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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For The Fiscal Year Endedthe fiscal year ended December 31, 20192022
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 AvenueLisleIL | 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 x☒ NoYes
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 x☒ No
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. x☒ Yes ¨☐ No
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). x☒ Yes ¨☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer", "accelerated filer," "smaller reporting company," and "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. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes x☒ No
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, 2019,2022, was approximately $890,000,000.$1,069,446,384. There were 32,433,39131,668,025 shares of common stock, without par value, outstanding on February 18, 2020.
DOCUMENTS INCORPORATED BY REFERENCE
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| Management's Discussion and Analysis of Financial Condition and Results of Operations | 22 |
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| Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 68 |
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| Disclosure Regarding Foreign Jurisdictions that Prevent Inspections | 70 |
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| Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters | 71 |
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| Certain Relationships and Related Transactions, and Director Independence | 71 |
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CTS CORPORATION 2
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'smanagement’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, including supply chain disruptions; changes in the economy generally, including inflationary and/or recessionary conditions, and in respect to the business in which CTS operates; unanticipated issues in integrating acquisitions;acquisitions, including our acquisitions of TEWA Temperature Sensors and Ferroperm Piezoceramics; 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.risks (including, without limitation, the potential impact U.S./China relations and the conflict between Russia and Ukraine may have on our business, results of operations and financial condition). 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 the 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.
PART I
Item 1. Business
CTS 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 while also using independent manufacturers' representatives and distributors.
On February 28, 2022, we acquired 100% of the outstanding shares of TEWA for $24,515. TEWA is a designer and manufacturer of high-quality temperature sensors. TEWA has complementary capabilities with our existing temperature sensing platform, and the acquisition supports our end market diversification strategy and expands our presence in Europe.
On June 30, 2022, we acquired 100% of the outstanding shares of Ferroperm for $72,340. Ferroperm specializes in the design and manufacture of high performance piezoceramic components for use in complex and demanding medical, industrial, and aerospace applications. Ferroperm has complementary capabilities with our existing medical diagnostics and imaging product lines. The acquisition supports our end market diversification strategy and expands our presence in European end markets.
On February 6, 2023, we acquired 100% of the outstanding shares of maglab AG ("maglab") for $4,164 in cash subject to additional earnout payments based on future performance. Maglab has deep expertise in magnetic system design and current measurement solutions for use in e-mobility, industrial automation, and renewable energy applications. Maglab's domain expertise coupled with CTS’ commercial, technical and operational capabilities position us to advance our status as a recognized innovator in electric motor sensing and controls markets.
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 and information technology markets.
CTS CORPORATION 2
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) |
CTS CORPORATION 4
The following table provides a breakdown of net sales by industry as a percent of consolidated net sales:
2019 | 2018 | 2017 | |
Industry | |||
Transportation | 64% | 64% | 65% |
Industrial | 17% | 18% | 18% |
Medical | 9% | 9% | 8% |
Aerospace and Defense | 7% | 5% | 4% |
Telecommunications and IT | 3% | 4% | 5% |
% of consolidated net sales | 100% | 100% | 100% |
|
| 2022 |
| 2021 |
| 2020 |
Industry |
|
|
|
|
|
|
Transportation |
| 52% |
| 55% |
| 57% |
Industrial |
| 29% |
| 27% |
| 25% |
Medical |
| 10% |
| 9% |
| 9% |
Aerospace and Defense |
| 9% |
| 9% |
| 9% |
% of consolidated net sales |
| 100% |
| 100% |
| 100% |
In the above table, previously reported Telecommunications & IT are included in the Industrial end-market for all periods presented.
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, Singapore, Taiwan, and the United States. Approximately 89%88% of 20192022 net sales were attributable to our sales engineers.
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 2022, independent distributors accounted for approximately 9% of net sales. We use 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 2019,2022, approximately 6%3% 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 2019, independent distributors accounted for approximately 5% 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 powders, plastic components, molding compounds, printed circuit boards and assemblies, quartz blanks and crystals, wire harness assemblies, copper, brass, silver, gold, platinum, lead, aluminum, and steel-based raw materials and components.
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. The price and availability of raw materials and manufactured components is subject to change due to, among other things, new laws and regulations, global economic and political events including strikes, and public health and safety concerns.
Due to the COVID-19 pandemic, we have experienced supply chain disruptions and inflationary pressures. In particular, semiconductor and resin shortages have increased our material prices, and they have impacted our OEM customers’ ability to finish assembly of vehicles, which in China has resulted in travel restrictions and extended shutdown of certain businesses in the region, delaying the re-opening of two ofturn have adversely impacted our manufacturing facilities following the Lunar New Year holiday. We rely upon these facilities to support our business in China and to export components for use in our production in other facilities. In addition, we source raw materials and certain components from Chinese suppliers for use in our operations. The closures and limitations on movement in the region are adversely affecting our business and will adversely affect our sales and results of operations and cash flows. These pressures are expected to continue in the first quarter of 2020, and possibly longer if coronavirus consequences continue.
PATENTS, TRADEMARKS, AND LICENSES
We maintain a programcontinue our practice of innovation and protect our intellectual property by obtaining and protectingpatents in the U.S. and non-U.S.abroad. Our patents cover inventions relating to products that weour engineers have designed, and manufactured, as well as processesfor methods and equipment used intechnology related to our manufacturing technology.processes. We were issued 18 newobtained 22 patents in 2022, including 7 U.S. patents and 15 non-U.S. patents in 2019 and currently hold 148 U.S. patents and 150 non-U.S. patents. We have 12currently own 314
CTS CORPORATION 5
patents worldwide including 132 active U.S. patents. We own 9 registered U.S. trademarks, 24most of which are registered foreign trademarks and 4 international trademark registrations.in jurisdictions throughout the world. We have also licensed the right to use several ofcertain patents and our patents. In 2019, license and royalty income for 2022 was less than 1% of net sales.
MAJOR CUSTOMERS
Years Ended December 31, | |||
2019 | 2018 | 2017 | |
Total of 15 largest customers / net sales | 61.9% | 63.7% | 64.4% |
Our net sales to significant customers as a percentage of total net sales were as follows:
Years Ended December 31, | |||
2019 | 2018 | 2017 | |
Cummins Inc. | 16.1% | 15.2% | 13.4% |
Honda Motor Co. | 11.6% | 10.5% | 11.2% |
Toyota Motor Corporation | 9.6% | 10.5% | 10.2% |
|
| Years Ended December 31, | ||||
|
| 2022 |
| 2021 |
| 2020 |
Cummins Inc. |
| 15.3% |
| 15.0% |
| 13.1% |
Toyota Motor Corporation |
| 11.5% |
| 12.4% |
| 13.4% |
We sell 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. We continue to focus on broadening our customer base to diversify our end market exposure.
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.
CTS CORPORATION 4COMPETITION
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, | |||
2019 | 2018 | 2017 | |
Net sales from non-U.S. operations | 40% | 33% | 32% |
Years Ended December 31, | |||
2019 | 2018 | 2017 | |
Total assets at non-U.S. operations | 49% | 46% | 49% |
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| Years Ended December 31, | ||||
|
| 2022 |
| 2021 |
| 2020 |
Net sales from non-U.S. operations |
| 44.4% |
| 42.0% |
| 43.0% |
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, Poland, and Taiwan. Additional information regarding the Company’s sales by geographic area and long-lived tangible assets in different geographic areas is included in Note 20 - "Geographic Data" of this Annual Report on Form 10-K.
HUMAN CAPITAL MANAGEMENT AND OUR CULTURE
CTS is a leading provider of sensing and motion devices as well as connectivity components and we believe our employees are a critical asset to meeting our mission of enabling an intelligent and seamless world. We take great pride in the products we build, and the manner
CTS CORPORATION 6
in which we operate as a company and as individuals. We pull together, drawing on our strengths, guided by our culture which is built on our values.
We employed 3,570 people athave a global business, and our employees reflect the diversity of our geographic footprint. Below is a summary of our employees by location and gender as of December 31, 2019,2022.
North America | 2,288 | ||
Asia | 1,352 | ||
Europe | 569 | ||
Total | 4,209 | ||
Female | 58 | % | |
Male | 42 | % |
CTS is committed to fostering an environment where all employees are respected and treated equally. Empowering our employees’ distinctive talents delivers customer value and advances our culture and engagement. We strive to create an inclusive workplace where everyone feels valued, respected, appreciated, and embraced because of their differences – a place where every employee can be themselves so they can reach their highest potential and help us achieve our business goals. Our commitment to the aforementioned goals is evidenced through the formation and leadership from our global diversity council.
Our employees must adhere to a Code of Ethics that sets standards for appropriate behavior. We require 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, www.ctscorp.com.
We have developed key recruitment and retention strategies that guide our human capital management approach as part of the overall management of our business. These strategies are advanced through a number of programs and initiatives outlined below:
Talent Planning Process
We have a global talent review and succession planning process designed to align our talent plans with 84%the current and future strategies of thesethe business. This includes the identification of key positions, assessment of internal talent and potential successors and plans for talent acquisition and development. Each year, employees locatedare expected to have defined performance objectives so that they focus time and resources appropriately, understand their impact to the success of our strategy, and know how their performance will be assessed. On an annual basis managers complete a mid-year and year-end performance evaluation with their employees.
Employee Compensation
We strive to align compensation with the external market of companies from a similar industry or that are similarly sized 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. Our compensation programs are designed to align the compensation of our employees with their performance and to provide the proper incentives to attract, retain and motivate employees to achieve superior results. We engage with outside consulting firms to benchmark all of our employee compensation and benefits aligning to market median.
Training and Development
Employee development and company growth goes hand in hand. At CTS we focus our learning and development activities on areas that we believe will most effectively support the U.S. delivery of our business objectives. In the competitive environment in which we operate, employees need to replenish their knowledge and acquire new skills to do their jobs better. CTS provides growth and development
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opportunities through programs such as Education Reimbursement, Situational Leadership, Leadership Essentials, and the Accelerated Leadership Program.
Health and Safety
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. Our employees are regularly trained on safety-related topics, and we monitor and measure the effectiveness of our programs at all of our locations.
CTS Cares
We employed 3,230 people atrecognize that we have a responsibility to be a positive influence in the communities in which we do business around the world, and CTS Cares is the platform which connects CTS employees to the causes that we care about. We have a rich history of philanthropy and community involvement. Our employees routinely leverage their individual skills and capabilities to give back to their local communities. We value and are proud of the contributions that our employees make. CTS Cares supports our global community.
EXECUTIVE OFFICERS OF THE COMPANY
Executive Officers. The following serve as executive officers of CTS as of December 31, 2022.
Name | Age | Positions and Offices | ||
Kieran O'Sullivan | 60 | President, Chief Executive Officer and Chairman of the Board | ||
Ashish Agrawal | 52 | Vice President and Chief Financial Officer | ||
Scott D’Angelo | 52 | Vice President, General Counsel and Secretary | ||
Martin Baumeister | 56 | Senior Vice President | ||
Mike Murray | 52 | Senior Vice President |
Kieran O’Sullivan – 60 – 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 – 52 – 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.
Scott D’Angelo – 52 – 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 CTS, 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.
Martin Baumeister – 56 – Senior Vice President. Mr. Baumeister joined CTS on January 14, 2020. Immediately prior to joining CTS, Mr. Baumeister served as Executive Director - Product Line Electronics Americas at Vitesco Technologies since October 2019. Prior to that role, Mr. Baumeister served as Executive Director Electronics Americas when Continental separated that subsidiary into an independent entity from July 2018, and served as Executive Director - Global Customer Head from February 2015.
Mike Murray – 52 – Senior Vice President, Mr. Murray joined CTS on January 22, 2018.
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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 2023 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 the Company, our services and other issues. It is possible that the information regarding our filings at www.sec.gov.
Item 1A. Risk Factors
The 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.
In addition, our 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 short term inefficiencies and costs due to resulting excess
CTS CORPORATION 9
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.
Deterioration of general economic, political, credit and/or capital market conditions could adversely affect our financial performance, our ability to grow or sustain our business, financial condition and results of operations, and our ability to access the capital markets.
We compete around the world in various geographic regions and product markets. Global economic and political conditions affect our business and the businesses of our customers, suppliers and consumers. Recessions, economic downturns, price instability, inflation, slowing economic growth and social and political instability in the markets where we compete could negatively affect our revenues and financial performance, and adversely impact our ability to grow or sustain our business. For example, current macroeconomic and political instability caused by the Russia-Ukraine conflict (as discussed below), global supply chain disruptions and inflation have adversely impacted and could continue to adversely impact our business and financial results.
The capital and credit markets provide us with liquidity to operate and grow our business beyond the liquidity that operating cash flows provide. A global or regional economic downturn or disruption of the credit markets could increase our future borrowing costs and impair our ability to access capital and credit markets necessary for our operations and to execute our strategic plan. If our access to capital on terms commercially acceptable to us were to become significantly constrained, or if costs of capital increased significantly, then our financial condition, results of operations and cash flows could be adversely affected.
Our business, financial condition and results of operations could be adversely affected by disruptions in the global economy caused by the ongoing Russia-Ukraine conflictor other geopolitical tensions and conflict.
The ongoing conflict between Russia and Ukraine (which we refer to as the “Russia-Ukraine conflict”), has adversely affected the global economy, and the geopolitical tensions and conflicts it generates may continue to negatively impact our operations. It has resulted in heightened economic sanctions from the U.S., the U.K., the European Union and the international community. Even though we have no physical assets in Russia, the impact of the Russia-Ukraine conflict could have a material adverse effect on our business, financial condition, results of operations, supply chain, availability of critical supplies, intellectual property, partners, or customers. Further escalation of geopolitical tensions related to the Russia-Ukraine conflict, including increased trade barriers or restrictions on global trade, could result in, among other things, broader impacts that expand into other markets, cyberattacks, supply chain and logistics disruptions, and volatility in foreign exchange rates, interest rates and financial markets, any of which may adversely affect our business and supply chain. More broadly, there could be additional negative impacts to our financial results if the Russia-Ukraine conflict worsens, including, among other potential impacts, economic recessions in certain neighboring countries or globally due to inflationary pressures, including with respect to energy and supply chain cost increases or shortages, or the geographic proximity of the conflict relative to the rest of Europe. Similar geopolitical tensions and political conflicts, including tensions between the U.S. and China as well as between China and Taiwan, could adversely impact our employees, financial performance, and global operations, including by, among other things, jeopardizing the safety of our employees and facilities, disrupting our and our partners’ production, supply chain and logistics and communications, and causing market volatility, which could adversely impact our sales. In addition, the effects of the ongoing Russia-Ukraine conflict as well as escalating tensions between China and Taiwan and other geopolitical conflicts could amplify or affect many of our other risks described elsewhere in Part I, Item 1A, "Risk Factors" in this Annual Report on Form 10-K.
The impacts of supply chain constraints and inflationary pressures could adversely impact our operating results.
Our business has been, and may continue to be, impacted by supply chain constraints, including as a result of raw materials and electronic component shortages, including, in particular, shortages of semiconductor chips and resin, longer lead times, port congestion, increased freight costs and the uncertain economic environment worldwide. These supply chain constraints have and may in the future 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
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raw materials or electronic components due to inflationary trends regardless of supply, including the current high inflationary environment. In addition, current proposed or future governmental policies may increase the risk of inflation, which could further increase the costs of raw materials and other components for our business. The supply and price of our key raw materials and electronic components can be affected by a number of factors beyond our control, including market demand, inflation, alternative sources for suppliers, global geopolitical events, global or regional disease outbreaks or pandemics, trade agreements among producing and consuming nations and governmental regulations (including tariffs).
Similarly, if the costs of goods continue to increase, our suppliers may seek price increases from us. If we are unable to mitigate the impact of these matters through price increases, cost savings to offset cost increases, hedging arrangements, or other measures, our results of operations and financial condition could be adversely impacted. If our competitors maintain or substantially lower their prices, we may lose customers and mark down prices. Our profitability may be impacted by prices that do not offset the inflationary pressures, which may impact our gross margins. Even if we are able to raise the prices of our products, we may not be able to sustain such price increases. Temporary or sustained price increases may also lead to a decrease in demand for our products as competitors may not adjust their prices which could lead to a decline in sales volume and loss of market share. Our projections may not accurately predict the volume impact of price increases, which could adversely affect our business, financial condition and results of operations.
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.
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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 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. For example, during 2022, we acquired both TEWA Temperature Sensors SP. Zo.o. (“TEWA”) and Meggitt A/S (a/k/a Ferroperm Piezoceramics A/S, “Ferroperm”). 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 businesses such as TEWA and Ferroperm, including their 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
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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, which could be material. 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.
