with local customs and practices. We cannot assure you that our internal controls and procedures always will protect us from the detrimental actions by our employees or agents. If we are found to be liable for violations of Anti-Bribery Laws (either due to our own acts or
CTS CORPORATION 14
inadvertence or due to the acts or inadvertence of others), we could suffer from criminal or civil penalties or other sanctions, which could have a material adverse effect on our business.
Public health or safety concerns and governmental restrictions, including measures implemented in response to the global COVID-19 pandemic, that impact the availability of raw materials, labor, or the movement of goods in some of the countries in which we operate could have a material adverse effect on our business, financial condition and operating results.
We are exposed to fluctuations in foreign currency exchange rates that may adversely affect our business, financial condition and operating results.
We transact business in various foreign countries. We present our consolidated financial statements in U.S. dollars, but a portion of our revenues and expenditures are transacted in other currencies. As a result, we are exposed to fluctuations in foreign currencies. Additionally, we have currency exposure arising from funds held in local currencies in foreign countries. Volatility in the exchange rates between the foreign currencies and the U.S. dollar could harm our business, financial condition and operating results. Furthermore, to the extent we sell our products in foreign markets, currency fluctuations may result in our products becoming too expensive for foreign customers.
If we are unable to protect our intellectual property or we infringe, or are alleged to infringe, on others' intellectual property rights, our business, financial condition and operating results could be materially adversely affected.
The success of our business depends, in part, upon our ability to protect trade secrets, trademarks, copyrights and patents, obtain or license patents and operate without infringing on the intellectual property rights of others. We rely on a combination of trade secrets, copyrights, patents, nondisclosure agreements and technical measures to protect our proprietary rights in our products and technology. The steps we have taken to prevent misappropriation of our technology may be inadequate. In addition, the laws of some foreign countries in which we operate do not protect our proprietary rights to the same extent as do the laws of the United States. Although we continue to evaluate and implement protective measures, there can be no assurance that these efforts will be successful. Our inability to protect our intellectual property rights could diminish or eliminate the competitive advantages that we derive from our technology, cause us to lose sales or otherwise harm our business.
We believe that patents will continue to play an important role in our business. However, there can be no assurance that we will be successful in securing patents for claims in any pending patent application or that any issued patent will provide us with any
We may become involved in litigation in the future to protect our intellectual property or because others may allege that we infringed on their intellectual property. These claims and any resulting lawsuit could subject us to liability for damages and invalidate our intellectual property rights. If an infringement claim is successfully asserted by a holder of intellectual property rights, we may be required to cease marketing or selling certain products, pay penalties and spend significant time and money to develop a non-infringing product or process or to obtain licenses for the technology, process or information from the holder. We may not be successful in the development of a non-infringing alternative, or licenses may not be available on commercially acceptable terms, if at all, in which case we may lose sales and profits. In addition, any litigation could be lengthy and costly and could materially adversely affect us even if we are successful in the litigation.
Loss of our key management and other personnel, or an inability to attract key management and other personnel, could materially affect our business.
We depend on our senior executive officers and other key personnel to run our business. We do not have long-term employment contracts with our key personnel. The loss of any of these officers or other key personnel could adversely affect our operations. Competition for qualified employees among companies that rely heavily on engineering and technology is at times intense, and has been particularly competitive during the COVID-19 pandemic, and the loss of qualified employees or an inability to attract, retain and motivate additional highly skilled employees required for the operation and expansion of our business could hinder our ability to conduct research and development activities and developdeliver marketable products successfully.
Ineffective internal control over our financial reporting may harm our business.
We are subject to the ongoing internal control provisions of Section 404 of the Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley"). Our controls necessary for continued compliance with Sarbanes-Oxley may not operate effectively or at all times and may result in a material weakness. The identification of material weaknesses in internal control over financial reporting could indicate a lack of proper controls to generate accurate financial statements. Further, the effectiveness of our internal controls may be impacted if we are unable to retain sufficient skilled finance and accounting personnel, especially in light of the increased demand for such personnel among publicly traded companies.
CTS CORPORATION 15
Global privacy, data protection and data security laws are highly complex, evolving rapidly, and may adversely impactincrease our capabilitycosts to supply productcomply.
To conduct our operations, we may need to our customers.
We are exposed to, and may be adversely affected by, potential security breaches or other disruptions to our information technology systems and data security.
We rely on our information technology systems and networks, including cloud-based systems, in connection with many of our business activities, some of which are managed directly by us, while others are managed by third-party service providers and are not under our direct control. Our operations routinely involve receiving, storing, processing and transmitting sensitive information pertaining to our business, customers, suppliers, employees, and other sensitive matters. We have both an increasing reliance on IT systems and an increasing digital footprint as a result of changing technologies, connected devices and digital offerings, as well as expanded remote work policies. If these technologies, systems, products or services are damaged, cease to function properly, are compromised due to employee or third-party contractor error, user error, malfeasance, system errors, or other vulnerabilities, or are subject to cybersecurity attacks, such as those involving denial of service attacks, unauthorized access, malicious software, or other intrusions, including by criminals, nation states or insiders, our business may be adversely impacted. The impacts of any such circumstances could include production downtimes, operational delays, and other impacts on our operations and ability to provide products and services to our customers; compromise of confidential, proprietary or otherwise protected information, including personal information and customer confidential data; destruction, corruption, or theft of data or intellectual property; manipulation, disruption, or improper use of these technologies, systems, products or services; financial losses from fraudulent transactions, remedial actions, loss of business or potential liability; adverse media coverage; and legal claims or legal proceedings, including regulatory investigations, actions and fines; and damage to our reputation. There has been a rise in the number of cyberattacks targeting confidential business information generally and in the manufacturing industry specifically. Moreover, there has been a rise in the number of cyberattacks that depend on human error or manipulation, including phishing attacks or schemes that use social engineering to gain access to systems or perpetuate wire transfer or other frauds.
These trends increase the likelihood of such events occurring as well as the costs associated with protecting against such attacks. It is possible for usvulnerabilities in our IT systems to findremain undetected for an alternate manufacturing location for certain product lines, further impacting our capabilityextended period of time up to recover from such a disruption.
Item 1B.
Unresolved Staff CommentsItem 2.
PropertiesAs of February 22, 2019,December 31, 2021, we had manufacturing facilities, administrative, research and development and sales offices in the following locations:
Manufacturing Facilities | Square Footage | Owned/Leased | ||
Albuquerque, New Mexico | 114,525 | Leased | ||
Bolingbrook, Illinois | 30,600 | Leased | ||
Elkhart, Indiana | 319,000 | Owned | ||
Haryana, India | 19,400 | Leased | ||
Hopkinton, Massachusetts | 32,000 | Owned | ||
Hradec Kralove, Czech Republic | 30,680 | Leased | ||
Juarez, Mexico | 114,600 | Leased | ||
Kaohsiung, Taiwan | 75,900 | Owned | (1) | |
Kvistgaard, Denmark | 30,680 | Leased | ||
Lisle, Illinois | 31,000 | Leased | ||
Matamoros, Mexico | 51,000 | Owned | ||
Nogales, Mexico | 64,000 | Leased | ||
Ostrava, Czech Republic | 67,600 | Leased | ||
Prague, Czech Republic | 13,660 | Leased | ||
Tianjin, China | 225,000 | Owned | (2) | |
Zhongshan, China | 112,600 | Leased | ||
Total manufacturing | 1,332,245 |
Manufacturing Facilities | Square Footage | Owned/Leased | ||
Albuquerque, New Mexico | 114,525 | Leased | ||
Boise, Idaho | 15,000 | Leased | ||
Calamba, Philippines | 14,800 | Leased | ||
Fairfield, New Jersey | 9,100 | Leased | ||
Hopkinton, Massachusetts | 32,000 | Owned | ||
Juarez, Mexico | 114,600 | Leased | ||
Kaohsiung, Taiwan | 75,900 | Owned (1) | ||
Kvistgaard, Denmark | 30,680 | Leased | ||
Lisle, Illinois | 31,000 | Leased | ||
Matamoros, Mexico | 51,000 | Owned | ||
Tecate, Mexico | 25,000 | Leased | ||
Tecate, Mexico | 12,000 | Owned | ||
Nogales, Mexico | 64,000 | Leased | ||
Nupaky, Czech Republic | 55,919 | Leased | ||
Ostrava, Czech Republic | 67,600 | Leased | ||
Tianjin, China | 225,000 | Owned (2) | ||
Zhongshan, China | 112,600 | Leased | ||
Total manufacturing | 1,050,724 |
(1) | Ground lease through 2026; restrictions on use and transfer apply. |
(2) | Land Use Rights Agreement through 2050 includes transfer, lease and mortgage rights. |
Non-Manufacturing Facilities | Square Footage | Owned/Leased | Description | |||||
Brownsville, Texas | N/A | Owned | Land | |||||
Brownsville, Texas | 10,000 | Leased | Warehouse | |||||
El Paso, Texas | 22,400 | Leased | Office and warehouse | |||||
Matamoros, Mexico | 23,000 | Leased | Warehouse and administrative offices | |||||
Tecate, Mexico | 9,500 | Owned | Warehouse | |||||
Elkhart, Indiana | 319,000 | Owned | Idle facility | |||||
Elkhart, Indiana | 93,000 | Owned | Administrative offices and research | |||||
Farmington Hills, Michigan | 1,800 | Leased | Sales office | |||||
Lisle, Illinois | 74,925 | Leased | Administrative offices and research | |||||
Nagoya, Japan | 800 | Leased | Sales office | |||||
Singapore | 5,600 | Leased | Sales office | |||||
Yokohama, Japan | 1,400 | Leased | Sales office | |||||
Total non-manufacturing | 561,425 |
We regularly assess the adequacy of our manufacturing facilities for manufacturing capacity, available labor, and proximity to our markets and major customers. Management believes our manufacturing facilities are suitable and adequate and have sufficient capacity to meet our current needs. The extent of utilization varies from plant to plant and with general economic conditions. We
Item 3.
Legal ProceedingsFrom time to time we are involved in litigation with respect to matters arising from the ordinary conduct of our business, and currently certain claims are pending against us. In the opinion of management, we believe we have established adequate accruals pursuant to U.S. generally accepted accounting principles for our expected future liability with respect to pending lawsuits, claims and proceedings, where the nature and extent of any such liability can be reasonably estimated based uponon presently available information, either adequate provision for anticipated costs have been accruedinformation. However, we cannot provide assurance that the final resolution of any existing or the ultimate anticipated costsfuture lawsuits, claims or proceedings will not materially affecthave a material adverse effect on our consolidated financial position,business, results of operations, financial condition, or cash flows.
See Note 1011 "Contingencies" in the Notes to the Consolidated Financial Statements in this Annual Report on Form 10-K.
Item 4.
Mine Safety DisclosuresNot applicable.
CTS CORPORATION 17
PART II
Item 5.
Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity SecuritiesOur common stock is listed on the New York Stock Exchange under the symbol "CTS." On February 19, 2019,22, 2022, there were approximately 962894 shareholders of record.
|
| (a) Total Number of Shares Purchased |
|
| (b) Average Price Paid per Share |
|
| (c) Total Number of Shares Purchased as Part of Publicly Announced Programs |
|
| (d) Maximum Value of Shares That May Yet Be Purchased Under the Plans or Programs |
| ||||
October 1, 2021 – October 31, 2021 |
|
| 88,000 |
|
| $ | 31.63 |
|
|
| 88,000 |
|
| $ | 42,278 |
|
November 1, 2021 – November 30, 2021 |
|
| 2,942 |
|
| $ | 35.00 |
|
|
| 2,942 |
|
| $ | 42,175 |
|
December 1, 2021 – December 31, 2021 |
|
| 27,745 |
|
| $ | 34.61 |
|
|
| 27,745 |
|
| $ | 41,214 |
|
Total |
|
| 118,687 |
|
| $ | 32.41 |
|
|
| 118,687 |
|
|
|
|
|
(in thousands, except share data) | (a) Total Number of Shares Purchased | (b) Average Price Paid per Share | (c) Total Value of Shares Purchased as Part of Plans or Program | (d) Maximum Value of Shares That May Yet Be Purchased Under the Plans or Programs(1) | |||||||
Balance at December 31, 2017 | $ | 17,554 | |||||||||
January 1, 2018 - September 30, 2018 | — | $ | — | $ | — | $ | 17,554 | ||||
October 1, 2018 – December 31, 2018 | 342,100 | $ | 27.60 | $ | 9,440 | $ | 8,114 |
On May 13, 2021, the Board of Directors authorized a program to repurchase up to $25 million of our common stock in the open market. The authorization has no expiration.
Shareholder Performance Graph
The following graph shows a five-year comparison of the cumulative total shareholder return on CTS common stock with the cumulative total returns of a general market index and a peer group index (S&P 500(Russell 2000 Index and Dow Jones Electrical Components & Equipment Industry Group). The graph tracks the performance of a $100 investment in the Company's common stock and in each of the indexes (with the reinvestment of all dividends) on December 31, 2013.
Item 6.
2018 | % of Sales | 2017 | % of Sales | 2016 | % of Sales | 2015 | % of Sales | 2014 | % of Sales | ||||||||||||||||
Summary of Operations | |||||||||||||||||||||||||
Net sales | $ | 470,483 | 100.0 | $ | 422,993 | 100.0 | $ | 396,679 | 100.0 | $ | 382,310 | 100.0 | $ | 404,021 | 100.0 | ||||||||||
Cost of goods sold | 305,510 | 64.9 | 282,562 | 66.8 | 256,251 | 64.6 | 255,201 | 66.8 | 274,058 | 67.8 | |||||||||||||||
Gross Margin | 164,973 | 35.1 | 140,431 | 33.2 | 140,428 | 35.4 | 127,109 | 33.2 | 129,963 | 32.2 | |||||||||||||||
Selling, general and administrative expenses | 73,569 | 15.6 | 71,943 | 17.0 | 61,624 | 15.5 | 59,586 | 15.6 | 61,051 | 15.1 | |||||||||||||||
Research and development expenses | 25,304 | 5.4 | 25,146 | 5.9 | 24,040 | 6.1 | 22,461 | 5.9 | 22,563 | 5.6 | |||||||||||||||
Non-recurring environmental expense | — | — | — | — | — | — | 14,541 | 3.8 | — | — | |||||||||||||||
Restructuring and impairment charges | 5,062 | 1.1 | 4,139 | 1.0 | 3,048 | 0.8 | 14,564 | 3.8 | 5,941 | 1.5 | |||||||||||||||
Loss (gain) on sale of assets | — | — | 708 | (2.9 | ) | (11,450 | ) | (2.9 | ) | (2,156 | ) | (0.6 | ) | (1,915 | ) | (0.5 | ) | ||||||||
Operating earnings | 61,038 | 13.0 | 38,495 | 9.1 | 63,166 | 15.9 | 18,113 | 4.7 | 42,323 | 10.5 | |||||||||||||||
Other (expense) income | (2,935 | ) | (0.6 | ) | 1,758 | 0.4 | (5,921 | ) | (1.5 | ) | (5,852 | ) | (1.5 | ) | (2,975 | ) | (0.7 | ) | |||||||
Earnings before income taxes | 58,103 | 12.3 | 40,253 | 9.5 | 57,245 | 14.4 | 12,261 | 3.2 | 39,348 | 9.8 | |||||||||||||||
Income tax expense | 11,571 | 2.5 | 25,805 | 6.1 | 22,865 | 5.8 | 5,307 | 1.4 | 12,826 | 3.2 | |||||||||||||||
Net earnings | $ | 46,532 | 9.9 | $ | 14,448 | 3.4 | $ | 34,380 | 8.7 | $ | 6,954 | 1.8 | $ | 26,522 | 6.6 | ||||||||||
Retained earnings - beginning of year | 420,160 | 410,979 | 381,840 | 380,145 | 358,997 | ||||||||||||||||||||
Dividends declared | (5,278 | ) | (5,267 | ) | (5,241 | ) | (5,259 | ) | (5,374 | ) | |||||||||||||||
Implementation of new accounting standard | 17,433 | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||
Retained earnings - end of year | $ | 478,847 | $ | 420,160 | $ | 410,979 | $ | 381,840 | $ | 380,145 | |||||||||||||||
Net earnings per share: | |||||||||||||||||||||||||
Basic | $ | 1.41 | $ | 0.44 | $ | 1.05 | $ | 0.21 | $ | 0.79 | |||||||||||||||
Diluted | $ | 1.39 | $ | 0.43 | $ | 1.03 | $ | 0.21 | $ | 0.78 | |||||||||||||||
Average basic shares outstanding (000s) | 33,024 | 32,892 | 32,728 | 32,959 | 33,618 | ||||||||||||||||||||
Average diluted shares outstanding (000s) | 33,569 | 33,420 | 33,251 | 33,484 | 34,130 | ||||||||||||||||||||
Cash dividends per share (annualized) | $ | 0.160 | $ | 0.160 | $ | 0.160 | $ | 0.160 | $ | 0.160 | |||||||||||||||
Capital expenditures | $ | 28,488 | $ | 18,094 | $ | 20,500 | $ | 9,723 | $ | 12,949 | |||||||||||||||
Depreciation and amortization | $ | 22,514 | $ | 20,674 | $ | 18,992 | $ | 16,254 | $ | 16,971 | |||||||||||||||
Financial Position at Year End | |||||||||||||||||||||||||
Current assets | $ | 239,359 | $ | 233,609 | $ | 215,707 | $ | 245,954 | $ | 240,401 | |||||||||||||||
Current liabilities | 103,993 | 102,412 | 98,129 | 94,620 | 79,982 | ||||||||||||||||||||
Current ratio | 2.3 to 1 | 2.3 to 1 | 2.2 to 1 | 2.5 to 1 | 3.0 to 1 | ||||||||||||||||||||
Working capital | 135,366 | 131,197 | 117,578 | 151,334 | 160,419 | ||||||||||||||||||||
Inventories | 43,486 | 36,596 | 28,652 | 24,600 | 27,887 | ||||||||||||||||||||
Net property, plant and equipment | 99,401 | 88,247 | 82,111 | 69,872 | 71,414 | ||||||||||||||||||||
Total assets | 548,341 | 539,696 | 517,697 | 483,373 | 456,926 | ||||||||||||||||||||
Long-term debt | 50,000 | 76,300 | 89,100 | 90,700 | 75,000 | ||||||||||||||||||||
Long-term obligations, including long-term debt | 66,419 | 93,479 | 101,686 | 107,099 | 87,155 | ||||||||||||||||||||
Shareholders' equity | 377,929 | 343,805 | 317,882 | 281,654 | 289,789 | ||||||||||||||||||||
Common shares outstanding (000s) | 32,751 | 32,938 | 32,762 | 32,548 | 33,392 | ||||||||||||||||||||
Equity (book value) per share | $ | 11.54 | $ | 10.44 | $ | 9.70 | $ | 8.65 | $ | 8.68 | |||||||||||||||
Stock price range | 24.07-39.20 | 19.30-28.35 | 12.87-24.80 | 15.30-20.25 | 15.58-21.65 |
CTS CORPORATION 18
Item 7.
Management's Discussion and Analysis of Financial Condition and Results of OperationsThis section of this Form 10-K generally discusses 2021 and 2020 items and year-to-year comparisons between 2021 and 2020. Discussions of 2019 items and year-to-year comparisons between 2020 and 2019 that are not included in this Annual Report on Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2020.
Overview
CTS Corporation ("CTS", "we", "our" or "us") is a leading designer and manufacturer of products that Sense, Connect and Move. Our vision is to be a leading provider of sensing and motion devices as well as connectivity components, enabling an intelligent and seamless world. These devices are categorized by their ability to Sense, Connect or Move. Sense products provide vital inputs to electronic systems. Connect products allow systems to function in synchronization with other systems. Move products ensure required movements are effectively and accurately executed. We are committed to achieving our vision by continuing to invest in the development of products and technologies, and talent within these categories.
We manufacture sensors, actuators, and electronicconnectivity components in North America, Europe, and Asia. CTS provides engineered products to OEMs and tier one suppliers in the aerospace and defense, industrial, information technology, medical, telecommunications, and transportation markets.
There is an increasing proliferation of sensing and motion applications within various markets we serve. In addition, the increasing connectivity of various devices to the internet results in greater demand for communication bandwidth and data storage, increasing the need for our connectivity products. Our success is dependent on the ability to execute our strategy to support these trends. We are subject to challenges including periodic market softness, competition from other suppliers, changes in technology, and the ability to add new customers, launch new products or penetrate new markets.
COVID-19 Impact and Supply Chain Uncertainties
The COVID-19 pandemic and subsequent supply chain uncertainties have had a significant negative impact on the global economy in 2020 and 2021. This has disrupted the financial markets, negatively impacted the global supply chain and increased the cost of materials and operations, particularly within the global automotive industry. Key semiconductor chip and other critical part shortages continue to force OEMs to shut down production, often on short notice. With customers changing orders on short notice, we run the risk of carrying excess inventory in these situations. These developments are outside of our control, remain highly uncertain, and cannot be predicted. In addition, the supply chain shortages continue to put pressure on our manufacturing costs and equally our gross margins. We continue to actively monitor the ongoing impacts of the COVID-19 pandemic and supply chain issues and will seek to mitigate and minimize their impact on our business, when possible. We anticipate these challenges to continue to impact our results in 2022 and we remain cautious about the financial impact of these potential disruptions on our business.
Results of Operations: Fourth Quarter 2018Year Ended December 31, 2021 versus Fourth Quarter 2017
(Amounts in thousands, except percentages and per share amounts):
The following table highlights changes in significant components of the Consolidated Statements of Earnings (Loss) for the quarters ended December 31, 2018, and December 31, 2017:
Three Months Ended December 31, | Percent of Net Sales | |||||||||||
2018 | 2017 | Percent Change | 2018 | 2017 | ||||||||
Net sales | $ | 120,073 | $ | 110,910 | 8.3 | 100.0 | 100.0 | |||||
Cost of goods sold | 77,428 | 78,035 | (0.8 | ) | 64.5 | 70.4 | ||||||
Gross margin | 42,645 | 32,875 | 29.7 | 35.5 | 29.6 | |||||||
Selling, general and administrative expenses | 18,128 | 24,973 | (27.4 | ) | 15.1 | 22.5 | ||||||
Research and development expenses | 5,804 | 6,714 | (13.6 | ) | 4.8 | 6.1 | ||||||
Restructuring and impairment charges | 1,698 | 1,197 | 41.9 | 1.4 | 1.1 | |||||||
(Gain) loss on sale of assets | (2 | ) | 10 | (120.0 | ) | — | — | |||||
Total operating expenses | 25,628 | 32,894 | (22.1 | ) | 21.3 | 29.7 | ||||||
Operating earnings (loss) | 17,017 | (19 | ) | 89,663.2 | 14.2 | — | ||||||
Other (expense) income, net | (144 | ) | 164 | (187.8 | ) | (0.1 | ) | 0.1 | ||||
Earnings before income tax | 16,873 | 145 | 11,536.6 | 14.1 | 0.1 | |||||||
Income tax (benefit) expense | (691 | ) | 13,766 | (105.0 | ) | (0.6 | ) | 12.4 | ||||
Net earnings (loss) | $ | 17,564 | $ | (13,621 | ) | 228.9 | 14.6 | (12.3 | ) | |||
Diluted earnings per share: | ||||||||||||
Diluted net earnings (loss) per share | $ | 0.52 | $ | (0.41 | ) |
Three Months Ended December 31, | ||||||
2018 | 2017 | |||||
Interest expense | $ | (484 | ) | $ | (1,134 | ) |
Interest income | 459 | 370 | ||||
Other (expense) income | (119 | ) | 928 | |||
Total other (expense) income, net | $ | (144 | ) | $ | 164 |
Three Months Ended December 31, | ||||
2018 | 2017 | |||
Effective tax rate | (4.1 | )% | 9,493.8 | % |
|
| Years Ended December 31, |
|
|
|
|
|
| Percent of Net Sales |
| ||||||||||
|
| 2021 |
|
| 2020 |
|
| Percent Change |
|
| 2021 |
|
| 2020 |
| |||||
Net sales |
| $ | 512,925 |
|
| $ | 424,066 |
|
|
| 21.0 | % |
|
| 100 | % |
|
| 100 | % |
Cost of goods sold |
|
| 328,306 |
|
|
| 285,003 |
|
|
| 15.2 |
|
|
| 64.0 |
|
|
| 67.2 |
|
Gross margin |
|
| 184,619 |
|
|
| 139,063 |
|
|
| 32.8 |
|
|
| 36.0 |
|
|
| 32.8 |
|
Selling, general and administrative expenses |
|
| 82,597 |
|
|
| 67,787 |
|
|
| 21.8 |
|
|
| 16.1 |
|
|
| 16.0 |
|
Research and development expenses |
|
| 23,856 |
|
|
| 24,317 |
|
|
| (1.9 | ) |
|
| 4.7 |
|
|
| 5.7 |
|
Restructuring charges |
|
| 1,687 |
|
|
| 1,830 |
|
|
| (7.8 | ) |
|
| 0.3 |
|
|
| 0.4 |
|
Total operating expenses |
|
| 108,140 |
|
|
| 93,934 |
|
|
| 15.1 |
|
|
| 21.1 |
|
|
| 22.2 |
|
Operating earnings |
|
| 76,479 |
|
|
| 45,129 |
|
|
| 69.5 |
|
|
| 14.9 |
|
|
| 10.6 |
|
Total other (expense) income, net |
|
| (137,359 | ) |
|
| 350 |
|
|
| (39,345.4 | ) |
|
| (26.8 | ) |
|
| 0.1 |
|
(Loss) earnings before taxes |
|
| (60,880 | ) |
|
| 45,479 |
|
|
| (233.9 | ) |
|
| (11.9 | ) |
|
| 10.7 |
|
Income tax (benefit) expense |
|
| (19,014 | ) |
|
| 10,793 |
|
|
| (276.2 | ) |
|
| (3.7 | ) |
|
| 2.5 |
|
Net (loss) earnings |
| $ | (41,866 | ) |
| $ | 34,686 |
|
|
| (220.7 | )% |
|
| (8.2 | )% |
|
| 8.2 | % |
Diluted (loss) earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net (loss) earnings per share |
| $ | (1.30 | ) |
| $ | 1.06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | Percent of Net Sales | ||||||||||
2018 | 2017 | Percent Change | 2018 | 2017 | |||||||
Net sales | $ | 470,483 | $ | 422,993 | 11.2 | 100.0 | 100.0 | ||||
Cost of goods sold | 305,510 | 282,562 | 8.1 | 64.9 | 66.8 | ||||||
Gross margin | 164,973 | 140,431 | 17.5 | 35.1 | 33.2 | ||||||
Selling, general and administrative expenses | 73,569 | 71,943 | 2.3 | 15.6 | 17.0 | ||||||
Research and development expenses | 25,304 | 25,146 | 0.6 | 5.4 | 5.9 | ||||||
Restructuring and impairment charges | 5,062 | 4,139 | 22.3 | 1.1 | 1.0 | ||||||
Loss on sale of assets | — | 708 | (100.0 | ) | — | 0.2 | |||||
Total operating expenses | 103,935 | 101,936 | 2.0 | 22.1 | 24.1 | ||||||
Operating earnings | 61,038 | 38,495 | 58.6 | 13.0 | 9.1 | ||||||
Other (expense) income, net | (2,935 | ) | 1,758 | (267.0 | ) | (0.6 | ) | 0.4 | |||
Earnings before income tax | 58,103 | 40,253 | 44.3 | 12.4 | 9.5 | ||||||
Income tax expense | 11,571 | 25,805 | (55.2 | ) | 2.5 | 6.1 | |||||
Net earnings | 46,532 | 14,448 | 222.1 | 9.9 | 3.4 | ||||||
Diluted earnings per share: | |||||||||||
Diluted net earnings per share | $ | 1.39 | $ | 0.43 |
CTS CORPORATION 19
Net sales were $470,483$512,925 for the year ended December 31, 2018,2021, an increase of $47,490,$88,859, or 11.2%21.0% from 2017. Sales2020. Net sales growth was driven by the overall improvement in the economy including our focus on end-customer diversification. Net sales to transportation markets increased $24,873$42,634 or 9.0%17.7%. SalesNet sales to other end markets increased $22,617$46,224, or 15.3%25.3%. The NoliacSensor Scientific, Inc. acquisition, which was completed in December 2020, added $9,463sales of $7,112 in sales in 2018 and $7,084 in sales in 2017.2021. Changes in foreign exchange rates increased net sales by $3,238$6,938 year-over-year primarily due to the U.S. Dollar depreciating compared to the Chinese Renminbi and Euro.
Gross margin as a percent of sales was 35.1%36.0% in 20182021 versus 33.2%32.8% in 2017. The pension settlement charge recorded in the fourth quarter of 2017 impacted gross margin unfavorably by $4,796, or 1.1% of sales.2020. The increase in gross margin was driven primarily driven by savings relatedsales volume and mix. We continue to product line transfersexperience significant inflation in material and a favorablefreight costs as well as interruptions in the supply chain particularly due to the global semiconductor chip and resin shortages impacting the operations of our business. The impact of foreign exchange rate movements which were partially offset by material cost increases.
Selling, general and administrative ("SG&A") expenses were $73,569,$82,597, or 15.6%16.1% of sales for the year ended December 31, 2018,2021, versus $71,943$67,787 or 17.0%16.0% of sales in 2020. Total SG&A expenses tracked higher with higher costs associated with increased net sales including primarily the comparable periodrestoration of 2017. The pension settlement charge recordedcost saving measures, including incentive compensation in the fourth quarter of 2017 impacted selling, general and administrative expenses unfavorably by $6,557 or 1.6% of sales. The increase includes higher stock-based compensation and ERP implementation costs as well as incremental costs resulting from the Noliac acquisition in 2017, including amortization of intangibles.