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
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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 (the “EPA”), 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 EPA’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. On February 8, 2023, we received a demand letter from the EPA seeking reimbursement of its past response costs and interest thereon in the amount of $9,955 relating to the CTS of Asheville, Inc. Superfund Site, from the three potentially responsible parties associated with the site, including the Company. See Note 11 "Contingencies" in the Notes to the Consolidated Financial Statements in this Annual Report on Form 10-K. Although we estimate our potential environmental liability and reserve for such matters, including the Asheville site, 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 an existing site, 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.
Changes in tax, environmental, trade or other regulations or failure to comply with existing licensing, trade and other regulations could cause volatility or have a material adverse effect on our business and financial results.
Future changes to U.S. or foreign tax and trade policies, impositions of new or increased tariffs, other trade restrictions or other government actions, including any government shutdown, may lead to the continuation or escalation of such risks and uncertainty.
In addition, changes to existing tax laws or the adoption of new tax laws, particularly in the U.S. and EU, could have a material adverse impact to our effective tax rate and future cash tax liabilities. The current economic and political environment may result in significant tax law changes in the numerous jurisdictions in which we operate. In addition, our effective tax rate could be materially affected by certain tax proposals developed by the Organization for Economic Cooperation and Development and European Commission regarding the taxation of multinational businesses.
Continued economic and political pressures to increase tax revenues in jurisdictions in which we operate, or the adoption of new or reformed tax legislation or regulation, may make resolving tax disputes more difficult. The final resolution of tax audits and any related litigation can differ from our historical provisions and accruals, resulting in an adverse effect on our financial performance. Additionally, modifications of laws and policies governing foreign trade and investment, including trade agreements and tariffs such as the United States-Mexico-Canada Agreement, or the European Union-United Kingdom Trade and Cooperating Agreement, could adversely affect our supply chain, business and results of operations. The implementation of additional tariffs and retaliatory tariffs from trade partners or related uncertainties could further increase the cost of certain of our imported materials, thereby adversely affecting our profitability.
Failure to comply with existing laws and regulations or changes in these laws, regulations, or interpretations thereof, specifically tax and environmental laws or any other laws or regulations could result in the loss, revocation or suspension of our licenses, permits or approvals and could have a material adverse effect on our business, financial condition and results of operations. Additionally, uncertainties exist with respect to the interpretation of, and potential future developments in, complex domestic and international tax laws and regulations, the amount and timing of future taxable income and the interaction of such laws and regulations among jurisdictions. Given the wide range of international business relationships and the long-term nature and complexity of existing contractual agreements, differences arising between the actual results and assumptions made, or future changes to such assumptions, could necessitate future adjustments to tax income and expense already recorded.
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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, 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.
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 estimates and assumptions on which our financial projections are based may prove to be inaccurate, which may cause our actual results to materially differ from such projections, which may adversely affect our future profitability, cash flows and stock price.
Our financial projections, including any sales or earnings guidance or outlook we may provide from time to time, are dependent on certain estimates and assumptions related to, among other things, development and launch of innovative new products, market share projections, product pricing, sales, volume and product mix, foreign exchange rates and volatility, tax rates, interest rates, commodity prices, cost savings, accruals for estimated liabilities, including litigation reserves, and our ability to generate sufficient cash flow to reinvest in our existing business, fund internal growth, repurchase of our stock, make acquisitions, pay dividends and meet debt obligations. There is no assurance that we will fully realize the anticipated cost savings and other benefits of our restructuring activities in the time frames we desire or at all. Our financial projections are based on historical experience and on various other estimates and assumptions that we believe to be reasonable under the circumstances and at the time they are made, and our actual results may differ materially from our financial projections. Any material variation between our financial projections and our actual results may adversely affect our future profitability, cash flows and stock price.
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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 for the past several years. As of December 31, 2022, we continue to experience some disruptions, mainly to our operations in China. 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 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. 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 2023 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.
Loss, operational disruptions or closure of a key facility, including those of our suppliers, due to unforeseen or catastrophic events or otherwise, could have a material adverse effect on our business and financial results.
Our business could be interrupted and our financial results could be materially adversely impacted by physical risks such as earthquakes, fires, hurricanes, floods, acts of war, terrorist attacks, cyberattacks and other disruptions in information systems, disease outbreaks or pandemics, and other natural disasters or catastrophic events that damage, disrupt or destroy one of our key facilities or the key facilities of our significant suppliers. If any of our key facilities or the key facilities of our significant suppliers experience a significant operational disruption or catastrophic loss, it could delay, disrupt or reduce production, shipments and revenue, and result in potentially significant expenses to repair or replace these properties. Such significant disruptions could be due to, among other things:
Additionally, certain catastrophes are not covered by our general insurance policies, which could result in significant unrecoverable losses. Our business and results of operations could also be adversely impacted by under-investment in physical assets or production capacity.
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 “Loss, operational disruptions or closure of a key facility, including those of our suppliers, due to unforeseen or catastrophic events or otherwise, could have a material adverse effect on our business and financial results”) 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
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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, payment of increased or additional 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
Unfavorable outcomes of legal or regulatory matters may adversely affect our business and financial condition and damage our reputation.
We are from time to time involved in or subject to a variety of litigation, claims, legal or regulatory proceedings or matters related to our business, warranty claims, our intellectual property rights, alleged infringement or misappropriation by us of intellectual property rights of others, tax, environmental, privacy, insurance, ERISA and employment matters. Such matters, even those that are ultimately non-meritorious, can be complex, costly, and highly disruptive to business operations by diverting the attention and energies of management and other key personnel, and may generate adverse publicity that damages our reputation. The assessment of the outcome of such matters, including our potential liability, if any, is a highly subjective process that requires judgments about future events that are not within our control and are based on the information available to management at that time. The outcome of such matters, including amounts ultimately received or paid upon judgment or settlement, may differ materially from management’s outlook or estimates, including any amounts accrued in the financial statements. Actual outcomes, including judgments, awards, settlements or orders, could have a material adverse effect on our business, financial condition, operating results, or cash flows and damage our reputation.
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 with 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 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 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.
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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 our 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 and other 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.
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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 heavilyOur future success depends on engineering and technology is at times intense, 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 activitiesidentify, attract, and develop marketable products successfully.
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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
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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.
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 perpetrate wire transfer or other frauds. Furthermore, geopolitical turmoil has heightened the risk of cyberattacks.
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.
Environmental, social, and governance ("ESG") issues, including those related to climate change and sustainability, may have an adverse effect on our business, financial condition and results of operations and damage our reputation.
Companies across all industries are facing increasing scrutiny relating to their ESG practices and policies. Increased focus and activism related to ESG may hinder our access to capital or negatively impact our stock price, as investors may reconsider their capital investment based on their natureassessment of our ESG practices and scope, such threatspolicies. In particular, investor advocacy groups, institutional investors, stockholders, employees, consumers, customers, regulators, proxy advisory services and other market participants have increasingly focused on ESG practices and policies of companies, including sustainability performance and risk mitigation efforts, and their effect on companies from an investor, consumer, customer or employee perspective. If our ESG practices do not meet investor or other stakeholder expectations
CTS CORPORATION 18
and standards or evolving regulatory requirements, our stock price, sales, ability to access capital markets, reputation and employee retention, among other things, may be negatively affected.
Shareholder activism efforts or unsolicited offers from a third-party could potentiallycause a material disruption to our business and financial results.
We may be subject to various legal and business challenges due to actions instituted by shareholder activists or an unsolicited third-party offer. Perceived uncertainties as to our future direction as a result of shareholder activism may lead to the compromisingperception of confidential informationa change in the direction of the business or other instability and communications, improper usemay affect our relationships with vendors, customers, prospective and current employees and others. Proposed or future laws and regulations may increase the chance we become the target of shareholder activist campaigns, including ESG-related actions. If shareholder activist campaigns are initiated against us, our response to such actions could be costly and time-consuming, which could divert the attention and resources of our systemsBoard of Directors, Chief Executive Officer and networks, manipulation and destructionsenior management from the pursuit of data, defective products, production downtimes and operational disruptions, which in turn could adversely affect our reputation, competitiveness and results of operations. Additionally, any updates to or implementation of systems, including the selection and implementation of an ERP system, may cause delays or disruptions in our processes or productionbusiness strategies, which could adversely affectharm our business, negatively impact our stock price, and have an adverse effect on our business and financial results.
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.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
As of February 20, 2020,December 31, 2022, we had manufacturing facilities, administrative, research and development and sales offices in the following locations:
Manufacturing Facilities | Square | Owned/Leased | ||||
Albuquerque, New Mexico | 114,525 | Leased | ||||
Boise, Idaho | 15,000 | Leased | ||||
Calamba, Philippines | 14,800 | Leased | ||||
Hopkinton, Massachusetts | 32,000 | Owned | ||||
Juarez, Mexico | 42,834 | Leased | ||||
Kaohsiung, Taiwan | 75,900 | Leased(1) | ||||
Kvistgaard, Denmark | 13,659 | Leased | ||||
Kvistgaard, Denmark | 50,569 | Leased | ||||
Lisle, Illinois | 31,000 | Leased | ||||
Matamoros, Mexico | 51,000 | Owned | ||||
Tecate, Mexico | 26,460 | Leased | ||||
Tecate, Mexico | 24,500 | Owned | ||||
Nogales, Mexico | 67,000 | Leased | ||||
Nupaky, Czech Republic | 55,919 | Leased | ||||
Ostrava, Czech Republic | 67,473 | Leased | ||||
Tianjin, China | 225,000 | Owned(2) | ||||
Zhongshan, China | 112,600 | Leased | ||||
Lublin, Poland | 24,886 | Leased | ||||
Leczna, Poland | 8,503 | Leased | ||||
Total manufacturing | 1,053,628 |
Manufacturing Facilities | Square Footage | Owned/Leased | ||
Albuquerque, New Mexico | 114,525 | Leased | ||
Boise, Idaho | 15,000 | Leased | ||
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 | ||
Nupaky, Czech Republic | 55,919 | Leased | ||
Ostrava, Czech Republic | 67,600 | Leased | ||
Tecate, Mexico | 22,537 | Leased | ||
Tianjin, China | 225,000 | Owned | (2) | |
Zhongshan, China | 112,600 | Leased | ||
Total manufacturing | 1,062,441 |
CTS CORPORATION 19
A small portion of the China, Czech Republic, and Denmark locations above also maintain sales offices.
Non-Manufacturing Facilities | Square | Owned/Leased | Description | |||||
Boise, ID | 13,150 | Leased | Warehouse | |||||
Brownsville, Texas | N/A | Owned | Land | |||||
Brownsville, Texas | 10,000 | Leased | Warehouse | |||||
El Paso, Texas | 22,400 | Leased | Office and | |||||
Matamoros, Mexico | 20,173 | Leased | Warehouse and administrative offices | |||||
Elkhart, Indiana | 319,000 | Owned | Idle facility | |||||
Elkhart, Indiana | 93,000 | Owned | Administrative offices and research | |||||
Farmington Hills, Michigan | 1,790 | Leased | Sales office | |||||
Kaohsiung, Taiwan | 8,951 | Leased | Administrative offices and research | |||||
Lisle, Illinois | 74,925 | Leased | Administrative offices and research | |||||
Nagoya, Japan | 800 | Leased | Sales office | |||||
Singapore | 5,597 | Leased | Sales office | |||||
Yokohama, Japan | 1,403 | Leased | Sales office | |||||
Total non-manufacturing | 571,189 |
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 Proceedings
From 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 on presently available information. However, there can be nowe cannot provide assurance that the final resolution of any existing or future lawsuits, claims or proceedings will not have a material adverse effect on our 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 Disclosures
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
Our common stock is listed on the New York Stock Exchange under the symbol "CTS." On February 18, 2020,17, 2023, there were approximately 919831 shareholders of record.
CTS CORPORATION 20
On May 13, 2021, the fourth quarter of 2019 is as follows:
(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, 2019 - October 31, 2019 | 6,250 | $ | 27.93 | 6,250 | $ | 17,347 | ||||
November 1, 2019 - November 30, 2019 | 74,100 | $ | 27.09 | 74,100 | $ | 15,340 | ||||
December 1, 2019 – December 31, 2019 | 53,694 | $ | 28.31 | 53,694 | $ | 13,820 | ||||
Total | 134,044 | 134,044 |
|
| (a) |
|
| (b) |
|
| (c) |
|
| (d) |
| ||||
October 1, 2022 – October 31, 2022 |
|
| 10,100 |
|
| $ | 38.00 |
|
|
| 10,100 |
|
| $ | 27,385 |
|
November 1, 2022 – November 30, 2022 |
|
| 69,800 |
|
| $ | 41.34 |
|
|
| 69,800 |
|
| $ | 24,499 |
|
December 1, 2022 – December 31, 2022 |
|
| 119,198 |
|
| $ | 39.70 |
|
|
| 119,198 |
|
| $ | 19,767 |
|
Total |
|
| 199,098 |
|
|
|
|
|
| 199,098 |
|
|
|
|
On February 9, 2023, the year ended December 31, 2019 we purchased 420,770 shares for approximately $11,746, of which $566 was repurchased under the previous plan and $11,180 was repurchased under the most recent board-authorizedBoard approved a new share repurchase program.
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, 2014.
Item 6. Reserved
CTS CORPORATION 16 21
Item 6. Selected Financial Data
2019 | % of Sales | 2018 | % of Sales | 2017 | % of Sales | 2016 | % of Sales | 2015 | % of Sales | ||||||||||||||||
Summary of Operations | |||||||||||||||||||||||||
Net sales | $ | 468,999 | 100.0 | $ | 470,483 | 100.0 | $ | 422,993 | 100.0 | $ | 396,679 | 100.0 | $ | 382,310 | 100.0 | ||||||||||
Cost of goods sold | 311,424 | 66.4 | 305,510 | 64.9 | 282,562 | 66.8 | 256,251 | 64.6 | 255,201 | 66.8 | |||||||||||||||
Gross Margin | 157,575 | 33.6 | 164,973 | 35.1 | 140,431 | 33.2 | 140,428 | 35.4 | 127,109 | 33.2 | |||||||||||||||
Selling, general and administrative expenses | 70,408 | 15.0 | 73,569 | 15.6 | 71,943 | 17.0 | 61,624 | 15.5 | 59,586 | 15.6 | |||||||||||||||
Research and development expenses | 25,967 | 5.5 | 25,304 | 5.4 | 25,146 | 5.9 | 24,040 | 6.1 | 22,461 | 5.9 | |||||||||||||||
Non-recurring environmental expense | — | — | — | — | — | — | — | — | 14,541 | 3.8 | |||||||||||||||
Restructuring charges | 7,448 | 1.6 | 5,062 | 1.1 | 4,139 | 1.0 | 3,048 | 0.8 | 14,564 | 3.8 | |||||||||||||||
(Gain) loss on sale of assets | (63 | ) | — | — | — | 708 | 0.2 | (11,450 | ) | (2.9 | ) | (2,156 | ) | (0.6 | ) | ||||||||||
Operating earnings | 53,815 | 11.5 | 61,038 | 13.0 | 38,495 | 9.1 | 63,166 | 15.9 | 18,113 | 4.7 | |||||||||||||||
Other (expense) income | (3,549 | ) | (0.8 | ) | (2,935 | ) | (0.6 | ) | 1,758 | 0.4 | (5,921 | ) | (1.5 | ) | (5,852 | ) | (1.5 | ) | |||||||
Earnings before taxes | 50,266 | 10.7 | 58,103 | 12.4 | 40,253 | 9.5 | 57,245 | 14.4 | 12,261 | 3.2 | |||||||||||||||
Income tax expense | 14,120 | 3.0 | 11,571 | 2.5 | 25,805 | 6.1 | 22,865 | 5.8 | 5,307 | 1.4 | |||||||||||||||
Net earnings | $ | 36,146 | 7.7 | $ | 46,532 | 9.9 | $ | 14,448 | 3.4 | $ | 34,380 | 8.7 | $ | 6,954 | 1.8 | ||||||||||
Retained earnings - beginning of year | 478,847 | 420,160 | 410,979 | 381,840 | 380,145 | ||||||||||||||||||||
Dividends declared | (5,227 | ) | (5,278 | ) | (5,267 | ) | (5,241 | ) | (5,259 | ) | |||||||||||||||
Implementation of new accounting standard | — | 17,433 | — | — | — | ||||||||||||||||||||
Retained earnings - end of year | $ | 509,766 | $ | 478,847 | $ | 420,160 | $ | 410,979 | $ | 381,840 | |||||||||||||||
Net earnings per share: | |||||||||||||||||||||||||
Basic | $ | 1.11 | $ | 1.41 | $ | 0.44 | $ | 1.05 | $ | 0.21 | |||||||||||||||
Diluted | $ | 1.09 | $ | 1.39 | $ | 0.43 | $ | 1.03 | $ | 0.21 | |||||||||||||||
Average basic shares outstanding (000s) | 32,700 | 33,024 | 32,892 | 32,728 | 32,959 | ||||||||||||||||||||
Average diluted shares outstanding (000s) | 33,105 | 33,569 | 33,420 | 33,251 | 33,484 | ||||||||||||||||||||
Cash dividends per share (annualized) | $ | 0.16 | $ | 0.16 | $ | 0.16 | $ | 0.16 | $ | 0.16 | |||||||||||||||
Capital expenditures | $ | 21,733 | $ | 28,488 | $ | 18,094 | $ | 20,500 | $ | 9,723 | |||||||||||||||
Depreciation and amortization | $ | 24,619 | $ | 22,514 | $ | 20,674 | $ | 18,992 | $ | 16,254 | |||||||||||||||
Financial Position at Year End | |||||||||||||||||||||||||
Current assets | $ | 237,478 | $ | 239,359 | $ | 233,609 | $ | 215,707 | $ | 245,954 | |||||||||||||||
Current liabilities | 96,948 | 103,993 | 102,412 | 98,129 | 94,620 | ||||||||||||||||||||
Current ratio | 2.4 to 1 | 2.3 to 1 | 2.3 to 1 | 2.2 to 1 | 2.5 to 1 | ||||||||||||||||||||
Working capital | 140,530 | 135,366 | 131,197 | 117,587 | 151,334 | ||||||||||||||||||||
Inventories | 42,237 | 43,486 | 36,596 | 28,652 | 24,600 | ||||||||||||||||||||
Net property, plant and equipment | 105,038 | 99,401 | 88,247 | 82,111 | 69,872 | ||||||||||||||||||||
Total assets | 643,354 | 548,341 | 539,696 | 517,697 | 483,373 | ||||||||||||||||||||
Long-term debt | 99,700 | 50,000 | 76,300 | 89,100 | 90,700 | ||||||||||||||||||||
Long-term obligations, including long-term debt | 141,187 | 66,419 | 93,479 | 101,686 | 107,099 | ||||||||||||||||||||
Shareholders' equity | 405,219 | 377,929 | 343,805 | 317,882 | 281,654 | ||||||||||||||||||||
Common shares outstanding (000s) | 32,472 | 32,751 | 32,938 | 32,762 | 32,548 | ||||||||||||||||||||
Equity (book value) per share | $ | 12.48 | $ | 11.54 | $ | 10.44 | $ | 9.70 | $ | 8.65 | |||||||||||||||
Stock price range | 25.10-33.95 | 24.07-39.20 | 19.30-28.35 | 12.87-24.80 | 15.30-20.25 |
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
This section of this Annual Report on Form 10-K generally discusses 2022 and 2021 items and year-to-year comparisons between 2022 and 2021. Discussions of 2020 items and year-to-year comparisons between 2021 and 2020 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, 2021.
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, technologies and technologiestalent 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.
On February 28, 2022, we acquired 100% of the outstanding shares of TEWA for $24,515. TEWA is a designer and manufacturer of high-quality temperature sensors. TEWA has complementary capabilities with our existing temperature sensing platform, and the acquisition supports our end market diversification strategy and expands our presence in Europe.
On June 30, 2022, we acquired 100% of the outstanding shares of Ferroperm for $72,340. Ferroperm specializes in the design and manufacture of high performance piezoceramic components for use in complex and demanding medical, industrial, and aerospace applications. Ferroperm has complementary capabilities with our existing medical diagnostics and imaging product lines. The acquisition supports our end market diversification strategy and expands our presence in European end markets.
On February 6, 2023, we acquired 100% of the outstanding shares of maglab AG ("maglab") for $4,164 in cash subject to additional earnout payments based on future performance. Maglab has deep expertise in magnetic system design and current measurement solutions for use in e-mobility, industrial automation, and renewable energy applications. Maglab's domain expertise coupled with CTS’ commercial, technical and operational capabilities position us to advance our status as a recognized innovator in electric motor sensing and controls 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 2022 and 2021. These events have 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 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 the supply chain disruptions to continue to impact our results in 2023 and we remain cautious about the financial impact of these potential disruptions on our business.
Results of Operations: Year Ended December 31, 2019,2022 versus Year Ended December 31, 20182021
CTS CORPORATION 22
The following table highlights changes in significant components of the Consolidated Statements of Earnings (Loss) for the years ended December 31, 2019,2022, and December 31, 2018:
Years Ended December 31, | Percent of Net Sales | |||||||||||
2019 | 2018 | Percent Change | 2019 | 2018 | ||||||||
Net sales | $ | 468,999 | $ | 470,483 | (0.3 | ) | 100.0 | 100.0 | ||||
Cost of goods sold | 311,424 | 305,510 | 1.9 | 66.4 | 64.9 | |||||||
Gross margin | 157,575 | 164,973 | (4.5 | ) | 33.6 | 35.1 | ||||||
Selling, general and administrative expenses | 70,408 | 73,569 | (4.3 | ) | 15.0 | 15.6 | ||||||
Research and development expenses | 25,967 | 25,304 | 2.6 | 5.5 | 5.4 | |||||||
Restructuring charges | 7,448 | 5,062 | 47.1 | 1.6 | 1.1 | |||||||
(Gain) on sale of assets | (63 | ) | — | — | — | — | ||||||
Total operating expenses | 103,760 | 103,935 | (0.2 | ) | 22.1 | 22.1 | ||||||
Operating earnings | 53,815 | 61,038 | (11.8 | ) | 11.5 | 13.0 | ||||||
Other (expense) income, net | (3,549 | ) | (2,935 | ) | 20.9 | (0.8 | ) | (0.6 | ) | |||
Earnings before income tax | 50,266 | 58,103 | (13.5 | ) | 10.7 | 12.4 | ||||||
Income tax expense | 14,120 | 11,571 | 22.0 | 3.0 | 2.5 | |||||||
Net earnings | $ | 36,146 | $ | 46,532 | (22.3 | ) | 7.7 | 9.9 | ||||
Diluted earnings per share: | ||||||||||||
Diluted net earnings per share | $ | 1.09 | $ | 1.39 |
|
| Years Ended December 31, |
|
|
|
|
| Percent of Net Sales |
| |||||||||||
|
| 2022 |
|
| 2021 |
|
| Percent |
|
| 2022 |
|
| 2021 |
| |||||
Net sales |
| $ | 586,869 |
|
| $ | 512,925 |
|
|
| 14.4 | % |
|
| 100 | % |
|
| 100 | % |
Cost of goods sold |
|
| 376,331 |
|
|
| 328,306 |
|
|
| 14.6 |
|
|
| 64.1 |
|
|
| 64.0 |
|
Gross margin |
|
| 210,538 |
|
|
| 184,619 |
|
|
| 14.0 |
|
|
| 35.9 |
|
|
| 36.0 |
|
Selling, general and administrative expenses |
|
| 91,520 |
|
|
| 82,597 |
|
|
| 10.8 |
|
|
| 15.6 |
|
|
| 16.1 |
|
Research and development expenses |
|
| 24,100 |
|
|
| 23,856 |
|
|
| 1.0 |
|
|
| 4.1 |
|
|
| 4.7 |
|
Restructuring charges |
|
| 1,912 |
|
|
| 1,687 |
|
|
| 13.3 |
|
|
| 0.3 |
|
|
| 0.3 |
|
Total operating expenses |
|
| 117,532 |
|
|
| 108,140 |
|
|
| 8.7 |
|
|
| 20.0 |
|
|
| 21.1 |
|
Operating earnings |
|
| 93,006 |
|
|
| 76,479 |
|
|
| 21.6 |
|
|
| 15.8 |
|
|
| 14.9 |
|
Total other (expense) income, net |
|
| (12,269 | ) |
|
| (137,359 | ) |
|
| (91.1 | ) |
|
| (2.1 | ) |
|
| (26.8 | ) |
Earnings (loss) before taxes |
|
| 80,737 |
|
|
| (60,880 | ) |
| n/a |
|
|
| 13.8 |
|
|
| (11.9 | ) | |
Income tax expense (benefit) |
|
| 21,162 |
|
|
| (19,014 | ) |
| n/a |
|
|
| 3.6 |
|
|
| (3.7 | ) | |
Net earnings (loss) |
| $ | 59,575 |
|
| $ | (41,866 | ) |
| n/a |
|
|
| 10.2 | % |
|
| (8.2 | )% | |
Diluted earnings (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Diluted net earnings (loss) per share |
| $ | 1.85 |
|
| $ | (1.30 | ) |
|
|
|
|
|
|
|
|
|
Net sales were $468,999$586,869 for the year ended December 31, 2019, a decrease2022, an increase of $1,484,$73,944, or 0.3%14.4% from 2018. Sales2021. Net sales growth was driven by increased demand for our products in all end markets we serve. Net sales to transportation markets decreased $1,119increased $19,615 or 0.4%6.9%. SalesNet sales to other markets decreased $364increased $54,329, or 0.2%23.7%. The QTI acquisition, which was completedTEWA and Ferroperm acquisitions added sales of $23,489 in July 2019, added $9,252 in sales for the year (see Note 19).2022. Changes in foreign exchange rates decreased net sales by $5,135$10,985 year-over-year primarily due to the U.S. Dollar appreciating compared to the Chinese Renminbi and Euro.
Gross margin as a percentwas $210,538 for the year ended December 31, 2022, an increase of sales was 33.6% in 2019 versus 35.1% in 2018.$25,919 or 14.0% from the year ended December 31, 2021. The decreaseincrease in gross margin was driven primarily by lowersales volume foundry inefficiency in our ceramics manufacturing operations, labor and commodity cost increases, a one-time purchase accounting step-up in the value of finished goods inventory acquired with our QTI acquisition, and an unfavorable impact from currency movements. These weremix partially offset by cost improvement projectsincreased material freight costs, changes in foreign exchange rates of $3,577 and $4,048 in inventory step-up amortization charges taken relating to the TEWA and Ferroperm acquisitions. We continue to experience significant inflation in material and freight costs as well as savings frominterruptions in the supply chain, particularly due to the global semiconductor chip shortages. The impact of the supply chain shortages and OEM shutdowns are expected to continue to have an adverse effect on our manufacturing transition project.
Selling, general and administrative ("SG&A") expenses were $70,408,$91,520, or 15.0%15.6% of sales for the year ended December 31, 2019,2022, versus $73,569$82,597 or 15.6%16.1% of sales in the comparable period of 2018.2021. The 2019increase in SG&A costs include amortization of intangiblesexpenses was driven by the acquisitions and other operating costs associated with the QTI acquisition as well as higher environmental expenses, which were offset by
Research and development (“R&D”) expenses were $25,967$24,100, or 5.5%4.1% of sales in 20192022 compared to $25,304$23,856, or 5.4%4.7% of sales in 2018.
Restructuring charges were $7,448 for year ended December 31, 2019. The charges were mainly for building and equipment relocation, severance, and asset impairment charges related to the restructuring$1,912, or 0.3% of certain operations, as well as a lease termination fee related to a property lease we acquired in the QTI acquisition. Restructuring charges were $5,062 in 2018.
Other income and expense items are summarized in the following table:
Years Ended December 31, | ||||||
2019 | 2018 | |||||
Interest expense | $ | (2,648 | ) | $ | (2,085 | ) |
Interest income | 1,737 | 1,826 | ||||
Other (expense) income | (2,638 | ) | (2,676 | ) | ||
Total other (expense) income, net | $ | (3,549 | ) | $ | (2,935 | ) |
|
| Years Ended December 31, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
Interest expense |
| $ | (2,192 | ) |
| $ | (2,111 | ) |
Interest income |
|
| 1,326 |
|
|
| 840 |
|
Other expense |
|
| (11,403 | ) |
|
| (136,088 | ) |
Total other (expense), net |
| $ | (12,269 | ) |
| $ | (137,359 | ) |
The reduction in other expense, increased mainlynet was primarily driven by decreased pension expense due to the U.S. pension plan termination, effective in 2021. Other expense, net for the year ended December 31, 2022 was primarily driven by $6,803 in excise taxes incurred as a resultpart of an increasethe U.S. pension plan termination, $1,776 in debtderivative losses associated with the acquisition of Ferroperm, and foreign currency losses primarily related to the QTI acquisition.Euro and Chinese Renminbi offset partially by income from the U.S. pension plan investments realized prior to the final termination. Other expense, net in 20192021 was principallyprimarily driven by increased pension expense including $126,269 in
CTS CORPORATION 23
settlement charges from our U.S. pension plan termination process in the second and 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 Euro, as well as an increase in pension expense.
Years Ended December 31, | ||||
2019 | 2018 | |||
Effective tax rate | 28.1 | % | 19.9 | % |
|
| Years Ended December 31, | ||
|
| 2022 |
| 2021 |
Effective tax rate |
| 26.2% |
| 31.2% |
The effective income tax rate in 20192022 was 28.1%26.2% compared to 19.9%31.2% in the prior year. The tax ratedecrease in 2019 was higher than the U.S. statutory federal tax rate primarily due to foreign earnings that are taxed at higher rates, the impact of taxes on unremitted earnings and unfavorable increases to reserves. The tax rate in 2018 was favorably impacted by a one-time rate change benefit related to the Tax Cuts and Jobs Act of 2017 resulting from the election of tax accounting method changes to accelerate deductions on the 2017 tax return, 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.
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 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 income (expense), 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 |
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 |
Years Ended December 31, | ||||
2018 | 2017 | |||
Effective tax rate | 19.9 | % | 64.1 | % |
Liquidity and Capital Resources
Long-term debt was comprised of the following:
As of December 31, | ||||||
2019 | 2018 | |||||
Total credit facility | $ | 300,000 | $ | 300,000 | ||
Balance Outstanding | $ | 99,700 | $ | 50,000 | ||
Standby letters of credit | $ | 1,800 | $ | 1,940 | ||
Amount available | $ | 198,500 | $ | 248,060 | ||
Weighted-average interest rate | 3.25 | % | 3.10 | % | ||
Commitment fee percentage per annum | 0.23 | % | 0.20 | % |
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.Facility (as defined below). 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, investments, 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.
Cash and Estimates
Cash Flows from Operating Activities
Net cash provided by operating activities was $121,197 during the year ended December 31, 2022. Components of net cash provided by operating activities included net earnings of $59,575, depreciation and amortization expense of $29,753, other net non-cash items totaling $10,260, and a net cash inflow from changes in assets and liabilities of $21,609 primarily driven by $34,016 received from the U.S. pension plan termination.
Net cash provided by operating activities was $86,141 during the year ended December 31, 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.
Cash Flows from Investing Activities
Net cash used in investing activities for the year ended December 31, 2022 was $111,188, driven by the acquisition payments for the TEWA and Ferroperm acquisitions of $96,855 and capital expenditures of $14,333. See Note 3 "Business Acquisitions" in the United StatesNotes to the Consolidated Financial Statements in this Annual Report on Form 10-K.
Net cash used in investing activities for the year ended December 31, 2021, was $15,896, driven primarily by capital expenditures.
Cash Flows from Financing Activities
Net cash provided by financing activities for the year ended December 31, 2022, was $4,336. The net cash inflow was the result of America. These principles requirenet cash from debt of $33,638 associated with completed acquisitions, partially offset by treasury stock purchases of $21,447, dividend payments of $5,131, taxes paid on behalf of equity award participants of $1,524, and contingent consideration payments of $1,200.
Net cash used in financing activities for the useyear ended December 31, 2021, was $20,712. The net cash outflow was the result of estimates, judgments,net payments of long-term debt of $4,600, treasury stock purchases of $8,786, dividend payments of $5,173, taxes paid on behalf of equity award participants of $1,503, and assumptions. We believe that the estimates, judgments, and assumptions we used are reasonable, based upon the information available.
CTS CORPORATION 22 24
Capital Resources
Long-term debt was comprised of the transferfollowing:
|
| As of December 31, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
Total credit facility availability |
| $ | 400,000 |
|
| $ | 400,000 |
|
Balance outstanding |
|
| 83,670 |
|
|
| 50,000 |
|
Standby letters of credit |
|
| 1,640 |
|
|
| 1,740 |
|
Amount available, subject to covenant restrictions |
| $ | 314,690 |
|
| $ | 348,260 |
|
Weighted-average interest rate |
|
| 2.96 | % |
|
| 1.16 | % |
On December 15, 2021, we entered into a second amended and restated five-year credit agreement with a group of promised goodsbanks (the “Revolving Credit Facility”) to (i) increase the total credit facility availability 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 customer occursdefined 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. We were in an amountcompliance with all debt covenants at December 31, 2022
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 COVID-19 pandemic discussed in this Annual Report on Form 10-K. See “Item 1A. Risk Factors” for additional discussion of these and other risks that reflects the consideration to which the entity expectsour business faces.
As of December 31, 2022, our material cash requirements for our known contractual and other obligations were as follows:
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.
Acquisitions
On February 28, 2022, we acquired TEWA, a designer and manufacturer of high-quality temperature sensors. The net cash payment of $24,515 for this acquisition was funded by the Company's cash on hand.