Research and development (“R&D”) expenses were $25,304$23,856, or 5.4%4.7% of sales in 20182021 compared to $25,146$24,317, or 5.9%5.7% of sales in 2017.2020. The pension settlement charge recordeddecrease in the fourth quarter of 2017 impacted researchoverall R&D expenses was primarily due to changes in timing and development expenses unfavorably by $2,062, or 0.5% of sales. Research and development expenses are focused on expanded applications of existing products, new product development, and enhancements for current products and processes.
Restructuring charges were $4,139 in 2017.
Other income and expense items are summarized in the following table:
|
| Years Ended December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Interest expense |
| $ | (2,111 | ) |
| $ | (3,272 | ) |
Interest income |
|
| 840 |
|
|
| 1,047 |
|
Other (expense) income |
|
| (136,088 | ) |
|
| 2,575 |
|
Total other (expense) income, net |
| $ | (137,359 | ) |
| $ | 350 |
|
Years Ended December 31, | ||||||
2018 | 2017 | |||||
Interest expense | $ | (2,085 | ) | $ | (3,343 | ) |
Interest income | 1,826 | 1,284 | ||||
Other (expense) income | (2,676 | ) | 3,817 | |||
Total other (expense) income, net | $ | (2,935 | ) | $ | 1,758 |
Other expense, decreasednet in 2021 was primarily driven by increased pension expense including $126,269 in settlement charges from our U.S. pension plan termination process in the year ended December 31, 2018, versus the same period in 2017 primarily due to lower debt balances, a reduction in interest related to interest rate swaps,second and a one-time charge related to a liability that was settled in 2017. Interest income increased due to higher interest rates. Other expense in the year ended December 31, 2018, was driven by third quarters of 2021 as well as foreign currency translation losses, mainly due to the appreciation of the U.S. Dollar compared to the Chinese RenminbiCzech Koruna and the Euro. Other income in the year ended December 31, 2017 was driven mainly by foreign currency translation gains due to the depreciation of the U.S. Dollar compared to the Chinese Renminbi and the Euro.Mexican Peso.
|
| Years Ended December 31, |
| |||
|
| 2021 |
|
| 2020 |
|
Effective tax rate |
| 31.2% |
|
| 23.7% |
|
Years Ended December 31, | ||||
2018 | 2017 | |||
Effective tax rate | 19.9 | % | 64.1 | % |
The effective income tax rate in 20182021 was 19.9%31.2% compared to 64.1%23.7% in the prior year. The tax rate in 2018 was favorably impacted by a discrete one-time rate change benefit related to the Tax Act resulting from the election of tax accounting method changes, partially offset by a one-time withholding tax on repatriation of earnings from one of our foreign subsidiaries that was completed during the year to enable the use of tax credits due to expire in 2018. The tax rate in 2017 was unfavorably impacted by the application of the Tax Act, driven by the remeasurement of the net deferred tax assets from 35% to 21% and the one-time mandatory transition tax on the historical earnings of foreign affiliates, which resulted in a net non-cash charge of $18,001.
Years Ended December 31, | Percent of Net Sales | ||||||||||
2017 | 2016 | Percent Change | 2017 | 2016 | |||||||
Net sales | $ | 422,993 | $ | 396,679 | 6.6 | 100.0 | 100.0 | ||||
Cost of goods sold | 282,562 | 256,251 | 10.3 | 66.8 | 64.6 | ||||||
Gross margin | 140,431 | 140,428 | — | 33.2 | 35.4 | ||||||
Selling, general and administrative expenses | 71,943 | 61,624 | 16.7 | 17.0 | 15.5 | ||||||
Research and development expenses | 25,146 | 24,040 | 4.6 | 5.9 | 6.1 | ||||||
Restructuring and impairment charges | 4,139 | 3,048 | 35.8 | 1.0 | 0.8 | ||||||
Loss (gain) on sale of assets | 708 | (11,450 | ) | (106.2 | ) | 0.2 | (2.9 | ) | |||
Total operating expenses | 101,936 | 77,262 | 31.9 | 24.1 | 19.5 | ||||||
Operating earnings | 38,495 | 63,166 | (39.1 | ) | 9.1 | 15.9 | |||||
Other income (expense), net | 1,758 | (5,921 | ) | (129.7 | ) | 0.4 | (1.5 | ) | |||
Earnings before income tax | 40,253 | 57,245 | (29.7 | ) | 9.5 | 14.4 | |||||
Income tax expense | 25,805 | 22,865 | 12.9 | 6.1 | 5.8 | ||||||
Net earnings | 14,448 | 34,380 | (58.0 | ) | 3.4 | 8.7 | |||||
Diluted earnings per share: | |||||||||||
Diluted net earnings per share | $ | 0.43 | $ | 1.03 |
Years Ended December 31, | ||||||
2017 | 2016 | |||||
Interest expense | $ | (3,343 | ) | $ | (3,702 | ) |
Interest income | 1,284 | 1,305 | ||||
Other expense (income) | 3,817 | (3,524 | ) | |||
Total other expense (income), net | $ | 1,758 | $ | (5,921 | ) |
Years Ended December 31, | ||||
2017 | 2016 | |||
Effective tax rate | 64.1 | % | 39.9 | % |
Liquidity and Capital Resources
Cash and cash equivalents were $100,933$141,465 at December 31, 2018,2021 and $113,572$91,773 at December 31, 2017,2020, of which $96,762$124,635 and $112,531,$90,051 respectively, were held outside the United States. The decreaseincrease in cash and cash equivalents of $12,639$49,692 was primarily driven principally by cash generated from operating activities of $58,152, which was$86,141 partially offset by capital expenditures of $28,488, net debt payments of $26,300, purchase of treasury stock of $9,440,$(20,712) and dividends paid of 5,285. $(15,896) in financing and investing activities, respectively.
Total debt as of December 31, 2018,2021 and December 31, 2017,2020, was $50,000 and $76,300,$54,600, respectively. Total debt as a percentage of total capitalization, defined as long-term debt as a percentage of total debt and shareholders’ equity, was 11.7%9.7% at December 31, 2018,2021, compared to 18.2%11.4% at December 31, 2017.
Cash Flows from Operating Activities
Net cash provided by operating activities was $58,152$86,141 during the year ended December 31, 2018.2021. Components of net cash provided by operating activities included net loss of $(41,866), depreciation and amortization expense of $26,930, non-cash pension and other post-retirement plan expenses of $132,650, and other net non-cash items totaling $(24,912), and a net cash outflow from changes in assets and liabilities of $(6,661).
CTS CORPORATION 20
Net cash provided by operating activities was $76,783 during the year ended December 31, 2020. Components of net cash provided by operating activities included net earnings of $46,532,$34,686, depreciation and amortization expense of $22,514,$26,670, stock-based compensation of $5,256, and$3,417, other net non-cash items totaling $340, which were offset by$930, and a net cash inflow from changes in assets and liabilities of $15,482 and deferred income taxes of 1,008.
Cash Flows from Investing Activities
Net cash used in investing activities for the year ended December 31, 2018,2021 was $28,485,$15,896, driven primarily by capital expenditures.
Net cash used in investing activities for the netyear ended December 31, 2020 was $23,167, driven by capital expenditures of $28,488.
Cash Flows from Financing Activities
Net cash used in financing activities for the year ended December 31, 2018,2021, was $42,493. This$20,712. The net cash outflow was the result of net debt payments of $26,300, the purchaselong-term debt of $4,600, treasury stock purchases of $9,440,$8,786, dividend payments of $5,285, and$5,173, taxes paid on behalf of equity award participants of $1,468.
Net cash used in financing activities for the year ended December 31, 2020, was $61,333. The net cash outflow was the result of net payments of long-term debt of $45,100, treasury stock purchases of $8,080, dividend payments of $5,179, taxes paid on behalf of equity award participants of $1,917, and a contingent consideration payment of $1,057.
Capital Resources
Long-term debt was comprised of the following:
|
| As of December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Total credit facility availability |
| $ | 400,000 |
|
| $ | 300,000 |
|
Balance outstanding |
|
| 50,000 |
|
|
| 54,600 |
|
Standby letters of credit |
|
| 1,740 |
|
|
| 1,740 |
|
Amount available, subject to covenant restrictions |
| $ | 348,260 |
|
| $ | 243,660 |
|
Weighted-average interest rate |
|
| 1.16 | % |
|
| 1.92 | % |
As of December 31, | ||||||
2018 | 2017 | |||||
Total credit facility | $ | 300,000 | $ | 300,000 | ||
Balance Outstanding | $ | 50,000 | $ | 76,300 | ||
Standby letters of credit | $ | 1,940 | $ | 2,065 | ||
Amount available | $ | 248,060 | $ | 221,635 | ||
Weighted-average interest rate | 3.10 | % | 2.30 | % | ||
Commitment fee percentage per annum | 0.20 | % | 0.25 | % |
On August 10, 2015,December 15, 2021, we entered into an unsecured five-year revolving credit agreement (“Revolving Credit Facility”) with a group of banks in order to support our financing needs. The Revolving Credit Facility originally provided for a credit line of $200,000. On May 23, 2016, we requested and received a $100,000 increase in the aggregate revolving credit commitments under our existing credit agreement, which increased the credit line from $200,000 to $300,000.
Borrowings in U.S. dollars under the Revolving Credit Facility’s variableFacility bear interest, at a per annum rate equal to the applicable Term SOFR rate (but not less than 0.0%), plus the Term SOFR adjustment, and plus an applicable margin, which ranges from 1.00% to 1.75%, based on our net leverage ratio. Similarly, borrowings of alternative currencies under the Revolving Credit Facility bear interest intoequal to a fixeddefined risk-free reference rate, plus the applicable risk-free rate adjustment and plus an applicable margin, which ranges from 1.00% to 1.75%, based on our net leverage ratio.
The Revolving Credit Facility includes a swing line sublimit of $20,000 and a letter of credit sublimit of $20,000. We also pay a quarterly commitment fee on the unused portion of the Revolving Credit Facility. The commitment fee ranges from 0.175% to 0.25% based on our debt balance. Innet leverage ratio.
Our liquidity, access to capital, and borrowing costs could be adversely impacted by declines in our credit rating, our financial performance, and global credit market conditions, as well as a broad range of other factors, including those related to the second quarterCOVID-19 pandemic discussed in this Form 10-K. See “Item 1A. Risk Factors” for additional discussion of 2012, we entered into four separate one-year interest rate swap agreements to fix interest rates on $50,000these and other risks that our business faces.
As of long-term debtDecember 31, 2021, our material cash requirements for the periods January 2013 to January 2017. In the third quarter of 2012, we entered into four additional one-year interest rate swap agreements to fix interest rates on $25,000 of long-term debt for the periods January 2013 to January 2017. In the third quarter of 2016, we entered into three additional one-year interest rate swap agreements to fix interest rates on $50,000 of long-term debt for the periods August 2017 to August 2020. The difference to be paid or received under the terms of the swap agreements will be recognizedour known contractual and other obligations were as an adjustment to interest expense when settled.follows:
CTS CORPORATION 21
• | Long-term debt, including interest – Outstanding principal on our Revolving Credit Facility was $50,000 at December 31, 2021, with no amounts payable within 12 months. Additionally, we had future interest payments based on our hedged borrowings under our Revolving Credit Facility of $3,720 through maturity in December 2026, with approximately $1,162 payable within 12 months. Interest payments under the Revolving Credit Facility are determined based upon the average outstanding balance of our borrowings and the prevailing interest rate during that time and are inclusive of our hedge impact. See Note 13, “Debt,” in our Annual Report on 10K for further details of our debt. |
• | Operating lease payments – We enter into various noncancelable lease agreements for land, buildings and equipment under non-cancellable operating leases used in our operations. Operating lease obligations were $31,894, with $4,826 payable within 12 months. See Note 12, “Leases,” in our Annual Report on 10K for further detail of our obligations and the timing of expected future payments. |
• | Retirement obligations – Expected future payments relating to our defined benefit postretirement plans were $6,609, with $825 payable in 12 months. See Note 7, “Retirement Plan,” in our Annual Report on 10K for further detail of our obligations and the timing of expected future payments. |
We have historically funded our capital and operating needs primarily through cash flows from operating activities, supported by available credit under our Revolving Credit Facility. We believe that cash flows from operating activities and available borrowings under our Revolving Credit Facility will be adequate to fund our working capital needs, capital expenditures, and debt service requirements for at least the next twelve months.months and for the foreseeable future thereafter. However, we may choose to pursue additional equity and debt financing to provide additional liquidity or to fund acquisitions.
We have no off-balance sheet arrangements that have a material current effect or are reasonably likely to have a material future effect on our financial condition or changes in our financial condition.
Critical Accounting PoliciesEstimates and Estimates
The Securities and Exchange Commission ("SEC") has defined a company’s critical accounting policies as the consolidatedones that are most important to the portrayal of a company’s financial statementscondition and results of operations, and which require a company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, we have identified the critical accounting policies and judgments addressed below. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates.
Critical Accounting Estimates
Goodwill, Intangibles and Other Long-Lived Assets
Purchase Accounting
We use the acquisition method of accounting principles generally accepted into allocate costs of acquired businesses to the United Statesassets acquired and liabilities assumed based on their estimated fair values at the dates of America. These principles requireacquisition. The excess costs of acquired businesses over the fair values of the assets acquired and liabilities assumed are recognized as goodwill. The valuations of the acquired assets and liabilities will impact the determination of future operating results. Determining the fair value of assets acquired and liabilities assumed requires management’s judgment and often involves the use of estimates, judgments, and assumptions. We believe that the estimates, judgments, and assumptions we used are reasonable, based upon the information available.
Intangible assets other than goodwill are recognized if the transactionbenefit of the intangible asset is obtained through contractual or other legal rights, or if the intangible asset can be sold, transferred, licensed or exchanged, regardless of the Company’s intent to do so. Goodwill represents the excess purchase price toover the performance obligationsfair value of the tangible net assets and intangible assets acquired in the contract; 5) recognize revenue when (or as) the entity satisfies a performance obligation.
Impairment ofAssessment – Goodwill
Goodwill of a reporting unit is tested for impairment annually,on the first day of its fiscal fourth quarter, or more frequently if an event occurs or circumstances change that would more-likely-than-not reduce the fair value of a reporting unit below its carrying amount. Examples of such events or circumstances include, but are not limited to, the following:
• Significant decline in market capitalization relative to net book value,
• Significant adverse change in legalregulatory factors or in the business climate,
• Unanticipated competition,
CTS CORPORATION 22
• | More-likely-than-not expectation that a reporting unit or a significant portion of a reporting unit will be sold or otherwise disposed of, |
• Testing for recoverability of a significant asset group within a reporting unit, and
• Allocation of a portion of goodwill to a business to be disposed.
If we believe that one or more of the above indicators of impairment have occurred, we perform an impairment test.
We have the option to perform a qualitative assessment (commonly referred to as a "step zero" test) to determine whether further quantitative analysis for impairment of goodwill and indefinite-lived intangible assets is necessary. The qualitative assessment includes a review of macroeconomic conditions, industry and market considerations, internal cost factors, and our own overall financial and share price performance, among other factors. If, after assessing the totality of events or circumstances we determine that it is not more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, we do not need to perform a quantitative analysis.
If a quantitative assessment is required, we estimate the fair value of each reporting unit using a combination of discounted cash flow analysis and market-based valuation methodologies. Determining fair value using a quantitative approach requires significant judgment, including judgments about projected revenues, operating expenses, working capital investment, capital expenditures, and cash flows over a multi-year period.period, discount rates and estimated valuation multiples. The discount rate applied to our forecasts of future cash flows is based on our estimated weighted average cost of capital. In assessing the reasonableness of our determined fair values, we evaluate our results against our market capitalization. Changes in these estimates and assumptions could materially affect the determination of fair value and impact the goodwill impairment assessment.
For 2021, we elected to perform the quantitative assessment. Based upon our latest assessment, we determined that our goodwill was performed using a qualitative approach not impaired as of October 1, 2018, and we determined that it was likely that the fair values of our reporting units were more than their carrying amounts, and therefore no impairment charges were recorded.2021. We will monitor future results and will perform a test if indicators trigger an impairment review.
Impairment ofAssessment – Other Intangible Assets and Other Long-Lived Assets
We evaluate the impairment of identifiable intangibles and other long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors considered that may trigger an impairment review consist of, but are not limited to, the following:
• Significant decline in market capitalization relative to net book value,
• Significant underperformance relative to expected historical or projected future operating results,
• Significant changes in the manner of use of the acquired assets or the strategy for the overall business,
• Significant negative industry or economic trends.
If we believe that one or more indicators of impairment have occurred, we perform a recoverability test by comparing the carrying amount of an asset or asset group to the sum of the undiscounted cash flows expected to result from the use and the eventual disposition of the asset or asset group. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value. No indicators of impairment were identified during the year ended December 31, 2018.
Income Taxes
Our income tax expense, deferred tax assets and liabilities, and liabilities for unrecognized tax benefits reflect management’s best estimate of current and future taxes to be paid. We are subject to income taxes in the United States and numerous foreign jurisdictions. Significant judgments and estimates are required in the determination of consolidated income tax expense.
Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, which will result in taxable or deductible amounts in the future. In evaluating our ability to recover our deferred tax assets in the jurisdiction from which they arise, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax-planning strategies, and results of recent operations. The assumptions about future taxable income require the use of significant judgment and are consistent with the plans and estimates we are using to manage our underlying businesses.
The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in a multitude of jurisdictions across our global operations. Accounting Standards Codification (ASC)(“ASC”) No. 740 states that a tax benefit from an uncertain tax position may be recognized when it is more-likely-than-not that the position will be sustained upon examination, including resolution of any related appeals or litigation processes, on the basis of its technical merits. We record unrecognized tax benefits as liabilities in accordance with ASC 740 and adjust these liabilities when our judgment changes as a result of the evaluation of new information not previously available. Because of the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the unrecognized tax benefit liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which new information is available.
CTS CORPORATION 23
Critical Accounting Policies
Revenue Recognition
We recognize revenue in accordance with the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) 606 Revenue from Contracts with Customers net of estimated reserves. Our practicerevenue reserves contain uncertainties because they require management to make assumptions and to apply judgment to estimate the value of future credits to customers for price adjustments. We base these estimates on the most likely value method considering all reasonably available information, including our historical experience and current expectations, and are reflected in the transaction price when sales are recorded.
Product Warranties
Provisions for estimated warranty expenses are made at the time products are sold. The expense and corresponding accrual primarily relate to our products sold to our transportation markets. These estimates are established using a quoted industry rate and are based on customer specific circumstances. We adjust our warranty reserve for any known or anticipated warranty claims as new information becomes available. We evaluate our warranty obligations at least quarterly and adjust our accruals if it is probable that future costs will be different than our current reserve.
Over the last three years, product warranty reserves have ranged from 0.5% to recognize interest2.7% of net sales. We believe our reserve level is appropriate considering all facts and penaltiescircumstances surrounding any outstanding quality claims and our historical experience selling our products to our customers.
Inventories
We value our inventories at the lower of the actual cost to purchase or manufacture using the first-in, first-out ("FIFO") method, or net realizable value. We review inventory quantities on hand and record a provision for excess and obsolete inventory based on historical consumption trends as well as forecasts of product demand including related production requirements. Once reserves are established, write-downs of inventory are considered permanent adjustments to the cost basis of inventory. Our reserves contain uncertainties because the calculation requires management to make assumptions and to apply judgment regarding historical experience, market conditions, and product life cycles. Changes in actual demand or market conditions could adversely impact our reserve calculations.
Over the last three years, our reserves for excess and obsolete inventories have ranged from 10.2% to 16.0% of gross inventory. We believe our reserve level is appropriate considering the quantities and quality of the inventories.
Retirement Plans
Actuarial assumptions are used in determining pension income tax matters as partand expense and our defined benefit obligations. We utilize actuaries from consulting companies in each applicable country to develop our discount rates, matching high-quality bonds currently available and expected to be available during the period to maturity of the pension benefit in order to provide the necessary future cash flows to pay the accumulated benefits when due. After considering the recommendations of our actuaries, we have assumed a discount rate, expected rate of return on plan assets, and a rate of compensation increase in determining our annual pension income tax expense.
In February 2020, the CTS Board of Directors authorized management to explore termination of the U.S.-based pension plan ("Plan"), subject to certain conditions. On June 1, 2020, we entered into the Fifth Amendment to the Plan whereby we set an effective termination date for the Plan of July 31, 2020.
In February 2021, we received a determination letter from the Internal Revenue Service that allowed us to proceed with the termination process for the Plan. As a result, we offered a lump sum payment to eligible participants with vested qualified Plan benefits in lieu of receiving monthly annuity payments in the second quarter of 2021 and purchased a group annuity contract that transferred our remaining obligations for the remaining participants in the third quarter.
For a further discussion of the process and related financial impact please see Note 7 to Item 8 of this Annual Report on Form 10-K.
Environmental Contingencies
U.S. GAAP requires a liability to be recorded for contingencies when it is probable that a liability has been our historical practiceincurred and the amount of the liability can be reasonably estimated. We record environmental contingent loss accruals on an undiscounted basis. Significant judgment is required to permanently reinvestdetermine the earningsexistence and amounts of our non-U.S. subsidiaries in those operations. As previously noted,environmental liabilities. We regularly consult with attorneys and consultants to determine the Tax Act made significant changes to the taxation of undistributed foreign earnings, requiring that all previously untaxed earningsrelevant facts and profits of our controlled foreign corporation be subjected tocircumstances before we record a one-time mandatory deemed repatriation tax. The transition tax substantially eliminated the basis difference that existed prior to the Tax Act. However, there are limited other taxes that could continue to apply such as foreign withholding and certain state taxes. We completed the evaluation of our indefinite reinvestment assertion as a result of the Tax Act during the fourth quarter of 2018 and decided not to reinvest the current year earnings of our primary operations, except forliability. Changes in the Czech Republic, Denmark, India, Mexico and Taiwan. We intend to continue to indefinitely reinvestestimates on which the earnings in these non-U.S. subsidiaries.
Payments due by period | |||||||||||||||
Total | 2019 | 2020-2021 | 2022-2023 | 2024-beyond | |||||||||||
Long-term debt, including interest | $ | 51,680 | $ | 1,045 | $ | 50,635 | $ | — | $ | — | |||||
Operating lease payments | 31,029 | 3,859 | 6,209 | 4,875 | 16,086 | ||||||||||
Retirement obligations | 6,663 | 779 | 1,476 | 1,370 | 3,038 | ||||||||||
Total | $ | 89,372 | $ | 5,683 | $ | 58,320 | $ | 6,245 | $ | 19,124 |
CTS CORPORATION 24
Recent Accounting Pronouncements
The information set forth under Note 1 to finance anticipated capital requirements.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk(in thousands)
Our cash flows and earnings are subject to fluctuations resulting from changes in foreign currency exchange rates, interest rates and interest rates.commodity prices. We manage our exposure to these market risks through internally established policies and procedures and, when deemed appropriate, through the use of derivative financial instruments. Our policies do not allow speculation in derivative instruments for profit or execution of derivative instrument contracts for which there are no underlying exposures. We do not use financial instruments for trading purposes, and we are not a party to any leveraged derivatives. We monitor our underlying market risk exposures on an ongoing basis and believe that we can modify or adapt our hedging strategies as needed.
Interest Rate Risk
We are exposed to risk of changes in interest rates on our revolving credit facility.Revolving Credit Facility. There was $50,000 and $76,300$54,600 outstanding under our revolving credit facility at December 31, 2018,2021 and 2017,2020, respectively. As of December 31, 2018,2021, we had interest rate swaps that fix interest costs on $50,000 of our long-term debt through August 2020.
Foreign Currency Risk
We are exposed to foreign currency exchange rate risks. Our significant foreign subsidiaries are located in China, Czech Republic, Mexico, and Taiwan. During 2021, net sales from outside the U.S. were approximately 42% of total net sales. During 2020, net sales to customers from outside the U.S. were approximately 43% of total net sales.
The company’s foreign exchange exposures result primarily from, sale of products in foreign currencies, foreign currency denominated purchases, and employee-related and other costs of running operations in foreign countries. Changes in foreign exchange rates could affect the company’s sales, costs, balance sheet values and earnings.
As of December 31, 2018,2021, we had $15,700 outstanding foreign currency forward exchange contracts outstanding with a notional value of $18,017 to hedge our exposure against the Mexican Peso.
Commodity Price Risk
Many of our products require the use of raw materials that are produced in only a limited number of regions around the world or are available from only a limited number of suppliers. Our results of operations may be materially and adversely affected if we have difficulty obtaining these raw materials, the quality of available raw materials deteriorates, or there are significant price increases for these raw materials. For periods in which the prices of these raw materials are rising, we may be unable to pass on the increased cost to our customers, which would result in decreased margins for the products in which they are used. For periods in which the prices are declining, we may be required to write down our inventory carrying cost of these raw materials, since we record our inventory at the lower of cost or net realizable value.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
CTS Corporation
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of CTS Corporation (an Indiana corporation)Corporation) and subsidiaries (the “Company”) as of December 31, 20182021 and 2017,2020, the related consolidated statements of (loss) earnings, comprehensive earnings, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2018,2021, and the related notes and(and financial statement scheduleschedules included under Item 15(a)) (collectively referred to as the “financial statements”). In our opinion, the
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2018,2021, based on criteria established in the 2013
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical audit matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Goodwill Impairment Assessment
The Company’s consolidated goodwill balance was $109.8 million as of December 31, 2021. As described in Note 1 and Note 8 to the consolidated financial statements, the Company evaluates goodwill for impairment at the reporting unit level annually. A quantitative impairment assessment was performed as of October 1, 2021 for each of the three reporting units. The quantitative impairment assessment involves the comparison of the fair value of a reporting unit to its carrying value. The Company determines the fair value of each reporting unit using a combination of discounted cash flow analysis and market-based valuation methodologies, which requires significant management judgment. We have identified the quantitative goodwill impairment assessment as a critical audit matter.
The principal consideration for our determination that the quantitative impairment assessment is a critical matter was the significant auditor judgment required to evaluate the reporting units’ forecasted revenues, forecasted cash flows over a multi-year period, discount rates, and estimated valuation multiples.
Our audit procedures related to the critical audit matter included the following, among others:
CTS CORPORATION 26
• | Tested the design and operating effectiveness of the key controls over the Company’s goodwill impairment assessment, including controls over the development of the significant assumptions such as the forecasted revenues and cash flows, discount rates, and estimated valuation multiples; |
• | Evaluated the forecasted revenues and cash flows for each reporting unit by comparing the forecasted growth assumptions to both current and historical results, as well as forecasted industry trends; |
• | Assessed the Company’s discount rates for each reporting unit by comparing them against discount rates independently developed using publicly available market data for comparable peers; and |
• | Assessed the estimated valuation multiples for each reporting unit by evaluating the reasonableness of the selected comparable publicly traded companies and the resulting market multiples calculations. |
Specialists were involved in evaluating the valuation methodology and significant assumptions such as discount rates and estimated valuation multiples.
/s/ GRANT THORNTON LLP
We have served as the Company’s auditor since 2005.
Chicago, Illinois
February 22, 2019
CTS Corporation
CTS CORPORATION AND SUBSIDIARIES
Consolidated Statements of (Loss) Earnings
(in thousands)thousands, except per share amounts)
|
| Years Ended December 31, |
| |||||||||
|
| 2021 |
|
| 2020 |
|
| 2019 |
| |||
Net sales |
| $ | 512,925 |
|
| $ | 424,066 |
|
| $ | 468,999 |
|
Cost of goods sold |
|
| 328,306 |
|
|
| 285,003 |
|
|
| 311,424 |
|
Gross margin |
|
| 184,619 |
|
|
| 139,063 |
|
|
| 157,575 |
|
Selling, general and administrative expenses |
|
| 82,597 |
|
|
| 67,787 |
|
|
| 70,408 |
|
Research and development expenses |
|
| 23,856 |
|
|
| 24,317 |
|
|
| 25,967 |
|
Restructuring charges |
|
| 1,687 |
|
|
| 1,830 |
|
|
| 7,448 |
|
Gain on sale of assets |
|
| — |
|
|
| — |
|
|
| (63 | ) |
Operating earnings |
|
| 76,479 |
|
|
| 45,129 |
|
|
| 53,815 |
|
Other (expense) income: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
| (2,111 | ) |
|
| (3,272 | ) |
|
| (2,648 | ) |
Interest income |
|
| 840 |
|
|
| 1,047 |
|
|
| 1,737 |
|
Other (expense) income |
|
| (136,088 | ) |
|
| 2,575 |
|
|
| (2,638 | ) |
Total other (expense) income, net |
|
| (137,359 | ) |
|
| 350 |
|
|
| (3,549 | ) |
(Loss) earnings before taxes |
|
| (60,880 | ) |
|
| 45,479 |
|
|
| 50,266 |
|
Income tax (benefit) expense |
|
| (19,014 | ) |
|
| 10,793 |
|
|
| 14,120 |
|
Net (loss) earnings |
| $ | (41,866 | ) |
| $ | 34,686 |
|
| $ | 36,146 |
|
Net (loss) earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | (1.30 | ) |
| $ | 1.07 |
|
| $ | 1.11 |
|
Diluted |
| $ | (1.30 | ) |
| $ | 1.06 |
|
| $ | 1.09 |
|
Basic weighted-average common shares outstanding |
|
| 32,327 |
|
|
| 32,317 |
|
|
| 32,700 |
|
Effect of dilutive securities |
|
| — |
|
|
| 267 |
|
|
| 405 |
|
Diluted weighted-average common shares outstanding |
|
| 32,327 |
|
|
| 32,584 |
|
|
| 33,105 |
|
Cash dividends declared per share |
| $ | 0.16 |
|
| $ | 0.16 |
|
| $ | 0.16 |
|
Years Ended December 31, | |||||||||
2018 | 2017 | 2016 | |||||||
Net sales | $ | 470,483 | $ | 422,993 | $ | 396,679 | |||
Cost of goods sold | 305,510 | 282,562 | 256,251 | ||||||
Gross Margin | 164,973 | 140,431 | 140,428 | ||||||
Selling, general and administrative expenses | 73,569 | 71,943 | 61,624 | ||||||
Research and development expenses | 25,304 | 25,146 | 24,040 | ||||||
Restructuring and impairment charges | 5,062 | 4,139 | 3,048 | ||||||
Loss (gain) on sale of assets | — | 708 | (11,450 | ) | |||||
Operating earnings | 61,038 | 38,495 | 63,166 | ||||||
Other (expense) income: | |||||||||
Interest expense | (2,085 | ) | (3,343 | ) | (3,702 | ) | |||
Interest income | 1,826 | 1,284 | 1,305 | ||||||
Other (expense) income | (2,676 | ) | 3,817 | (3,524 | ) | ||||
Total other (expense) income, net | (2,935 | ) | 1,758 | (5,921 | ) | ||||
Earnings before taxes | 58,103 | 40,253 | 57,245 | ||||||
Income tax expense | 11,571 | 25,805 | 22,865 | ||||||
Net earnings | $ | 46,532 | $ | 14,448 | $ | 34,380 | |||
Net earnings per share: | |||||||||
Basic | 1.41 | 0.44 | 1.05 | ||||||
Diluted | 1.39 | 0.43 | 1.03 | ||||||
Basic weighted-average common shares outstanding | 33,024 | 32,892 | 32,728 | ||||||
Effect of dilutive securities | 545 | 528 | 523 | ||||||
Diluted weighted-average common shares outstanding | 33,569 | 33,420 | 33,251 | ||||||
Cash dividends declared per share | $ | 0.16 | $ | 0.16 | $ | 0.16 |
The accompanying notes are an integral part of the consolidated financial statements.