CTS CORPORATION 25
On June 30, 2022, we acquired Ferroperm, a designer and manufacturer of high performance piezoceramic components for use in complex and demanding medical, industrial, and aerospace applications. The net cash payment of $72,340 for this acquisition was funded by a combination of cash on hand and borrowings under our Revolving Credit Facility.
On February 6, 2023, we acquired 100% of the outstanding shares of maglab for $4,164 in cash subject to additional earnout payments based on future performance. The acquisition was funded from cash on hand.
Critical Accounting Estimates and Policies
The Securities and Exchange Commission ("SEC") has defined a company’s critical accounting policies as the ones that are most important to the portrayal of a company’s financial condition 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 to allocate costs of acquired businesses to the assets acquired and liabilities assumed based on their estimated fair values at the dates of acquisition. 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 assumed 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 significant estimates and assumptions, including assumptions with respect to future cash inflows and outflows, revenue growth rates, discount rates, customer attrition rates, asset lives, contributory asset charges, and market multiples, among other items. We determine the transaction price; 4) allocatefair values of intangible assets acquired generally in consultation with third-party valuation advisors.
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:
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.
CTS CORPORATION 26
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 2022, we elected to perform the qualitative assessment. Based upon our latest assessment, we determined that our goodwill was performed using a qualitative approachnot impaired as of October 1, 2019, 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.2022. 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:
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, 2019.
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) No.(“ASC”) 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.
Critical Accounting Policies
Revenue Recognition
We recognize revenue in accordance with the Financial Accounting Standards Board’s (“FASB”) 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.
CTS CORPORATION 27
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 0.4% 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 income tax matters as partthe cost basis of income tax expense.
Over the last three years, our reserves for excess and obsolete inventories have ranged from 10.8% to 16.0% of Canadagross inventory. We believe our reserve level is appropriate considering the quantities and quality of the inventories.
Environmental Contingencies
U.S. GAAP requires a liability to be recorded for contingencies when it is probable that a liability has been incurred and the United Kingdom, it has been our historical practiceamount 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 | 2020 | 2021-2022 | 2023-2024 | 2025-beyond | |||||||||||
Long-term debt, including interest | $ | 111,586 | $ | 2,807 | $ | 5,876 | $ | 102,903 | $ | — | |||||
Operating lease payments | 37,610 | 4,467 | 8,764 | 7,813 | 16,566 | ||||||||||
Retirement obligations | 6,447 | 757 | 1,429 | 1,328 | 2,933 | ||||||||||
Total | $ | 155,643 | $ | 8,031 | $ | 16,069 | $ | 112,044 | $ | 19,499 |
Recent Accounting Pronouncements
The information set forth under Note 1 - "Summary of Significant Accounting Policies" in the Notes to finance anticipated capital requirements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
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 $99,700$83,670 and $50,000 outstanding under our revolving credit facilityRevolving Credit Facility at December 31, 2019,2022 and 2018,2021, respectively. As of December 31, 2019,2022, we had interest rate swaps that fix interest costs on $50,000 of our long-term debt through February 2024.
Foreign Currency Risk
We are exposed to foreign currency exchange rate risks. Our significant foreign subsidiaries are located in China, Czech Republic, Denmark, Mexico, and Taiwan. AsDuring 2022, net sales from outside the U.S. were approximately 44% of December 31, 2019,total net sales. During 2021, net sales to customers from outside the U.S. were approximately 42% of total net sales.
CTS CORPORATION 28
The Company’s foreign exchange exposures result primarily from the 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; therefore, we hadhave entered into foreign currency forward contracts outstanding with a notional valuevalues of $8,011$12,602 and $17,732 as of December 31, 2022 to hedge our exposure against the Euro and Mexican Peso.
In addition, we entered into a cross currency interest rate swap agreement on June 27, 2022 that synthetically swapped $25,000 of variable rate debt to Krone denominated variable rate debt. Upon completion of the Ferroperm acquisition on June 30, 2022, the transaction was designated as a net investment hedge for accounting purposes and will mature on June 30, 2027. Accordingly, any gains or losses on this derivative instrument will be included in the foreign currency translation component of other comprehensive income until the net investment is sold, diluted or liquidated. Interest payments received for the cross currency-swap are excluded from the net investment hedge effectiveness assessment and are recorded in interest expense in the Condensed Consolidated Statements of Earnings. The assumptions used in measuring fair value of the cross-currency swap are considered level 2 inputs, which are based upon the Krone to United States Dollar exchange rate market. At December 31, 2022 we had a net unrealized loss of $557 in accumulated other comprehensive (loss) income.
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.
Due to the impact from the COVID-19 pandemic, freight costs increased significantly in 2022. While the Company is adversely affecting our business. Weexposed to significant changes in certain commodity prices and some of our suppliersexpects higher freight costs into 2023, the Company actively monitors these exposures and customers have facilities that were required by Chinese authoritiesmay take various actions from time to remain closed for a period of time following the Lunar New Year holiday, and when permitted to reopen, employees have been limited in their ability to return to work due to governmental restrictions. The consequences of the outbreak, and the actions taken to limit its spread, will adversely affect our sales and results of operations in the first quarter of 2020, and possibly longer if coronavirus consequences continue.
CTS CORPORATION 26 29
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) and subsidiaries (the “Company”) as of December 31, 20192022 and 2018,2021, the related consolidated statements of earnings (loss), comprehensive earnings, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2019,2022, and the related notes and financial statement schedules included under Item 15(a) (collectively referred to as the “financial statements”). In our opinion, thefinancial statements present fairly, in all material respects, the financial position of the Companyas of December 31, 20192022 and 2018,2021, and the results of itsoperations and itscash flows for each of the three years in the period ended December 31, 2019,2022, in conformity with accounting principles generally accepted in the United States of America.
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, 2019,2022, based on criteria established in the 2013 Internal Control-IntegratedControl—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated February 20, 202024, 2023 expressed an unqualified opinion.
(Topic 842).
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 mattermatters 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.
Acquisition of Quality Thermistor, Inc.
As described further in Note 193 to the financial statements, the Company acquired Quality Thermistor, Inc. (QTI)TEWA Temperature Sensors SP. Zo.o. (“TEWA”) on July 31, 2019February 28, 2022 for a total purchase price of $75$24.5 million. Accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based on their respective fair values, including identified intangible assets of approximately $33$13.7 million, which is primarily comprised of customer relationships of $31$13 million. The Company estimated the fair value of the customer relationships using the multi-period excess earnings method, which is an income approach that required management to make significant estimates and assumptions related to future revenues and cash flows and the selection of the discount rate. We identified the measurement of the acquisition-date fair value of the acquired customer relationships as a critical audit matter.
The principal considerationconsiderations for our determination that the acquisition-date fair value of the acquired customer relationships is a critical audit matter was the evaluation required a high degree of estimation uncertainty in determining the followingauditor judgment and an increased extent of effort, which included utilizing specialists, to test
CTS CORPORATION 30
management’s internally developed assumptions for which there was limited observable market information:information. These assumptions were: 1) the forecasted revenue growth rates for existing customers, 2) the estimated customer attrition rate, and 3) the discount rate.
Our audit procedures related to the critical audit matter included the following, among others:
/s/ GRANT THORNTON LLP
We have served as the Company’s auditor since 2005.
Chicago, Illinois
February 20, 2020
CTS CORPORATION 28 31
CTS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Earnings
(in thousands)
Years Ended December 31, | |||||||||
2019 | 2018 | 2017 | |||||||
Net sales | $ | 468,999 | $ | 470,483 | $ | 422,993 | |||
Cost of goods sold | 311,424 | 305,510 | 282,562 | ||||||
Gross margin | 157,575 | 164,973 | 140,431 | ||||||
Selling, general and administrative expenses | 70,408 | 73,569 | 71,943 | ||||||
Research and development expenses | 25,967 | 25,304 | 25,146 | ||||||
Restructuring charges | 7,448 | 5,062 | 4,139 | ||||||
(Gain) loss on sale of assets | (63 | ) | — | 708 | |||||
Operating earnings | 53,815 | 61,038 | 38,495 | ||||||
Other (expense) income: | |||||||||
Interest expense | (2,648 | ) | (2,085 | ) | (3,343 | ) | |||
Interest income | 1,737 | 1,826 | 1,284 | ||||||
Other (expense) income | (2,638 | ) | (2,676 | ) | 3,817 | ||||
Total other (expense) income, net | (3,549 | ) | (2,935 | ) | 1,758 | ||||
Earnings before taxes | 50,266 | 58,103 | 40,253 | ||||||
Income tax expense | 14,120 | 11,571 | 25,805 | ||||||
Net earnings | $ | 36,146 | $ | 46,532 | $ | 14,448 | |||
Net earnings per share: | |||||||||
Basic | 1.11 | 1.41 | 0.44 | ||||||
Diluted | 1.09 | 1.39 | 0.43 | ||||||
Basic weighted-average common shares outstanding | 32,700 | 33,024 | 32,892 | ||||||
Effect of dilutive securities | 405 | 545 | 528 | ||||||
Diluted weighted-average common shares outstanding | 33,105 | 33,569 | 33,420 | ||||||
Cash dividends declared per share | $ | 0.16 | $ | 0.16 | $ | 0.16 |
|
| Years Ended December 31, |
| |||||||||
|
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
Net sales |
| $ | 586,869 |
|
| $ | 512,925 |
|
| $ | 424,066 |
|
Cost of goods sold |
|
| 376,331 |
|
|
| 328,306 |
|
|
| 285,003 |
|
Gross margin |
|
| 210,538 |
|
|
| 184,619 |
|
|
| 139,063 |
|
Selling, general and administrative expenses |
|
| 91,520 |
|
|
| 82,597 |
|
|
| 67,787 |
|
Research and development expenses |
|
| 24,100 |
|
|
| 23,856 |
|
|
| 24,317 |
|
Restructuring charges |
|
| 1,912 |
|
|
| 1,687 |
|
|
| 1,830 |
|
Operating earnings |
|
| 93,006 |
|
|
| 76,479 |
|
|
| 45,129 |
|
Other (expense) income: |
|
|
|
|
|
|
|
|
| |||
Interest expense |
|
| (2,192 | ) |
|
| (2,111 | ) |
|
| (3,272 | ) |
Interest income |
|
| 1,326 |
|
|
| 840 |
|
|
| 1,047 |
|
Other (expense) income |
|
| (11,403 | ) |
|
| (136,088 | ) |
|
| 2,575 |
|
Total other (expense) income, net |
|
| (12,269 | ) |
|
| (137,359 | ) |
|
| 350 |
|
Earnings (loss) before taxes |
|
| 80,737 |
|
|
| (60,880 | ) |
|
| 45,479 |
|
Income tax expense (benefit) |
|
| 21,162 |
|
|
| (19,014 | ) |
|
| 10,793 |
|
Net earnings (loss) |
| $ | 59,575 |
|
| $ | (41,866 | ) |
| $ | 34,686 |
|
Net earnings (loss) per share: |
|
|
|
|
|
|
|
|
| |||
Basic |
| $ | 1.86 |
|
| $ | (1.30 | ) |
| $ | 1.07 |
|
Diluted |
| $ | 1.85 |
|
| $ | (1.30 | ) |
| $ | 1.06 |
|
Basic weighted-average common shares outstanding |
|
| 31,968 |
|
|
| 32,327 |
|
|
| 32,317 |
|
Effect of dilutive securities |
|
| 270 |
|
|
| — |
|
|
| 267 |
|
Diluted weighted-average common shares outstanding |
|
| 32,238 |
|
|
| 32,327 |
|
|
| 32,584 |
|
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, | |||||||||
2019 | 2018 | 2017 | |||||||
Net earnings | $ | 36,146 | $ | 46,532 | $ | 14,448 | |||
Other comprehensive earnings (loss): | |||||||||
Changes in fair market value of derivatives, net of tax | (509 | ) | 795 | 110 | |||||
Changes in unrealized pension cost, net of tax | 6,439 | (1,830 | ) | 13,687 | |||||
Cumulative translation adjustment, net of tax | 83 | (311 | ) | 437 | |||||
Other comprehensive earnings (loss) | $ | 6,013 | $ | (1,346 | ) | $ | 14,234 | ||
Comprehensive earnings | $ | 42,159 | $ | 45,186 | $ | 28,682 |
|
| Years Ended December 31, |
| |||||||||
|
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
Net earnings (loss) |
| $ | 59,575 |
|
| $ | (41,866 | ) |
| $ | 34,686 |
|
Other comprehensive earnings (loss): |
|
|
|
|
|
|
|
|
| |||
Changes in fair market value of derivatives, net of tax |
|
| 3,499 |
|
|
| 311 |
|
|
| (1,307 | ) |
Changes in unrealized pension cost, net of tax |
|
| 1,203 |
|
|
| 91,081 |
|
|
| (2,965 | ) |
Cumulative translation adjustment, net of tax |
|
| (848 | ) |
|
| 4 |
|
|
| 77 |
|
Other comprehensive earnings (loss) |
| $ | 3,854 |
|
| $ | 91,396 |
|
| $ | (4,195 | ) |
Comprehensive earnings |
| $ | 63,429 |
|
| $ | 49,530 |
|
| $ | 30,491 |
|
The accompanying notes are an integral part of the consolidated financial statements.
CTS CORPORATION 30 33
CTS CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands)
December 31, | ||||||
2019 | 2018 | |||||
ASSETS | ||||||
Current Assets | ||||||
Cash and cash equivalents | $ | 100,241 | $ | 100,933 | ||
Accounts receivable, net | 78,008 | 79,518 | ||||
Inventories, net | 42,237 | 43,486 | ||||
Other current assets | 16,992 | 15,422 | ||||
Total current assets | 237,478 | 239,359 | ||||
Property, plant and equipment, net | 105,038 | 99,401 | ||||
Operating lease assets, net | 24,644 | — | ||||
Other assets | ||||||
Prepaid pension asset | 62,082 | 54,100 | ||||
Goodwill | 106,056 | 71,057 | ||||
Other intangible assets, net | 85,215 | 60,180 | ||||
Deferred income taxes | 19,795 | 22,201 | ||||
Other assets | 3,046 | 2,043 | ||||
Total other assets | 276,194 | 209,581 | ||||
Total Assets | $ | 643,354 | $ | 548,341 | ||
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||
Current Liabilities | ||||||
Accounts payable | $ | 48,219 | $ | 51,975 | ||
Operating lease obligations | 2,787 | — | ||||
Accrued payroll and benefits | 9,564 | 14,671 | ||||
Accrued expenses and other liabilities | 36,378 | 37,347 | ||||
Total current liabilities | 96,948 | 103,993 | ||||
Long-term debt | 99,700 | 50,000 | ||||
Long-term operating lease obligations | 24,926 | — | ||||
Long-term pension obligations | 6,632 | 6,510 | ||||
Deferred income taxes | 5,637 | 3,990 | ||||
Other long-term obligations | 4,292 | 5,919 | ||||
Total Liabilities | 238,135 | 170,412 | ||||
Commitments and Contingencies (Note 10) | ||||||
Shareholders' Equity | ||||||
Common stock | 307,932 | 306,697 | ||||
Additional contributed capital | 43,689 | 42,820 | ||||
Retained earnings | 509,766 | 478,847 | ||||
Accumulated other comprehensive loss | (91,726 | ) | (97,739 | ) | ||
Total shareholders' equity before treasury stock | 769,661 | 730,625 | ||||
Treasury stock | (364,442 | ) | (352,696 | ) | ||
Total shareholders' equity | 405,219 | 377,929 | ||||
Total Liabilities and Shareholders' Equity | $ | 643,354 | $ | 548,341 |
|
| December 31, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
ASSETS |
|
|
|
|
|
| ||
Current Assets |
|
|
|
|
|
| ||
Cash and cash equivalents |
| $ | 156,910 |
|
| $ | 141,465 |
|
Accounts receivable, net |
|
| 90,935 |
|
|
| 82,191 |
|
Inventories, net |
|
| 62,260 |
|
|
| 49,506 |
|
Other current assets |
|
| 15,655 |
|
|
| 15,927 |
|
Total current assets |
|
| 325,760 |
|
|
| 289,089 |
|
Property, plant and equipment, net |
|
| 97,300 |
|
|
| 96,876 |
|
Operating lease assets, net |
|
| 22,702 |
|
|
| 21,594 |
|
Other assets |
|
|
|
|
|
| ||
Prepaid pension asset |
|
| — |
|
|
| 49,382 |
|
Goodwill |
|
| 152,361 |
|
|
| 109,798 |
|
Other intangible assets, net |
|
| 108,053 |
|
|
| 69,888 |
|
Deferred income taxes |
|
| 23,461 |
|
|
| 25,415 |
|
Other assets |
|
| 18,850 |
|
|
| 2,420 |
|
Total other assets |
|
| 302,725 |
|
|
| 256,903 |
|
Total Assets |
| $ | 748,487 |
|
| $ | 664,462 |
|
LIABILITIES AND SHAREHOLDERS' EQUITY |
|
|
|
|
|
| ||
Current Liabilities |
|
|
|
|
|
| ||
Accounts payable |
| $ | 53,211 |
|
| $ | 55,537 |
|
Operating lease obligations |
|
| 3,936 |
|
|
| 3,393 |
|
Accrued payroll and benefits |
|
| 20,063 |
|
|
| 18,418 |
|
Accrued expenses and other liabilities |
|
| 35,322 |
|
|
| 36,718 |
|
Total current liabilities |
|
| 112,532 |
|
|
| 114,066 |
|
Long-term debt |
|
| 83,670 |
|
|
| 50,000 |
|
Long-term operating lease obligations |
|
| 21,754 |
|
|
| 21,354 |
|
Long-term pension obligations |
|
| 5,048 |
|
|
| 6,886 |
|
Deferred income taxes |
|
| 16,010 |
|
|
| 5,894 |
|
Other long-term obligations |
|
| 3,249 |
|
|
| 2,684 |
|
Total Liabilities |
|
| 242,263 |
|
|
| 200,884 |
|
Commitments and Contingencies (Note 11) |
|
|
|
|
|
| ||
Shareholders' Equity |
|
|
|
|
|
| ||
Common stock |
|
| 316,803 |
|
|
| 314,620 |
|
Additional contributed capital |
|
| 46,144 |
|
|
| 42,549 |
|
Retained earnings |
|
| 546,703 |
|
|
| 492,242 |
|
Accumulated other comprehensive loss |
|
| (671 | ) |
|
| (4,525 | ) |
Total shareholders' equity before treasury stock |
|
| 908,979 |
|
|
| 844,886 |
|
Treasury stock |
|
| (402,755 | ) |
|
| (381,308 | ) |
Total shareholders' equity |
|
| 506,224 |
|
|
| 463,578 |
|
Total Liabilities and Shareholders' Equity |
| $ | 748,487 |
|
| $ | 664,462 |
|
The accompanying notes are an integral part of the consolidated financial statements.