Consolidated Statements of Comprehensive Earnings
(in thousands)
|
| Years Ended December 31, |
| |||||||||
|
| 2021 |
|
| 2020 |
|
| 2019 |
| |||
Net (loss) earnings |
| $ | (41,866 | ) |
| $ | 34,686 |
|
| $ | 36,146 |
|
Other comprehensive earnings (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
Changes in fair market value of derivatives, net of tax |
|
| 311 |
|
|
| (1,307 | ) |
|
| (509 | ) |
Changes in unrealized pension cost, net of tax |
|
| 91,081 |
|
|
| (2,965 | ) |
|
| 6,439 |
|
Cumulative translation adjustment, net of tax |
|
| 4 |
|
|
| 77 |
|
|
| 83 |
|
Other comprehensive earnings (loss) |
| $ | 91,396 |
|
| $ | (4,195 | ) |
| $ | 6,013 |
|
Comprehensive earnings |
| $ | 49,530 |
|
| $ | 30,491 |
|
| $ | 42,159 |
|
Years Ended December 31, | |||||||||
2018 | 2017 | 2016 | |||||||
Net earnings | $ | 46,532 | $ | 14,448 | $ | 34,380 | |||
Other comprehensive earnings (loss): | |||||||||
Changes in fair market value of hedges, net of tax | 795 | 110 | 553 | ||||||
Changes in unrealized pension cost, net of tax | (1,830 | ) | 13,687 | 6,412 | |||||
Cumulative translation adjustment, net of tax | (311 | ) | 437 | (1,154 | ) | ||||
Other comprehensive (loss) earnings | $ | (1,346 | ) | $ | 14,234 | $ | 5,811 | ||
Comprehensive earnings | $ | 45,186 | $ | 28,682 | $ | 40,191 |
The accompanying notes are an integral part of the consolidated financial statements.
CTS CORPORATION 29
CTS CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands)
|
| December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
ASSETS |
|
|
|
|
|
|
|
|
Current Assets |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 141,465 |
|
| $ | 91,773 |
|
Accounts receivable, net |
|
| 82,191 |
|
|
| 80,981 |
|
Inventories, net |
|
| 49,506 |
|
|
| 45,870 |
|
Other current assets |
|
| 15,927 |
|
|
| 14,607 |
|
Total current assets |
|
| 289,089 |
|
|
| 233,231 |
|
Property, plant and equipment, net |
|
| 96,876 |
|
|
| 97,437 |
|
Operating lease assets, net |
|
| 21,594 |
|
|
| 23,281 |
|
Other assets |
|
|
|
|
|
|
|
|
Prepaid pension asset |
|
| 49,382 |
|
|
| 56,642 |
|
Goodwill |
|
| 109,798 |
|
|
| 109,497 |
|
Other intangible assets, net |
|
| 69,888 |
|
|
| 79,121 |
|
Deferred income taxes |
|
| 25,415 |
|
|
| 24,250 |
|
Other assets |
|
| 2,420 |
|
|
| 2,590 |
|
Total other assets |
|
| 256,903 |
|
|
| 272,100 |
|
Total Assets |
| $ | 664,462 |
|
| $ | 626,049 |
|
LIABILITIES AND SHAREHOLDERS' EQUITY |
|
|
|
|
|
|
|
|
Current Liabilities |
|
|
|
|
|
|
|
|
Accounts payable |
| $ | 55,537 |
|
| $ | 50,489 |
|
Operating lease obligations |
|
| 3,393 |
|
|
| 3,294 |
|
Accrued payroll and benefits |
|
| 18,418 |
|
|
| 12,978 |
|
Accrued expenses and other liabilities |
|
| 36,718 |
|
|
| 38,171 |
|
Total current liabilities |
|
| 114,066 |
|
|
| 104,932 |
|
Long-term debt |
|
| 50,000 |
|
|
| 54,600 |
|
Long-term operating lease obligations |
|
| 21,354 |
|
|
| 23,163 |
|
Long-term pension obligations |
|
| 6,886 |
|
|
| 7,466 |
|
Deferred income taxes |
|
| 5,894 |
|
|
| 7,010 |
|
Other long-term obligations |
|
| 2,684 |
|
|
| 5,196 |
|
Total Liabilities |
|
| 200,884 |
|
|
| 202,367 |
|
Commitments and Contingencies (Note 11) |
|
|
|
|
|
|
|
|
Shareholders' Equity |
|
|
|
|
|
|
|
|
Common stock |
|
| 314,620 |
|
|
| 311,190 |
|
Additional contributed capital |
|
| 42,549 |
|
|
| 41,654 |
|
Retained earnings |
|
| 492,242 |
|
|
| 539,281 |
|
Accumulated other comprehensive loss |
|
| (4,525 | ) |
|
| (95,921 | ) |
Total shareholders' equity before treasury stock |
|
| 844,886 |
|
|
| 796,204 |
|
Treasury stock |
|
| (381,308 | ) |
|
| (372,522 | ) |
Total shareholders' equity |
|
| 463,578 |
|
|
| 423,682 |
|
Total Liabilities and Shareholders' Equity |
| $ | 664,462 |
|
| $ | 626,049 |
|
December 31, | ||||||
2018 | 2017 | |||||
ASSETS | ||||||
Current Assets | ||||||
Cash and cash equivalents | $ | 100,933 | $ | 113,572 | ||
Accounts receivable, net | 79,518 | 70,584 | ||||
Inventories, net | 43,486 | 36,596 | ||||
Other current assets | 15,422 | 12,857 | ||||
Total current assets | 239,359 | 233,609 | ||||
Property, plant and equipment, net | 99,401 | 88,247 | ||||
Other Assets | ||||||
Prepaid pension asset | 54,100 | 57,050 | ||||
Goodwill | 71,057 | 71,057 | ||||
Other intangible assets, net | 60,180 | 66,943 | ||||
Deferred income taxes | 22,201 | 20,694 | ||||
Other assets | 2,043 | 2,096 | ||||
Total other assets | 209,581 | 217,840 | ||||
Total Assets | $ | 548,341 | $ | 539,696 | ||
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||
Current Liabilities | ||||||
Accounts payable | $ | 51,975 | $ | 49,201 | ||
Accrued payroll and benefits | 14,671 | 11,867 | ||||
Accrued expenses and other liabilities | 37,347 | 41,344 | ||||
Total current liabilities | 103,993 | 102,412 | ||||
Long-term debt | 50,000 | 76,300 | ||||
Long-term pension obligations | 6,510 | 7,201 | ||||
Deferred income taxes | 3,990 | 3,802 | ||||
Other long-term obligations | 5,919 | 6,176 | ||||
Total Liabilities | 170,412 | 195,891 | ||||
Commitments and Contingencies (Note 10) | ||||||
Shareholders' Equity | ||||||
Common stock | 306,697 | 304,777 | ||||
Additional contributed capital | 42,820 | 41,084 | ||||
Retained earnings | 478,847 | 420,160 | ||||
Accumulated other comprehensive loss | (97,739 | ) | (78,960 | ) | ||
Total shareholders' equity before treasury stock | 730,625 | 687,061 | ||||
Treasury stock | (352,696 | ) | (343,256 | ) | ||
Total shareholders' equity | 377,929 | 343,805 | ||||
Total Liabilities and Shareholders' Equity | $ | 548,341 | $ | 539,696 |
The accompanying notes are an integral part of the consolidated financial statements.
Consolidated Statements of Cash Flows
(in thousands)
|
| Years Ended December 31, |
| |||||||||
|
| 2021 |
|
| 2020 |
|
| 2019 |
| |||
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) earnings |
| $ | (41,866 | ) |
| $ | 34,686 |
|
| $ | 36,146 |
|
Adjustments to reconcile net (loss) earnings to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 26,930 |
|
|
| 26,670 |
|
|
| 24,619 |
|
Pensions and other post-retirement plan expense |
|
| 132,650 |
|
|
| 2,698 |
|
|
| 1,009 |
|
Stock-based compensation |
|
| 6,105 |
|
|
| 3,417 |
|
|
| 5,015 |
|
Asset impairment charges |
|
| 0 |
|
|
| 1,016 |
|
|
| 0 |
|
Restructuring non-cash charges |
|
| 0 |
|
|
| 300 |
|
|
| 1,704 |
|
Deferred income taxes |
|
| (30,982 | ) |
|
| (2,048 | ) |
|
| 2,413 |
|
Gain on sales of fixed assets |
|
| 0 |
|
|
| 0 |
|
|
| (63 | ) |
(Gain) loss on foreign current hedges, net of tax |
|
| (35 | ) |
|
| (20 | ) |
|
| 97 |
|
Changes in assets and liabilities, net of acquisitions: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
| (928 | ) |
|
| (343 | ) |
|
| 3,784 |
|
Inventories |
|
| (3,570 | ) |
|
| (578 | ) |
|
| 4,371 |
|
Operating lease assets |
|
| 1,687 |
|
|
| 1,363 |
|
|
| (2,578 | ) |
Other assets |
|
| (2,076 | ) |
|
| 3,701 |
|
|
| (2,605 | ) |
Accounts payable |
|
| 3,136 |
|
|
| 3,860 |
|
|
| (4,658 | ) |
Accrued payroll and benefits |
|
| 5,023 |
|
|
| 2,518 |
|
|
| (5,940 | ) |
Operating lease liabilities |
|
| (1,709 | ) |
|
| (1,257 | ) |
|
| 2,921 |
|
Accrued expenses and other liabilities |
|
| (7,937 | ) |
|
| 1,056 |
|
|
| (1,543 | ) |
Pension and other post-retirement plans |
|
| (287 | ) |
|
| (256 | ) |
|
| (287 | ) |
Net cash provided by operating activities |
|
| 86,141 |
|
|
| 76,783 |
|
|
| 64,405 |
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
| (15,641 | ) |
|
| (14,858 | ) |
|
| (21,733 | ) |
Proceeds from sale of assets |
|
| 0 |
|
|
| 0 |
|
|
| 137 |
|
Payments for acquisitions, net of cash acquired |
|
| (255 | ) |
|
| (8,309 | ) |
|
| (73,906 | ) |
Net cash used in investing activities |
|
| (15,896 | ) |
|
| (23,167 | ) |
|
| (95,502 | ) |
CASH FLOWS FROM FINANCING ACTVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Payments of long-term debt |
|
| (808,800 | ) |
|
| (3,792,550 | ) |
|
| (1,885,800 | ) |
Proceeds from borrowings of long-term debt |
|
| 804,200 |
|
|
| 3,747,450 |
|
|
| 1,935,500 |
|
Purchase of treasury stock |
|
| (8,786 | ) |
|
| (8,080 | ) |
|
| (11,746 | ) |
Dividends paid |
|
| (5,173 | ) |
|
| (5,179 | ) |
|
| (5,238 | ) |
Taxes paid on behalf of equity award participants |
|
| (1,503 | ) |
|
| (1,917 | ) |
|
| (2,657 | ) |
Contingent consideration payments |
|
| (650 | ) |
|
| (1,057 | ) |
|
| 0 |
|
Net cash (used in) provided by financing activities |
|
| (20,712 | ) |
|
| (61,333 | ) |
|
| 30,059 |
|
Effect of exchange rate on cash and cash equivalents |
|
| 159 |
|
|
| (751 | ) |
|
| 346 |
|
Net increase (decrease) in cash and cash equivalents |
|
| 49,692 |
|
|
| (8,468 | ) |
|
| (692 | ) |
Cash and cash equivalents at beginning of year |
|
| 91,773 |
|
|
| 100,241 |
|
|
| 100,933 |
|
Cash and cash equivalents at end of year |
| $ | 141,465 |
|
| $ | 91,773 |
|
| $ | 100,241 |
|
Supplemental cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest |
| $ | 1,950 |
|
| $ | 2,597 |
|
| $ | 1,961 |
|
Cash paid for income taxes, net |
| $ | 16,887 |
|
| $ | 11,967 |
|
| $ | 11,113 |
|
Non-cash financing and investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures incurred not paid |
| $ | 2,348 |
|
| $ | 729 |
|
| $ | 4,077 |
|
Years Ended December 31, | |||||||||
2018 | 2017 | 2016 | |||||||
Cash flows from operating activities: | |||||||||
Net earnings | $ | 46,532 | $ | 14,448 | $ | 34,380 | |||
Adjustments to reconcile net earnings to net cash provided by operating activities: | |||||||||
Depreciation and amortization | 22,514 | 20,674 | 18,992 | ||||||
Stock-based compensation | 5,256 | 4,184 | 2,738 | ||||||
Pension and other post-retirement plan expense (income) | 422 | 11,570 | (1,599 | ) | |||||
Deferred income taxes | (1,008 | ) | 16,710 | 10,297 | |||||
Loss (gain) on sale of assets | — | 708 | (11,450 | ) | |||||
(Gain) loss on foreign currency hedges, net of cash received | (82 | ) | 94 | (36 | ) | ||||
Changes in assets and liabilities, net of acquisitions and divestitures: | |||||||||
Accounts receivable | (9,877 | ) | (5,198 | ) | (7,120 | ) | |||
Inventories | (7,521 | ) | (5,404 | ) | (2,290 | ) | |||
Other assets | (2,675 | ) | (1,531 | ) | (289 | ) | |||
Accounts payable | 5,113 | 5,387 | 537 | ||||||
Accrued payroll and benefits | 2,349 | (1,666 | ) | 1,876 | |||||
Accrued expenses | (3,795 | ) | 28 | 451 | |||||
Income taxes payable | 1,564 | (4,555 | ) | 966 | |||||
Other liabilities | (258 | ) | 2,918 | 52 | |||||
Pension and other post-retirement plans | (382 | ) | (319 | ) | (303 | ) | |||
Total adjustments | 11,620 | 43,600 | 12,822 | ||||||
Net cash provided by operating activities | 58,152 | 58,048 | 47,202 | ||||||
Cash flows from investing activities: | |||||||||
Capital expenditures | (28,488 | ) | (18,094 | ) | (20,500 | ) | |||
Proceeds from sale of assets | 3 | 541 | 12,296 | ||||||
Payment for acquisitions, net of cash acquired | — | (19,121 | ) | (73,063 | ) | ||||
Net cash used in investing activities | (28,485 | ) | (36,674 | ) | (81,267 | ) | |||
Cash flows from financing activities: | |||||||||
Payments of long-term debt | (1,060,100 | ) | (1,518,200 | ) | (2,458,400 | ) | |||
Proceeds from borrowings of long-term debt | 1,033,800 | 1,505,400 | 2,456,800 | ||||||
Payments of short-term notes payable | — | (1,150 | ) | — | |||||
Purchase of treasury stock | (9,440 | ) | — | — | |||||
Dividends paid | (5,285 | ) | (5,260 | ) | (5,234 | ) | |||
Taxes paid on behalf of equity award participants | (1,468 | ) | (1,604 | ) | (1,809 | ) | |||
Net cash used in financing activities | (42,493 | ) | (20,814 | ) | (8,643 | ) | |||
Effect of exchange rate on cash and cash equivalents | 187 | (793 | ) | (415 | ) | ||||
Net decrease in cash and cash equivalents | (12,639 | ) | (233 | ) | (43,123 | ) | |||
Cash and cash equivalents at beginning of year | 113,572 | 113,805 | 156,928 | ||||||
Cash and cash equivalents at end of year | $ | 100,933 | $ | 113,572 | $ | 113,805 | |||
Supplemental cash flow information: | |||||||||
Cash paid for interest | $ | 1,582 | $ | 2,130 | $ | 2,939 | |||
Cash paid for income taxes, net | $ | 9,916 | $ | 10,884 | $ | 10,471 | |||
Non-cash investing and financing activities: | |||||||||
Purchase of assets with short-term notes payable | $ | — | $ | — | $ | 1,006 | |||
Capital expenditures incurred not paid | $ | 4,312 | $ | 5,914 | $ | 3,214 |
The accompanying notes are an integral part of the consolidated financial statements.
CTS CORPORATION 31
CTS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
(in thousands)
|
| Common Stock |
|
| Additional Contributed Capital |
|
| Retained Earnings |
|
| Accumulated Other Comprehensive Loss |
|
| Treasury Stock |
|
| Total |
| ||||||
Balances at January 1, 2019 |
| $ | 306,697 |
|
| $ | 42,820 |
|
| $ | 478,847 |
|
| $ | (97,739 | ) |
| $ | (352,696 | ) |
| $ | 377,929 |
|
Net earnings |
|
| — |
|
|
| — |
|
|
| 36,146 |
|
|
| — |
|
|
| — |
|
|
| 36,146 |
|
Changes in fair market value of derivatives, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (509 | ) |
|
| — |
|
|
| (509 | ) |
Changes in unrealized pension cost, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 6,439 |
|
|
| — |
|
|
| 6,439 |
|
Cumulative translation adjustment, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 83 |
|
|
| — |
|
|
| 83 |
|
Cash dividends of $0.16 per share |
|
| — |
|
|
| — |
|
|
| (5,227 | ) |
|
| — |
|
|
| — |
|
|
| (5,227 | ) |
Acquired 420,770 shares of treasury stock |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (11,746 | ) |
|
| (11,746 | ) |
Issued shares on vesting of restricted stock units |
|
| 1,235 |
|
|
| (3,891 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (2,656 | ) |
Stock compensation |
|
| — |
|
|
| 4,760 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 4,760 |
|
Balances at December 31, 2019 |
| $ | 307,932 |
|
| $ | 43,689 |
|
| $ | 509,766 |
|
| $ | (91,726 | ) |
| $ | (364,442 | ) |
| $ | 405,219 |
|
Net earnings |
|
| — |
|
|
| — |
|
|
| 34,686 |
|
|
| — |
|
|
| — |
|
|
| 34,686 |
|
Changes in fair market value of derivatives, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,307 | ) |
|
| — |
|
|
| (1,307 | ) |
Changes in unrealized pension cost, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (2,965 | ) |
|
| — |
|
|
| (2,965 | ) |
Cumulative translation adjustment, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 77 |
|
|
| — |
|
|
| 77 |
|
Cash dividends of $0.16 per share |
|
| — |
|
|
| — |
|
|
| (5,171 | ) |
|
| — |
|
|
| — |
|
|
| (5,171 | ) |
Acquired 342,731 shares for treasury stock |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (8,080 | ) |
|
| (8,080 | ) |
Issued shares on vesting of restricted stock units |
|
| 3,258 |
|
|
| (5,175 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,917 | ) |
Stock compensation |
|
| — |
|
|
| 3,140 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 3,140 |
|
Balances at December 31, 2020 |
| $ | 311,190 |
|
| $ | 41,654 |
|
| $ | 539,281 |
|
| $ | (95,921 | ) |
| $ | (372,522 | ) |
| $ | 423,682 |
|
Net loss |
|
| — |
|
|
| — |
|
|
| (41,866 | ) |
|
| — |
|
|
| — |
|
|
| (41,866 | ) |
Changes in fair market value of derivatives, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 311 |
|
|
| — |
|
|
| 311 |
|
Changes in unrealized pension cost, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 91,081 |
|
|
| — |
|
|
| 91,081 |
|
Cumulative translation adjustment, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 4 |
|
|
| — |
|
|
| 4 |
|
Cash dividends of $0.16 per share |
|
| — |
|
|
| — |
|
|
| (5,173 | ) |
|
| — |
|
|
| — |
|
|
| (5,173 | ) |
Acquired 266,722 shares for treasury stock |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (8,786 | ) |
|
| (8,786 | ) |
Issued shares on vesting of restricted stock units |
|
| 3,430 |
|
|
| (4,932 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,502 | ) |
Stock compensation |
|
| — |
|
|
| 5,827 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 5,827 |
|
Balances at December 31, 2021 |
| $ | 314,620 |
|
| $ | 42,549 |
|
| $ | 492,242 |
|
| $ | (4,525 | ) |
| $ | (381,308 | ) |
| $ | 463,578 |
|
Common Stock | Additional Contributed Capital | Retained Earnings | Accumulated Other Comprehensive Earnings/(Loss) | Treasury Stock | Total | |||||||||||||
Balances at January 1, 2016 | $ | 300,909 | $ | 41,166 | $ | 381,840 | $ | (99,005 | ) | $ | (343,256 | ) | $ | 281,654 | ||||
Net earnings | — | — | 34,380 | — | — | 34,380 | ||||||||||||
Changes in fair market value of hedges, net of tax | — | — | — | 553 | — | 553 | ||||||||||||
Changes in unrealized pension cost, net of tax | — | — | — | 6,412 | — | 6,412 | ||||||||||||
Cumulative translation adjustment, net of tax | — | — | — | (1,154 | ) | — | (1,154 | ) | ||||||||||
Cash dividends of $0.16 per share | — | — | (5,241 | ) | — | — | (5,241 | ) | ||||||||||
Issued shares on vesting of restricted stock units | 1,923 | (3,307 | ) | — | — | — | (1,384 | ) | ||||||||||
Stock compensation | — | 2,662 | — | — | — | 2,662 | ||||||||||||
Balances at December 31, 2016 | $ | 302,832 | $ | 40,521 | $ | 410,979 | $ | (93,194 | ) | $ | (343,256 | ) | $ | 317,882 | ||||
Net earnings | — | — | 14,448 | — | — | 14,448 | ||||||||||||
Changes in fair market value of hedges, net of tax | — | — | — | 110 | — | 110 | ||||||||||||
Changes in unrealized pension cost, net of tax | — | — | — | 13,687 | — | 13,687 | ||||||||||||
Cumulative translation adjustment, net of tax | — | — | — | 437 | — | 437 | ||||||||||||
Cash dividends of $0.16 per share | — | — | (5,267 | ) | — | — | (5,267 | ) | ||||||||||
Issued shares on vesting of restricted stock units | 1,945 | (3,549 | ) | — | — | — | (1,604 | ) | ||||||||||
Stock compensation | — | 4,112 | — | — | — | 4,112 | ||||||||||||
Balances at December 31, 2017 | $ | 304,777 | $ | 41,084 | $ | 420,160 | $ | (78,960 | ) | $ | (343,256 | ) | $ | 343,805 | ||||
Net earnings | — | — | 46,532 | — | — | 46,532 | ||||||||||||
Changes in fair market value of hedges, net of tax | — | — | — | 795 | — | 795 | ||||||||||||
Changes in unrealized pension cost, net of tax | — | — | — | (1,830 | ) | — | (1,830 | ) | ||||||||||
Cumulative translation adjustment, net of tax | — | — | — | (311 | ) | — | (311 | ) | ||||||||||
Cash dividends of $0.16 per share | — | — | (5,278 | ) | — | — | (5,278 | ) | ||||||||||
Acquired 342,100 shares for treasury stock | — | — | — | — | (9,440 | ) | (9,440 | ) | ||||||||||
Issued shares on vesting of restricted stock units | 1,920 | (3,389 | ) | — | — | — | (1,469 | ) | ||||||||||
Implementation of ASU No. 2018-02 (see Note 1) | — | — | 17,433 | (17,433 | ) | — | — | |||||||||||
Stock compensation | — | 5,125 | — | — | — | 5,125 | ||||||||||||
Balances at December 31, 2018 | $ | 306,697 | $ | 42,820 | $ | 478,847 | $ | (97,739 | ) | $ | (352,696 | ) | $ | 377,929 |
The accompanying notes are an integral part of the consolidated financial statements.
(in thousands, except for share and per share data)
NOTE 1 — Summary of Significant Accounting Policies
Description of Business:
CTS Corporation ("CTS", "we", "our", "us" or the "Company") is a global manufacturer of sensors,Principles of Consolidation:
The consolidated financial statements include the accounts of CTS and itsUse of Estimates:
The preparation of financial statements in conformity with the accounting principles generally accepted in the United States of America ("U.S. GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates.Cash and Cash Equivalents:
All highly liquid investments with maturities of three months or less at the date of purchase are considered to be cash equivalents.Accounts Receivable and Allowance for Doubtful Accounts:
Concentration of Credit Risk:
Financial instruments that potentially subject us to concentrations of credit risk consist of cash and cash equivalents and trade receivables. Our cash and cash equivalents, at times, may exceed federally insured limits. Cash and cash equivalents are deposited primarily in banking institutions with global operations. We have not experienced any losses in such accounts. We believe we are not exposed to any significant credit riskTrade receivables subject us to the potential for credit risk with major customers. We sell our products to customers principally in the aerospace and defense, industrial, information technology, medical, telecommunications, and transportation markets, primarily in North America, Europe, and Asia. We perform ongoing credit evaluations of our customers to minimize credit risk. We do not require collateral. The allowance for doubtful accountscredit losses is based on management's estimates of the collectability of its accounts receivable after analyzing historical bad debts,credit losses, customer concentrations, customer creditworthiness, and current economic trends.trends, specific customer collection issues, and reasonable and supportable forecasts that affect the collectability of the remaining cash flows over the contractual terms of our receivables. Uncollectible trade receivables are charged against the allowance for doubtful accountscredit losses when all reasonable efforts to collect the amounts due have been exhausted.
Our net sales to significant customers as a percentage of total net sales were as follows:
|
| Years Ended December 31, |
| ||||||
|
| 2021 |
|
| 2020 |
|
| 2019 |
|
Cummins Inc. |
| 15.0% |
|
| 13.1% |
|
| 16.1% |
|
Toyota Motor Corporation |
| 12.4% |
|
| 13.4% |
|
| 11.6% |
|
Years Ended December 31, | |||
2018 | 2017 | 2016 | |
Cummins Inc. | 15.2% | 13.4% | 9.9% |
Honda Motor Co. | 10.5% | 11.2% | 10.7% |
Toyota Motor Corporation | 10.5% | 10.2% | 10.4% |
We sell automotive parts to these threetwo transportation customers for certain vehicle platforms under purchase agreements that have no volume commitments and are subject to purchase orders issued from time to time.
No other customer accounted for 10% or more of total net sales during these periods.
Inventories:
We value our inventories at the lower of the actual cost to purchase or manufactureRetirement Plans:
We have various defined benefit and defined contribution retirement plans. Our policy is to annually fund the defined benefit pension plans at or above the minimum required by law. We: 1) recognize the funded status of a benefit planCTS CORPORATION 33
(measured as the difference between plan assets at fair value and the projected benefit obligation) in our Consolidated Balance Sheets; 2) recognize the gains or losses and prior service costs or credits that arise during the period but are not recognized as components of net periodic benefit/cost as a component of other comprehensive earnings; and 3) measure defined benefit plan assets and obligations as of the date of our fiscal year-end.
During 2020, the Company commenced the termination process for its primary U.S. Pension Plan (“U.S. Plan”) and expects to complete the termination process in the first half of 2022. See Note 6,7, "Retirement Plans" for further information.
Property, Plant and Equipment:
Property, plant and equipment is stated atIncome Taxes:
We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, we determine deferred tax assets and liabilities on the basis of the differences between the financial statement and tax bases of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.We recognize deferred tax assets to the extent that we believe that these assets are more-likely-than-not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If we determine that we would be able to realize our deferred tax assets in the future in excess of their net recorded amount, we would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes. In 2016, we elected to early adopt Accounting Standards Update ("ASU") No. 2015-17
We record uncertain tax positions in accordance with Accounting Standards Codification ("ASC") Topic 740 on the basis of a two-step process in which (1) we determine whether it is more-likely-than-not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority.
We recognize interest and penalties related to unrecognized tax benefits on the income tax expense line in the accompanying Consolidated Statements of Operations.(Loss) Earnings. Accrued interest and penalties are included onin the related tax liability line in the Consolidated Balance Sheets.
See Note 18,19, "Income Taxes" for further information.
Goodwill and Indefinite-lived Intangible Assets:
Goodwill represents the excess of the purchase price over the fair values of the net assets acquired in a business combination.Based upon our fourth quarter, or more frequently if events or changes in circumstances indicatelatest assessment, we determined that the carrying value may not be recoverable.
In addition to goodwill, we also havehad an acquired in-process research and development ("IPR&D") intangible assetsasset that arewas treated as indefinite-lived intangible assets and therefore was not subject to amortization until the completion or abandonment of the associated research and development efforts. If these efforts are abandonedIn the third quarter of 2020, due to the restructuring actions further outlined in Note 9, we identified a triggering event associated with a specific asset group including IPR&D due to executed restructuring actions. This resulted in the future, the carrying valuerecognition of the IPR&D asset will be expensed. If the research$2,200 of impairment charges, and development efforts are successfully completed, the IPR&D will be reclassifieda revaluation of associated contingent liabilities totaling $1,900. The net impact of $300 was recorded as a finite-lived asset and amortized over its useful life.
Other Intangible Assets and Long-lived Assets:
We account for long-lived assets (excluding indefinite-lived intangible assets) in accordance with the provisions of ASCCTS CORPORATION 34
disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
Intangible assets (excluding indefinite-lived intangible assets) consist primarily of technology, customer lists and relationships, patents, and trade names. These assets are recorded at cost and usually amortized on a straight-line basis over their estimated lives. We assess useful lives based on the period over which the asset is expected to contribute to cash flows.
Revenue Recognition:
Research and Development:
Research and development ("R&D") costs include expenditures for search and investigation aimed at discovery of new knowledge to be used to develop new products or processes or to significantly enhance existing products or production processes. R&D costs also include the implementation of new knowledge through design, testing of product alternatives, or construction of prototypes. We expense all R&D costs as incurred, net of customer reimbursements for sales of prototypes and non-recurring engineering charges.We create prototypes and tools related to R&D projects. A prototype is defined as a constructed product not intended for production resulting in a commercial sale. We also incur engineering costs related to R&D activities. Such costs are incurred to support such activities to improve the reliability, performance and cost-effectiveness of our existing products and to design and develop innovative products that meet customer requirements for new applications. Furthermore, we may engage in activities that develop tooling machinery and equipment for our customers.
We occasionally enter into agreements with our customers whereby we receive a contractual guarantee based on achieving milestones to be reimbursed the costs we incur in the product development process or to construct molds, dies, and other tools that are used to make many of the products we sell. The costs we incur are included in other current assets on the Consolidated Balance Sheets until reimbursement is received from the customer. Reimbursements received from customers are netted against such costs and included in our Consolidated Statements of (Loss) Earnings if the amount received is in excess of the costs that we incur. The following is a summary of amounts to be received from customers as of December 31, 20182021 and 2017:2020:
|
| As of December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Cost of molds, dies and other tools included in other current assets |
| $ | 4,497 |
|
| $ | 4,895 |
|
December 31, | ||||||
2018 | 2017 | |||||
Cost of molds, dies and other tools included in other current assets | $ | 5,388 | $ | 3,382 |
Years Ended December 31, | ||||||
2018 | 2017 | |||||
Reimbursements received from customers | $ | 4,483 | $ | 4,299 |
Financial Instruments:
We use forward contracts to mitigate currency risk related to forecasted foreign currency revenue and costs. These forward contracts are designed as cash flow hedges. At least quarterly, we assess the effectiveness of these hedging relationships based on the total change in their fair value using regression analysis. In addition, we use interest rate swaps to convert a portion of our revolving credit facility's variable rate of interest into a fixed rate. As a result of the use of these derivative instruments, the Company is exposed to the risk that counterparties to derivative contracts will fail to meet their contractual obligations. To mitigate the counterparty credit risk, the Company has a policy of only entering into contracts with carefully selected major financial institutions based upon their credit ratings and other factors and by using netting agreements. OurWe estimate the fair value of our financial instruments as follows:
Instrument | Method for determining fair value | |
Cash, cash equivalents, accounts receivable and accounts payable | Cost, approximates fair value due to the short-term nature of these instruments. | |
Revolving credit facility | The fair value of long-term debt approximates carrying value and was determined by valuing a similar hypothetical coupon bond and attributing that value to our credit facility. | |
Interest rate swaps and forward contracts | The fair value of our interest rate swaps and forward contracts are measured using a market approach which uses current industry information. |
CTS CORPORATION 35
Debt Issuance Costs:
We have debt issuance costs related to our long-term debt that are being amortized using the straight-line method over theStock-Based Compensation:
We recognize expense related to the fair value of stock-based compensation awards, consisting of restricted stock units ("RSUs"), cash-settled restricted stock units, performance share units ("PSUs"), and stock options, in the Consolidated Statements of (Loss) Earnings.We estimate the fair value of stock option awards on the date of grant using the Black-Scholes option pricing model. A number of assumptions are used by the Black-Scholes option pricing model to compute the grant date fair value of an award, including expected price volatility, option term, risk-free interest rate, and dividend yield. These assumptions are established at each grant date based upon current information at that time. Expected volatilities are based on historical volatilities of CTS'CTS common stock. The expected option term is derived from historical data of exercise behavior. Actual option terms can differ from the expected option terms as a result of different groups of employees exhibiting different exercise behavior. The dividend yield is based on historical dividend payments. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve at the time of grant. The fair value of awards that are ultimately expected to vest is recognized as expense over the requisite service periods of the awards in the Consolidated Statements of (Loss) Earnings.
The grant date fair values of our service-based and performance-based RSUs are the closing price of our common stock on the date of grant. The grant date fair value of our market-based RSUs is determined by using a simulation, or Monte Carlo, approach. Under this approach, stock returns from a comparative group of companies are simulated over the performance period, considering both stock price volatility and the correlation of returns. The simulated results are then used to estimate the future payout based on the performance and payout relationship established by the conditions of the award. The future payout is discounted to the measurement date using the risk-free interest rate.
Both our stock option and RSU awards primarily have a graded vesting schedule. We recognize expense on a straight-line basis over the requisite service period for each separately vesting portion of the award as if the award was, in substance, multiple awards. Compensation expense for PSUs is measured by determining the fair value of the award using the closing share price on the grant date and is recognized ratably from the grant date to the vesting date for the number of awards expected to vest. The amount of compensation expense recognized for PSUs is dependent upon a quarterly assessment of the likelihood of achieving the performance conditions and is subject to adjustment based on management's assessment of the Company's performance relative to the target number of shares performance criteria. Forfeitures are recorded as they occur.
See Note 16,17, "Stock-Based Compensation" for further information.
(Loss)Earnings Per Share:
Basic (loss) earnings per share excludes any dilution and is computed by dividing net (loss) earnings available to common shareholders by the weighted-average number of common shares outstanding for the period.Diluted earnings per share is calculated by adding all potentially dilutive shares todividing net earnings by the weighted average number ofshares outstanding assuming dilution. Dilutive common shares outstanding is computed using the Treasury Stock Method and reflects the additional shares that would be outstanding if dilutive stock options were exercised, and restricted stock units were settled for common shares during the denominator.period. In addition, dilutive shares include any shares issuable related to performance share units for which the performance conditions would have been met as of the end of the period and therefore would be considered contingently issuable. If the common stock equivalents have an anti-dilutive effect, they are excluded from the computation of diluted earnings per share.
Our antidilutive stock options and RSUssecurities consist of the following:
|
| Years Ended December 31, |
| |||||||||
(units) |
| 2021 |
|
| 2020 |
|
| 2019 |
| |||
Antidilutive securities |
|
| 0 |
|
|
| 26,140 |
|
|
| 22,040 |
|
Years Ended December 31, | ||||||
(units) | 2018 | 2017 | 2016 | |||
Antidilutive stock options and RSUs | 18,138 | 22,110 | 35,189 |
Foreign Currencies:
The financial statements of our non-U.S. subsidiaries, except the United Kingdom ("U.K.") subsidiary, are remeasured into U.S. dollars using the U.S. dollar as the functional currency with all remeasurement adjustments included in the determination of net (loss) earnings.CTS CORPORATION 36
Foreign currency (losses) gains (losses) recorded in the Consolidated StatementStatements of (Loss) Earnings includes the following:
|
| Years Ended December 31, |
| |||||||||
|
| 2021 |
|
| 2020 |
|
| 2019 |
| |||
Foreign currency (losses) gains |
| $ | (3,305 | ) |
| $ | 5,316 |
|
| $ | (1,797 | ) |
Years Ended December 31, | |||||||||
2018 | 2017 | 2016 | |||||||
Foreign currency (losses) gains | $ | (2,619 | ) | $ | 3,052 | $ | (3,714 | ) |
The assets and liabilities of our U.K. subsidiary are translated into U.S. dollars at the current exchange rate at period end, with the resulting translation adjustments made directly to the "accumulated other comprehensive loss" component of shareholders' equity. Our Consolidated StatementStatements of (Loss) Earnings accounts are translated at the average rates during the period.
Shipping and Handling:
All fees billed to the customer for shipping and handling are classified as a component of net sales. All costs associated with shipping and handling are classified as a component of cost of goods sold or operating expenses, depending on the nature of the underlying purchase.Sales Taxes:
When applicable, we classify sales taxes on a net basis in our consolidated financial statements.Reclassifications:
Certain reclassifications have been made to prior year amounts to conform to the current year presentation. The reclassifications had no impact on previously reported net earnings.Accounting Pronouncements
ASU No. 2018-14
In August 2018,March 2020, the Financial Accounting Standards Board ("FASB"(“FASB”) issued Accounting Standards Update (“ASU”) 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides temporary optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting as it relates to our LIBOR indexed instruments. ASU 2020-04 provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. ASU 2020-04 is effective for all entities as of March 12, 2020 through December 31, 2022, and an entity may elect to apply ASU 2020-04 for contract modifications by Topic or Industry Subtopic as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued.
We amended and restated our credit and underlying interest rate swap agreements effective December 15, 2021. We have elected to continue to apply hedge accounting as we have determined that the hedge remains effective. See Note 13 for further discussion of the credit agreement modification.
ASU No. 2018-14,
In December 15, 2020 and for interim periods therein with early adoption permitted. Adoption on a retrospective basis for all periods presented is required. This ASU will impact our financial statement disclosures but will not have an impact on our consolidated financial position, results of operations, or cash flows.
NOTE 2 – Revenue Recognition
The core principle of ASC 606 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance provides a five-step process to achieve that core principle:
• | Identify the contract(s) with a customer |
• | Identify the performance obligations |
• | Determine the transaction price |
• | Allocate the transaction price |
• | Recognize revenue when the performance obligations are met |
CTS CORPORATION 37
We recognize revenue when the performance obligations specified in our contracts have been satisfied, after considering the impact of variable consideration and other factors that may affect the transaction price. Our contracts normally contain a single performance obligation that is fulfilled on the date of delivery based on shipping terms stipulated in the contract. We usually expect payment within 30 to 90 days from the shipping date, depending on our terms with the customer. None of our contracts as of December 31, 2018, contained a significant financing component. Differences between the amount of revenue recognized and the amount invoiced, collected from, or paid to our customers are recognized as contract assets or liabilities. Contract assets will be reviewed for impairment when events or circumstances indicate that they may not be recoverable.
To the extent the transaction price includes variable consideration, we estimate the amount of variable consideration that should be included in the transaction price utilizing the most likely amountvalue method based on an analysis of historical experience and current facts and circumstances, which requiresmay require significant judgment. Variable consideration is included in the transaction price if, in our judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur.
As of | |||||||
December 31, | December 31, | ||||||
2018 | 2017 | ||||||
Contract Assets | |||||||
Prepaid rebates included in Other current assets | $ | 65 | $ | 52 | |||
Prepaid rebates included in Other assets | 999 | 465 | |||||
Total Contract Assets | $ | 1,064 | $ | 517 | |||
Contract Liabilities | |||||||
Customer discounts and price concessions included in Accrued liabilities | $ | (1,656 | ) | $ | (1,133 | ) | |
Customer rights of return included in Accrued liabilities | (325 | ) | (462 | ) | |||
Total Contract Liabilities | $ | (1,981 | ) | $ | (1,595 | ) |
Disaggregated Revenue
The following table presents revenues disaggregated by the major markets we serve:
|
| Years Ended December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Transportation |
| $ | 284,080 |
|
| $ | 241,445 |
|
Industrial |
|
| 133,371 |
|
|
| 104,224 |
|
Medical |
|
| 48,159 |
|
|
| 39,070 |
|
Aerospace & Defense |
|
| 47,315 |
|
|
| 39,327 |
|
Total |
| $ | 512,925 |
|
| $ | 424,066 |
|
Three Months Ended | Twelve Months Ended | ||||||||||||||
December 31, 2018 | December 31, 2017 | December 31, 2018 | December 31, 2017 | ||||||||||||
Transportation | $ | 76,729 | $ | 71,566 | $ | 300,124 | $ | 275,251 | |||||||
Industrial | 21,164 | 19,537 | 86,968 | 74,605 | |||||||||||
Medical | 11,370 | 10,474 | 40,663 | 35,264 | |||||||||||
Aerospace & Defense | 6,504 | 4,978 | 23,323 | 18,813 | |||||||||||
Telecom & IT | 4,306 | 4,355 | 19,405 | 19,060 | |||||||||||
Total | $ | 120,073 | $ | 110,910 | $ | 470,483 | $ | 422,993 |
NOTE 3 - Business Acquisitions
Sensor Scientific, Inc.
On December 30, 2020, we acquired 100% of the outstanding shares of Sensor Scientific, Inc. (“SSI”). SSI is a manufacturer of high-quality thermistors and temperature sensor assemblies serving original equipment manufacturers (“OEMs”) for applications that require precision and reliability in the medical, industrial and defense markets. SSI has complementary capabilities with our existing temperature sensing platform and the acquisition expands our presence in the medical and industrial end markets. It also provides high quality ceramic processing capabilities and valuable customer partnerships that expand our temperature sensing product portfolio and build on our strategy to focus on innovative products that sense, connect and move.
The final purchase price, which includes changes in working capital, of $10,221 has been allocated to the fair values of assets and liabilities acquired as of December 30, 2020.
The following table summarizes the consideration paid and the fair values of the assets acquired, and the liabilities assumed at the date of acquisition:
|
| Consideration Paid |
| |
Cash paid, net of cash acquired of $470 |
| $ | 8,221 |
|
Contingent consideration |
|
| 2,000 |
|
Purchase price |
| $ | 10,221 |
|
|
| Fair Values at December 30, 2020 |
| |
Current assets |
| $ | 2,551 |
|
Property, plant and equipment |
|
| 67 |
|
Other assets |
|
| 14 |
|
Goodwill |
|
| 3,321 |
|
Intangible assets |
|
| 5,340 |
|
Fair value of assets acquired |
|
| 11,293 |
|
Less fair value of liabilities acquired |
|
| (1,072 | ) |
Purchase price |
| $ | 10,221 |
|
CTS CORPORATION 38
Goodwill represents value the Company expects to be created by combining the operations of the acquired business with the Company's operations, including the expansion of customer relationships, access to new customers, and potential cost savings and synergies. Goodwill related to the acquisition is expected to be deductible for tax purposes.
All contingent consideration is payable in cash and is based on success factors related to the integration process as well as upon the achievement of a revenue performance target through the year ending December 31, 2022. The Company recorded $2,000 as the acquisition date fair value of the contingent consideration based on an estimate of the probability of achieving the performance targets. This represents the maximum amount of contingent consideration payable. This amount is also reflected as an addition to the purchase price and will be evaluated quarterly. Refer to Note 18 for further information on contingent consideration.
The following table summarizes the carrying amounts and weighted average lives of the acquired intangible assets:
|
| Carrying Value |
|
| Weighted Average Amortization Period |
| ||
Customer lists/relationships |
| $ | 5,200 |
|
|
| 11.0 |
|
Trademarks, tradenames, and other intangibles |
|
| 140 |
|
|
| 3.0 |
|
Total |
| $ | 5,340 |
|
|
|
|
|
Quality Thermistor, Inc.
On July 31, 2019, we acquired 100% of the outstanding shares of Quality Thermistor, Inc. (“QTI”) for $75 million plus a contingent earn out of up to $5 million based on sales performance objectives. The purchase price includes adjustments for debt assumed and changes in working capital. QTI, doing business as QTI Sensing Solutions, is a leading designer and manufacturer of high-quality temperature sensors serving original equipment manufacturers with mission-critical applications in the industrial, aerospace, defense and medical markets. This acquisition provides us with a new core temperature sensing technology that expands our sensing product portfolio, while increasing our presence in the industrial and medical markets.
The final purchase price of $73,906 has been allocated to the fair values of assets and liabilities acquired as of July 31, 2019.
The following table summarizes the consideration paid and the fair values of the assets acquired, and the liabilities assumed at the date of acquisition:
|
| Consideration Paid |
| |
Cash paid, net of cash acquired of $567 |
| $ | 72,850 |
|
Contingent consideration |
|
| 1,056 |
|
Purchase price |
| $ | 73,906 |
|
|
| Fair Values at July 31, 2019 |
| |
Current assets |
| $ | 6,221 |
|
Property, plant and equipment |
|
| 2,567 |
|
Other assets |
|
| 29 |
|
Goodwill |
|
| 34,999 |
|
Intangible assets |
|
| 32,800 |
|
Fair value of assets acquired |
|
| 76,616 |
|
Less fair value of liabilities acquired |
|
| (2,710 | ) |
Purchase price |
| $ | 73,906 |
|
Goodwill represents value the Company expects to be created by combining the operations of the acquired business with the Company's operations, including the expansion of customer relationships within our existing business, access to new customers, and potential cost savings and synergies. Goodwill related to the acquisition is expected to be deductible for tax purposes.
The contingent earn-out was payable in cash upon the achievement of a revenue performance target for the year ending December 31, 2019. The Company recorded contingent consideration for the earn out of $1,056 as of December 31, 2019 based on the achievement of the revenue performance target for the full year 2019 results and the balance was paid out in the first quarter of 2020. This amount was reflected as an addition to purchase price and was settled in the first quarter of 2020.
CTS CORPORATION 39
The following table summarizes the carrying amounts and weighted average lives of the acquired intangible assets:
|
| Carrying Value |
|
| Weighted Average Amortization Period |
| ||
Customer lists/relationships |
| $ | 31,000 |
|
|
| 15.0 |
|
Trademarks, tradenames, and other intangibles |
|
| 1,800 |
|
|
| 5.0 |
|
Total |
| $ | 32,800 |
|
|
|
|
|
Results of operations for QTI are included in our consolidated financial statements beginning on July 31, 2019. The amount of net sales and net loss from QTI since the acquisition date that have been included in the Consolidated Statements of (Loss) Earnings are as follows:
|
| For the period July 31, 2019 through December 31, 2019 |
| |
Net sales |
| $ | 9,252 |
|
Net loss |
| $ | (465 | ) |
NOTE 4 — Accounts Receivable,
The components of accounts receivable, net are as follows:
|
| As of December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Accounts receivable, gross |
| $ | 83,848 |
|
| $ | 81,745 |
|
Less: Allowance for credit losses |
|
| (1,657 | ) |
|
| (764 | ) |
Accounts receivable, net |
| $ | 82,191 |
|
| $ | 80,981 |
|
As of December 31, | ||||||
2018 | 2017 | |||||
Accounts receivable, gross | $ | 79,902 | $ | 70,941 | ||
Less: Allowance for doubtful accounts | (384 | ) | (357 | ) | ||
Accounts receivable, net | $ | 79,518 | $ | 70,584 |
NOTE 45 — Inventories,
Inventories, net consist of the following:
|
| As of December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Finished goods |
| $ | 11,955 |
|
| $ | 10,647 |
|
Work-in-process |
|
| 18,878 |
|
|
| 16,927 |
|
Raw materials |
|
| 28,078 |
|
|
| 24,893 |
|
Less: Inventory reserves |
|
| (9,405 | ) |
|
| (6,597 | ) |
Inventories, net |
| $ | 49,506 |
|
| $ | 45,870 |
|
As of December 31, | ||||||
2018 | 2017 | |||||
Finished goods | $ | 10,995 | $ | 9,203 | ||
Work-in-process | 12,129 | 12,065 | ||||
Raw materials | 25,746 | 21,150 | ||||
Less: Inventory reserves | (5,384 | ) | (5,822 | ) | ||
Inventories, net | $ | 43,486 | $ | 36,596 |
NOTE 56 — Property, Plant and Equipment,
Property, plant and equipment, net is comprised of the following:
|
| As of December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Land and land improvements |
| $ | 1,095 |
|
| $ | 1,095 |
|
Buildings and improvements |
|
| 69,614 |
|
|
| 69,360 |
|
Machinery and equipment |
|
| 247,708 |
|
|
| 233,743 |
|
Less: Accumulated depreciation |
|
| (221,541 | ) |
|
| (206,761 | ) |
Property, plant and equipment, net |
| $ | 96,876 |
|
| $ | 97,437 |
|
As of December 31, | ||||||
2018 | 2017 | |||||
Land | $ | 1,136 | $ | 1,130 | ||
Buildings and improvements | 70,522 | 64,201 | ||||
Machinery and equipment | 231,619 | 223,650 | ||||
Less: Accumulated depreciation | (203,876 | ) | (200,734 | ) | ||
Property, plant and equipment, net | $ | 99,401 | $ | 88,247 |
CTS CORPORATION 40
Depreciation expense recorded in the Consolidated Statements of (Loss) Earnings includes the following:
|
| For the Years Ended |
| |||||||||
|
| 2021 |
|
| 2020 |
|
| 2019 |
| |||
Depreciation expense |
| $ | 17,517 |
|
| $ | 17,615 |
|
| $ | 16,849 |
|
For the Years Ended | |||||||||
2018 | 2017 | 2016 | |||||||
Depreciation expense | $ | 15,697 | $ | 14,071 | $ | 13,177 |
NOTE 67 — Retirement Plans
We have a number of2 active noncontributory defined benefit pension plans ("pension plans") covering approximatelyless than 1% of our active employees. Pension plans covering salaried employees provide pension benefits that are based on the employees´ years of service and compensation prior to retirement. Pension plans covering hourly employees generally provide benefits of stated amounts for each year of service.
We also provide post-retirement life insurance benefits for certain retired employees. Domestic employees who were hired prior to 1982 and certain domesticformer union employees are eligible for life insurance benefits upon retirement. We fund life insurance benefits through term life insurance policies and intend to continue funding all of the premiums on a pay-as-you-go basis.
We recognize the funded status of a benefit plan in our consolidated balance sheets. The funded status is measured as the difference between plan assets at fair value and the projected benefit obligation. We also recognize, as a component of other comprehensive income,earnings, net of tax, the gains or losses and prior service costs or credits that arise during the period but are not recognized as components of net periodic benefit/cost.
The measurement dates for the pension plans for our U.S. and non-U.S. locations were December 31, 2018,2021, and 2017.
In February 2020, the CTS Board of Directors authorized management to explore termination of the U.S.-based pension plan ("Plan"), subject to certain conditions. On June 1, 2020, we entered into the Fifth Amendment to the Plan whereby we set an effective termination date for the Plan of July 31, 2020. In February 2021, we received a one-timedetermination letter from the Internal Revenue Service that allowed us to proceed with the termination process for the Plan. During the second quarter of 2021, the Company offered the option to receiveof receiving a lump sum distributionpayment to eligible participants with vested qualified Plan benefits in lieu of their benefits from pension plan assets. The pension plan made approximately $23,912 inreceiving monthly annuity payments. Approximately 365 participants elected to receive the settlement, and lump sum payments to settle its obligationof approximately $35,594 were made from Plan assets to these participants. Theseparticipants in June 2021.
As required under U.S. GAAP, the Company recognizes a settlement payments decreasedgain or loss when the aggregate amount of lump-sum distributions to participants equals or exceeds the sum of the service and interest cost components of the net periodic pension cost. The amount of settlement gain or loss recognized is the pro rata amount of the existing unrealized gain or loss immediately prior to the settlement. In general, both the projected benefit obligation and fair value of plan assets by $23,912,are required to be remeasured in order to determine the settlement gain or loss.
Upon the partial settlement of the pension liability due to the lump sum offering in the second quarter of 2021, the Company recognized a non-cash and resulted in a non-cashnon-operating settlement charge of $13,476$20,063 related to pension losses, reclassified from accumulated other comprehensive loss to other (income) expense in the Company's Condensed Consolidated Statements of (Loss) Earnings.
On July 29, 2021, the Plan purchased a group annuity contract that transferred our benefit obligations for approximately 2,700 CTS participants and beneficiaries in the United States (“Transferred Participants”). As part of the purchase of the group annuity contract, Plan benefit obligations and related annuity administration services for Transferred Participants were irrevocably assumed and guaranteed by the insurance company effective as of August 3, 2021. There will be no change to pension benefits for Transferred Participants. The purchase of the group annuity contract was fully funded directly by Plan assets.
As a result of the final settlement of the pension liability with the purchase of annuities, we reclassified the remaining related unrecognized net actuarialpension losses of $106,206 that were previously includedrecorded in accumulated other comprehensive loss.loss to the Consolidated Statements of (Loss) Earnings.
In January 2022, we transferred approximately $17,500 of funds from Plan assets to a qualified replacement plan (QRP) managed by the Company. This plan requires that these assets be used to fund future annual Company contributions to our U.S. 401(k) program. The measurement datePlan assets of this settlement was$49,382 as of December 31, 2017.
CTS CORPORATION 41
The following table provides a reconciliation of benefit obligation, plan assets, and the funded status of the pension plans for U.S. and non-U.S. locations at the measurement dates.
|
| U.S. Pension Plans |
|
| Non-U.S. Pension Plans |
| ||||||||||
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
Accumulated benefit obligation |
| $ | 1,008 |
|
| $ | 230,205 |
|
| $ | 1,957 |
|
| $ | 1,983 |
|
Change in projected benefit obligation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation at January 1 |
| $ | 230,205 |
|
| $ | 220,339 |
|
| $ | 2,686 |
|
| $ | 2,633 |
|
Service cost |
|
| 0 |
|
|
| 0 |
|
|
| 26 |
|
|
| 31 |
|
Interest cost |
|
| 2,861 |
|
|
| 5,773 |
|
|
| 17 |
|
|
| 28 |
|
Benefits paid |
|
| (12,206 | ) |
|
| (14,590 | ) |
|
| (476 | ) |
|
| (285 | ) |
Actuarial (gain) loss |
|
| (3,533 | ) |
|
| 18,683 |
|
|
| 44 |
|
|
| 95 |
|
Plan settlements |
|
| (216,319 | ) |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
Foreign exchange impact |
|
| 0 |
|
|
| 0 |
|
|
| 38 |
|
|
| 184 |
|
Projected benefit obligation at December 31 |
| $ | 1,008 |
|
| $ | 230,205 |
|
| $ | 2,335 |
|
| $ | 2,686 |
|
Change in plan assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets at fair value at January 1 |
| $ | 285,675 |
|
| $ | 281,276 |
|
| $ | 1,595 |
|
| $ | 1,419 |
|
Actual return on assets |
|
| (7,967 | ) |
|
| 18,886 |
|
|
| 28 |
|
|
| 95 |
|
Company contributions |
|
| 199 |
|
|
| 103 |
|
|
| 252 |
|
|
| 268 |
|
Benefits paid |
|
| (12,206 | ) |
|
| (14,590 | ) |
|
| (476 | ) |
|
| (285 | ) |
Plan settlements |
|
| (216,319 | ) |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
Foreign exchange impact |
|
| 0 |
|
|
| 0 |
|
|
| 22 |
|
|
| 98 |
|
Assets at fair value at December 31 |
| $ | 49,382 |
|
| $ | 285,675 |
|
| $ | 1,421 |
|
| $ | 1,595 |
|
Funded status (plan assets less projected benefit obligations) |
| $ | 48,374 |
|
| $ | 55,470 |
|
| $ | (914 | ) |
| $ | (1,091 | ) |
U.S. Pension Plans | Non-U.S. Pension Plans | ||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||
Accumulated benefit obligation | $ | 205,319 | $ | 228,934 | $ | 1,936 | $ | 2,535 | |||||
Change in projected benefit obligation: | |||||||||||||
Projected benefit obligation at January 1 | $ | 228,934 | $ | 247,276 | $ | 3,140 | $ | 2,866 | |||||
Service cost | — | — | 43 | 48 | |||||||||
Interest cost | 7,123 | 8,273 | 42 | 34 | |||||||||
Benefits paid | (14,781 | ) | (39,177 | ) | (669 | ) | (210 | ) | |||||
Actuarial (gain) loss | (15,957 | ) | 12,562 | 287 | 164 | ||||||||
Foreign exchange impact | — | — | (87 | ) | 238 | ||||||||
Projected benefit obligation at December 31 | $ | 205,319 | $ | 228,934 | $ | 2,756 | $ | 3,140 | |||||
Change in plan assets: | |||||||||||||
Assets at fair value at January 1 | $ | 284,762 | $ | 292,044 | $ | 1,777 | $ | 1,523 | |||||
Actual return on assets | (11,757 | ) | 31,559 | 67 | 17 | ||||||||
Company contributions | 103 | 336 | 300 | 319 | |||||||||
Benefits paid | (14,781 | ) | (39,177 | ) | (669 | ) | (210 | ) | |||||
Foreign exchange impact | — | — | (50 | ) | 128 | ||||||||
Assets at fair value at December 31 | $ | 258,327 | $ | 284,762 | $ | 1,425 | $ | 1,777 | |||||
Funded status (plan assets less projected benefit obligations) | $ | 53,008 | $ | 55,828 | $ | (1,331 | ) | $ | (1,363 | ) |
*Actual return on plan assets is net of expected investment expenses and certain administrative expenses.