Consolidated Statements of Cash Flows
(in thousands)
Years Ended December 31, | |||||||||
2019 | 2018 | 2017 | |||||||
Cash flows from operating activities: | |||||||||
Net earnings | $ | 36,146 | $ | 46,532 | $ | 14,448 | |||
Adjustments to reconcile net earnings to net cash provided by operating activities: | |||||||||
Depreciation and amortization | 24,619 | 22,514 | 20,674 | ||||||
Stock-based compensation | 5,015 | 5,256 | 4,184 | ||||||
Restructuring and impairment charges | 1,704 | — | — | ||||||
Pension and other post-retirement plan expense | 1,009 | 422 | 11,570 | ||||||
Deferred income taxes | 2,413 | (1,008 | ) | 16,710 | |||||
(Gain) loss on sale of assets | (63 | ) | — | 708 | |||||
Loss (gain) on foreign currency hedges, net of cash received | 97 | (82 | ) | 94 | |||||
Changes in assets and liabilities, net of acquisitions and divestitures: | |||||||||
Accounts receivable | 3,784 | (9,877 | ) | (5,198 | ) | ||||
Inventories | 4,371 | (7,521 | ) | (5,404 | ) | ||||
Other assets | (2,605 | ) | (2,675 | ) | (1,531 | ) | |||
Operating lease assets | (2,578 | ) | — | — | |||||
Accounts payable | (4,658 | ) | 5,113 | 5,387 | |||||
Accrued payroll and benefits | (5,940 | ) | 2,349 | (1,666 | ) | ||||
Accrued expenses and other liabilities | (3,405 | ) | (3,795 | ) | 28 | ||||
Income taxes payable | 941 | 1,564 | (4,555 | ) | |||||
Operating lease liabilities | 2,921 | — | — | ||||||
Other liabilities | 921 | (258 | ) | 2,918 | |||||
Pension and other post-retirement plans | (287 | ) | (382 | ) | (319 | ) | |||
Total adjustments | 28,259 | 11,620 | 43,600 | ||||||
Net cash provided by operating activities | 64,405 | 58,152 | 58,048 | ||||||
Cash flows from investing activities: | |||||||||
Capital expenditures | (21,733 | ) | (28,488 | ) | (18,094 | ) | |||
Proceeds from sale of assets | 137 | 3 | 541 | ||||||
Payments for acquisitions, net of cash acquired | (73,906 | ) | — | (19,121 | ) | ||||
Net cash used in investing activities | (95,502 | ) | (28,485 | ) | (36,674 | ) | |||
Cash flows from financing activities: | |||||||||
Payments of long-term debt | (1,885,800 | ) | (1,060,100 | ) | (1,518,200 | ) | |||
Proceeds from borrowings of long-term debt | 1,935,500 | 1,033,800 | 1,505,400 | ||||||
Payments of short-term notes payable | — | — | (1,150 | ) | |||||
Purchase of treasury stock | (11,746 | ) | (9,440 | ) | — | ||||
Dividends paid | (5,238 | ) | (5,285 | ) | (5,260 | ) | |||
Taxes paid on behalf of equity award participants | (2,657 | ) | (1,468 | ) | (1,604 | ) | |||
Net cash provided by (used) in financing activities | 30,059 | (42,493 | ) | (20,814 | ) | ||||
Effect of exchange rate on cash and cash equivalents | 346 | 187 | (793 | ) | |||||
Net decrease in cash and cash equivalents | (692 | ) | (12,639 | ) | (233 | ) | |||
Cash and cash equivalents at beginning of year | 100,933 | 113,572 | 113,805 | ||||||
Cash and cash equivalents at end of year | $ | 100,241 | $ | 100,933 | $ | 113,572 | |||
Supplemental cash flow information: | |||||||||
Cash paid for interest | $ | 1,961 | $ | 1,582 | $ | 2,130 | |||
Cash paid for income taxes, net | $ | 11,113 | $ | 9,916 | $ | 10,884 | |||
Non-cash investing and financing activities: | |||||||||
Capital expenditures incurred not paid | $ | 4,077 | $ | 4,312 | $ | 5,914 |
|
| Years Ended December 31, |
| |||||||||
|
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
| |||
Net earnings (loss) |
| $ | 59,575 |
|
| $ | (41,866 | ) |
| $ | 34,686 |
|
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
| |||
Depreciation and amortization |
|
| 29,753 |
|
|
| 26,930 |
|
|
| 26,670 |
|
Non-cash inventory charges |
|
| 4,048 |
|
|
| — |
|
|
| — |
|
Pensions and other post-retirement plan (income) expense |
|
| (1,792 | ) |
|
| 132,650 |
|
|
| 2,698 |
|
Stock-based compensation |
|
| 7,726 |
|
|
| 6,105 |
|
|
| 3,417 |
|
Asset impairment charges |
|
| — |
|
|
| — |
|
|
| 1,016 |
|
Restructuring non-cash charges |
|
| — |
|
|
| — |
|
|
| 300 |
|
Deferred income taxes |
|
| 492 |
|
|
| (30,982 | ) |
|
| (2,048 | ) |
Gain on foreign current hedges, net of tax |
|
| (214 | ) |
|
| (35 | ) |
|
| (20 | ) |
Changes in assets and liabilities, net of acquisitions: |
|
|
|
|
|
|
|
|
| |||
Accounts receivable |
|
| (5,913 | ) |
|
| (928 | ) |
|
| (343 | ) |
Inventories |
|
| (8,211 | ) |
|
| (3,570 | ) |
|
| (578 | ) |
Operating lease assets |
|
| 1,266 |
|
|
| 1,687 |
|
|
| 1,363 |
|
Other assets |
|
| 5,625 |
|
|
| (2,076 | ) |
|
| 3,701 |
|
Accounts payable |
|
| (2,293 | ) |
|
| 3,136 |
|
|
| 3,860 |
|
Accrued payroll and benefits |
|
| 450 |
|
|
| 5,023 |
|
|
| 2,518 |
|
Operating lease liabilities |
|
| (1,431 | ) |
|
| (1,709 | ) |
|
| (1,257 | ) |
Accrued expenses and other liabilities |
|
| (1,381 | ) |
|
| (7,937 | ) |
|
| 1,056 |
|
Pension and other post-retirement plans |
|
| 33,497 |
|
|
| (287 | ) |
|
| (256 | ) |
Net cash provided by operating activities |
|
| 121,197 |
|
|
| 86,141 |
|
|
| 76,783 |
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
| |||
Capital expenditures |
|
| (14,333 | ) |
|
| (15,641 | ) |
|
| (14,858 | ) |
Payments for acquisitions, net of cash acquired |
|
| (96,855 | ) |
|
| (255 | ) |
|
| (8,309 | ) |
Net cash used in investing activities |
|
| (111,188 | ) |
|
| (15,896 | ) |
|
| (23,167 | ) |
CASH FLOWS FROM FINANCING ACTVITIES: |
|
|
|
|
|
|
|
|
| |||
Payments of long-term debt |
|
| (722,942 | ) |
|
| (808,800 | ) |
|
| (3,792,550 | ) |
Proceeds from borrowings of long-term debt |
|
| 756,580 |
|
|
| 804,200 |
|
|
| 3,747,450 |
|
Purchase of treasury stock |
|
| (21,447 | ) |
|
| (8,786 | ) |
|
| (8,080 | ) |
Dividends paid |
|
| (5,131 | ) |
|
| (5,173 | ) |
|
| (5,179 | ) |
Taxes paid on behalf of equity award participants |
|
| (1,524 | ) |
|
| (1,503 | ) |
|
| (1,917 | ) |
Contingent consideration payments |
|
| (1,200 | ) |
|
| (650 | ) |
|
| (1,057 | ) |
Net cash provided by (used in) financing activities |
|
| 4,336 |
|
|
| (20,712 | ) |
|
| (61,333 | ) |
Effect of exchange rate on cash and cash equivalents |
|
| 1,100 |
|
|
| 159 |
|
|
| (751 | ) |
Net increase (decrease) in cash and cash equivalents |
|
| 15,445 |
|
|
| 49,692 |
|
|
| (8,468 | ) |
Cash and cash equivalents at beginning of year |
|
| 141,465 |
|
|
| 91,773 |
|
|
| 100,241 |
|
Cash and cash equivalents at end of year |
| $ | 156,910 |
|
| $ | 141,465 |
|
| $ | 91,773 |
|
Supplemental cash flow information: |
|
|
|
|
|
|
|
|
| |||
Cash paid for interest |
| $ | 2,016 |
|
| $ | 1,950 |
|
| $ | 2,597 |
|
Cash paid for income taxes, net |
| $ | 20,080 |
|
| $ | 16,887 |
|
| $ | 11,967 |
|
Non-cash financing and investing activities: |
|
|
|
|
|
|
|
|
| |||
Capital expenditures incurred not paid |
| $ | 2,480 |
|
| $ | 2,348 |
|
| $ | 729 |
|
The accompanying notes are an integral part of the consolidated financial statements.
CTS CORPORATION 32 35
CTS CORPORATION AND SUBSIDIARIES
(in thousands)
Common Stock | Additional Contributed Capital | Retained Earnings | Accumulated Other Comprehensive Earnings/(Loss) | Treasury Stock | Total | |||||||||||||
Balances at January 1, 2017 | $ | 302,832 | $ | 40,521 | $ | 410,979 | $ | (93,194 | ) | $ | (343,256 | ) | $ | 317,882 | ||||
Net earnings | — | — | 14,448 | — | — | 14,448 | ||||||||||||
Changes in fair market value of derivatives, 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 derivatives, 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 of 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 | — | — | 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 | ||||
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 for 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 |
|
| Common |
|
| Additional |
|
| Retained |
|
| Accumulated |
|
| Treasury |
|
| Total |
| ||||||
Balances at January 1, 2020 |
| $ | 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 of 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 earnings |
|
| — |
|
|
| — |
|
|
| (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 |
|
Net earnings |
|
| — |
|
|
| — |
|
|
| 59,575 |
|
|
| — |
|
|
| — |
|
|
| 59,575 |
|
Changes in fair market value of derivatives, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 3,499 |
|
|
| — |
|
|
| 3,499 |
|
Changes in unrealized pension cost, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,203 |
|
|
| — |
|
|
| 1,203 |
|
Cumulative translation adjustment, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (848 | ) |
|
| — |
|
|
| (848 | ) |
Cash dividends of $0.16 per share |
|
| — |
|
|
| — |
|
|
| (5,114 | ) |
|
| — |
|
|
| — |
|
|
| (5,114 | ) |
Acquired 583,526 shares for treasury stock |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (21,447 | ) |
|
| (21,447 | ) |
Issued shares on vesting of restricted stock units |
|
| 2,183 |
|
|
| (3,708 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,525 | ) |
Stock compensation |
|
| — |
|
|
| 7,303 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 7,303 |
|
Balances at December 31, 2022 |
| $ | 316,803 |
|
| $ | 46,144 |
|
| $ | 546,703 |
|
| $ | (671 | ) |
| $ | (402,755 | ) |
| $ | 506,224 |
|
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, electronicconnectivity components, and actuators operating as a single reportable business segment. We operate manufacturing facilities located throughout North America, Asia and Europe and service major markets globally.
Principles of Consolidation: The consolidated financial statements include the accounts of CTS and its wholly-ownedwholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.
Use 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:Credit Losses: Accounts receivable consists primarily of amounts due from normal business activities. We maintain an allowance for doubtful accountscredit losses for estimated uncollectible accounts receivable. Our reserves for estimated credit losses are based upon historical experience, and specific customer collection issues.issues, current conditions and reasonable and supportable forecasts that affect the collectability of the remaining cash flows over the contractual terms of our receivables and other financial assets. Accounts are written off against the allowance account when they are determined to no longer be collectible.
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 risk related to cash and cash equivalents.
Trade 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 itsour 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, | |||
2019 | 2018 | 2017 | |
Cummins Inc. | 16.1% | 15.2% | 13.4% |
Honda Motor Co. | 11.6% | 10.5% | 11.2% |
Toyota Motor Corporation | 9.6% | 10.5% | 10.2% |
|
| Years Ended December 31, | ||||
|
| 2022 |
| 2021 |
| 2020 |
Cummins Inc. |
| 15.3% |
| 15.0% |
| 13.1% |
Toyota Motor Corporation |
| 11.5% |
| 12.4% |
| 13.4% |
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 manufacture or the net realizable value using the first-in, first-out ("FIFO") method.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 andincluding related production requirements.
CTS CORPORATION 34 37
Property, Plant and Equipment: Property, plant and equipment is stated at cost, less accumulated depreciation. Depreciation is computed primarily over the estimated useful lives of the various classes of assets using the straight-line method. Useful lives for buildings and improvements range from 10 to 45 years, machinery and equipment from 3three to 15 years,years, and software from 2 to 15 years.years. Depreciation on leasehold improvements is computed over the lesser of the lease term or estimated useful lives of the assets. Amounts expended for maintenance and repairs are charged to expense as incurred. Major overhauls that extend the useful lives of existing assets are capitalized. Upon disposition, any related gains or losses are included in operating earnings.
Income 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.
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 Earnings.Earnings (Loss). Accrued interest and penalties are included in 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. In accordance with ASC 350, Intangibles—Goodwill and Other, goodwill is not amortized, but instead is tested for impairment annually or more frequently if circumstances indicate a possible impairment may exist. Absent any interim indicators of impairment, the Company tests for goodwill impairment as of the first day of its fourth fiscal quarter of each year.
Based upon our latest assessment, we determined that our goodwill was not impaired as of October 1, 2022.
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 - "Costs Associated with Exit and Restructuring Activities", 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 ASC 360, Property, Plant, and Equipment. This statement requires that long-lived assets, which includes fixed assets and finite-lived intangible assets, be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If an impairment test is warranted, recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the sum of the undiscounted cash flows expected to result from the use and the eventual disposition of the asset. If such assets are considered to be impaired, the
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.
CTS CORPORATION 38
Revenue Recognition: Product revenue is recognized upon the transfer of promised goods to a customer in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods.goods net of reserves. We follow the five step model to determine when this transfer has occurred: 1) identify the contract(s) with the customer; 2) identify the performance obligations in the contract; 3) determine the transaction price; 4) allocate the transaction price to the performance obligations in the contract; 5) recognize revenue when (or as) the entity satisfies a performance obligation. Our revenue reserves contain uncertainties because they require management to make assumptions and to apply judgment to estimate the value of future credits to customers for product returns, price adjustments, and stock rotation 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.
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 Earnings (Loss) 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, 2019,2022 and 2018:2021:
|
| As of December 31, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
Cost of molds, dies and other tools included in other current assets |
| $ | 2,569 |
|
| $ | 4,497 |
|
As of December 31, | ||||||
2019 | 2018 | |||||
Cost of molds, dies and other tools included in other current assets | $ | 7,690 | $ | 5,388 |
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. Our established policies and procedures for mitigating credit risk on principal transactions include reviewing and establishing limits for credit exposure and continually assessing the creditworthiness of counterparties.
We estimate the fair value of our cash, cash equivalents, accounts receivable and accounts payable as cost due to the short-term nature of these instruments. Please refer to Note 13 - "Debt" and Note 14 - "Accumulated Other Comprehensive (Loss) Income" for information on the method of determining fair value for our debt and financial instruments as follows:derivatives, respectively.
Debt Issuance Costs: We have debt issuance costs related to our long-term debt that are being amortized using the straight-line method over the lifeterm of the debt. Debt issuance costs are capitalized and reflected as an asset in deferred financing costs in the accompanying Consolidated Balance Sheets. Amortization of debt issuance costs are recorded in interest expense.
Stock-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, and performance share units ("PSU's"PSUs"), and stock options, in the Consolidated Statements of Earnings.Earnings (Loss).
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
CTS CORPORATION 39
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.
Our 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 portiontranche 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.
See Note 16,17, "Stock-Based Compensation" for further information.
Earnings (Loss) Per Share: Basic earnings (loss) per share excludes any dilution and is computed by dividing net earnings (loss) available to common shareholders by the weighted-average number of common shares outstanding for the period.
Diluted earnings per share is calculated by dividing net earnings by the weighted average shares 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 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 securities consist of the following:
|
| Years Ended December 31, |
| |||||||||
(units) |
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
Antidilutive securities |
|
| 21,687 |
|
|
| — |
|
|
| 26,140 |
|
Years Ended December 31, | ||||||
(units) | 2019 | 2018 | 2017 | |||
Antidilutive securities | 22,040 | 18,138 | 22,110 |
Foreign Currencies: The financial statements of the majority 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 earnings.earnings (loss).
Foreign currency (losses) gains recorded in the Consolidated StatementStatements of Earnings (Loss) includes the following:
|
| Years Ended December 31, |
| |||||||||
|
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
Foreign currency (losses) gains |
| $ | (4,875 | ) |
| $ | (3,305 | ) |
| $ | 5,316 |
|
Years Ended December 31, | |||||||||
2019 | 2018 | 2017 | |||||||
Foreign currency (losses) gains | $ | (1,797 | ) | $ | (2,619 | ) | $ | 3,052 |
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.
Changes in Accounting Principles:Reclassifications: Beginning in January 2019, CTS adopted the provisions of Accounting Standards Update ("ASU") 2016-02, "Leases (Topic 842)" under the optional transition method, which requires, if necessary, a cumulative effect adjustmentCertain reclassifications have been made to prior year amounts to conform to the opening balance of retainedcurrent year presentation. The reclassifications had no impact on previously reported net earnings. The lease liability is based on the present value of minimum lease payments discounted using our secured incremental borrowing rate at the date of adoption. Existing deferred rent liabilities, resulting from our historical practice of using the straight line method for recognizing lease expense, were reclassified upon adoption to reduce the measurement
Accounting Pronouncements Recently Adopted
ASU No. 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the lease assets. We elected the packageEffects of practical expedients permitted under the transition guidance, which among other things, allows us to carry forward the historical accounting relating to lease identification and classification for existing leases at adoption. Our leases are classified as operating leases and expense is recorded in a manner similar to historical accounting guidance. We have also elected the practical expedient to not separate lease and non-lease components for the majorityReference Rate Reform on Financial Reporting"
CTS CORPORATION 40
ASU No. 2019-12 "Simplifying the Accounting for Income Taxes"
In December 2019,March 2020, the Financial Accounting Standards Board (“FASB”) issued ASU 2019-12,2020-04, SimplifyingReference Rate Reform (Topic 848): Facilitation of the Accounting for Income TaxesEffects of Reference Rate Reform on Financial Reporting, as partwhich provides temporary optional guidance for a limited period of its Simplification Initiativetime to reduceease the cost and complexitypotential burden in accounting for income taxes.(or recognizing the effects of) reference rate reform on financial reporting as it relates to our LIBOR indexed instruments. ASU 2019-12 removes2020-04 provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain exceptions relatedcriteria 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 approach for intraperiod tax allocation, the methodology for calculating income taxes inbeginning 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 the recognition of deferred tax liabilities for outside basis differences. ASU 2019-12 also amends other aspects of the guidance to help simplifyrestated our credit and promote consistent application of GAAP. The guidance isunderlying interest rate swap agreements effective for interim and annual periods beginning after December 15, 2020, with early adoption permitted.2021. We will adopt this ASU in the first quarter of 2020 and it is not expectedhave elected to have a material impact on our consolidated financial statements.
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:
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, 20192022 or 2021 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, | |||||||
2019 | 2018 | ||||||
Contract Assets | |||||||
Prepaid rebates included in Other current assets | $ | 64 | $ | 65 | |||
Prepaid rebates included in Other assets | 1,853 | 999 | |||||
Total Contract Assets | $ | 1,917 | $ | 1,064 | |||
Contract Liabilities | |||||||
Customer discounts and price concessions included in Accrued expenses and other liabilities | $ | (2,070 | ) | $ | (1,656 | ) | |
Customer rights of return included in Accrued expenses and other liabilities | (807 | ) | (325 | ) | |||
Total Contract Liabilities | $ | (2,877 | ) | $ | (1,981 | ) |
The following table presents revenues disaggregated by the major markets we serve:
|
| Years Ended |
| |||||
|
| 2022 |
|
| 2021 |
| ||
Transportation |
| $ | 303,695 |
|
| $ | 284,080 |
|
Industrial |
|
| 168,088 |
|
|
| 133,371 |
|
Medical |
|
| 64,890 |
|
|
| 48,159 |
|
Aerospace & Defense |
|
| 50,196 |
|
|
| 47,315 |
|
Total |
| $ | 586,869 |
|
| $ | 512,925 |
|
Twelve Months Ended December 31, | |||||||
2019 | 2018 | ||||||
Transportation | $ | 299,005 | $ | 300,124 | |||
Industrial | 78,369 | 86,968 | |||||
Medical | 41,901 | 40,663 | |||||
Aerospace & Defense | 32,569 | 23,323 | |||||
Telecom & IT | 17,155 | 19,405 | |||||
Total | $ | 468,999 | $ | 470,483 |
TEWA Temperature Sensors SP. Zo.o. Acquisition
CTS CORPORATION 41
On February 28, 2022, we acquired 100% of the outstanding shares of TEWA Temperature Sensors SP. Zo.o. (“TEWA”). TEWA is a designer and manufacturer of high-quality temperature sensors. TEWA has complementary capabilities with our existing temperature sensing platform, and the acquisition supports our end market diversification strategy and expands our presence in Europe.
The purchase price of $24,515, which includes assumed changes in working capital, net of cash acquired of $2,979, has been allocated to the fair values of assets and liabilities acquired as of February 28, 2022. The allocation of the purchase price continues to be preliminary pending the completion of the working capital settlement in the first quarter of 2023. The purchase price will be reduced by $794 due to final settlements in the first quarter of 2023.
The following table summarizes the consideration paid and the fair values of the assets acquired, and the liabilities assumed as of the date of acquisition:
|
| Fair Values at |
| |
Accounts Receivable |
| $ | 2,521 |
|
Inventory |
|
| 3,136 |
|
Other current assets |
|
| 69 |
|
Property, plant and equipment |
|
| 654 |
|
Other assets |
|
| 27 |
|
Goodwill |
|
| 9,267 |
|
Intangible assets |
|
| 13,650 |
|
Fair value of assets acquired |
|
| 29,324 |
|
Less fair value of liabilities acquired |
|
| (4,809 | ) |
Purchase price |
| $ | 24,515 |
|
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.
The Company recorded a $1,180 step-up of inventory to its fair value as of the acquisition date based on the preliminary valuation. The step-up was amortized as a non-cash charge to cost of goods sold as the acquired inventory was sold with all of it recognized in the twelve months ended December 31, 2022.
The following table summarizes the carrying amounts and weighted average lives of the acquired intangible assets:
|
| Carrying Value |
|
| Weighted |
| ||
Customer lists/relationships |
| $ | 13,000 |
|
|
| 12.0 |
|
Trademarks, tradenames, and other intangibles |
|
| 650 |
|
|
| 3.0 |
|
Total |
| $ | 13,650 |
|
|
|
|
Ferroperm Piezoceramics A/S Acquisition
On June 30, 2022, we acquired 100% of the outstanding shares of Ferroperm Piezoceramics A/S (“Ferroperm”). Ferroperm specializes in the design and manufacture of high performance piezoceramic components for use in complex and demanding medical, industrial, and aerospace applications. Ferroperm has complementary capabilities with our existing medical diagnostics and imaging product lines. The acquisition supports our end market diversification strategy and expands our presence in European end markets.
The purchase price of $72,340, which includes assumed changes in working capital, net of cash acquired of $5,578, has been allocated to the fair values of assets and liabilities acquired as of June 30, 2022. The allocation of the purchase price continues to be preliminary pending the completion of the valuation of intangible assets. The final purchase price allocation may result in a materially different allocation than that recorded as of December 31, 2022.
The following table summarizes the consideration paid, the fair values of the assets acquired, and the liabilities assumed as of the date of acquisition:
CTS CORPORATION 42
|
| Fair Values at |
| |
Accounts Receivable |
| $ | 3,073 |
|
Inventory |
|
| 6,848 |
|
Other current assets |
|
| 1,003 |
|
Property, plant and equipment |
|
| 3,953 |
|
Other assets |
|
| 158 |
|
Goodwill |
|
| 33,274 |
|
Intangible assets |
|
| 36,448 |
|
Fair value of assets acquired |
|
| 84,757 |
|
Less fair value of liabilities acquired |
|
| (12,417 | ) |
Purchase price |
| $ | 72,340 |
|
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.
The Company recorded a $3,012 step-up of inventory to its fair value as of the acquisition date based on the preliminary valuation. The step-up was amortized as a non-cash charge to cost of goods sold as the acquired inventory was sold with all of it recognized in the twelve months ended December 31, 2022.
Intangible assets acquired have been assigned a provisional value of $36,448 with an estimated weighted average amortization period of 12 years. They are included as customer lists/relationships in our Condensed Consolidated Balance Sheets and subsequent notes. Due to the timing of the acquisition, the identification and valuation of all intangible assets remains incomplete; however, management used historical experience and projections to estimate the potential value at December 31, 2022. The amount and assumptions included above remain an estimate that will be adjusted once purchase accounting is complete.
Maglab AG Acquisition
On February 6, 2023, we acquired 100% of the outstanding shares of maglab AG ("maglab") for $4,164 in cash subject to additional earnout payments based on future performance. Maglab has deep expertise in magnetic system design and current measurement solutions for use in e-mobility, industrial automation, and renewable energy applications. Maglab's domain expertise coupled with CTS’ commercial, technical and operational capabilities position us to advance our status as a recognized innovator in electric motor sensing and controls markets.
NOTE 4 — Accounts Receivable,
The components of accounts receivable, net are as follows:
|
| As of December 31, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
Accounts receivable, gross |
| $ | 92,171 |
|
| $ | 83,848 |
|
Less: Allowance for credit losses |
|
| (1,236 | ) |
|
| (1,657 | ) |
Accounts receivable, net |
| $ | 90,935 |
|
| $ | 82,191 |
|
As of December 31, | ||||||
2019 | 2018 | |||||
Accounts receivable, gross | $ | 78,269 | $ | 79,902 | ||
Less: Allowance for doubtful accounts | (261 | ) | (384 | ) | ||
Accounts receivable, net | $ | 78,008 | $ | 79,518 |
Inventories, net consist of the following:
|
| As of December 31, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
Finished goods |
| $ | 12,865 |
|
| $ | 11,955 |
|
Work-in-process |
|
| 22,819 |
|
|
| 18,878 |
|
Raw materials |
|
| 37,362 |
|
|
| 28,078 |
|
Less: Inventory reserves |
|
| (10,786 | ) |
|
| (9,405 | ) |
Inventories, net |
| $ | 62,260 |
|
| $ | 49,506 |
|
As of December 31, | ||||||
2019 | 2018 | |||||
Finished goods | $ | 9,447 | $ | 10,995 | ||
Work-in-process | 14,954 | 12,129 | ||||
Raw materials | 23,363 | 25,746 | ||||
Less: Inventory reserves | (5,527 | ) | (5,384 | ) | ||
Inventories, net | $ | 42,237 | $ | 43,486 |
CTS CORPORATION 40 43
NOTE 56 — Property, Plant and Equipment,
Property, plant and equipment, net is comprised of the following:
|
| As of December 31, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
Land and land improvements |
| $ | 1,100 |
|
| $ | 1,095 |
|
Buildings and improvements |
|
| 71,938 |
|
|
| 69,614 |
|
Machinery and equipment |
|
| 258,159 |
|
|
| 247,708 |
|
Less: Accumulated depreciation |
|
| (233,897 | ) |
|
| (221,541 | ) |
Property, plant and equipment, net |
| $ | 97,300 |
|
| $ | 96,876 |
|
As of December 31, | ||||||
2019 | 2018 | |||||
Land and land improvements | $ | 1,095 | $ | 1,136 | ||
Buildings and improvements | 68,350 | 70,522 | ||||
Machinery and equipment | 224,312 | 231,619 | ||||
Less: Accumulated depreciation | (188,719 | ) | (203,876 | ) | ||
Property, plant and equipment, net | $ | 105,038 | $ | 99,401 |
|
| For the Years Ended |
| |||||||||
|
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
Depreciation expense |
| $ | 18,126 |
|
| $ | 17,517 |
|
| $ | 17,615 |
|
For the Years Ended | |||||||||
2019 | 2018 | 2017 | |||||||
Depreciation expense | $ | 16,849 | $ | 15,697 | $ | 14,071 |
As of December 31, 2022, we have a number of noncontributorytwo active noncocntributory defined benefit pension plans ("pension plans") covering approximately 3%less than 1% of our active employees. PensionThese two plans covering salariedconsist of a U.S. supplemental retirement plan ("SERP") and a Taiwan pension plan. The SERP is comprised entirely of participants who were past employees provide pension benefits that are based onof 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 former 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 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, 2019,2022 and 2018.
In February 2020, the CTS Board of Directors authorized and empowered management to explore termination of our U.S. basedthe U.S.-based pension plans at management's discretion,plan ("Plan"), subject to certain conditions. Management has not yetOn 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. During the second quarter of 2021, the Company offered the option of receiving a lump sum payment to eligible participants with vested qualified Plan benefits in lieu of receiving monthly annuity payments. Approximately 365 participants elected to receive the settlement, and lump sum payments of approximately $35,594 were made from Plan assets to these participants in June 2021.
As required under U.S. GAAP, the Company recognizes a settlement gain 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 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 non-operating settlement charge of $20,063 related to pension losses, reclassified from accumulated other comprehensive loss to other (income) expense in the Company's Condensed Consolidated Statements of Earnings (Loss).
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.
CTS CORPORATION 44
As a result of the final decision on whethersettlement of the pension liability with the purchase of annuities, we reclassified the remaining related unrecognized pension losses of $106,206 that were previously recorded in accumulated other comprehensive loss to pursuethe Consolidated Statements of Earnings (Loss) in the third quarter of 2021.
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 remaining Plan assets were transferred to the Company in the third quarter of 2022 as part of the final termination andprocess. As a result, approximately $34,016 was transferred to the potential timing thereof.