The measurement dates for the post-retirement life insurance plan were December 31, 2018,2021, and 2017.2020. The following table provides a reconciliation of benefit obligation, plan assets, and the funded status of the post-retirement life insurance plan at those measurement dates.
|
| Post-Retirement Life Insurance Plan |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Accumulated benefit obligation |
| $ | 5,231 |
|
| $ | 5,376 |
|
Change in projected benefit obligation: |
|
|
|
|
|
|
|
|
Projected benefit obligation at January 1 |
| $ | 5,376 |
|
| $ | 4,766 |
|
Service cost |
|
| 1 |
|
|
| 1 |
|
Interest cost |
|
| 80 |
|
|
| 122 |
|
Benefits paid |
|
| (151 | ) |
|
| (154 | ) |
Actuarial (gain) loss |
|
| (75 | ) |
|
| 641 |
|
Projected benefit obligation at December 31 |
| $ | 5,231 |
|
| $ | 5,376 |
|
Change in plan assets: |
|
|
|
|
|
|
|
|
Assets at fair value at January 1 |
| $ | 0 |
|
| $ | 0 |
|
Actual return on assets |
|
| 0 |
|
|
| 0 |
|
Company contributions |
|
| 151 |
|
|
| 154 |
|
Benefits paid |
|
| (151 | ) |
|
| (154 | ) |
Other |
|
| 0 |
|
|
| 0 |
|
Assets at fair value at December 31 |
| $ | 0 |
|
| $ | 0 |
|
Funded status (plan assets less projected benefit obligations) |
| $ | (5,231 | ) |
| $ | (5,376 | ) |
Post-Retirement Life Insurance Plan | ||||||
2018 | 2017 | |||||
Accumulated benefit obligation | $ | 4,595 | $ | 5,134 | ||
Change in projected benefit obligation: | ||||||
Projected benefit obligation at January 1 | $ | 5,134 | $ | 4,952 | ||
Service cost | 2 | 2 | ||||
Interest cost | 156 | 161 | ||||
Benefits paid | (157 | ) | (165 | ) | ||
Actuarial loss | (540 | ) | 184 | |||
Projected benefit obligation at December 31 | $ | 4,595 | $ | 5,134 | ||
Change in plan assets: | ||||||
Assets at fair value at January 1 | $ | — | $ | — | ||
Actual return on assets | — | — | ||||
Company contributions | 157 | 165 | ||||
Benefits paid | (157 | ) | (165 | ) | ||
Other | — | — | ||||
Assets at fair value at December 31 | $ | — | $ | — | ||
Funded status (plan assets less projected benefit obligations) | $ | (4,595 | ) | $ | (5,134 | ) |
The components of the prepaid (accrued) cost of the domestic and foreign pension plans are classified in the following lines in the Consolidated Balance Sheets at December 31:
CTS CORPORATION 42
|
| U.S. Pension Plans |
|
| Non-U.S. Pension Plans |
| ||||||||||
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
Prepaid pension asset |
| $ | 49,382 |
|
| $ | 56,642 |
|
| $ | 0 |
|
| $ | 0 |
|
Accrued expenses and other liabilities |
|
| (100 | ) |
|
| (100 | ) |
|
| 0 |
|
|
| 0 |
|
Long-term pension obligations |
|
| (908 | ) |
|
| (1,072 | ) |
|
| (914 | ) |
|
| (1,091 | ) |
Net prepaid (accrued) cost |
| $ | 48,374 |
|
| $ | 55,470 |
|
| $ | (914 | ) |
| $ | (1,091 | ) |
U.S.Pension Plans | Non-U.S. Pension Plans | ||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||
Prepaid pension asset | $ | 54,100 | $ | 57,050 | $ | — | $ | — | |||||
Accrued expenses and other liabilities | (100 | ) | (100 | ) | — | — | |||||||
Long-term pension obligations | (992 | ) | (1,122 | ) | (1,331 | ) | (1,363 | ) | |||||
Net prepaid (accrued) cost | $ | 53,008 | $ | 55,828 | $ | (1,331 | ) | $ | (1,363 | ) |
The components of the accrued cost of the post-retirement life insurance plan are classified in the following lines in the Consolidated Balance Sheets at December 31:
|
| Post-Retirement Life Insurance Plan |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Accrued expenses and other liabilities |
| $ | (489 | ) |
| $ | (451 | ) |
Long-term pension obligations |
|
| (4,742 | ) |
|
| (4,924 | ) |
Total accrued cost |
| $ | (5,231 | ) |
| $ | (5,375 | ) |
Post-Retirement Life Insurance Plan | ||||||
2018 | 2017 | |||||
Accrued expenses and other liabilities | $ | (407 | ) | $ | (418 | ) |
Long-term pension obligations | (4,188 | ) | (4,716 | ) | ||
Total accrued cost | $ | (4,595 | ) | $ | (5,134 | ) |
We have also recorded the following amounts to accumulated other comprehensive loss for the U.S. and non-U.S. pension plans, net of tax:
|
| U.S. Pension Plans |
|
| Non-U.S. Pension Plans |
| ||
|
| Unrecognized Loss |
|
| Unrecognized Loss |
| ||
Balance at January 1, 2020 |
| $ | 88,830 |
|
| $ | 1,900 |
|
Amortization of retirement benefits, net of tax |
|
| (4,995 | ) |
|
| (146 | ) |
Net actuarial gain |
|
| 7,402 |
|
|
| 14 |
|
Foreign exchange impact |
|
| 0 |
|
|
| 133 |
|
Balance at January 1, 2021 |
| $ | 91,237 |
|
| $ | 1,901 |
|
Amortization of retirement benefits, net of tax |
|
| (2,851 | ) |
|
| (152 | ) |
Net actuarial gain (loss) |
|
| 3,777 |
|
|
| 27 |
|
Settlement charges |
|
| (91,851 | ) |
|
| 0 |
|
Foreign exchange impact |
|
| 0 |
|
|
| 27 |
|
Balance at December 31, 2021 |
| $ | 312 |
|
| $ | 1,803 |
|
U.S.Pension Plans | Non-U.S. Pension Plans | ||||||
Unrecognized Loss | Unrecognized Loss | ||||||
Balance at January 1, 2017 | $ | 89,763 | $ | 1,743 | |||
Amortization of retirement benefits, net of tax | (3,685 | ) | 10 | ||||
Settlements | (8,585 | ) | — | ||||
Net actuarial (loss) gain | (1,753 | ) | 2 | ||||
Foreign exchange impact | — | 143 | |||||
Balance at January 1, 2018 | $ | 75,740 | $ | 1,898 | |||
Amortization of retirement benefits, net of tax | (4,538 | ) | (126 | ) | |||
Settlements | 19,083 | — | |||||
Net actuarial (loss) gain | (12,351 | ) | 196 | ||||
Foreign exchange impact | — | (52 | ) | ||||
Tax impact due to implementation of ASU 2018-02 | 17,560 | — | |||||
Balance at December 31, 2018 | $ | 95,494 | $ | 1,916 |
We have recorded the following amounts to accumulated other comprehensive loss for the post-retirement life insurance plan, net of tax:
|
| Unrecognized Gain |
| |
Balance at January 1, 2020 |
| $ | (608 | ) |
Amortization of retirement benefits, net of tax |
|
| 64 |
|
Net actuarial gain |
|
| 493 |
|
Balance at January 1, 2021 |
| $ | (51 | ) |
Amortization of retirement benefits, net of tax |
|
| 0 |
|
Net actuarial loss |
|
| (58 | ) |
Balance at December 31, 2021 |
| $ | (109 | ) |
Unrecognized Gain | |||
Balance at January 1, 2017 | $ | (560 | ) |
Amortization of retirement benefits, net of tax | 64 | ||
Net actuarial gain | 117 | ||
Balance at January 1, 2018 | $ | (379 | ) |
Amortization of retirement benefits, net of tax | 36 | ||
Net actuarial loss | (418 | ) | |
Tax impact due to implementation of ASU No. 2018-02 | (88 | ) | |
Balance at December 31, 2018 | $ | (849 | ) |
The accumulated actuarial gains and losses and prior service costs and credits included in other comprehensive incomeearnings are amortized in the following manner:
The component of unamortized net gains or losses related to our qualified pension plans is amortized based on the expected future life expectancy of the plan participants (estimated to be approximately 1714 years at December 31, 2018)2021), because substantially all of the participants in those plans are inactive. The component of unamortized net gains or losses related to our post-retirement life insurance plan is amortized based on the estimated remaining future service period of the plan participants (estimated to be approximately 43 years at December 31, 2018)2021). The Company uses a market-related approach to value plan assets, reflecting changes in the fair value of plan assets over a five-year period. The variance resulting from the difference between the expected and actual return on plan assets is included in the amortization calculation upon reflection in the market-related value of plan assets.
CTS CORPORATION 43
The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for those Pension Planspension plans with accumulated benefit obligation in excess of fair value of plan assets is shown below:
|
| As of December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Projected benefit obligation |
| $ | 3,343 |
|
| $ | 3,859 |
|
Accumulated benefit obligation |
| $ | 2,965 |
|
| $ | 3,155 |
|
Fair value of plan assets |
| $ | 1,421 |
|
| $ | 1,595 |
|
As of December 31, | ||||||
2018 | 2017 | |||||
Projected benefit obligation | $ | 3,848 | $ | 4,361 | ||
Accumulated benefit obligation | $ | 3,028 | $ | 3,757 | ||
Fair value of plan assets | $ | 1,426 | $ | 1,776 |
Net pension expense (income) includes the following components:
|
| Years Ended December 31, |
|
| Years Ended December 31, |
| ||||||||||||||||||
|
| U.S. Pension Plans |
|
| Non-U.S. Pension Plans |
| ||||||||||||||||||
|
| 2021 |
|
| 2020 |
|
| 2019 |
|
| 2021 |
|
| 2020 |
|
| 2019 |
| ||||||
Service cost |
| $ | 0 |
|
| $ | 0 |
|
| $ | 0 |
|
| $ | 26 |
|
| $ | 31 |
|
| $ | 37 |
|
Interest cost |
|
| 2,861 |
|
|
| 5,773 |
|
|
| 7,724 |
|
|
| 17 |
|
|
| 28 |
|
|
| 31 |
|
Expected return on plan assets(1) |
|
| (474 | ) |
|
| (9,817 | ) |
|
| (12,187 | ) |
|
| (17 | ) |
|
| (16 | ) |
|
| (17 | ) |
Amortization of unrecognized loss |
|
| 3,703 |
|
|
| 6,488 |
|
|
| 5,246 |
|
|
| 184 |
|
|
| 174 |
|
|
| 170 |
|
Settlement charges |
|
| 126,269 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
Net expense |
| $ | 132,359 |
|
| $ | 2,444 |
|
| $ | 783 |
|
| $ | 210 |
|
| $ | 217 |
|
| $ | 221 |
|
Weighted-average actuarial assumptions(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation assumptions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate |
|
| 2.46 | % |
|
| 2.26 | % |
|
| 3.15 | % |
|
| 0.63 | % |
|
| 0.63 | % |
|
| 1.00 | % |
Rate of compensation increase |
| N/A |
|
| N/A |
|
| N/A |
|
|
| 3.00 | % |
|
| 3.00 | % |
|
| 3.00 | % | |||
Pension income/expense assumptions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate |
|
| 2.10 | % |
|
| 3.15 | % |
|
| 4.30 | % |
|
| 0.63 | % |
|
| 0.63 | % |
|
| 1.13 | % |
Expected return on plan assets(1) |
|
| 1.44 | % |
|
| 3.76 | % |
|
| 4.61 | % |
|
| 0.63 | % |
|
| 0.63 | % |
|
| 1.13 | % |
Rate of compensation increase |
| N/A |
|
| N/A |
|
| N/A |
|
|
| 3.00 | % |
|
| 3.00 | % |
|
| 3.00 | % |
Years Ended December 31, | Years Ended December 31, | ||||||||||||||||||
U.S. Pension Plans | Non-U.S. Pension Plans | ||||||||||||||||||
2018 | 2017 | 2016 | 2018 | 2017 | 2016 | ||||||||||||||
Service cost | $ | — | $ | — | $ | 87 | $ | 43 | $ | 48 | $ | 51 | |||||||
Interest cost | 7,123 | 8,273 | 11,024 | 42 | 34 | 46 | |||||||||||||
Expected return on plan assets(1) | (12,898 | ) | (16,243 | ) | (18,976 | ) | (25 | ) | (20 | ) | (26 | ) | |||||||
Amortization of unrecognized loss | 5,863 | 5,785 | 5,994 | 162 | 155 | 140 | |||||||||||||
Settlement loss | — | 13,476 | — | — | — | — | |||||||||||||
Net expense (income) | $ | 88 | $ | 11,291 | $ | (1,871 | ) | $ | 222 | $ | 217 | $ | 211 | ||||||
Weighted-average actuarial assumptions(2) | |||||||||||||||||||
Benefit obligation assumptions: | |||||||||||||||||||
Discount rate | 4.30 | % | 3.63 | % | 4.16 | % | 1.13 | % | 1.38 | % | 1.13 | % | |||||||
Rate of compensation increase | 0.00 | % | 0.00 | % | 0.00 | % | 3.00 | % | 2.00 | % | 2.00 | % | |||||||
Pension income/expense assumptions: | |||||||||||||||||||
Discount rate | 3.63 | % | 4.16 | % | 4.43 | % | 1.38 | % | 1.13 | % | 1.63 | % | |||||||
Expected return on plan assets(1) | 4.72 | % | 5.61 | % | 6.63 | % | 1.38 | % | 1.13 | % | 1.63 | % | |||||||
Rate of compensation increase | 0.00 | % | 0.00 | % | 0.00 | % | 2.00 | % | 2.00 | % | 2.00 | % |
(1) | |
Expected return on plan assets is net of expected investment expenses and certain administrative expenses. |
(2) | |
During the fourth quarter of each year, we review our actuarial assumptions in light of current economic factors to determine if the assumptions need to be adjusted. 2020 assumptions reflect termination basis accounting. |
Net post-retirement expense includes the following components:
|
| Post-Retirement Life Insurance Plan |
| |||||||||
|
| Years Ended December 31, |
| |||||||||
|
| 2021 |
|
| 2020 |
|
| 2019 |
| |||
Service cost |
| $ | 1 |
|
| $ | 1 |
|
| $ | 1 |
|
Interest cost |
|
| 80 |
|
|
| 122 |
|
|
| 170 |
|
Amortization of unrecognized gain |
|
| 0 |
|
|
| (84 | ) |
|
| (166 | ) |
Net expense |
| $ | 81 |
|
| $ | 39 |
|
| $ | 5 |
|
Weighted-average actuarial assumptions(1) |
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation assumptions: |
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate |
|
| 2.66 | % |
|
| 2.27 | % |
|
| 3.09 | % |
Rate of compensation increase |
| N/A |
|
| N/A |
|
| N/A |
| |||
Pension income/post-retirement expense assumptions: |
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate |
|
| 2.27 | % |
|
| 3.09 | % |
|
| 4.26 | % |
Rate of compensation increase |
| N/A |
|
| N/A |
|
| N/A |
|
Post-Retirement Life Insurance Plan | |||||||||
Years Ended December 31, | |||||||||
2018 | 2017 | 2016 | |||||||
Service cost | $ | 2 | $ | 2 | $ | 3 | |||
Interest cost | 156 | 161 | 207 | ||||||
Amortization of unrecognized gain | (46 | ) | (101 | ) | (149 | ) | |||
Net expense | $ | 112 | $ | 62 | $ | 61 | |||
Weighted-average actuarial assumptions (1) | |||||||||
Benefit obligation assumptions: | |||||||||
Discount rate | 4.26 | % | 3.59 | % | 4.10 | % | |||
Rate of compensation increase | 0 | % | 0 | % | 0 | % | |||
Pension income/post-retirement expense assumptions: | |||||||||
Discount rate | 3.59 | % | 4.10 | % | 4.43 | % | |||
Rate of compensation increase | 0 | % | 0 | % | 0 | % |
(1) | |
During the fourth quarter of each year, we review our actuarial assumptions in light of current economic factors to determine if the assumptions need to be adjusted. |
CTS CORPORATION 44
Our pension plan asset allocation at December 31, 2018,2021, and 2017,2020, and target allocation for 20192022 by asset category are as follows:
|
| Target Allocations |
|
| Percentage of Plan Assets at December 31, |
| |||
Asset Category |
| 2022 |
|
| 2021 |
|
| 2020 |
|
Equity securities |
| 0% |
|
| 0% |
|
| 13% |
|
Fixed income/Debt securities |
| 100% |
|
| 100% |
|
| 83% |
|
Other |
| 0% |
|
| 0% |
|
| 4% |
|
Total |
| 100% |
|
| 100% |
|
| 100% |
|
Target Allocations | Percentage of Plan Assets at December 31, | |||
Asset Category | 2019 | 2018 | 2017 | |
Equity securities | 13% | 12% | 11% | |
Debt securities | 83% | 84% | 82% | |
Other | 4% | 4% | 7% | |
Total | 100% | 100% | 100% |
Historically, we employed a liability-driven investment strategy whereby a mix of equity and fixed-income investments are used to pursue a de-risking strategy which over time seeks to reduce interest rate mismatch risk and other risks while achieving a return that matches or exceeds the growth in projected pension plan liabilities. Risk tolerance is established through careful consideration of plan liabilities and funded status. The investment portfolio primarily containscontained a diversified mix of equity and fixed-income investments. Other assets such as private equity are used modestly to enhance long-term returns while improving portfolio diversification. Investment risk is measured and monitored on an ongoing basis through quarterly investment portfolio reviews, annual liability measurements, and asset/liability studies at regular intervals.
As part of the planned termination of the U.S. Plan, a new investment allocation strategy was put in place to protect the funded status of the U.S. plan assets subsequent to Board approval of the U.S. Plan termination. The target allocation for U.S. plan assets for 2022 is 100% fixed income investments including cash and cash equivalents.
The following table summarizes the fair values of our pension plan assets:
|
| As of December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Equity securities - U.S. holdings(1) |
| $ | 8 |
|
| $ | 7 |
|
Bond funds - government(4) (6) |
|
| 0 |
|
|
| 53,239 |
|
Bond funds - other(5) (6) |
|
| 31,380 |
|
|
| 173,853 |
|
Cash and cash equivalents(2) |
|
| 19,415 |
|
|
| 53,379 |
|
Partnerships(3) |
|
| 0 |
|
|
| 6,792 |
|
Total fair value of plan assets |
| $ | 50,803 |
|
| $ | 287,270 |
|
As of December 31, | ||||||
2018 | 2017 | |||||
Equity securities - U.S. holdings(1) | $ | 20,469 | $ | 19,487 | ||
Equity securities - non-U.S. holdings(1) | — | 1,131 | ||||
Equity funds - U.S. holdings(1) (8) | 54 | 1,314 | ||||
Bond funds - government(5) (8) | 19,146 | 3,126 | ||||
Bond funds - other(6) (8) | 202,393 | 231,710 | ||||
Real estate(7) (8) | 2,652 | 1,235 | ||||
Cash and cash equivalents(2) | 5,866 | 11,145 | ||||
Partnerships(4) | 9,172 | 10,787 | ||||
International hedge funds(3) | — | 6,604 | ||||
Total fair value of plan assets | $ | 259,752 | $ | 286,539 |
The fair values at December 31, 2018,2021, are classified within the following categories in the fair value hierarchy:
|
| Quoted Prices in Active Markets (Level 1) |
|
| Significant Other Observable Inputs (Level 2) |
|
| Significant Unobservable Inputs (Level 3) |
|
| Total |
| ||||
Equity securities - U.S. holdings(1) |
| $ | 8 |
|
| $ | — |
|
| $ | — |
|
| $ | 8 |
|
Bond funds - other(5) |
|
| 31,380 |
|
|
| — |
|
|
| — |
|
|
| 31,380 |
|
Cash and cash equivalents(2) |
|
| 19,415 |
|
|
| — |
|
|
| — |
|
|
| 19,415 |
|
Total |
| $ | 50,803 |
|
| $ | 0 |
|
| $ | — |
|
| $ | 50,803 |
|
Quoted Prices in Active Markets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Not Leveled | Total | |||||||||||
Equity securities - U.S. holdings(1) | $ | 20,469 | $ | — | $ | — | $ | — | $ | 20,469 | |||||
Equity funds - U.S. holdings(1) (8) | — | — | — | 54 | 54 | ||||||||||
Bond funds - government(5) | — | — | — | 19,146 | 19,146 | ||||||||||
Bond funds - other(6) (8) | — | — | — | 202,393 | 202,393 | ||||||||||
Real estate(7) (8) | — | — | — | 2,652 | 2,652 | ||||||||||
Cash and cash equivalents(2) | 5,866 | — | — | — | 5,866 | ||||||||||
Partnerships(4) | — | — | 9,172 | — | 9,172 | ||||||||||
Total | $ | 26,335 | $ | — | $ | 9,172 | $ | 224,245 | $ | 259,752 |
The fair values at December 31, 2017,2020, are classified within the following categories in the fair value hierarchy:
|
| Quoted Prices in Active Markets (Level 1) |
|
| Significant Other Observable Inputs (Level 2) |
|
| Significant Unobservable Inputs (Level 3) |
|
| Not Leveled |
|
| Total |
| |||||
Equity securities - U.S. holdings(1) |
| $ | 7 |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | 7 |
|
Bond funds - government(4) (6) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 53,239 |
|
|
| 53,239 |
|
Bond funds - other(5) (6) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 173,853 |
|
|
| 173,853 |
|
Cash and cash equivalents(2) |
|
| 53,379 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 53,379 |
|
Partnerships(3) |
|
| — |
|
|
| — |
|
|
| 6,792 |
|
|
| — |
|
|
| 6,792 |
|
Total |
| $ | 53,386 |
|
| $ | 0 |
|
| $ | 6,792 |
|
| $ | 227,092 |
|
| $ | 287,270 |
|
CTS CORPORATION 45
Quoted Prices in Active Markets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Not Leveled | Total | |||||||||||
Equity securities - U.S. holdings(1) | $ | 19,487 | $ | — | $ | — | $ | — | $ | 19,487 | |||||
Equity securities - non-U.S. holdings(1) | 1,131 | — | — | — | 1,131 | ||||||||||
Equity funds - U.S.holdings(1) (8) | — | — | — | 1,314 | 1,314 | ||||||||||
Bond funds - government(5) (8) | — | — | — | 3,126 | 3,126 | ||||||||||
Bond funds - other(6) (8) | — | — | — | 231,710 | 231,710 | ||||||||||
Real estate(7) (8) | — | — | — | 1,235 | 1,235 | ||||||||||
Cash and cash equivalents(2) | 11,145 | — | — | — | 11,145 | ||||||||||
Partnerships(4) | — | — | 10,787 | — | 10,787 | ||||||||||
International hedge funds(3) (8) | — | — | — | 6,604 | 6,604 | ||||||||||
Total | $ | 31,763 | $ | — | $ | 10,787 | $ | 243,989 | $ | 286,539 |
(1) | |
Comprised of common stocks of companies in various industries. The Pension Plan fund manager may shift investments from value to growth strategies or vice-versa, from small cap to large cap stocks or vice-versa, in order to meet the Pension Plan's investment objectives, which are to provide for a reasonable amount of long-term growth of capital without undue exposure to volatility and protect the assets from erosion of purchasing power. |
(2) | |
Comprised of investment grade short-term investment and money-market funds. |
(3) | |
Comprised of partnerships that invest in various U.S. and international industries. |
(4) | |
Comprised of long-term government bonds with a minimum maturity of 10 years and zero-coupon Treasury securities ("Treasury Strips") with maturities greater than 20 years. |
(5) | |
Comprised predominately of investment grade U.S. corporate bonds with various maturities |
(6) | |
Comprised of investments that are measured at fair value using the NAV per share practical expedient. In accordance with the provisions of ASC 820-10, these investments have not been classified in the fair value hierarchy. The fair value amount not leveled is presented to allow reconciliation of the fair value hierarchy to total fund pension plan assets. |
The pension plan assets recorded at fair value are measured and classified in a hierarchy for disclosure purposes consisting of three levels based on the observability of inputs available in the marketplace used to measure fair value as discussed below:
• | Level 1: Fair value measurements that are based on quoted prices (unadjusted) in active markets that the pension plan trustees have the ability to access for identical assets or liabilities. Market price data generally is obtained from exchange or dealer markets. |
• | Level 2: Fair value measurements based on inputs other than quoted prices included in Level 1 that are observable for the asset, either directly or indirectly. Level 2 inputs include quoted prices for similar assets in active or inactive markets, and inputs other than quoted prices that are observable for the asset, such as interest rates and yield curves that are observable at commonly quoted intervals. |
• | Level 3: Fair value measurements based on valuation techniques that use significant inputs that are unobservable. |
The table below reconciles the Level 3 partnership assets within the fair value hierarchy:
|
| Amount |
| |
Fair value of Level 3 partnership assets at January 1, 2020 |
| $ | 7,539 |
|
Capital contributions |
|
| 44 |
|
Realized and unrealized loss |
|
| (269 | ) |
Capital distributions |
|
| (522 | ) |
Fair value of Level 3 partnership assets at December 31, 2020 |
| $ | 6,792 |
|
Capital contributions |
|
| 13 |
|
Realized and unrealized loss |
|
| (2,075 | ) |
Capital distributions |
|
| (4,730 | ) |
Fair value of Level 3 partnership assets at December 31, 2021 |
| $ | — |
|
Amount | |||
Fair value of Level 3 partnership assets at January 1, 2017 | $ | 12,862 | |
Capital contributions | 343 | ||
Realized and unrealized gain | 2,107 | ||
Capital distributions | (4,525 | ) | |
Fair value of Level 3 partnership assets at December 31, 2017 | 10,787 | ||
Capital contributions | 78 | ||
Realized and unrealized gain | 1,154 | ||
Capital distributions | (2,847 | ) | |
Fair value of Level 3 partnership assets at December 31, 2018 | $ | 9,172 |
The partnership fund manager usesused a market approach in estimating the fair value of the plan's Level 3 asset.assets. The market approach estimates fair value by first determining the entity's earnings before interest, taxes, depreciation, and amortization and then multiplying that value by an estimated multiple. When establishing an appropriate multiple, the fund manager considersconsidered recent comparable private company transactions and multiples paid. The entity's net debt iswas then subtracted from the calculated amount to arrive at an estimated fair value for the entity.
We expect to make $100 of contributions to the U.S. plans and $271$235 of contributions to the non-U.S. plans during 2019.
Expected benefit payments which reflect expected future service,under the defined benefit pension plans and the postretirement benefit plan, for the next five years subsequent to 2021 and in the aggregate for the following five years are as appropriate, are expected to be paid:follows:
|
| U.S. Pension Plans |
|
| Non-U.S. Pension Plans |
|
| Post- Retirement Life Insurance Plan |
| |||
2022 |
| $ | 100 |
|
| $ | 54 |
|
| $ | 489 |
|
2023 |
|
| 96 |
|
|
| 58 |
|
|
| 455 |
|
2024 |
|
| 92 |
|
|
| 73 |
|
|
| 425 |
|
2025 |
|
| 88 |
|
|
| 81 |
|
|
| 398 |
|
2026 |
|
| 84 |
|
|
| 89 |
|
|
| 373 |
|
2027-2030 |
|
| 349 |
|
|
| 667 |
|
|
| 1,571 |
|
Total |
| $ | 809 |
|
| $ | 1,022 |
|
| $ | 3,711 |
|
U.S. Pension Plans | Non-U.S. Pension Plans | Post-Retirement Life Insurance Plan | |||||||
2019 | $ | 15,537 | $ | 52 | $ | 407 | |||
2020 | 15,519 | 57 | 393 | ||||||
2021 | 15,409 | 66 | 379 | ||||||
2022 | 15,226 | 91 | 365 | ||||||
2023 | 14,988 | 82 | 351 | ||||||
2024-2027 | 70,462 | 658 | 1,551 | ||||||
Total | $ | 147,141 | $ | 1,006 | $ | 3,446 |
We sponsor a 401(k) plan that covers substantially all of our U.S. employees.employees as well as offer similar defined contribution plans at certain foreign locations. Contributions and costs arewere generally determined as a percentage of the covered employee's annual salary.
Effective January 1, 2022, in connection with the U.S. Plan termination process, we amended our 401(k) plan and transitioned to a non-elective contribution for all U.S. employees that is also determined as a percentage of the covered employee's salary, provides for immediate vesting and is provided regardless of individual contribution plans. In addition, we began offering a Roth 401(k) option to employees.
Expenses related to defined contribution plans include the following:
|
| Years Ended December 31, |
| |||||||||
|
| 2021 |
|
| 2020 |
|
| 2019 |
| |||
401(k) and other defined contribution plan expense |
| $ | 3,242 |
|
| $ | 1,636 |
|
| $ | 3,125 |
|
Years Ended December 31, | |||||||||
2018 | 2017 | 2016 | |||||||
401(k) and other plan expense | $ | 3,256 | $ | 3,141 | $ | 2,841 |
NOTE 78 — Goodwill and Other Intangible Assets
Other Intangible Assets
Other intangible assets, net consist of the following:following components:
|
| As of December 31, 2021 |
|
|
|
|
| |||||||||
|
| Gross Carrying Amount |
|
| Accumulated Amortization |
|
| Net Amount |
|
| Weighted Average Remaining Amortization Period (in years) |
| ||||
Other intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer lists / relationships |
| $ | 96,889 |
|
| $ | (49,213 | ) |
| $ | 47,676 |
|
|
| 8.9 |
|
Technology and other intangibles |
|
| 47,441 |
|
|
| (25,229 | ) |
|
| 22,212 |
|
|
| 6.8 |
|
Other intangible assets, net |
| $ | 144,330 |
|
| $ | (74,442 | ) |
| $ | 69,888 |
|
|
| 8.3 |
|
Amortization expense for the year ended December 31, 2021 |
|
|
|
|
| $ | 9,413 |
|
|
|
|
|
|
|
|
|
|
| As of December 31, 2020 |
| |||||||||
|
| Gross Carrying Amount |
|
| Accumulated Amortization |
|
| Net Amount |
| |||
Other intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Customer lists / relationships |
| $ | 97,355 |
|
| $ | (44,002 | ) |
| $ | 53,353 |
|
Technology and other intangibles |
|
| 47,301 |
|
|
| (21,533 | ) |
|
| 25,768 |
|
Other intangible assets, net |
| $ | 144,656 |
|
| $ | (65,535 | ) |
| $ | 79,121 |
|
Amortization expense for the year ended December 31, 2020 |
|
|
|
|
| $ | 9,055 |
|
|
|
|
|
Amortization expense for the year ended December 31, 2019 |
|
|
|
|
| $ | 7,770 |
|
|
|
|
|
As of December 31, 2018 | ||||||||||||
Gross Carrying Amount | Accumulated Amortization | Net Amount | Weighted Average Remaining Amortization Period (in years) | |||||||||
Other intangible assets: | ||||||||||||
Customer lists / relationships | $ | 64,323 | $ | (37,088 | ) | $ | 27,235 | 9.6 | ||||
Technology and other intangibles | 44,460 | (13,715 | ) | 30,745 | 10.1 | |||||||
In process research and development | 2,200 | — | 2,200 | — | ||||||||
Other intangible assets, net | $ | 110,983 | $ | (50,803 | ) | $ | 60,180 | 9.8 | ||||
Amortization expense for the year ended December 31, 2018 | $ | 6,817 |
In the third quarter of 2020, due to the restructuring actions further outlined in Note 9, we performed an interim impairment assessment. This resulted in the recognition of $2,200 of impairment charges related to in process research and development, and a revaluation of associated contingent liabilities totaling $1,900. The net impact of $300 was recorded as restructuring expense remainingin the Consolidated Statements of (Loss) Earnings.
CTS CORPORATION 47
The estimated amortization expense for other intangible assetsthe next five years and thereafter is as follows:
|
| Amortization expense |
| |
2022 |
| $ | 9,176 |
|
2023 |
|
| 7,170 |
|
2024 |
|
| 7,008 |
|
2025 |
|
| 6,787 |
|
2026 |
|
| 6,752 |
|
Thereafter |
|
| 32,995 |
|
Total future amortization expense |
| $ | 69,888 |
|
Amortization expense | |||
2019 | $ | 6,754 | |
2020 | 6,624 | ||
2021 | 6,467 | ||
2022 | 6,230 | ||
2023 | 4,225 | ||
Thereafter | 29,880 | ||
Total future amortization expense | $ | 60,180 |
As of December 31, 2017 | |||||||||
Gross Carrying Amount | Accumulated Amortization | Net Amount | |||||||
Other intangible assets: | |||||||||
Customer lists / relationships | $ | 64,323 | $ | (33,685 | ) | $ | 30,638 | ||
Patents | 10,319 | (10,319 | ) | — | |||||
Technology and other intangibles | 44,460 | (10,355 | ) | 34,105 | |||||
In process research and development | 2,200 | — | 2,200 | ||||||
Other intangible assets, net | $ | 121,302 | $ | (54,359 | ) | $ | 66,943 | ||
Amortization expense for the year ended December 31, 2017 | $ | 6,603 | |||||||
Amortization expense for the year ended December 31, 2016 | $ | 5,815 |
Goodwill
Changes in the net carrying value amount of goodwill were as follows:
|
| Total |
| |
Goodwill as of December 31, 2019 |
| $ | 106,056 |
|
Increase due to acquisition |
|
| 3,441 |
|
Goodwill as of December 31, 2020 |
| $ | 109,497 |
|
Increase due to acquisition |
|
| 430 |
|
Decrease from purchase accounting adjustments |
|
| (129 | ) |
Goodwill as of December 31, 2021 |
| $ | 109,798 |
|
Total | |||
Goodwill as of December 31, 2016 | $ | 61,744 | |
Increase from acquisitions | 9,313 | ||
Goodwill as of December 31, 2017 | 71,057 | ||
Increase from acquisition | — | ||
Goodwill as of December 31, 2018 | $ | 71,057 |
In addition to the purchase accounting adjustments from the SSI transaction, goodwill increased in 2021 due to an acquisition completed during the second quarter. The purchase price was $510, with $255 paid in the second quarter of 2021 and an additional $255 to be paid in the second quarter of 2022.
We performed our annual impairment test as of October 1, 2021, our measurement date, and concluded that there was 0 impairment in any of our reporting units. The fair value estimates used in the goodwill impairment analysis required significant judgment. The Company's fair value estimates for the purposes of determining the goodwill impairment charge are considered Level 3 fair value measurements. The fair value estimates were based on assumptions management believes to be reasonable, but that are inherently uncertain, including estimates of future revenues and operating margins and assumptions about the overall economic climate and the competitive environment for the business.
NOTE 89 — Costs Associated with Exit and Restructuring Activities
Restructuring and impairment charges are reported as a separate line within operating earnings in the Consolidated Statements of (Loss) Earnings. Total restructuring and impairment charges were:
|
| Years Ended December 31, |
| |||||||||
|
| 2021 |
|
| 2020 |
|
| 2019 |
| |||
Restructuring charges |
| $ | 1,687 |
|
| $ | 1,830 |
|
| $ | 7,448 |
|
Years Ended December 31, | ||||||
2018 | 2017 | 2016 | ||||
Restructuring and impairment charges | 5,062 | 4,139 | 3,048 |
September 2020 Plan
In September 2020, we initiated a restructuring plan focused on optimizing our manufacturing footprint and improving operational efficiency by better utilizing our systems capabilities. This plan includes transitioning certain administrative functions to a shared service center, realignment of manufacturing locations, and certain other efficiency improvement actions ("September 2020 Plan"). The restructuring cost of the September 2020 Plan is now estimated to be in the range of $3,500 to $4,500, including workforce reduction charges, building and equipment relocation charges, other contract and asset related costs. We have incurred $1,397 in program costs to date, There were 0 substantial restructuring charges under the September 2020 Plan during the three and twelve months ended December 31, 2021. Due to the robust demand environment and COVID-19 limitations, some projects are delayed. As of December 31, 2021 there was 0 liability related to the September 2020 Plan.
June 2016 Plan
In June 2016, we announced plans to restructure operations by phasing out production at our Elkhart, INIndiana facility and transitioning it into a research and development center supporting our global operations ("June 2016 Plan"). Additional organizational changes willwere also occurimplemented in various other locations. In 2017, we amended this planrevised the June 2016 Plan to include an additional $1,100 in planned costs related to the relocation of our corporate headquarters in Lisle, Illinois and our plant in Bolingbrook, Illinois, manufacturing operations. The costboth of which have now
CTS CORPORATION 48
been consolidated into a single facility. These restructuring actions were completed during the plan, which is expected to be completed in mid 2019, is estimated to be approximately $13,400 and impacts approximately 230 employees. Additional costs related to line movements, equipmentyear ended December 31, 2021. Restructuring charges and other costs will be expensed as incurred. The total restructuring liability related tounder the June 2016 Plan, was $668 at December 31, 2018.
June 2016 Plan | Planned Costs | Actual costs incurred through December 31, 2018 | |||||
Workforce reduction | $ | 3,075 | $ | 2,975 | |||
Building and equipment relocation | 9,025 | 7,807 | |||||
Other charges | 1,300 | 964 | |||||
Restructuring and impairment charges | $ | 13,400 | $ | 11,746 |
April 2014 Plan were as follows:
Years Ended December 31, | |||||||||||
2018 | 2017 | 2016 | |||||||||
Restructuring and impairment charges | $ | 4,559 | $ | 4,139 | $ | 3,048 |
In April 2014, we announced plans to restructure our operations and consolidate our Canadian operations into other existing facilities as part of our overall plan to simplify our business model and rationalize our global footprint ("April 2014 Plan"). These restructuring actions which were substantially completed during 2015 resulted inand the elimination of approximately 120 positions.
April 2014 Plan | Planned Costs | Actual costs incurred through December 31, 2018 | ||||
Inventory write-down | $ | 850 | $ | — | ||
Equipment relocation | 1,800 | 444 | ||||
Other charges | 1,400 | 113 | ||||
Restructuring-related charges, included in cost of goods sold | 4,050 | 557 | ||||
Workforce reduction | 4,200 | 4,423 | ||||
Other charges, including pension termination costs | 1,700 | 3,916 | ||||
Restructuring and impairment charges | 5,900 | 8,339 | ||||
Total restructuring, impairment and restructuring-related charges | $ | 9,950 | $ | 8,896 |
Other Restructuring charges under the April 2014 Plan were $503, $0, and $4,923 duringActivities
From time to time we incur other restructuring activities that are not part of a formal plan. During the years ended December 31, 2018, 2017,2021 and 2016, respectively.2020, we incurred restructuring charges of $1,717 and $442, respectively, for exit and disposal activities at three sites, building and equipment relocation, and workforce reduction costs across the company. The totalremaining restructuring liability related to the April 2014 Planassociated with these actions was $918$962 and $9 at December 31, 2018.
The following table displays the restructuring liability activity for all plans the year ended December 31, 2018:2021:
Restructuring liability at January 1, 2021 |
| $ | 1,363 |
|
Restructuring charges |
|
| 1,687 |
|
Cost paid |
|
| (1,903 | ) |
Other activities(1) |
|
| (185 | ) |
Restructuring liability at December 31, 2021 |
| $ | 962 |
|
(1) | Other charges include the effects of currency translation, non-cash asset write-downs, travel, legal and other charges. |
April 2014 Plan and June 2016 Plan | Restructuring Liability | ||
Restructuring liability at January 1, 2018 | $ | 1,913 | |
Restructuring charges | 5,062 | ||
Cost paid | (5,465 | ) | |
Other activities (1) | 76 | ||
Restructuring liability at December 31, 2018 | $ | 1,586 |
The total liability of $1,586$962 is included in Accrued expenses and other liabilities at December 31, 2018.
NOTE 910 — Accrued Expenses and Other Liabilities
The components of accrued expenses and other liabilities are as follows:
|
| As of December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Accrued product-related costs |
| $ | 3,188 |
|
| $ | 4,470 |
|
Accrued income taxes |
|
| 6,761 |
|
|
| 7,320 |
|
Accrued property and other taxes |
|
| 2,370 |
|
|
| 2,478 |
|
Accrued professional fees |
|
| 1,629 |
|
|
| 1,663 |
|
Accrued customer-related liabilities |
|
| 3,254 |
|
|
| 3,815 |
|
Dividends payable |
|
| 1,289 |
|
|
| 1,291 |
|
Remediation reserves |
|
| 10,979 |
|
|
| 10,642 |
|
Derivative liabilities |
|
| 437 |
|
|
| 671 |
|
Other accrued liabilities |
|
| 6,811 |
|
|
| 5,821 |
|
Total accrued expenses and other liabilities |
| $ | 36,718 |
|
| $ | 38,171 |
|
As of December 31, | ||||||
2018 | 2017 | |||||
Accrued product-related costs | $ | 4,377 | $ | 5,297 | ||
Accrued income taxes | 6,914 | 5,475 | ||||
Accrued property and other taxes | 1,976 | 997 | ||||
Accrued professional fees | 3,350 | 2,228 | ||||
Contract liabilities | 1,981 | 1,595 | ||||
Dividends payable | 1,310 | 1,318 | ||||
Remediation reserves | 11,274 | 17,067 | ||||
Other accrued liabilities | 6,165 | 7,367 | ||||
Total accrued expenses and other liabilities | $ | 37,347 | $ | 41,344 |
NOTE 1011 — Contingencies
Certain processes in the manufacture of our current and past products create by-products classified as hazardous waste. We have been notified by the U.S. Environmental Protection Agency, state environmental agencies, and in some cases, groups of potentially responsible parties, that we aremay be potentially liable for environmental contamination at several sites currently and formerly owned or operated by CTS. Someus. NaN of those sites, such as Asheville, North Carolina and Mountain View, California, are designated National Priorities List Superfund sites under the U.S. Environmental Protection Agency’s Superfund program. We reserveaccrue a liability for probable remediation activities, at these sites and for claims and proceedings against CTSus with respect to other environmental matters. We record reserves on an undiscounted basis. Inmatters if the opinionamount can be reasonably estimated, and provide disclosures including the nature of management, based upon presently available information relating to such matters, adequate provision for probable and estimable costs have been recorded. We do not have any known environmental obligations where a loss whenever it is probable or reasonably possible of occurring for which we do notthat a potentially material loss may have a reserve, nor do we have any amounts for which we have not reserved because the amount of the lossoccurred but cannot be reasonably estimated. Due to the inherent nature of environmental obligations, we cannot provide assurance that our ultimate environmental liability will not materially exceed the amount of our current reserve. Our reserve and disclosures will be adjusted accordingly if additional information becomes available in the future.
CTS CORPORATION 49
A roll-forward of remediation reserves onincluded in accrued expenses and other liabilities in the balance sheetConsolidated Balance Sheets is comprised of the following:
|
| Years Ended December 31, |
| |||||||||
|
| 2021 |
|
| 2020 |
|
| 2019 |
| |||
Balance at beginning of period |
| $ | 10,642 |
|
| $ | 11,444 |
|
| $ | 11,274 |
|
Remediation expense |
|
| 2,254 |
|
|
| 2,769 |
|
|
| 2,602 |
|
Remediation payments |
|
| (1,929 | ) |
|
| (3,639 | ) |
|
| (2,455 | ) |
Other activity (1) |
|
| 12 |
|
|
| 68 |
|
|
| 23 |
|
Balance at end of the period |
| $ | 10,979 |
|
| $ | 10,642 |
|
| $ | 11,444 |
|
(1) | Other activity includes currency translation adjustments not recorded through remediation expense |
Years Ended December 31, | |||||||||
2018 | 2017 | 2016 | |||||||
Balance at beginning of period | $ | 17,067 | $ | 18,176 | $ | 20,603 | |||
Remediation expense | 1,182 | 307 | 556 | ||||||
Remediation payments | (6,967 | ) | (1,416 | ) | (2,983 | ) | |||
Other activity (1) | (8 | ) | — | — | |||||
Balance at end of the period | $ | 11,274 | $ | 17,067 | $ | 18,176 | |||
(1) Other activity includes currency translation adjustments not recorded through remediation expense |
Unrelated to the environmental claims described above, certain other legal claims are pending against us with respect to matters arising out of the ordinary conduct of our business. Although
We provide product warranties when we sell our products and accrue for estimated liabilities at the time of sale. Warranty estimates are forecasts based on the best available information and historical claims experience. We accrue for specific warranty claims if we believe that the facts of a specific claim make it probable that a liability in excess of our historical experience has been incurred and provide disclosures for specific claims whenever it is reasonably possible that a material loss may be incurred which cannot be estimated.
We cannot provide assurance that the ultimate outcomedisposition of any potential litigation resulting from theseenvironmental, legal, and product warranty claims cannot be predicted with certainty,will not materially exceed the amount of our accrued losses and some may be disposed of unfavorably to CTS, management believes that adequate provision for anticipated costs have been established based upon all presently available information. Except as noted herein, we do not believe we have any pending loss contingencies that are probable or reasonably possible of having a materialadversely impact on our consolidated financial position, results of operations, or cash flows.
NOTE 1112 — Leases
We lease certain land, buildings and equipment under all non-cancelablenon-cancellable operating leases used in our operations. Operating lease assets represent our right to use an underlying asset for the lease term. Operating lease liabilities represent the present value of lease payments over the lease term, discounted using an estimate of our secured incremental borrowing rate because none of our leases contain a rate implicit in the lease arrangement.
The operating lease assets and liabilities are adjusted to include the impact of any lease incentives and non-lease components. We have elected not to separate lease and non-lease components, which include taxes and common area maintenance in some of our leases. Variable lease payments that depend on an index or a rate are included in lease payments using the prevailing index or rate in effect at lease commencement.
Options to extend or terminate a lease are included in the lease term when it is reasonably likely that we will exercise that option. We occasionally enter into short term operating leases with an initial term of twelve months or less. These leases are not recorded in the Consolidated Balance Sheets.
We determine if an arrangement is a lease or contains a lease at its inception, which normally does not require significant estimates or judgments. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants and we currently have no material sublease agreements.
In accordance with FASB Staff Q&A - Topic 842 and Topic 840: Accounting for Lease Concessions Related to the Effects of the COVID-19 Pandemic ("FASB Staff Q&A") issued in April 2020, we elected to account for any lease concessions resulting directly from the COVID-19 pandemic as ofif the enforceable rights and obligations for the concessions existed in the respective contracts at lease inception and as such we will not account for any concession as a lease modification. Guidance from the FASB Staff Q&A provided methods to account for rent deferrals which include the option to treat the lease as if no changes to the lease contract were made or to treat deferred payments as variable lease payments. The FASB Staff Q&A allows entities to select the most practical approach and does not require the same approach be applied consistently to all leases. As a result, we have accounted for lease deferrals as if no changes to the lease contract were made and will continue to recognize lease expense, on a straight-line basis, during the deferral periods. During the year ended December 31, 2018, are2020, these rent concessions related to the COVID-19 pandemic were not material.
CTS CORPORATION 50
Components of lease expense for the years ended December 31, 2021, 2020, and 2019 were as follows:
| Years Ended December 31, |
| |||||||||
| 2021 |
|
| 2020 |
|
| 2019 |
| |||
Operating lease cost | $ | 5,144 |
|
| $ | 4,763 |
|
| $ | 4,342 |
|
Short-term lease cost |
| 1,403 |
|
|
| 1,015 |
|
|
| 1,013 |
|
Total lease cost | $ | 6,547 |
|
| $ | 5,778 |
|
| $ | 5,355 |
|
Operating Leases | |||
2019 | $ | 3,859 | |
2020 | 3,622 | ||
2021 | 2,587 | ||
2022 | 2,411 | ||
2023 | 2,464 | ||
Thereafter | 16,086 | ||
Total minimum lease obligations | $ | 31,029 |
Supplemental cash flow information related to operationsleases was as follows:
|
| Years Ended December 31, |
| |||||||||
|
| 2021 |
|
| 2020 |
|
| 2019 |
| |||
Cash paid for amounts included in the measurement of lease obligations |
| $ | 3,666 |
|
| $ | 4,654 |
|
| $ | 3,957 |
|
Leased assets obtained in exchange for new operating lease obligations |
| $ | 1,253 |
|
| $ | 1,678 |
|
| $ | 5,000 |
|
Years Ended December 31, | |||||||||
2018 | 2017 | 2016 | |||||||
Rent expense | $ | 5,726 | $ | 4,762 | $ | 5,694 |
Supplemental balance sheet information related to leases include a variety of properties around the world. These properties are usedwas as manufacturing facilities, distribution centers and sales and administrative offices. Lease expirations range from 2018 to 2033 with breaking periods specified in the lease agreements. Sublease income was $455 in 2018. Future sublease income is $444 in 2019, $423 in 2020, and $846 thereafter. Somefollows:
|
|
|
|
|
|
|
|
|
|
| As of December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Operating lease obligations |
| $ | 3,393 |
|
| $ | 3,294 |
|
Long-term operating lease obligations |
|
| 21,354 |
|
|
| 23,163 |
|
Total lease liabilities |
| $ | 24,747 |
|
| $ | 26,457 |
|
Weighted-average remaining lease terms (years) |
|
| 7.21 |
|
|
| 7.88 |
|
Weighted-average discount rate |
|
| 6.27 | % |
|
| 6.40 | % |
Remaining maturity of our operating leases include renewal options and escalation clauses.existing lease liabilities as of December 31, 2021 is as follows:
|
| Operating Leases(1) |
| |
2022 |
| $ | 4,826 |
|
2023 |
|
| 4,567 |
|
2024 |
|
| 4,402 |
|
2025 |
|
| 3,759 |
|
2026 |
|
| 2,815 |
|
Thereafter |
|
| 11,525 |
|
Total |
| $ | 31,894 |
|
Less: interest |
|
| (7,147 | ) |
Present value of lease payments |
| $ | 24,747 |
|
(1) | Operating lease payments include $651 of payments related to options to extend lease terms that are reasonably expected to be exercised. |
NOTE 1213 — Debt
Long-term debt was comprised of the following:
|
| As of December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Total credit facility availability |
| $ | 400,000 |
|
| $ | 300,000 |
|
Balance outstanding |
|
| 50,000 |
|
|
| 54,600 |
|
Standby letters of credit |
|
| 1,740 |
|
|
| 1,740 |
|
Amount available, subject to covenant restrictions |
| $ | 348,260 |
|
| $ | 243,660 |
|
Weighted-average interest rate |
|
| 1.16 | % |
|
| 1.92 | % |
As of December 31 | ||||||
2018 | 2017 | |||||
Total credit facility | $ | 300,000 | $ | 300,000 | ||
Balance outstanding | $ | 50,000 | $ | 76,300 | ||
Standby letters of credit | $ | 1,940 | $ | 2,065 | ||
Amount available | $ | 248,060 | $ | 221,635 | ||
Weighted-average interest rate | 3.10 | % | 2.30 | % | ||
Commitment fee percentage per annum | 0.20 | % | 0.25 | % |
CTS CORPORATION 51
On December 15, 2021, we entered into a second amended and restated five-year credit agreement with a group of banks (the “Revolving Credit Facility”) to (i) increase the total credit facility to $400,000 which may be increased by $200,000 at the request of the Company, subject to the administrative agent's approval, (ii) extend the maturity of the Revolving Credit Facility from February 12, 2024 to December 15, 2026, (iii) replace LIBOR with SOFR as the primary reference rate used to calculate interest on the loans under the Revolving Credit Facility, (iv) increase available sublimits for letters of credit, and swingline loans as well as providing for additional alternative currency borrowing capabilities, and (v) modify the financial and non-financial covenants to provide the Company additional flexibility. This new unsecured credit facility replaced the prior $300,000 unsecured credit facility, which would have expired February 12, 2024.
Borrowings in U.S. dollars under the Revolving Credit Facility bear interest, at a per annum rate equal to the applicable Term SOFR rate (but not less than 0.0%), plus the Term SOFR adjustment, and plus an applicable margin, which ranges from 1.00% to 1.75%, based on our net leverage ratio. Similarly, borrowings of alternative currencies under the Revolving Credit Facility bear interest equal to a defined risk-free reference rate, plus the applicable risk-free rate adjustment and plus an applicable margin, which ranges from 1.00% to 1.75%, based on our net leverage ratio.
The Revolving Credit Facility includes a swing line sublimit of $20,000 and a letter of credit sublimit of $20,000. We also pay a quarterly commitment fee on the unused portion of the Revolving Credit Facility. The commitment fee ranges from 0.175% to 0.25% based on our net leverage ratio.
The Revolving Credit Facility requires, among other things,in addition to customary representations and warranties, that we comply with a maximum totalnet leverage ratio and a minimum fixed chargeinterest coverage ratio. Failure to comply with these covenants could reduce the borrowing availability under the revolving credit facility.Revolving Credit Facility. We were in compliance with all debt covenants as ofat December 31, 2018.2021. The revolving credit facilityRevolving Credit Facility requires us tothat we deliver quarterly financial statements, annual financial statements, auditorsauditor certifications, and compliance certificates within a specified number of days after the end of a quarter and year. Additionally, the revolving credit facilityRevolving Credit Facility contains restrictions limiting our ability toto: dispose of assets; incur certain additional debt; repay other debt or amend subordinated debt instruments; create liens on assets; make investments, loans or advances; make acquisitions or engage in mergers or consolidations; engage in certain transactions with our subsidiaries and affiliates; and make stock repurchases and dividend payments. Interest rates on the revolving credit facility fluctuate based upon the London Interbank Offered Rate and the Company's quarterly total leverage ratio. We pay a commitment fee on the undrawn portion of the revolving credit facility. The commitment fee varies based on the quarterly leverage ratio.
We have debt issuance costs related to our long-term debt that are being amortized using the straight-line method over the life of the debt. Amortization expense was approximately $185$169 for the years ended December 31, 2021, $168 in 2018 and 2017,2020 and $163 in 2016, and was recognized as2019. These costs are included in interest expense.
We use interest rate swaps to convert the revolving credit facility's variable rate of interest into a fixed rate on a portion of the debt as described more fully in Note 13 "Derivatives".14 "Derivative Financial Instruments." These swaps are treated as cash flow hedges and consequently, the changes in fair value were recorded in other comprehensive earnings.
Years Ended December 31, | |||||||||
2018 | 2017 | 2016 | |||||||
Unrealized (loss) gain | $ | (394 | ) | $ | (255 | ) | $ | 593 | |
Realized gain reclassified to interest expense | $ | 421 | $ | 37 | $ | 928 |
NOTE 1314 — Derivatives
Our earnings and cash flows are subject to fluctuations due to changes in foreign currency exchange rates and interest rates. We selectively use derivative financial instruments including foreign currency forward contracts and interest rate swaps to manage our exposure to these risks.
The use of derivative financial instruments exposes the Company to credit risk, which relates to the risk of nonperformance by a counterparty to the derivative contracts. We manage our credit risk by entering into derivative contracts with only highly rated financial institutions and by using netting agreements.
The effective portion of derivative gains and losses are recorded in accumulated other comprehensive (loss) income until the hedged transaction affects earnings upon settlement, at which time they are reclassified to interest expense, cost of goods sold, or net sales.the income statement. If it is probable that an anticipated hedged transaction will not occur by the end of the originally specified time period, we reclassify the gains or losses related to that hedge from accumulated other comprehensive (loss) income to other income (expense).
We assess hedge effectiveness was reviewed qualitatively by verifying that the critical terms of the hedging instrument and the forecasted transaction continue to match, and that there have been no adverse developments that have increased the risk that the counterparty will default. NoNaN recognition of ineffectiveness was recorded in our Consolidated Statement of (Loss) Earnings as a result of this qualitative analysis for the year ended December 31, 2018.
Foreign Currency Hedges
We use forward contracts to mitigate currency risk related to a portion of our forecasted foreign Euro denominatedcurrency revenues and Mexican Peso denominated expenses.costs. The currency forward contracts are designed as cash flow hedges and are recorded in the Consolidated Balance Sheets at fair value.
CTS CORPORATION 52
We continue to monitor the Company’s overall currency exposure and may elect to add cash flow hedges in the future. At December 31, 2018,2021, we had a net unrealized lossgain of $371$121 in accumulated other comprehensive loss,(loss) income, of which $318 is$121 in gains are expected to be reclassified to incomeearnings within the next 12 months. The notional amount of foreign currency forward contracts outstanding was $15,700$18,017 at December 31, 2018.
Interest Rate Swaps
We use interest rate swaps to convert thea portion of our revolving credit facility’sfacility's outstanding balance from a variable rate of interest intoto a fixed rate on a portionrate.
As of our debt balance. In the second quarter of 2012,December 31, 2021, we entered into four separate one-year interest rate swaphave agreements to fix interest rates on $50,000 of long-term debt for the periods January 2013 to January 2017. In the third quarter of 2012, we entered into four additional one-year interest rate swap agreements to fix interest rates on $25,000 of long-term debt for the periods January 2013 to January 2017. In the third quarter of 2016, we entered into three additional one-year interest rate swap agreements to fix interest rates on $50,000 of long-term debt for the periods August 2017 to August 2020.through February 2024. The difference to be paid or received under the terms of the swap agreements will be recognized as an adjustment to interest expense when settled.
These swaps are treated as cash flow hedges and consequently, the changes in fair value wereare recorded in other comprehensive income (loss). income. The estimated net amount of the existing gains or losses that are reported in accumulated other comprehensive (loss) income (loss) that isare expected to be reclassified into earnings within the next twelve months is approximately $576.
The location and fair values of derivative instruments designated as hedging instruments in the Consolidated Balance Sheets as of December 31, 2018,2021, are shown in the following table:
|
| As of December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Interest rate swaps reported in Other current assets |
| $ | 0 |
|
| $ | 0 |
|
Interest rate swaps reported in Accrued expenses and other liabilities |
| $ | (437 | ) |
| $ | (671 | ) |
Interest rate swaps reported in Other long-term obligations |
| $ | (353 | ) |
| $ | (1,546 | ) |
Foreign currency hedges reported in Other current assets |
| $ | 135 |
|
| $ | 1,125 |
|
As of December 31, | |||||||
2018 | 2017 | ||||||
Foreign currency hedges reported in Accrued expenses and other liabilities | $ | — | $ | 742 | |||
Foreign currency hedges reported in Other current assets | $ | 393 | $ | — | |||
Interest rate swaps reported in Other current assets | $ | 576 | $ | 278 | |||
Interest rate swaps reported in Other assets | $ | 369 | $ | 693 |
The Company has elected to net its foreign currency derivative assets and liabilities in the balance sheet in accordance with ASC 210-20 (Balance(Balance Sheet, Offsetting)Offsetting). On a gross basis, there were $423 foreign currency derivative assets of $141 and foreign currency derivative liabilities were $30.