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 | ||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||
Accumulated benefit obligation | $ | 220,339 | $ | 205,319 | $ | 1,854 | $ | 1,936 | |||||
Change in projected benefit obligation: | |||||||||||||
Projected benefit obligation at January 1 | $ | 205,319 | $ | 228,934 | $ | 2,756 | $ | 3,140 | |||||
Service cost | — | — | 37 | 43 | |||||||||
Interest cost | 7,724 | 7,123 | 31 | 42 | |||||||||
Benefits paid | (14,834 | ) | (14,781 | ) | (408 | ) | (669 | ) | |||||
Actuarial loss (gain) | 22,130 | (15,957 | ) | 153 | 287 | ||||||||
Foreign exchange impact | — | — | 64 | (87 | ) | ||||||||
Projected benefit obligation at December 31 | $ | 220,339 | $ | 205,319 | $ | 2,633 | $ | 2,756 | |||||
Change in plan assets: | |||||||||||||
Assets at fair value at January 1 | $ | 258,327 | $ | 284,762 | $ | 1,425 | $ | 1,777 | |||||
Actual return on assets | 37,680 | (11,757 | ) | 73 | 67 | ||||||||
Company contributions | 103 | 103 | 295 | 300 | |||||||||
Benefits paid | (14,834 | ) | (14,781 | ) | (408 | ) | (669 | ) | |||||
Foreign exchange impact | — | — | 34 | (50 | ) | ||||||||
Assets at fair value at December 31 | $ | 281,276 | $ | 258,327 | $ | 1,419 | $ | 1,425 | |||||
Funded status (plan assets less projected benefit obligations) | $ | 60,937 | $ | 53,008 | $ | (1,214 | ) | $ | (1,331 | ) |
|
| U.S. |
|
| Non-U.S. |
| ||||||||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||
Accumulated benefit obligation |
| $ | 814 |
|
| $ | 1,008 |
|
| $ | 1,771 |
|
| $ | 1,957 |
|
Change in projected benefit obligation: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Projected benefit obligation at January 1 |
| $ | 1,008 |
|
| $ | 230,205 |
|
| $ | 2,335 |
|
| $ | 2,686 |
|
Service cost |
|
| — |
|
|
| — |
|
|
| 20 |
|
|
| 26 |
|
Interest cost |
|
| 18 |
|
|
| 2,861 |
|
|
| 13 |
|
|
| 17 |
|
Benefits paid |
|
| (103 | ) |
|
| (12,206 | ) |
|
| (238 | ) |
|
| (476 | ) |
Actuarial (gain) loss |
|
| (109 | ) |
|
| (3,533 | ) |
|
| 239 |
|
|
| 44 |
|
Plan settlements |
|
| — |
|
|
| (216,319 | ) |
|
| — |
|
|
| — |
|
Foreign exchange impact |
|
| — |
|
|
| — |
|
|
| (223 | ) |
|
| 38 |
|
Projected benefit obligation at December 31 |
| $ | 814 |
|
| $ | 1,008 |
|
| $ | 2,146 |
|
| $ | 2,335 |
|
Change in plan assets: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Assets at fair value at January 1 |
| $ | 49,382 |
|
| $ | 285,675 |
|
| $ | 1,421 |
|
| $ | 1,595 |
|
Actual return on assets |
|
| 2,134 |
|
|
| (7,967 | ) |
|
| 116 |
|
|
| 28 |
|
Company contributions |
|
| 103 |
|
|
| 199 |
|
|
| 213 |
|
|
| 252 |
|
Benefits paid |
|
| (103 | ) |
|
| (12,206 | ) |
|
| (238 | ) |
|
| (476 | ) |
Plan settlements |
|
| — |
|
|
| (216,319 | ) |
|
| — |
|
|
| — |
|
Qualified replacement plan transfer |
|
| (17,500 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
Asset reversion |
|
| (34,016 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
Foreign exchange impact |
|
| — |
|
|
| — |
|
|
| (136 | ) |
|
| 22 |
|
Assets at fair value at December 31 |
| $ | — |
|
| $ | 49,382 |
|
| $ | 1,376 |
|
| $ | 1,421 |
|
Funded status (plan assets less projected benefit obligations) |
| $ | (814 | ) |
| $ | 48,374 |
|
| $ | (770 | ) |
| $ | (914 | ) |
CTS CORPORATION 45
The measurement dates for the post-retirement life insurance plan were December 31, 2019,2022 and 2018.2021. 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 |
| |||||
|
| 2022 |
|
| 2021 |
| ||
Accumulated benefit obligation |
| $ | 4,018 |
|
| $ | 5,231 |
|
Change in projected benefit obligation: |
|
|
|
|
|
| ||
Projected benefit obligation at January 1 |
| $ | 5,231 |
|
| $ | 5,376 |
|
Service cost |
|
| 1 |
|
|
| 1 |
|
Interest cost |
|
| 102 |
|
|
| 80 |
|
Benefits paid |
|
| (147 | ) |
|
| (151 | ) |
Actuarial (gain) loss |
|
| (1,169 | ) |
|
| (75 | ) |
Projected benefit obligation at December 31 |
| $ | 4,018 |
|
| $ | 5,231 |
|
Change in plan assets: |
|
|
|
|
|
| ||
Assets at fair value at January 1 |
| $ | — |
|
| $ | — |
|
Actual return on assets |
|
| — |
|
|
| — |
|
Company contributions |
|
| 147 |
|
|
| 151 |
|
Benefits paid |
|
| (147 | ) |
|
| (151 | ) |
Other |
|
| — |
|
|
| — |
|
Assets at fair value at December 31 |
| $ | — |
|
| $ | — |
|
Funded status (plan assets less projected benefit obligations) |
| $ | (4,018 | ) |
| $ | (5,231 | ) |
Post-Retirement Life Insurance Plan | ||||||
2019 | 2018 | |||||
Accumulated benefit obligation | $ | 4,766 | $ | 4,595 | ||
Change in projected benefit obligation: | ||||||
Projected benefit obligation at January 1 | $ | 4,595 | $ | 5,134 | ||
Service cost | 1 | 2 | ||||
Interest cost | 170 | 156 | ||||
Benefits paid | (145 | ) | (157 | ) | ||
Actuarial loss (gain) | 145 | (540 | ) | |||
Projected benefit obligation at December 31 | $ | 4,766 | $ | 4,595 | ||
Change in plan assets: | ||||||
Assets at fair value at January 1 | $ | — | $ | — | ||
Actual return on assets | — | — | ||||
Company contributions | 145 | 157 | ||||
Benefits paid | (145 | ) | (157 | ) | ||
Other | — | — | ||||
Assets at fair value at December 31 | $ | — | $ | — | ||
Funded status (plan assets less projected benefit obligations) | $ | (4,766 | ) | $ | (4,595 | ) |
U.S.Pension Plans | Non-U.S. Pension Plans | ||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||
Prepaid pension asset | $ | 62,082 | $ | 54,100 | $ | — | $ | — | |||||
Accrued expenses and other liabilities | (100 | ) | (100 | ) | — | — | |||||||
Long-term pension obligations | (1,045 | ) | (992 | ) | (1,214 | ) | (1,331 | ) | |||||
Net prepaid (accrued) cost | $ | 60,937 | $ | 53,008 | $ | (1,214 | ) | $ | (1,331 | ) |
CTS CORPORATION 42
|
| U.S. Pension Plans |
|
| Non-U.S. Pension Plans |
| ||||||||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||
Prepaid pension asset |
| $ | — |
|
| $ | 49,382 |
|
| $ | — |
|
| $ | — |
|
Accrued expenses and other liabilities |
|
| (99 | ) |
|
| (100 | ) |
|
| — |
|
|
| — |
|
Long-term pension obligations |
|
| (715 | ) |
|
| (908 | ) |
|
| (770 | ) |
|
| (914 | ) |
Net (accrued) prepaid cost |
| $ | (814 | ) |
| $ | 48,374 |
|
| $ | (770 | ) |
| $ | (914 | ) |
|
| Post-Retirement |
| |||||
|
| 2022 |
|
| 2021 |
| ||
Accrued expenses and other liabilities |
| $ | (455 | ) |
| $ | (489 | ) |
Long-term pension obligations |
|
| (3,563 | ) |
|
| (4,742 | ) |
Total accrued cost |
| $ | (4,018 | ) |
| $ | (5,231 | ) |
CTS CORPORATION 46
Post-Retirement Life Insurance Plan | ||||||
2019 | 2018 | |||||
Accrued expenses and other liabilities | $ | (393 | ) | $ | (407 | ) |
Long-term pension obligations | (4,373 | ) | (4,188 | ) | ||
Total accrued cost | $ | (4,766 | ) | $ | (4,595 | ) |
U.S.Pension Plans | Non-U.S. Pension Plans | ||||||
Unrecognized Loss | Unrecognized Loss | ||||||
Balance at January 1, 2018 | $ | 75,740 | $ | 1,898 | |||
Amortization of retirement benefits, net of tax | (4,538 | ) | (126 | ) | |||
Settlements | — | — | |||||
Net actuarial gain | 6,732 | 196 | |||||
Foreign exchange impact | — | (52 | ) | ||||
Tax impact due to implementation of ASU 2018-02 | 17,560 | — | |||||
Balance at January 1, 2019 | $ | 95,494 | $ | 1,916 | |||
Amortization of retirement benefits, net of tax | (4,060 | ) | (138 | ) | |||
Net actuarial (loss) gain | (2,604 | ) | 78 | ||||
Foreign exchange impact | — | 44 | |||||
Balance at December 31, 2019 | $ | 88,830 | $ | 1,900 |
|
| U.S. |
|
| Non-U.S. |
| ||
|
| Unrecognized |
|
| Unrecognized |
| ||
Balance at January 1, 2021 |
| $ | 91,237 |
|
| $ | 1,901 |
|
Amortization of retirement benefits, net of tax |
|
| (2,851 | ) |
|
| (152 | ) |
Net actuarial gain |
|
| 3,777 |
|
|
| 27 |
|
Settlement charges |
|
| (91,851 | ) |
|
| — |
|
Foreign exchange impact |
|
| — |
|
|
| 27 |
|
Balance at January 1, 2022 |
| $ | 312 |
|
| $ | 1,803 |
|
Amortization of retirement benefits, net of tax |
|
| — |
|
|
| (155 | ) |
Net actuarial gain (loss) |
|
| (108 | ) |
|
| 132 |
|
Foreign exchange impact |
|
| — |
|
|
| (172 | ) |
Balance at December 31, 2022 |
| $ | 204 |
|
| $ | 1,608 |
|
We have recorded the following amounts to accumulated other comprehensive loss for the post-retirement life insurance plan, net of tax:
Unrecognized | ||||
Balance at January 1, 2021 | $ | (51 | ) | |
Amortization of retirement benefits, net of tax | — | |||
Net actuarial loss | (58 | ) | ||
Balance at January 1, 2022 | $ | (109 | ) | |
Amortization of retirement benefits, net of tax | — | |||
Net actuarial loss | (900 | ) | ||
Balance at December 31, 2022 | $ | (1,009 | ) |
Unrecognized Gain | |||
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 January 1, 2019 | $ | (849 | ) |
Amortization of retirement benefits, net of tax | 129 | ||
Net actuarial gain | 112 | ||
Balance at December 31, 2019 | $ | (608 | ) |
The component of unamortized net gains or losses related to our qualified pension plansplan is amortized based on the expected future life expectancy of the plan participants (estimated to be approximately 1711 years at December 31, 2019)2022), 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, 2019)2022). 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.
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, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
Projected benefit obligation |
| $ | 2,961 |
|
| $ | 3,343 |
|
Accumulated benefit obligation |
| $ | 2,585 |
|
| $ | 2,965 |
|
Fair value of plan assets |
| $ | 1,377 |
|
| $ | 1,421 |
|
CTS CORPORATION 47
As of December 31, | ||||||
2019 | 2018 | |||||
Projected benefit obligation | $ | 3,778 | $ | 3,848 | ||
Accumulated benefit obligation | $ | 2,999 | $ | 3,028 | ||
Fair value of plan assets | $ | 1,418 | $ | 1,426 |
|
| Years Ended |
|
| Years Ended |
| ||||||||||||||||||
|
| U.S. Pension Plans |
|
| Non-U.S. Pension Plans |
| ||||||||||||||||||
|
| 2022 |
|
| 2021 |
|
| 2020 |
|
| 2022 |
|
| 2021 |
|
| 2020 |
| ||||||
Service cost |
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | 20 |
|
| $ | 26 |
|
| $ | 31 |
|
Interest cost |
|
| 18 |
|
|
| 2,861 |
|
|
| 5,773 |
|
|
| 13 |
|
|
| 17 |
|
|
| 28 |
|
Expected return on plan assets(1) |
|
| (2,134 | ) |
|
| (474 | ) |
|
| (9,817 | ) |
|
| (9 | ) |
|
| (17 | ) |
|
| (16 | ) |
Amortization of unrecognized loss |
|
| 30 |
|
|
| 3,703 |
|
|
| 6,488 |
|
|
| 167 |
|
|
| 184 |
|
|
| 174 |
|
Settlement charges |
|
| — |
|
|
| 126,269 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Net expense |
| $ | (2,086 | ) |
| $ | 132,359 |
|
| $ | 2,444 |
|
| $ | 191 |
|
| $ | 210 |
|
| $ | 221 |
|
Weighted-average actuarial assumptions(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Benefit obligation assumptions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Discount rate |
|
| 5.04 | % |
|
| 2.46 | % |
|
| 2.26 | % |
|
| 1.75 | % |
|
| 0.63 | % |
|
| 0.63 | % |
Rate of compensation increase |
| N/A |
|
| N/A |
|
| N/A |
|
|
| 5.00 | % |
|
| 3.00 | % |
|
| 3.00 | % | |||
Pension income/expense assumptions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Discount rate |
|
| 2.46 | % |
|
| 2.10 | % |
|
| 3.15 | % |
|
| 0.63 | % |
|
| 0.63 | % |
|
| 0.63 | % |
Expected return on plan assets(1) |
| N/A |
|
|
| 1.44 | % |
|
| 3.76 | % |
|
| 0.63 | % |
|
| 0.63 | % |
|
| 0.63 | % | |
Rate of compensation increase |
| N/A |
|
| N/A |
|
| N/A |
|
|
| 5.00 | % |
|
| 3.00 | % |
|
| 3.00 | % |
Years Ended December 31, | Years Ended December 31, | ||||||||||||||||||
U.S. Pension Plans | Non-U.S. Pension Plans | ||||||||||||||||||
2019 | 2018 | 2017 | 2019 | 2018 | 2017 | ||||||||||||||
Service cost | $ | — | $ | — | $ | — | $ | 37 | $ | 43 | $ | 48 | |||||||
Interest cost | 7,724 | 7,123 | 8,273 | 31 | 42 | 34 | |||||||||||||
Expected return on plan assets(1) | (12,187 | ) | (12,898 | ) | (16,243 | ) | (17 | ) | (25 | ) | (20 | ) | |||||||
Amortization of unrecognized loss | 5,246 | 5,863 | 5,785 | 170 | 162 | 155 | |||||||||||||
Settlement loss | — | — | 13,476 | — | — | — | |||||||||||||
Net expense (income) | $ | 783 | $ | 88 | $ | 11,291 | $ | 221 | $ | 222 | $ | 217 | |||||||
Weighted-average actuarial assumptions(2) | |||||||||||||||||||
Benefit obligation assumptions: | |||||||||||||||||||
Discount rate | 3.15 | % | 4.30 | % | 3.63 | % | 1.00 | % | 1.13 | % | 1.38 | % | |||||||
Rate of compensation increase | N/A | N/A | N/A | 3.00 | % | 3.00 | % | 2.00 | % | ||||||||||
Pension income/expense assumptions: | |||||||||||||||||||
Discount rate | 4.30 | % | 3.63 | % | 4.16 | % | 1.13 | % | 1.38 | % | 1.13 | % | |||||||
Expected return on plan assets(1) | 4.61 | % | 4.72 | % | 5.61 | % | 1.13 | % | 1.38 | % | 1.13 | % | |||||||
Rate of compensation increase | N/A | N/A | N/A | 3.00 | % | 2.00 | % | 2.00 | % |
Net post-retirement expense includes the following components:
|
| Post-Retirement |
| |||||||||
|
| Years Ended December 31, |
| |||||||||
|
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
Service cost |
| $ | 1 |
|
| $ | 1 |
|
| $ | 1 |
|
Interest cost |
|
| 102 |
|
|
| 80 |
|
|
| 122 |
|
Amortization of unrecognized gain |
|
| — |
|
|
| — |
|
|
| (84 | ) |
Net expense |
| $ | 103 |
|
| $ | 81 |
|
| $ | 39 |
|
Weighted-average actuarial assumptions(1) |
|
|
|
|
|
|
|
|
| |||
Benefit obligation assumptions: |
|
|
|
|
|
|
|
|
| |||
Discount rate |
|
| 5.11 | % |
|
| 2.66 | % |
|
| 2.27 | % |
Rate of compensation increase |
| N/A |
|
| N/A |
|
| N/A |
| |||
Pension income/post-retirement expense assumptions: |
|
|
|
|
|
|
|
|
| |||
Discount rate |
|
| 2.66 | % |
|
| 2.27 | % |
|
| 3.09 | % |
Rate of compensation increase |
| N/A |
|
| N/A |
|
| N/A |
|
Post-Retirement Life Insurance Plan | |||||||||
Years Ended December 31, | |||||||||
2019 | 2018 | 2017 | |||||||
Service cost | $ | 1 | $ | 2 | $ | 2 | |||
Interest cost | 170 | 156 | 161 | ||||||
Amortization of unrecognized gain | (166 | ) | (46 | ) | (101 | ) | |||
Net expense | $ | 5 | $ | 112 | $ | 62 | |||
Weighted-average actuarial assumptions (1) | |||||||||
Benefit obligation assumptions: | |||||||||
Discount rate | 3.09 | % | 4.26 | % | 3.59 | % | |||
Rate of compensation increase | N/A | N/A | N/A | ||||||
Pension income/post-retirement expense assumptions: | |||||||||
Discount rate | 4.26 | % | 3.59 | % | 4.10 | % | |||
Rate of compensation increase | N/A | N/A | N/A |
CTS CORPORATION 44
Target Allocations | Percentage of Plan Assets at December 31, | |||
Asset Category | 2020 | 2019 | 2018 | |
Equity securities | 13% | 13% | 12% | |
Debt securities | 83% | 83% | 84% | |
Other | 4% | 4% | 4% | |
Total | 100% | 100% | 100% |
CTS CORPORATION 48
ongoing basis through quarterly investment portfolio reviews, annual liability measurements, and asset/liability studies at regular intervals.