The effect of derivative instruments on the Consolidated Statements of (Loss) Earnings is as follows:
|
| Years Ended December 31, |
| |||||||||
|
| 2021 |
|
| 2020 |
|
| 2019 |
| |||
Foreign Exchange Contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
Amounts reclassified from AOCI to earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
| $ | 0 |
|
| $ | (128 | ) |
| $ | 0 |
|
Cost of goods sold |
|
| 1,384 |
|
|
| (754 | ) |
|
| 860 |
|
Selling, general and administrative expense |
|
| 0 |
|
|
| (5 | ) |
|
| 92 |
|
Total amounts reclassified from AOCI to earnings |
|
| 1,384 |
|
|
| (887 | ) |
|
| 952 |
|
Gain recognized in other expense for hedge ineffectiveness |
|
| 0 |
|
|
| 3 |
|
|
| 0 |
|
Total derivative gain (loss) on foreign exchange contracts recognized in earnings |
| $ | 1,384 |
|
| $ | (884 | ) |
| $ | 952 |
|
Interest Rate Swaps: |
|
|
|
|
|
|
|
|
|
|
|
|
(Expense) benefit recorded in interest expense |
| $ | (744 | ) |
| $ | (432 | ) |
| $ | 491 |
|
Total gains (losses) on derivatives |
| $ | 640 |
|
| $ | (1,316 | ) |
| $ | 1,443 |
|
Years Ended December 31, | |||||||||||
2018 | 2017 | 2016 | |||||||||
Foreign Exchange Contracts: | |||||||||||
Amounts reclassified from AOCI to earnings: | |||||||||||
Net sales | $ | 383 | $ | (488 | ) | $ | (124 | ) | |||
Cost of goods sold | (6 | ) | 497 | 111 | |||||||
Selling, general and administrative | 107 | 45 | 1 | ||||||||
Total amounts reclassified from AOCI to earnings | 484 | 54 | (12 | ) | |||||||
Loss recognized in other expense for hedge ineffectiveness | — | (1 | ) | (1 | ) | ||||||
Loss recognized in other expense for derivatives not designated as cash flow hedges | — | (15 | ) | (5 | ) | ||||||
Total derivative gain (loss) on foreign exchange contracts recognized in earnings | $ | 484 | $ | 38 | $ | (18 | ) | ||||
Interest Rate Swaps: | |||||||||||
Interest Expense | $ | (421 | ) | $ | (37 | ) | $ | (928 | ) | ||
Total income (loss) on derivatives recognized in earnings | $ | 63 | $ | 1 | $ | (946 | ) |
CTS CORPORATION 53
NOTE 1415 — Accumulated Other Comprehensive Loss
Shareholders’ equity includes certain items classified as accumulated other comprehensive loss ("AOCI"(loss) income (“AOCI”) in the Consolidated Balance Sheets, including:
• | Unrealized gains (losses) on hedges relate to interest rate swaps to convert a portion of our revolving credit facility's outstanding balance from a variable rate of interest into a fixed rate and foreign currency forward contracts used to hedge our exposure to changes in exchange rates affecting certain revenues and costs denominated in foreign currencies. These hedges are designated as cash flow hedges, and we have deferred income statement recognition of gains and losses until the hedged transactions occur, at which time amounts are reclassified into earnings. Further information related to our derivative financial instruments is included in Note 14, “Derivative Financial Instruments” and Note 18, “Fair Value Measurements”. |
• | Unrealized gains (losses) on pension obligations are deferred from income statement recognition until the gains or losses are realized. Amounts reclassified to earnings from AOCI are included in net periodic pension income (expense). Further information related to our pension obligations is included in Note 7, “Retirement Plans”. |
• | Cumulative translation adjustment relates to our non-U.S. subsidiary companies that have designated a functional currency other than the U.S. dollar. We are required to translate the subsidiary functional currency financial statements to dollars using a combination of historical, period-end, and average foreign exchange rates. This combination of rates creates the foreign currency translation adjustment component of other comprehensive income. |
The components of AOCIaccumulated other comprehensive (loss) income for 2018the year ended December 31, 2021 are as follows:
|
| As of December 31, 2020 |
|
| Gain (Loss) Recognized in OCI |
|
| (Gain) Loss reclassified from AOCI to earnings |
|
| As of December 31, 2021 |
| ||||
Changes in fair market value of derivatives: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
| $ | (1,038 | ) |
| $ | 1,043 |
|
| $ | (640 | ) |
| $ | (635 | ) |
Income tax benefit (expense) |
|
| 240 |
|
|
| (240 | ) |
|
| 147 |
|
|
| 147 |
|
Net |
|
| (798 | ) |
|
| 803 |
|
|
| (493 | ) |
|
| (488 | ) |
Changes in unrealized pension cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
| (128,004 | ) |
|
| (4,951 | ) |
|
| 130,211 |
|
|
| (2,744 | ) |
Income tax benefit (expense) |
|
| 34,917 |
|
|
| 1,139 |
|
|
| (35,318 | ) |
|
| 738 |
|
Net |
|
| (93,087 | ) |
|
| (3,812 | ) |
|
| 94,893 |
|
|
| (2,006 | ) |
Cumulative translation adjustment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
| (2,036 | ) |
|
| 4 |
|
|
| — |
|
|
| (2,032 | ) |
Income tax benefit (expense) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Net |
|
| (2,036 | ) |
|
| 4 |
|
|
| — |
|
|
| (2,032 | ) |
Total accumulated other comprehensive (loss) income |
| $ | (95,921 | ) |
| $ | (3,005 | ) |
| $ | 94,400 |
|
| $ | (4,526 | ) |
As of December 31, 2017 | Gain (Loss) Recognized in OCI | Gain (Loss) reclassified from AOCI to income | Impact of ASU No. 2018-02 | As of December 31, 2018 | |||||||||||
Changes in fair market value of hedges: | |||||||||||||||
Gross | $ | 289 | $ | 1,932 | $ | (905 | ) | $ | — | $ | 1,316 | ||||
Income tax (expense) benefit | (105 | ) | (437 | ) | 205 | 39 | (298 | ) | |||||||
Net | 184 | 1,495 | (700 | ) | 39 | 1,018 | |||||||||
Changes in unrealized pension cost: | |||||||||||||||
Gross | (130,096 | ) | — | (2,358 | ) | — | (132,454 | ) | |||||||
Income tax benefit (expense) | 52,837 | — | 528 | (17,472 | ) | 35,893 | |||||||||
Net | (77,259 | ) | — | (1,830 | ) | (17,472 | ) | (96,561 | ) | ||||||
Cumulative translation adjustment: | |||||||||||||||
Gross | (1,985 | ) | (306 | ) | — | — | (2,291 | ) | |||||||
Income tax benefit (expense) | 100 | (5 | ) | — | — | 95 | |||||||||
Net | (1,885 | ) | (311 | ) | — | — | (2,196 | ) | |||||||
Total accumulated other comprehensive (loss) income | $ | (78,960 | ) | $ | 1,184 | $ | (2,530 | ) | $ | (17,433 | ) | $ | (97,739 | ) |
CTS CORPORATION 54
The components of AOCIaccumulated other comprehensive (loss) income for 2017the year ended December 31, 2020 are as follows:
|
| As of December 31, 2019 |
|
| Gain (Loss) Recognized in OCI |
|
| (Gain) Loss reclassified from AOCI to earnings |
|
| As of December 31, 2020 |
| ||||
Changes in fair market value of derivatives: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
| $ | 659 |
|
| $ | (3,015 | ) |
| $ | 1,318 |
|
| $ | (1,038 | ) |
Income tax (expense) benefit |
|
| (150 | ) |
|
| 684 |
|
|
| (294 | ) |
|
| 240 |
|
Net |
|
| 509 |
|
|
| (2,331 | ) |
|
| 1,024 |
|
|
| (798 | ) |
Changes in unrealized pension cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
| (124,140 | ) |
|
| — |
|
|
| (3,864 | ) |
|
| (128,004 | ) |
Income tax benefit |
|
| 34,018 |
|
|
| — |
|
|
| 899 |
|
|
| 34,917 |
|
Net |
|
| (90,122 | ) |
|
| — |
|
|
| (2,965 | ) |
|
| (93,087 | ) |
Cumulative translation adjustment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
| (2,211 | ) |
|
| 175 |
|
|
| — |
|
|
| (2,036 | ) |
Income tax benefit (expense) |
|
| 98 |
|
|
| (98 | ) |
|
| — |
|
|
| — |
|
Net |
|
| (2,113 | ) |
|
| 77 |
|
|
| — |
|
|
| (2,036 | ) |
Total accumulated other comprehensive (loss) income |
| $ | (91,726 | ) |
| $ | (2,254 | ) |
| $ | (1,941 | ) |
| $ | (95,921 | ) |
As of December 31, 2016 | (Loss) Gain recognized in OCI | Gain (Loss) reclassified from AOCI to income | As of December 31, 2017 | |||||||||
Changes in fair market value of hedges: | ||||||||||||
Gross | $ | 116 | $ | 264 | $ | (91 | ) | $ | 289 | |||
Income tax (expense) benefit | (42 | ) | (96 | ) | 33 | (105 | ) | |||||
Net | 74 | 168 | (58 | ) | 184 | |||||||
Changes in unrealized pension cost: | ||||||||||||
Gross | (151,618 | ) | — | 21,522 | (130,096 | ) | ||||||
Income tax benefit (expense) | 60,672 | — | (7,835 | ) | 52,837 | |||||||
Net | (90,946 | ) | — | 13,687 | (77,259 | ) | ||||||
Cumulative translation adjustment: | ||||||||||||
Gross | (2,414 | ) | 429 | — | (1,985 | ) | ||||||
Income tax benefit | 92 | 8 | — | 100 | ||||||||
Net | (2,322 | ) | 437 | — | (1,885 | ) | ||||||
Total accumulated other comprehensive (loss) income | $ | (93,194 | ) | $ | 605 | $ | 13,629 | $ | (78,960 | ) |
NOTE 1516 — Shareholders' Equity
Share count and par value data related to shareholders' equity are as follows:
|
| As of December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Preferred Stock |
|
|
|
|
|
|
|
|
Par value per share |
| No par value |
|
| No par value |
| ||
Shares authorized |
|
| 25,000,000 |
|
|
| 25,000,000 |
|
Shares outstanding |
|
| 0 |
|
|
| 0 |
|
Common Stock |
|
|
|
|
|
|
|
|
Par value per share |
| No par value |
|
| No par value |
| ||
Shares authorized |
|
| 75,000,000 |
|
|
| 75,000,000 |
|
Shares issued |
|
| 57,245,060 |
|
|
| 57,076,410 |
|
Shares outstanding |
|
| 32,178,715 |
|
|
| 32,276,787 |
|
Treasury stock |
|
|
|
|
|
|
|
|
Shares held |
|
| 25,066,345 |
|
|
| 24,799,623 |
|
As of December 31, | ||
2018 | 2017 | |
Preferred Stock | ||
Par value per share | No par value | No par value |
Shares authorized | 25,000,000 | 25,000,000 |
Shares outstanding | — | — |
Common Stock | ||
Par value per share | No par value | No par value |
Shares authorized | 75,000,000 | 75,000,000 |
Shares issued | 56,786,849 | 56,632,488 |
Shares outstanding | 32,750,727 | 32,938,466 |
Treasury stock | ||
Shares held | 24,036,122 | 23,694,022 |
On May 13, 2021, the cost methodBoard of Directors approved a new share repurchase program that authorizes the Company to account for ourrepurchase up to $50,000 of the Company’s common stock purchases.stock. The repurchase program has no set expiration date and replaces the repurchase program approved by the Board of Directors on February 7, 2019. During the year ended December 31, 2018 we purchased 342,100 shares for $9,440. During the year ended December 31, 2017, we did not purchase any2021, 266,722 shares of common stock under our board-authorized share repurchase program.were repurchased for approximately $8,786. Approximately $8,114 was$41,214 is still available for future purchases under the previously authorized stock repurchase program that was approved by our Board of Directors in April 2015. As discussed in Note 1, the Board or Directors authorized a new stock repurchase program with a maximum dollar limit of $25 million that replaced the previousthis program.
A roll forward of common shares outstanding is as follows:
|
| As of December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Balance at beginning of the year |
|
| 32,276,787 |
|
|
| 32,472,406 |
|
Repurchases |
|
| (266,722 | ) |
|
| (342,731 | ) |
Restricted stock unit issuances |
|
| 168,650 |
|
|
| 147,112 |
|
Balance at end of period |
|
| 32,178,715 |
|
|
| 32,276,787 |
|
As of December 31, | ||||
2018 | 2017 | |||
Balance at beginning of the year | 32,938,466 | 32,762,494 | ||
Repurchases | (342,100 | ) | — | |
Restricted stock unit issuances | 154,361 | 175,972 | ||
Balance at end of period | 32,750,727 | 32,938,466 |
NOTE 1617 — Stock-Based Compensation
At December 31, 2018,2021, we had five5 stock-based compensation plans: the Non-Employee Directors' Stock Retirement Plan ("Directors' Plan"), the 2004 Omnibus Long-Term Incentive Plan ("2004 Plan"), the 2009 Omnibus Equity and Performance Incentive Plan ("2009
CTS CORPORATION 55
Plan"), the 2014 Performance & Incentive Plan ("2014 Plan"), and the 2018 Equity and Incentive Compensation Plan ("2018 Plan"). Future grants can only be made under the 2018 Plan.
The following table summarizes the compensation expense included in selling, general and administrative expenses in the Consolidated Statements of (Loss) Earnings related to stock-based compensation plans:
|
| Years Ended December 31, |
| |||||||||
|
| 2021 |
|
| 2020 |
|
| 2019 |
| |||
Service-Based RSUs |
| $ | 2,714 |
|
| $ | 2,601 |
|
| $ | 2,207 |
|
Performance-Based RSUs |
|
| 3,113 |
|
|
| 539 |
|
|
| 2,553 |
|
Cash-settled awards |
|
| 278 |
|
|
| 277 |
|
|
| 255 |
|
Total |
| $ | 6,105 |
|
| $ | 3,417 |
|
| $ | 5,015 |
|
Income tax benefit |
|
| 1,404 |
|
|
| 786 |
|
|
| 1,133 |
|
Net |
| $ | 4,701 |
|
| $ | 2,631 |
|
| $ | 3,882 |
|
Years Ended December 31, | |||||||||
2018 | 2017 | 2016 | |||||||
Service-Based RSUs | $ | 2,036 | $ | 1,762 | $ | 1,997 | |||
Performance-Based RSUs | 3,089 | 2,350 | 665 | ||||||
Cash-settled awards | 131 | 72 | 76 | ||||||
Total | $ | 5,256 | $ | 4,184 | $ | 2,738 | |||
Income tax benefit | 1,188 | 1,573 | 1,029 | ||||||
Net | $ | 4,068 | $ | 2,611 | $ | 1,709 |
The fair value of all equity awards that vested during the periods ended December 31, 2018, 2017,2021, 2020, and 20162019 were $5,805, $5,471,$7,063, $5,680, and $4,959,$6,589, respectively. We recorded a tax deduction related to equity awards that vested during the year ended December 31, 2018,2021, in the amount of $1,312.
The following table summarizes the unrecognized compensation expense related to non-vested RSUs by type and the weighted-average period in which the expense is to be recognized:
|
| Unrecognized compensation expense at December 31, 2021 |
|
| Weighted- average period | |
Service-Based RSUs |
| $ | 2,021 |
|
| 1.23 years |
Performance-Based RSUs |
|
| 3,704 |
|
| 1.77 years |
Total |
| $ | 5,725 |
|
| 1.58 years |
Unrecognized compensation expense at December 31, 2018 | Weighted- average period | |||
Service-Based RSUs | $ | 1,598 | 1.21 | |
Performance-Based RSUs | 2,539 | 1.56 | ||
Total | $ | 4,137 | 1.43 |
We recognize expense on a straight-line basis over the requisite service period for each separately vesting portion of the award as if the award was, in substance, multiple awards.
The following table summarizes the status of these plans as of December 31, 2018:2021:
|
| 2018 Plan |
|
| 2014 Plan |
|
| 2009 Plan |
|
| 2004 Plan |
|
| Directors' Plan |
| |||||
Awards originally available to be granted |
|
| 2,500,000 |
|
|
| 1,500,000 |
|
|
| 3,400,000 |
|
|
| 6,500,000 |
|
| N/A |
| |
Performance stock options outstanding |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Maximum potential RSU and cash settled awards outstanding |
|
| 638,268 |
|
|
| 35,100 |
|
|
| 45,200 |
|
|
| 14,545 |
|
|
| 4,722 |
|
Maximum potential awards outstanding |
|
| 638,268 |
|
|
| 35,100 |
|
|
| 45,200 |
|
|
| 14,545 |
|
|
| 4,722 |
|
RSUs and cash settled awards vested and released |
|
| 127,313 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Awards available to be granted |
|
| 1,734,419 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
2018 Plan | 2014 Plan | 2009 Plan | 2004 Plan | Directors' Plan | ||||||
Awards originally available to be granted | 2,500,000 | 1,500,000 | 3,400,000 | 6,500,000 | N/A | |||||
Performance stock options outstanding | — | 275,000 | — | — | — | |||||
Maximum potential RSU and cash settled awards outstanding | 25,200 | 722,035 | 92,600 | 35,952 | 5,522 | |||||
Maximum potential awards outstanding | 25,200 | 997,035 | 92,600 | 35,952 | 5,522 | |||||
RSUs and cash settled awards vested and released | — | — | — | — | — | |||||
Awards available to be granted | 2,474,800 | — | — | — | — |
Service-Based Restricted Stock Units
Service-based RSUs entitle the holder to receive one1 share of common stock for each unit when the unit vests. RSUs are issued to officers, key employees, and non-employee directors as compensation. Generally, the RSUs vest over a three-year period. RSUs granted to non-employee directors vest one year after being granted. Upon vesting, the non-employee directors elect to either receive the stock associated with the RSU immediately or defer receipt of the stock to a future date. The fair value of the RSUs is equivalent to the trading value of our common stock on the grant date.
CTS CORPORATION 56
A summary of RSUsRSU activity for all Plansthe year ended December 31, 2021 is presented below:
|
| Units |
|
| Weighted Average Grant Date Fair Value |
|
| Weighted Average Remaining Contractual Term |
|
| Aggregate Intrinsic Value |
| ||||
Outstanding at January 1, 2021 |
|
| 367,428 |
|
| $ | 21.28 |
|
|
|
|
|
|
|
|
|
Granted |
|
| 93,565 |
|
|
| 33.81 |
|
|
|
|
|
|
|
|
|
Released |
|
| (161,626 | ) |
|
| 21.41 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
| (16,151 | ) |
|
| 29.11 |
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2021 |
|
| 283,216 |
|
| $ | 24.91 |
|
|
| 17.88 |
|
| $ | 10,320 |
|
Releasable at December 31, 2021 |
|
| 132,667 |
|
| $ | 17.53 |
|
|
| 29.92 |
|
| $ | 4,872 |
|
|
| Years Ended December 31, |
| |||||||||
|
| 2021 |
|
| 2020 |
|
| 2019 |
| |||
Weighted-average grant date fair value |
| $ | 33.81 |
|
| $ | 27.94 |
|
| $ | 28.61 |
|
Intrinsic value of RSUs released |
| $ | 5,408 |
|
| $ | 2,503 |
|
| $ | 2,155 |
|
Units | Weighted Average Grant Date Fair Value | Weighted Average Remaining Contractual Term | Aggregate Intrinsic Value | ||||||
Outstanding at January 1, 2018 | 399,347 | $ | 14.60 | ||||||
Granted | 99,422 | 26.95 | |||||||
Released | (137,500 | ) | 14.68 | ||||||
Forfeited | (5,679 | ) | 22.07 | ||||||
Outstanding at December 31, 2018 | 355,590 | $ | 17.91 | 22.46 | $ | 9,206 | |||
Releasable at December 31, 2018 | 209,474 | $ | 13.76 | 33.63 | $ | 5,423 |
Years Ended December 31, | |||||||||
2018 | 2017 | 2016 | |||||||
Weighted-average grant date fair value | $ | 26.95 | $ | 24.32 | $ | 15.07 | |||
Intrinsic value of RSUs released | $ | 4,015 | $ | 4,485 | $ | 1,520 |
A summary of nonvested RSUsnon-vested RSU activity for the year ended December 31, 2021 is presented below:
|
| RSUs |
|
| Weighted Average Grant Date Fair Value |
| ||
Nonvested at January 1, 2021 |
|
| 163,854 |
|
| $ | 28.14 |
|
Granted |
|
| 93,565 |
|
|
| 33.81 |
|
Vested |
|
| (90,719 | ) |
|
| 28.39 |
|
Forfeited |
|
| (16,151 | ) |
|
| 29.11 |
|
Nonvested at December 31, 2021 |
|
| 150,549 |
|
| $ | 31.42 |
|
RSUs | Weighted Average Grant Date Fair Value | ||||
Nonvested at January 1, 2018 | 139,536 | $ | 18.56 | ||
Granted | 99,422 | 26.95 | |||
Vested | (87,163 | ) | 19.05 | ||
Forfeited | (5,679 | ) | 22.07 | ||
Nonvested at December 31, 2018 | 146,116 | $ | 23.84 |
Performance-Based Restricted Stock Units
We grant performance-based restricted stock unit awards ("PSUs") to certain executives and key employees. Units are usually awarded in the range from zero0 percent to 200% of a targeted number of shares. The award rate for the 2016-2018, 2017-2019,2018-2020, 2019-2021, and 2018-20202020-2022 PSUs is dependent upon our achievement of sales growth targets, cash flow targets, and relative total shareholder return ("RTSR") using a matrix based on the percentile ranking of our stock price performance compared to a peer group over a three-year period. These awards are weighted 35% for achievement of the sales growth metric, 30% for achievement of the cash flow metric, and 35% for achievement of the RTSR metric. Other PSUs are granted from time to time based on other performance criteria.
A summary of PSUsPSU activity for all Plansthe year ended December 31, 2021 is presented below:
|
| Units |
|
| Weighted Average Grant Date Fair Value |
|
| Weighted Average Remaining Contractual Term |
|
| Aggregate Intrinsic Value |
| ||||
Outstanding at January 1, 2021 |
|
| 225,559 |
|
| $ | 28.97 |
|
|
|
|
|
|
|
|
|
Granted |
|
| 90,337 |
|
|
| 34.38 |
|
|
|
|
|
|
|
|
|
Added by performance factor |
|
| 18,107 |
|
|
| 28.33 |
|
|
|
|
|
|
|
|
|
Released |
|
| (53,145 | ) |
|
| 28.33 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
| (43,091 | ) |
|
| 27.71 |
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2021 |
|
| 237,767 |
|
| $ | 31.35 |
|
|
| 1.74 |
|
| $ | 8,731 |
|
Releasable at December 31, 2021 |
|
| — |
|
| $ | — |
|
|
|
|
|
| $ | — |
|
Units | Weighted Average Grant Date Fair Value | Weighted Average Remaining Contractual Term | Aggregate Intrinsic Value | ||||||
Outstanding at January 1, 2018 | 271,305 | $ | 18.77 | ||||||
Granted | 72,043 | 28.75 | |||||||
Released | (72,456 | ) | 18.66 | ||||||
Forfeited | (21,700 | ) | 17.66 | ||||||
Added by performance factor | 18,600 | 17.66 | |||||||
Outstanding at December 31, 2018 | 267,792 | $ | 21.44 | 1.14 | $ | 6,933 | |||
Releasable at December 31, 2018 | — | $ | — | — | $ | — |
CTS CORPORATION 57
The following table summarizes each grant of performance awards outstanding at December 31, 2018:2021:
Description |
| Grant Date |
| Vesting Year |
| Vesting Dependency |
| Target Units Outstanding |
|
| Maximum Number of Units to be Granted |
| ||
2019-2021 Performance RSUs |
| February 7, 2019 |
| 2021 |
| 35% RTSR, 35% sales growth, |
|
| 46,928 |
|
|
| 93,856 |
|
2019 Supplemental Performance RSUs |
| February 7, 2019 |
| 2021 |
| Succession Planning Targets |
|
| 6,945 |
|
|
| 13,890 |
|
2020 - 2022 QTI Performance RSUs |
| September 24, 2019 |
| 2022 |
| 50% EBITDA growth, |
|
| 1,750 |
|
|
| 3,500 |
|
2020 - 2022 Performance RSUs |
| February 6, 2020 |
| 2022 |
| 25% RTSR, 40% sales growth, |
|
| 59,475 |
|
|
| 118,950 |
|
2021 - 2023 Performance RSUs |
| Varies |
| 2023 |
| 25% RTSR, 40% sales growth, |
|
| 69,669 |
|
|
| 139,338 |
|
Focus 2025 Performance RSUs |
| Varies |
| 2024 |
| Cumulative revenues of $750 million over a trailing four-quarter period |
|
| 53,000 |
|
|
| 53,000 |
|
Total |
|
|
|
|
|
|
|
| 237,767 |
|
|
| 422,534 |
|
Description | Grant Date | Vesting Year | Vesting Dependency | Target Units Outstanding | Maximum Number of Units to be Granted | ||
2016-2018 Performance RSUs | February 16, 2016 | 2018 | 35% RTSR, 35% sales growth, 30% cash flow | 92,840 | 185,680 | ||
Single Crystal Performance RSUs | March 31, 2016 | 2018 | Various | 4,000 | 8,000 | ||
2017-2019 Performance RSUs | February 9, 2017 | 2019 | 35% RTSR, 35% sales growth, 30% cash flow | 71,796 | 143,592 | ||
2017-2019 Performance RSUs | February 9, 2017 | 2020 | Operating Income | 27,113 | 27,113 | ||
2018-2020 Performance RSUs | February 8, 2018 | 2021 | 35% RTSR, 35% sales growth, 30% cash flow | 40,223 | 80,446 | ||
2018- 2020 Performance RSUs | February 16, 2018 | 2021 | 35% RTSR, 35% sales growth, 30% cash flow | 31,820 | 63,640 | ||
Total | 267,792 | 508,471 |
Cash-Settled Restricted Stock Units
Cash-Settled RSUs entitle the holder to receive the cash equivalent of one share of common stock for each unit when the unit vests. These RSUs are issued to key employees residing in foreign locations as direct compensation. Generally, these RSUs vest over a three-year period. Cash-settled RSUs are classified as liabilities and are remeasured at each reporting date until settled. At December 31, 2018,2021, and 2017,2020, we had 17,24832,085 and 14,08230,009 cash-settled RSUs outstanding, respectively. At December 31, 2018,2021, and 2017,2020, liabilities of $300$400 and $241,$396, respectively were included in Accrued expenses and other liabilities on our Consolidated Balance Sheets.
NOTE 1718 — Fair Value Measurements
We use interest rates swaps to convert a portion of our Revolving Credit Facility's outstanding balance from a variable rate of interest to a fixed rate and foreign currency forward contracts to hedge the effect of foreign currency changes on certain revenues and costs denominated in foreign currencies. These derivative financial instruments are measured at fair value on a recurring basis.
The table below summarizes the financial assetsliabilities and liabilitiesassets that were measured at fair value on a recurring basis as of December 31, 20182021 and the (gain) lossgain (loss) recorded during the year ended December 31, 2018:2021:
|
| (Liability) Asset Carrying Value at December 31, 2021 |
|
| Quoted Prices in Active Markets for Identical (Level 1) |
|
| Significant Other Observable Inputs (Level 2) |
|
| Significant Unobservable Inputs (Level 3) |
|
| (Loss) Gain for Year Ended December 31, 2021 |
| |||||
Interest rate swap |
| $ | (790 | ) |
| $ | — |
|
| $ | (790 | ) |
| $ | — |
|
| $ | (744 | ) |
Foreign currency hedges |
| $ | 135 |
|
| $ | — |
|
| $ | 135 |
|
| $ | — |
|
| $ | 1,384 |
|
Contingent consideration |
| $ | (1,200 | ) |
| $ | — |
|
| $ | — |
|
| $ | (1,200 | ) |
| $ | — |
|
Asset Carrying Value at December 31, 2018 | Quoted Prices in Active Markets for Identical (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Loss (gain) for Year Ended December 31, 2018 | |||||||||||
Interest rate swap | $ | 945 | $ | — | $ | 945 | $ | — | $ | 421 | |||||
Foreign currency hedges | $ | 393 | $ | — | $ | 393 | $ | — | $ | (484 | ) |
The table below summarizes the financial assets and liabilities that were measured at fair value on a recurring basis as of December 31, 20172020 and the (gain) loss(loss) recorded during the year ended December 31, 2017:2020:
|
| (Liability) Asset Carrying Value at December 31, 2020 |
|
| Quoted Prices in Active Markets for Identical (Level 1) |
|
| Significant Other Observable Inputs (Level 2) |
|
| Significant Unobservable Inputs (Level 3) |
|
| (Loss) for Year Ended December 31, 2020 |
| |||||
Interest rate swap |
| $ | (2,217 | ) |
| $ | — |
|
| $ | (2,217 | ) |
| $ | — |
|
| $ | (432 | ) |
Foreign currency hedges |
| $ | 1,125 |
|
| $ | — |
|
| $ | 1,125 |
|
| $ | — |
|
| $ | (887 | ) |
Contingent consideration |
| $ | (2,000 | ) |
| $ | — |
|
| $ | — |
|
| $ | (2,000 | ) |
| $ | — |
|
Asset (Liability) Carrying Value at December 31, 2017 | Quoted Prices in Active Markets for Identical (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Loss (gain) for Year Ended December 31, 2017 | |||||||||||
Interest rate swap | $ | 971 | $ | — | $ | 971 | $ | — | $ | 37 | |||||
Foreign currency hedges | $ | (742 | ) | $ | — | $ | (742 | ) | $ | — | $ | (38 | ) |
CTS CORPORATION 58
The fair value of our interest rate swaps, and foreign currency hedges were measured using standard valuation models using market-based observable inputs over the contractual terms, including forward yield curves, among others. There is a readily determinable market for these derivative instruments, but thethat market is not active and therefore they are classified within levelLevel 2 of the fair value hierarchy.
The table below provides a reconciliationfair value of the recurring financial assetscontingent consideration requires significant judgment. The Company's fair value estimates used in the contingent consideration valuation are considered Level 3 fair value measurements. The fair value estimates were based on assumptions management believes to be reasonable, but that are inherently uncertain, including estimates of future revenues and liabilities relatedtiming of events and activities that are expected to interest rate swaps and foreign currency hedges:take place. Refer to Note 3 for further discussion on contingent consideration.
A roll-forward of the contingent consideration is as follows:
|
| Contingent |
| |
|
| Consideration |
| |
Balance at December 31, 2020 |
| $ | 2,000 |
|
Settled in cash |
|
| (650 | ) |
Reclassified to payable in accrued expenses and other liabilities |
|
| (150 | ) |
Balance at December 31, 2021 in accrued expenses and other liabilities |
| $ | 1,200 |
|
Interest Rate Swaps | Foreign Currency Hedges | |||||
Balance at January 1, 2017 | $ | 753 | $ | (601 | ) | |
Cash settlements paid (received) | 37 | (132 | ) | |||
Total gains (losses) for the period: | ||||||
Included in earnings | (37 | ) | 38 | |||
Included in other comprehensive earnings | 218 | (47 | ) | |||
Balance at January 1, 2018 | $ | 971 | $ | (742 | ) | |
Cash settlements paid (received) | 421 | (402 | ) | |||
Total gains (losses) for the period: | ||||||
Included in earnings | (421 | ) | 484 | |||
Included in other comprehensive earnings | (26 | ) | 1,053 | |||
Balance at December 31, 2018 | $ | 945 | $ | 393 |
Our long-term debt consists of a revolvingthe Revolving credit facility which is recorded at its carrying value. There is a readily determinable market for our revolving creditlong-term debt and it is classified within Level 2 of the fair value hierarchy as the market is not deemed to be active. The fair value of long-term debt approximates carrying value and was determined by valuing a similar hypothetical coupon bond and attributing that value to our credit facility.
NOTE 1819 — Income Taxes
(Loss) earnings before income taxes consist of the following:
|
| Years Ended December 31, |
| |||||||||
|
| 2021 |
|
| 2020 |
|
| 2019 |
| |||
U.S. |
| $ | (128,699 | ) |
| $ | (7,101 | ) |
| $ | 15,103 |
|
Non-U.S. |
|
| 67,819 |
|
|
| 52,580 |
|
|
| 35,163 |
|
Total |
| $ | (60,880 | ) |
| $ | 45,479 |
|
| $ | 50,266 |
|
Years Ended December 31, | |||||||||
2018 | 2017 | 2016 | |||||||
U.S. | $ | 30,815 | $ | 9,315 | $ | 25,746 | |||
Non-U.S. | 27,288 | 30,938 | 31,499 | ||||||
Total | $ | 58,103 | $ | 40,253 | $ | 57,245 |
Significant components of income tax provision/(benefit) are as follows:
|
| Years Ended December 31, |
| |||||||||
|
| 2021 |
|
| 2020 |
|
| 2019 |
| |||
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. |
| $ | 36 |
|
| $ | 211 |
|
| $ | (391 | ) |
Non-U.S. |
|
| 11,932 |
|
|
| 11,275 |
|
|
| 10,666 |
|
Total Current |
|
| 11,968 |
|
|
| 11,486 |
|
|
| 10,275 |
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. |
|
| (35,979 | ) |
|
| (2,815 | ) |
|
| 558 |
|
Non-U.S. |
|
| 4,997 |
|
|
| 2,122 |
|
|
| 3,287 |
|
Total Deferred |
|
| (30,982 | ) |
|
| (693 | ) |
|
| 3,845 |
|
Total provision for income taxes |
| $ | (19,014 | ) |
| $ | 10,793 |
|
| $ | 14,120 |
|
Years Ended December 31, | |||||||||
2018 | 2017 | 2016 | |||||||
Current: | |||||||||
U.S. | $ | (397 | ) | $ | 1,635 | $ | (1,312 | ) | |
Non-U.S. | 12,538 | 7,150 | 13,729 | ||||||
Total Current | 12,141 | 8,785 | 12,417 | ||||||
Deferred: | |||||||||
U.S. | (330 | ) | 17,597 | 13,245 | |||||
Non-U.S. | (240 | ) | (577 | ) | (2,797 | ) | |||
Total Deferred | (570 | ) | 17,020 | 10,448 | |||||
Total provision for income taxes | $ | 11,571 | $ | 25,805 | $ | 22,865 |
CTS CORPORATION 59
Significant components of our deferred tax assets and liabilities are as follows:
|
| As of December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Post-retirement benefits |
| $ | 1,226 |
|
| $ | 1,259 |
|
Inventory reserves |
|
| 69 |
|
|
| 477 |
|
Loss carry-forwards |
|
| 5,070 |
|
|
| 5,128 |
|
Credit carry-forwards |
|
| 19,665 |
|
|
| 17,401 |
|
Accrued expenses |
|
| 4,917 |
|
|
| 5,693 |
|
Research expenditures |
|
| 19,226 |
|
|
| 18,893 |
|
Operating lease liabilities |
|
| 5,643 |
|
|
| 6,012 |
|
Stock compensation |
|
| 1,970 |
|
|
| 1,969 |
|
Foreign exchange loss |
|
| 2,052 |
|
|
| 2,166 |
|
Other |
|
| 769 |
|
|
| 872 |
|
Gross deferred tax assets |
|
| 60,607 |
|
|
| 59,870 |
|
Depreciation and amortization |
|
| 13,386 |
|
|
| 13,004 |
|
Pensions |
|
| 10,958 |
|
|
| 12,557 |
|
Operating lease assets |
|
| 5,307 |
|
|
| 5,703 |
|
Subsidiaries' unremitted earnings |
|
| 1,947 |
|
|
| 3,046 |
|
Gross deferred tax liabilities |
|
| 31,598 |
|
|
| 34,310 |
|
Net deferred tax assets |
|
| 29,009 |
|
|
| 25,560 |
|
Deferred tax asset valuation allowance |
|
| (9,489 | ) |
|
| (8,320 | ) |
Total net deferred tax assets |
| $ | 19,520 |
|
| $ | 17,240 |
|
As of December 31, | ||||||
2018 | 2017 | |||||
Post-retirement benefits | $ | 1,061 | $ | 1,160 | ||
Inventory reserves | 1,236 | 1,128 | ||||
Loss carry-forwards | 4,647 | 5,401 | ||||
Credit carry-forwards | 16,909 | 10,793 | ||||
Nondeductible accruals | 5,685 | 7,062 | ||||
Research expenditures | 16,847 | 20,002 | ||||
Stock compensation | 2,142 | 1,803 | ||||
Foreign exchange loss | 2,245 | 1,373 | ||||
Other | 207 | 220 | ||||
Gross deferred tax assets | 50,979 | 48,942 | ||||
Depreciation and amortization | 11,500 | 9,819 | ||||
Pensions | 11,736 | 12,387 | ||||
Subsidiaries' unremitted earnings | 1,258 | 1,662 | ||||
Gross deferred tax liabilities | 24,494 | 23,868 | ||||
Net deferred tax assets | 26,485 | 25,074 | ||||
Deferred tax asset valuation allowance | (8,274 | ) | (8,182 | ) | ||
Total net deferred tax assets | $ | 18,211 | $ | 16,892 |
The long-term deferred tax assets and long-term deferred tax liabilities, classified as non-current, are as follows below:
|
| As of December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Non-current deferred tax assets |
| $ | 25,414 |
|
| $ | 24,250 |
|
Non-current deferred tax liabilities |
| $ | (5,894 | ) |
| $ | (7,010 | ) |
Total net deferred tax assets |
| $ | 19,520 |
|
| $ | 17,240 |
|
As of December 31, | ||||||
2018 | 2017 | |||||
Non-current deferred tax assets | $ | 22,201 | $ | 20,694 | ||
Non-current deferred tax liabilities | $ | (3,990 | ) | $ | (3,802 | ) |
Total net deferred tax assets | $ | 18,211 | $ | 16,892 |
At each reporting date, we weigh all available positive and negative evidence to assess whether it is more-likely-than-not that the Company's deferred tax assets, including deferred tax assets associated with accumulated loss carryforwards and tax credits in the various jurisdictions in which it operates, will be realized. As of December 31, 2018,2021, and 2017,2020, we recorded deferred tax assets related to certain U.S. state and non-U.S. income tax loss carryforwards of $4,647$5,070 and $5,401,$5,128, respectively, and U.S. and non-U.S. tax credits of $16,909$19,665 and $10,793,$17,401, respectively. The deferred tax assets expire in various years primarily between 20212022 and 2038.
Generally, we assess if it is more-likely-than-not that our net deferred tax assets will be realized during the available carry-forward periods. As a result, we have determined that valuation allowances of $8,274$9,489 and $8,182$8,320 should be provided for certain deferred tax assets at December 31, 2018,2021, and 2017,2020, respectively. As of December 31, 2018,2021, the valuation allowances relate to certain U.S. state and non-U.S. loss carry-forwards and certain U.S. state tax credits that management does not anticipate will be utilized.
A valuation allowance of $1,286 was recorded in 20182021 against the U.S. federal foreign tax credit carryforwards of $7,316, which$9,229. These credits begin to expire in varying amounts between 20232028 and 2025 as well as2031. NaN valuation allowance was recorded in 2021 against the U.S. federal research and development tax credits of $6,516, which$8,024. These credits begin to expire in varying amounts between 20212022 and 2038.2041. We assessed the anticipated realization of those tax credits utilizing future taxable income projections. Based on those projections, management believes it is more-likely-than-not that we will realize the benefits of these credit carryforwards.
CTS CORPORATION 60
The following table reconciles taxes at the U.S. federal statutory rate to the effective income tax rate:
|
| Years Ended December 31, |
| ||||||
|
| 2021 |
|
| 2020 |
|
| 2019 |
|
Taxes at the U.S. statutory rate |
| 21.0% |
|
| 21.0% |
|
| 21.0% |
|
State income taxes, net of federal income tax benefit |
| 4.3% |
|
| (0.1)% |
|
| 0.4% |
|
Non-U.S. earnings taxed at rates different than the U.S. statutory rate |
| 3.1% |
|
| (0.9)% |
|
| 1.3% |
|
Foreign source earnings, net of associated foreign tax credits |
| 0.1% |
|
| (0.7)% |
|
| 0.3% |
|
Benefit of tax credits |
| 0.8% |
|
| (0.7)% |
|
| (1.5)% |
|
Non-deductible expenses |
| (1.6)% |
|
| (0.5)% |
|
| 4.1% |
|
Stock compensation - excess tax benefits |
| 0.7% |
|
| (0.1)% |
|
| (1.1)% |
|
Adjustment to valuation allowances |
| (3.1)% |
|
| 1.6% |
|
| (0.4)% |
|
Other changes in tax laws and rates |
| 0 |
|
| 0 |
|
| 0.1% |
|
Change in unrecognized tax benefits |
| 0.4% |
|
| (0.7)% |
|
| 3.3% |
|
Impacts of unremitted foreign earnings |
| (4.5)% |
|
| 5.2% |
|
| 1.3% |
|
Release of disproportionate tax effects of OCI |
| 8.8% |
|
| 0 |
|
| 0 |
|
Other |
| 1.2% |
|
| (0.4)% |
|
| (0.7)% |
|
Effective income tax rate |
| 31.2% |
|
| 23.7% |
|
| 28.1% |
|
Years Ended December 31, | ||||||
2018 | 2017 | 2016 | ||||
Taxes at the U.S. statutory rate | 21.0 | % | 35.0 | % | 35.0 | % |
State income taxes, net of federal income tax benefit | 1.2 | % | 1.1 | % | 1.4 | % |
Non-U.S. income taxed at rates different than the U.S. statutory rate | 0.8 | % | (9.0 | )% | (7.5 | )% |
Foreign source income, net of associated foreign tax credits | 4.1 | % | 0.1 | % | 5.3 | % |
Benefit of tax credits | (0.9 | )% | (1.4 | )% | (1.0 | )% |
Non-deductible expenses | 1.3 | % | 1.5 | % | 0.7 | % |
Stock compensation - excess tax benefits | (0.9 | )% | (1.5 | )% | (0.8 | )% |
Adjustment to valuation allowances | (0.6 | )% | (4.4 | )% | 3.8 | % |
Other changes in tax laws and rates | (6.1 | )% | — | % | — | % |
Change in unrecognized tax benefits | (1.7 | )% | 2.0 | % | 3.3 | % |
Impacts of unremitted foreign earnings | 1.1 | % | 0.9 | % | 0.6 | % |
Impacts related to the 2017 Tax Cuts and Jobs Act | (0.6 | )% | 44.7 | % | — | % |
Other | 1.2 | % | (4.9 | )% | (0.9 | )% |
Effective income tax rate | 19.9 | % | 64.1 | % | 39.9 | % |
In 2020, the Company began the termination of the U.S.-based pension plan. As a result of the final settlement of the pension liability in 2021, we reclassified the disproportionate tax effect related to the pension plan of $5,375 that were previously recorded in accumulated other comprehensive loss to income tax expense. Further information related to our pension terminations is included in Note 7 – Retirement Plans.
Following the enactment of the 2017 the Tax CutsCut and Jobs Act of 2017 (the “Tax Act”) was signed into law making significant changes toand the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, the transition of U.S international taxation from a worldwide tax system to a territorial system, and aassociated one-time transition tax, on the mandatory deemedin general, repatriation of cumulative foreign earnings as of December 31, 2017. We recognized a provisional amount of $18,001 as an additional income tax expense in the fourth quarter of 2017. This amount included $11,734 related to the mandatory deemed one-time transition tax and $6,267 related to the remeasurement of certain deferred tax assets and liabilities.
The Tax Act also includes provisions for Global Intangible Low-Taxed Income (“GILTI”) wherein taxes on foreign income are imposed in excess of a deemed return on tangible assets of foreign corporations. We elected to recognize the tax on GILTI as an expense in the period the tax is incurred. We have not provided deferred taxes related to temporary differences that upon their reversal will impact the amount of income subject to GILTI in the period.
We recognize the financial statement benefit of a tax position when it is more-likely-than-not, based on its technical merits, that the position will be sustained upon examination. A tax position that meets the more-likely-than-not threshold is then measured to determine the amount of benefit to be recognized in the financial statements. As of December 31, 2018,2021, we have approximately $6,203$2,196 of unrecognized tax benefits, which if recognized, would impact the effective tax rate. We do not anticipate any significant changes in our unrecognized tax benefitsbenefit within the next 12 months.
A reconciliation of the beginning and ending unrecognized tax benefits is provided below:
|
| As of December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Balance at January 1 |
| $ | 3,128 |
|
| $ | 5,016 |
|
Increase related to current year tax positions |
|
| 70 |
|
|
| 880 |
|
Decrease related to prior year tax positions |
|
| (237 | ) |
|
| (1,156 | ) |
Decrease related to lapse in statute of limitation |
|
| (125 | ) |
|
| 0 |
|
Decrease related to settlements with taxing authorities |
|
| (640 | ) |
|
| (1,612 | ) |
Balance at December 31 |
| $ | 2,196 |
|
| $ | 3,128 |
|
2018 | 2017 | |||||
Balance at January 1 | $ | 7,306 | $ | 12,347 | ||
Increase related to current year tax positions | 55 | — | ||||
(Decrease) increase related to prior year tax positions | (36 | ) | 1,290 | |||
Decrease related to lapse in statute of limitation | (1,076 | ) | — | |||
Decrease related to settlements with taxing authorities | (46 | ) | (6,331 | ) | ||
Balance at December 31 | $ | 6,203 | $ | 7,306 |
Our continuing practice is to recognize interest and/or penalties related to unrecognized tax benefits as income tax expense. As of December 31, 2018,2021, and 2017, $2,5152020, $39 and $2,596,$301, respectively, of interest and penalties were accrued.
We are subject to taxation in the U.S., various states, and in non-U.S. jurisdictions. Our U.S. income tax returns are primarily subject to examination from 20152018 through 2017;2020; however, U.S. tax authorities also have the ability to review prior tax years to the extent loss
CTS CORPORATION 61
carryforwards and tax credit carryforwards are utilized. The open years for the non-U.S. tax returns range from 2010 through 20172020 based on local statutes.
Fair Values at May 15, 2017 | ||||
Current assets | $ | 2,836 | ||
Property, plant and equipment | 580 | |||
Other assets | 395 | |||
Goodwill | 9,313 | |||
Intangible assets | 9,142 | |||
Fair value of assets acquired | 22,266 | |||
Less fair value of liabilities acquired | (3,145 | ) | ||
Net cash paid | $ | 19,121 |
Carrying Value | Weighted Average Amortization Period (in years) | ||||
Developed technology | $ | 7,581 | 15.0 | ||
Customer relationships | 937 | 10.0 | |||
Other | 624 | 3.0 | |||
Total | $ | 9,142 | 13.7 |
Fair Values at March 11, 2016 | ||||
Current assets | $ | 4,215 | ||
Property, plant and equipment | 6,173 | |||
Other assets | 37 | |||
Goodwill | 27,879 | |||
Intangible assets | 35,427 | |||
Fair value of assets acquired | 73,731 | |||
Less fair value of liabilities acquired | (668 | ) | ||
Net cash paid | $ | 73,063 |
Carrying Value | Weighted Average Amortization Period (in years) | ||||
Developed technology | $ | 23,730 | 15.0 | ||
Customer relationships and contracts | 11,502 | 14.6 | |||
Other | 195 | 0.8 | |||
Total | $ | 35,427 | 14.8 |
NOTE 20 — Geographic Data
Financial information relating to our operations by geographic area were as follows:
|
| Years Ended December 31, |
| |||||||||
Net Sales |
| 2021 |
|
| 2020 |
|
| 2019 |
| |||
United States |
| $ | 297,322 |
|
| $ | 241,823 |
|
| $ | 279,904 |
|
China |
|
| 106,700 |
|
|
| 88,129 |
|
|
| 87,342 |
|
Singapore |
|
| 37,742 |
|
|
| 31,985 |
|
|
| 32,957 |
|
Czech Republic |
|
| 36,252 |
|
|
| 27,143 |
|
|
| 33,214 |
|
Taiwan |
|
| 27,768 |
|
|
| 21,849 |
|
|
| 19,810 |
|
Other non-U.S. |
|
| 7,141 |
|
|
| 13,137 |
|
|
| 15,772 |
|
Consolidated net sales |
| $ | 512,925 |
|
| $ | 424,066 |
|
| $ | 468,999 |
|
Net Sales | Years Ended December 31, | ||||||||
2018 | 2017 | 2016 | |||||||
United States | $ | 313,489 | $ | 287,092 | $ | 276,033 | |||
Singapore | 6,724 | 5,596 | 6,668 | ||||||
Taiwan | 20,802 | 18,586 | 17,121 | ||||||
China | 79,380 | 66,510 | 59,506 | ||||||
Czech Republic | 36,528 | 34,476 | 34,767 | ||||||
Other non-U.S. | 13,560 | 10,733 | 2,584 | ||||||
Consolidated net sales | $ | 470,483 | $ | 422,993 | $ | 396,679 |
Sales are attributed to countries based upon the origin of the sale.
|
| Years Ended December 31, |
| |||||
Long-Lived Tangible Assets |
| 2021 |
|
| 2020 |
| ||
United States |
| $ | 37,409 |
|
| $ | 39,368 |
|
China |
|
| 30,461 |
|
|
| 30,240 |
|
Mexico |
|
| 13,311 |
|
|
| 12,441 |
|
Czech Republic |
|
| 9,728 |
|
|
| 9,856 |
|
Taiwan |
|
| 5,679 |
|
|
| 5,071 |
|
Other non-U.S |
|
| 288 |
|
|
| 461 |
|
Consolidated long-lived assets |
| $ | 96,876 |
|
| $ | 97,437 |
|
Long-Lived Assets | Years Ended December 31, | |||||
2018 | 2017 | |||||
United States | $ | 53,950 | $ | 44,010 | ||
China | 32,973 | 32,464 | ||||
Taiwan | 3,752 | 3,540 | ||||
Czech Republic | 5,976 | 5,518 | ||||
Other non-U.S | 2,750 | 2,715 | ||||
Consolidated long-lived assets | $ | 99,401 | $ | 88,247 |
First | Second | Third | Fourth | |||||||||
2018 | ||||||||||||
Net sales | $ | 113,530 | $ | 118,021 | $ | 118,859 | $ | 120,073 | ||||
Gross margin | $ | 38,433 | $ | 41,813 | $ | 42,082 | $ | 42,645 | ||||
Operating earnings | $ | 13,359 | $ | 14,544 | $ | 16,118 | $ | 17,017 | ||||
Net earnings | $ | 11,548 | $ | 7,209 | $ | 10,211 | $ | 17,564 | ||||
Basic earnings per share | $ | 0.35 | $ | 0.22 | $ | 0.31 | $ | 0.53 | ||||
Diluted earnings per share | $ | 0.34 | $ | 0.21 | $ | 0.30 | $ | 0.52 | ||||
2017 | ||||||||||||
Net sales | $ | 100,154 | $ | 105,686 | $ | 106,243 | $ | 110,910 | ||||
Gross margin | $ | 34,224 | $ | 35,794 | $ | 37,538 | $ | 32,875 | ||||
Operating earnings (loss) | $ | 12,196 | $ | 13,208 | $ | 13,111 | $ | (19 | ) | |||
Net earnings (loss) | $ | 8,484 | $ | 9,966 | $ | 9,619 | $ | (13,621 | ) | |||
Basic earnings (loss) per share | $ | 0.26 | $ | 0.30 | $ | 0.29 | $ | (0.41 | ) | |||
Diluted earnings (loss) per share | $ | 0.25 | $ | 0.30 | $ | 0.29 | $ | (0.41 | ) |
CTS CORPORATION
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
(in thousands) |
| Balance at Beginning of Period |
|
| Charged to Expense |
|
| Charged to Other Accounts |
|
| (Write-offs) / Recoveries |
|
| Balance at End of Period |
| |||||
Year ended December 31, 2021 Allowance for credit losses |
| $ | 764 |
|
| $ | 1,020 |
|
| $ | 4 |
|
| $ | (131 | ) |
| $ | 1,657 |
|
Year ended December 31, 2020 Allowance for credit losses |
| $ | 261 |
|
| $ | 513 |
|
| $ | 152 |
|
| $ | (162 | ) |
| $ | 764 |
|
Year ended December 31, 2019 Allowance for credit losses |
| $ | 384 |
|
| $ | 141 |
|
| $ | (9 | ) |
| $ | (255 | ) |
| $ | 261 |
|
(in thousands) | Balance at Beginning of Period | Charged to Expense | Charged to Other Accounts | (Write-offs) / Recoveries | Balance at End of Period | ||||||||||
Year ended December 31, 2018 Allowance for doubtful accounts | $ | 357 | $ | 56 | $ | (8 | ) | $ | (21 | ) | $ | 384 | |||
Year ended December 31, 2017 Allowance for doubtful accounts | $ | 170 | $ | 248 | $ | 9 | $ | (70 | ) | $ | 357 | ||||
Year ended December 31, 2016 Allowance for doubtful accounts | $ | 133 | $ | 44 | $ | — | $ | (7 | ) | $ | 170 |
CTS CORPORATION 63
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial DisclosureNot applicable.
Item 9A.
Controls and Procedures(a) Evaluation of Disclosure and Controls
Our management, with the Securities Exchange Act of 1934, management, under the directionparticipation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this annual report.Annual Report on Form 10-K. Based on suchthat evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K were effective in providing reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of December 31, 2018.
(b) Management’s Annual Report on its auditInternal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934 as amended (the Exchange Act)). Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2018,2021. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control—Integrated Framework (2013 framework). Based on our assessment under the framework in Internal Control—Integrated Framework (2013 framework), our management concluded that our internal control over financial reporting was effective as of December 31, 2021. The effectiveness of our internal control over financial reporting as of December 31, 2021 has been audited by Grant Thornton LLP, an independent registered public accounting firm, as stated in their report that is included in Part II, Item 8 of this Annual Report on Form 10-K under the heading "Report of Independent Registered Public Accounting Firm" and is incorporated herein by reference. The Report of Management on Internal Control over Financial Reporting, which can be found following the signature page of this Annual Report on Form 10-K, is incorporated herein by reference.
(c) Changes in Internal Control over Financial Reporting
There were no additional changes in our internal control over financial reporting for the quarter ended December 31, 20182021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
CTS Corporation
Opinion on internal control over financial reporting
We have audited the internal control over financial reporting of CTS Corporation (an Indiana corporation) and subsidiaries (the “Company”) as of December 31, 2021, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended December 31, 2021, and our report dated February 25, 2022 expressed an unqualified opinion on those financial statements.
Basis for opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual report on Internal Control Over Financial Reporting (“Management’s Report”). Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and limitations of internal control over financial reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ GRANT THORNTON LLP
Chicago, Illinois
February 25, 2022
CTS CORPORATION 65
Item 9B.
Other InformationNot applicable.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
PART III
Item 10.
Directors, Executive Officers and Corporate GovernancePlease see Part I, Item 1 of this Annual Report on Form 10-K for information about our executive officers, which is incorporated by reference herein. Information with respect to Directors and Corporate Governance may be found in our definitive proxy statement to be delivered to shareholders in connection with our 20192022 Annual Meeting of Shareholders. Such information is incorporated herein by reference.
Item 11.
Executive CompensationInformation with respect to this item may be found in our definitive proxy statement to be delivered to shareholders in connection with our 20192022 Annual Meeting of Shareholders. Such information is incorporated herein by reference.
EQUITY COMPENSATION PLAN INFORMATION
The following table provides information about shares of CTS common stock that could be issued under all of our equity compensation plans as of December 31, 2018:2021:
Plan Category |
| (a) Number of Securities to be Issued Upon Exercise of Outstanding Options, RSUs, Warrants and Rights (2) |
|
| (b) Weighted- Average Grant Date Fair Value of Outstanding Options, RSUs, Warrants and Rights |
|
| (c) Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column(a)) |
| |||
Equity compensation plans approved by security holders |
|
| 820,021 |
|
| $ | 27.85 |
|
|
| 1,734,419 |
|
Equity compensation plans not approved by security holders(1) |
|
| 4,722 |
|
|
| — |
|
|
| — |
|
Total |
|
| 824,743 |
|
|
|
|
|
|
| 1,734,419 |
|
(1) | In 1990, we adopted the Stock Retirement Plan for Non-Employee Directors. Prior to December 1, 2004, we annually credited an account for each non-employee director with 800 CTS common stock units. We also annually credited each deferred stock account with an additional number of CTS common stock units representing the amount of dividends which would have been paid on an equivalent number of shares of CTS common stock for each quarter during the preceding calendar year. As of December 1, 2004, this plan was amended to preclude crediting any additional CTS common stock units under the plan. Upon retirement, a participating non-employee director is entitled to receive one share of CTS common stock for each CTS common stock unit in his deferred stock account. On December 31, 2021, the deferred stock accounts contained a total of 4,722 CTS common stock units. |
(2) | Based on achievement of the maximum targets for performance-based equity grants. |
Plan Category | (a) Number of Securities to be Issued Upon Exercise of Outstanding Options, RSUs, Warrants and Rights (2) | (b) Weighted-Average Grant Date Fair Value of Outstanding Options, RSUs, Warrants and Rights | (c) Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column(a)) | ||||
Equity compensation plans approved by security holders | 1,133,539 | $ | 13.48 | 2,474,800 | |||
Equity compensation plans not approved by security holders(1) | 5,522 | — | — | ||||
Total | 1,139,061 | 2,474,800 |
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Shareholder MattersInformation with respect to this item may be found in our definitive proxy statement to be delivered to shareholders in connection with our 20192022 Annual Meeting of Shareholders. Such information is incorporated herein by reference.
Item 13.
Certain Relationships and Related Transactions, and Director IndependenceInformation with respect to this item may be found in our definitive proxy statement to be delivered to shareholders in connection with our 20192022 Annual Meeting of Shareholders. Such information is incorporated herein by reference.
Item 14.
Principal Accountant Fees and ServicesInformation with respect to this item the aggregate fees billed to us by our principal accountant, Grant Thornton LLP (PCAOB ID No. 248), may be found in our definitive proxy statement to be delivered to shareholders in connection with our 20192022 Annual Meeting of Shareholders. Such information is incorporated herein by reference.
CTS CORPORATION 67
PART IV
Item 15.
Exhibits and Financial Statements SchedulesThe following Consolidated Financial Statements of CTS Corporation and Subsidiaries are included herein:
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Earnings: Years ended December 31, 2018,2021, December 31, 2017,2020, and December 31, 2016
Consolidated Statements of Comprehensive Earnings: Years ended December 31, 2018,2020, December 31, 2017,2020, and December 31, 2016
Consolidated Balance Sheets: December 31, 2018,2021, and December 31, 2017
Consolidated Statements of Cash Flows: Years ended December 31, 2018,2021, December 31, 2017,2020, and December 31, 2016
Consolidated Statements of Shareholders' Equity: Years Ended December 31, 2018,2021, December 31, 2017,2020, and December 31, 2016
Notes to Consolidated Financial Statements
Schedule II: Valuation and Qualifying Accounts and Reserves
Other schedules have been omitted because they are not applicable, or the required information is shown in the Consolidated Financial Statements or Notes thereto.
(a) (3) Exhibits
All references to documents filed pursuant to the Securities Exchange Act of 1934, including Forms 10-K, 10-Q and 8-K, were filed by CTS, File No. 1-4639.
(3)(i) | |||
(3)(ii) | |||
(3)(iii) | |||
(10)(a) | |||
(10)(b) | |||
(10)(c) | |||
(10)(d) | |||
(10)(e) | |||
(10)(f) | |||
(10)(g) | |||
CTS CORPORATION 68
(10)(h) | |||
(10)(i) | |||
(10)(j) | |||
(10)(k) | |||
(10)(l) | |||
(10)(m) | |||
(10)(n) | |||
(10)(o) | |||
(10)(p) | |||
(10)(q) | |||
(21) | |||
(23) | |||
(31)(a) | |||
(31)(b) | |||
(32)(a) | |||
(32)(b) | |||
101 | The following financial statements from the Company's Annual Report on Form 10-K for the year ended December 31, 2021, formatted in Inline XBRL: (i) Consolidated Statements of (Loss) Earnings, (ii) Consolidated Statements of Comprehensive Earnings, (iii) Consolidated Balance Sheets, (iv) Consolidated Statements of Cash Flows, (v) Consolidated Statements of Stockholders' Equity and (vi) Notes to Consolidated Financial Statements, tagged as blocks of text and including detailed tags. | ||
104 | The cover page from the Company's Annual Report on Form 10-K for the year ended December 31, 2021, formatted in Inline XBRL | ||
* | |
Management contract or compensatory plan or arrangement. |
CTS CORPORATION 69
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CTS Corporation | |||
Date: February 25, 2022 | By: | /s/ Ashish Agrawal | |
Ashish Agrawal | |||
Vice President and Chief Financial Officer (Principal Financial Officer) | |||
Date: February 25, 2022 | By: | /s/ Thomas M. White | |
Thomas M. White Corporate Controller (Principal Accounting Officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Date: February 25, 2022 | By: | /s/ Kieran O'Sullivan | |
Kieran O'Sullivan | |||
Chairman, President, and Chief Executive Officer (Principal Executive Officer) | |||
Date: February | By: | /s/ Robert A. Profusek | |
Robert A. Profusek Lead Director | |||
Date: February | By: | /s/ | |
Gordon Hunter Director | |||
Date: February | By: | /s/ | |
William S. Johnson Director | |||
Date: February | By: | /s/ | |
Alfonso G. Zulueta Director | |||
Date: February 25, 2022 | By: | /s/ Ye Jane Li | |
Ye Jane Li | |||
Date: February 25, 2022 | By: | /s/ Donna M. Costello | |
Donna M. Costello |
CTS CORPORATION 75