As a result of the termination of the Plan and final reversion activities in 2022, no assets remained in the Plan as of December 31, 2022.
The following table summarizes the fair values of our pension plan assets:
|
| As of December 31, |
| |
|
| 2021 |
| |
Equity securities - U.S. holdings(1) |
| $ | 8 |
|
Bond funds - other(3) (4) |
|
| 31,380 |
|
Cash and cash equivalents(2) |
|
| 19,415 |
|
Total fair value of plan assets |
| $ | 50,803 |
|
As of December 31, | ||||||
2019 | 2018 | |||||
Equity securities - U.S. holdings(1) | $ | 24,586 | $ | 20,469 | ||
Equity funds - U.S. holdings(1) (7) | — | 54 | ||||
Bond funds - government(4) (7) | 33,991 | 19,146 | ||||
Bond funds - other(5) (7) | 207,901 | 202,393 | ||||
Real estate(6) (7) | 2,979 | 2,652 | ||||
Cash and cash equivalents(2) | 5,700 | 5,866 | ||||
Partnerships(3) | 7,539 | 9,172 | ||||
Total fair value of plan assets | $ | 282,696 | $ | 259,752 |
|
| Quoted |
|
| Significant |
|
| Significant |
|
| Not Leveled |
|
| Total |
| |||||
Equity securities - U.S. holdings(1) |
| $ | 8 |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | 8 |
|
Bond funds - other(3) (4) |
|
| 31,380 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 31,380 |
|
Cash and cash equivalents(2) |
|
| 19,415 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 19,415 |
|
Total |
| $ | 50,803 |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | 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) | $ | 24,586 | $ | — | $ | — | $ | — | $ | 24,586 | |||||
Bond funds - government(4) (7) | — | — | — | 33,991 | 33,991 | ||||||||||
Bond funds - other(5) (7) | — | — | — | 207,901 | 207,901 | ||||||||||
Real estate(6) (7) | — | — | — | 2,979 | 2,979 | ||||||||||
Cash and cash equivalents(2) | 5,700 | — | — | — | 5,700 | ||||||||||
Partnerships(3) | — | — | 7,539 | — | 7,539 | ||||||||||
Total | $ | 30,286 | $ | — | $ | 7,539 | $ | 244,871 | $ | 282,696 |
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) (7) | — | — | — | 54 | 54 | ||||||||||
Bond funds - government(4) (7) | — | — | — | 19,146 | 19,146 | ||||||||||
Bond funds - other(5) (7) | — | — | — | 202,393 | 202,393 | ||||||||||
Real estate(6) (7) | — | — | — | 2,652 | 2,652 | ||||||||||
Cash and cash equivalents(2) | 5,866 | — | — | — | 5,866 | ||||||||||
Partnerships(3) | — | — | 9,172 | — | 9,172 | ||||||||||
Total | $ | 26,335 | $ | — | $ | 9,172 | $ | 224,245 | $ | 259,752 |
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 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.
|
|
| Amount |
| |
Fair value of Level 3 partnership assets at January 1, 2021 |
| $ | 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 |
| $ | — |
|
Capital contributions |
|
| — |
|
Realized and unrealized loss |
|
| — |
|
Capital distributions |
|
| — |
|
Fair value of Level 3 partnership assets at December 31, 2022 |
| $ | — |
|
CTS CORPORATION 49
Amount | |||
Fair value of Level 3 partnership assets at January 1, 2018 | $ | 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 | |
Capital contributions | 120 | ||
Realized and unrealized gain | (139 | ) | |
Capital distributions | (1,614 | ) | |
Fair value of Level 3 partnership assets at December 31, 2019 | $ | 7,539 |
CTS CORPORATION 46
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 2022 and in the aggregate for the following five years are as appropriate, are expected to be paid:follows:
|
| U.S. |
|
| Non-U.S. |
|
| Post- |
| |||
2023 |
| $ | 99 |
|
| $ | 51 |
|
| $ | 455 |
|
2024 |
|
| 95 |
|
|
| 64 |
|
|
| 425 |
|
2025 |
|
| 91 |
|
|
| 74 |
|
|
| 398 |
|
2026 |
|
| 88 |
|
|
| 82 |
|
|
| 373 |
|
2027 |
|
| 84 |
|
|
| 117 |
|
|
| 351 |
|
2028-2031 |
|
| 335 |
|
|
| 638 |
|
|
| 1,488 |
|
Total |
| $ | 792 |
|
| $ | 1,026 |
|
| $ | 3,490 |
|
U.S. Pension Plans | Non-U.S. Pension Plans | Post-Retirement Life Insurance Plan | |||||||
2020 | $ | 15,514 | $ | 46 | $ | 393 | |||
2021 | 15,399 | 54 | 377 | ||||||
2022 | 15,218 | 82 | 362 | ||||||
2023 | 14,983 | 69 | 347 | ||||||
2024 | 14,706 | 84 | 332 | ||||||
2025-2029 | 68,594 | 715 | 1,468 | ||||||
Total | $ | 144,414 | $ | 1,050 | $ | 3,279 |
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, |
| |||||||||
|
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
401(k) and other defined contribution plan expense |
| $ | 3,878 |
|
| $ | 3,242 |
|
| $ | 1,636 |
|
CTS CORPORATION 50
Years Ended December 31, | |||||||||
2019 | 2018 | 2017 | |||||||
401(k) and other defined contribution plan expense | $ | 3,125 | $ | 3,256 | $ | 3,141 |
Other Intangible Assets
Other intangible assets, net consist of the Company’s other intangible assets as of December 31:following components:
|
| As of December 31, 2022 |
|
|
|
| ||||||||||
|
| Gross |
|
| Accumulated |
|
| Net |
|
| Weighted |
| ||||
Other intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Customer lists / relationships |
| $ | 148,899 |
|
| $ | (59,603 | ) |
| $ | 89,296 |
|
|
| 9.4 |
|
Technology and other intangibles |
|
| 45,255 |
|
|
| (26,498 | ) |
|
| 18,757 |
|
|
| 7.4 |
|
Other intangible assets, net |
| $ | 194,154 |
|
| $ | (86,101 | ) |
| $ | 108,053 |
|
|
| 8.2 |
|
Amortization expense for the year ended December 31, 2022 |
|
|
|
| $ | 11,627 |
|
|
|
|
|
|
|
|
| As of December 31, 2021 |
| |||||||||
|
| Gross |
|
| Accumulated |
|
| Net |
| |||
Other intangible assets: |
|
|
|
|
|
|
|
|
| |||
Customer lists / relationships |
| $ | 96,889 |
|
| $ | (49,213 | ) |
| $ | 47,676 |
|
Technology and other intangibles |
|
| 47,441 |
|
|
| (25,229 | ) |
|
| 22,212 |
|
Other intangible assets, net |
| $ | 144,330 |
|
| $ | (74,442 | ) |
| $ | 69,888 |
|
Amortization expense for the year ended December 31, 2021 |
|
|
|
| $ | 9,413 |
|
|
|
| ||
Amortization expense for the year ended December 31, 2020 |
|
|
|
| $ | 9,055 |
|
|
|
|
As of December 31, 2019 | ||||||||||||
Gross Carrying Amount | Accumulated Amortization | Net Amount | Weighted Average Remaining Amortization Period (in years) | |||||||||
Other intangible assets: | ||||||||||||
Customer lists / relationships | $ | 92,194 | $ | (38,682 | ) | $ | 53,512 | 10.8 | ||||
Technology and other intangibles | 47,925 | (18,422 | ) | 29,503 | 8.7 | |||||||
In process research and development | 2,200 | — | 2,200 | — | ||||||||
Other intangible assets, net | $ | 142,319 | $ | (57,104 | ) | $ | 85,215 | 10.1 | ||||
Amortization expense for the year ended December 31, 2019 | $ | 7,770 |
As of December 31, 2018 | |||||||||
Gross Carrying Amount | Accumulated Amortization | Net Amount | |||||||
Other intangible assets: | |||||||||
Customer lists / relationships | $ | 64,323 | $ | (37,088 | ) | $ | 27,235 | ||
Technology and other intangibles | 44,460 | (13,715 | ) | 30,745 | |||||
In process research and development | 2,200 | — | 2,200 | ||||||
Other intangible assets, net | $ | 110,983 | $ | (50,803 | ) | $ | 60,180 | ||
Amortization expense for the year ended December 31, 2018 | $ | 6,817 | |||||||
Amortization expense for the year ended December 31, 2017 | $ | 6,603 |
|
| Amortization |
| |
2023 |
| $ | 11,161 |
|
2024 |
|
| 10,999 |
|
2025 |
|
| 10,610 |
|
2026 |
|
| 10,543 |
|
2027 |
|
| 10,484 |
|
Thereafter |
|
| 54,256 |
|
Total future amortization expense |
| $ | 108,053 |
|
Goodwill
Amortization expense | |||
2020 | $ | 9,051 | |
2021 | 8,893 | ||
2022 | 8,657 | ||
2023 | 6,651 | ||
2024 | 6,479 | ||
Thereafter | 45,484 | ||
Total future amortization expense | $ | 85,215 |
|
| Total |
| |
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 |
|
Increase due to acquisitions |
|
| 42,541 |
|
Foreign exchange impact |
|
| 22 |
|
Goodwill as of December 31, 2022 |
| $ | 152,361 |
|
Total | |||
Goodwill as of December 31, 2017 | $ | 71,057 | |
Increase from acquisitions | — | ||
Goodwill as of December 31, 2018 | $ | 71,057 | |
Increase from acquisition | 34,999 | ||
Goodwill as of December 31, 2019 | $ | 106,056 |
Refer to Note 3 - "Business Acquisitions" for further information on the increase due to acquisitions in 2022.
We performed our annual impairment test as of October 1, 2019,2022, our measurement date, and concluded that there was no impairment in any of our reporting units.
CTS CORPORATION 48 51
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 charges are reported as a separate line within operating earnings in the Consolidated Statements of Earnings.Earnings (Loss). Total restructuring charges were:
|
| Years Ended December 31, |
| |||||||||
|
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
Restructuring charges |
| $ | 1,912 |
|
| $ | 1,687 |
|
| $ | 1,830 |
|
Years Ended December 31, | |||||||||
2019 | 2018 | 2017 | |||||||
Restructuring charges | $ | 7,448 | $ | 5,062 | $ | 4,139 |
September 2020 Plan
In June 2016,September 2020, we announced plansinitiated 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 restructure operations by phasing out production at our Elkhart, IN facilitya shared service center, realignment of manufacturing locations, and transitioning it into a research and development center supporting our global operationscertain other efficiency improvement actions ("June 2016September 2020 Plan"). Additional organizational changes were also implementedThe restructuring cost of the September 2020 Plan is now estimated to be in variousthe range of $3,500 to $4,500, including workforce reduction charges, building and equipment relocation charges, other locations. In 2017, we revised this plancontract and asset related costs. We have incurred $2,059 in program costs to include an additional $1,100date. We recorded $266 and $662 in plannedworkforce reduction costs related to the relocation of our corporate headquarters in Lisle, IL and our plant in Bolingbrook, IL, both of which have now been consolidated into a single facility. Restructuring charges under this plan, which is substantially complete, were $4,284, $4,559, and $4,139 during the yearsthree and twelve months ended December 31, 2019, 2018, and 2017, respectively.2022. The total restructuring liability related to the June 2016 Plan was $233 and $668 at December 31, 2019 and 2018, respectively. Any additional costs related to line movements, equipment charges, and other costs will be expensed as incurred.
June 2016 Plan | Planned Costs | Actual costs incurred through December 31, 2019 | |||||
Workforce reduction | $ | 3,075 | $ | 3,340 | |||
Building and equipment relocation | 9,025 | 10,534 | |||||
Asset impairment charge | — | 1,168 | |||||
Other charges (1) | 1,300 | 988 | |||||
Restructuring charges | $ | 13,400 | $ | 16,030 |
Other Restructuring Activities
From time to time we incur other restructuring activities that are not part of a formal plan. Beginning in Q3 2019,During the years ended December 31, 2022 and 2021, we incurred restructuring charges of $3,412$1,250 and $1,717, respectively, for exit and disposal activities at threefour sites, building and equipment relocation, and workforce reduction costs across the company.Company. The remaining restructuring liability associated with these actions was $1,057$235 and $962 at December 31, 2019.
The following table displays the restructuring liability activity for all plans for the year ended December 31, 2019:
Restructuring liability at January 1, 2022 |
| $ | 962 |
|
Restructuring charges |
|
| 1,912 |
|
Cost paid |
|
| (2,003 | ) |
Other activities(1) |
|
| (2 | ) |
Restructuring liability at December 31, 2022 |
| $ | 869 |
|
Restructuring liability at January 1, 2019 | $ | 1,586 | |
Restructuring charges | 7,448 | ||
Cost paid | (4,997 | ) | |
Other activities (1) | (2,044 | ) | |
Restructuring liability at December 31, 2019 | $ | 1,993 |
The total liability of $1,993$869 is included in Accruedaccrued expenses and other liabilities at December 31, 2019.2022.
NOTE 910 — Accrued Expenses and Other Liabilities
The components of accrued expenses and other liabilities are as follows:
|
| December 31, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
Accrued product-related costs |
| $ | 2,368 |
|
| $ | 3,188 |
|
Accrued income taxes |
|
| 9,630 |
|
|
| 6,761 |
|
Accrued property and other taxes |
|
| 2,142 |
|
|
| 2,370 |
|
Accrued professional fees |
|
| 1,472 |
|
|
| 1,629 |
|
Accrued customer-related liabilities |
|
| 2,837 |
|
|
| 3,254 |
|
Dividends payable |
|
| 1,272 |
|
|
| 1,289 |
|
Remediation reserves |
|
| 11,048 |
|
|
| 10,979 |
|
Derivative liabilities |
|
| 357 |
|
|
| 437 |
|
Other accrued liabilities |
|
| 4,196 |
|
|
| 6,811 |
|
Total accrued expenses and other liabilities |
| $ | 35,322 |
|
| $ | 36,718 |
|
CTS CORPORATION 52
As of December 31, | ||||||
2019 | 2018 | |||||
Accrued product-related costs | $ | 4,464 | $ | 4,377 | ||
Accrued income taxes | 7,903 | 6,914 | ||||
Accrued property and other taxes | 1,574 | 1,976 | ||||
Accrued professional fees | 1,599 | 3,350 | ||||
Contract liabilities | 2,877 | 1,981 | ||||
Dividends payable | 1,299 | 1,310 | ||||
Remediation reserves | 11,444 | 11,274 | ||||
Other accrued liabilities | 5,218 | 6,165 | ||||
Total accrued expenses and other liabilities | $ | 36,378 | $ | 37,347 |
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 ("EPA"), state environmental agencies, and in some cases, groups of potentially responsible parties, that we may be potentially liable for environmental contamination at several sites currently and formerly owned or operated by us. Two of those sites, Asheville, North Carolina and Mountain View, California, are designated National Priorities List sites under the U.S. Environmental Protection Agency’s Superfund program. We accrue a liability for probable remediation activities, claims and proceedings against us with respect to environmental matters if the amount can be reasonably estimated, and provide disclosures including the nature of a loss whenever it is probable or reasonably possible that a potentially material loss may have occurred but cannot be estimated. We record contingent loss accruals on an undiscounted basis.
A roll-forward of remediation reserves included in accrued expenses and other liabilities in the Consolidated Balance Sheets is comprised of the following:
|
| Years Ended December 31, |
| |||||||||
|
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
Balance at beginning of period |
| $ | 10,979 |
|
| $ | 10,642 |
|
| $ | 11,444 |
|
Remediation expense |
|
| 2,750 |
|
|
| 2,254 |
|
|
| 2,769 |
|
Remediation payments |
|
| (2,661 | ) |
|
| (1,929 | ) |
|
| (3,639 | ) |
Other activity (1) |
|
| (20 | ) |
|
| 12 |
|
|
| 68 |
|
Balance at end of the period |
| $ | 11,048 |
|
| $ | 10,979 |
|
| $ | 10,642 |
|
Years Ended December 31, | |||||||||
2019 | 2018 | 2017 | |||||||
Balance at beginning of period | $ | 11,274 | $ | 17,067 | $ | 18,176 | |||
Remediation expense | 2,602 | 1,182 | 307 | ||||||
Remediation payments | (2,455 | ) | (6,967 | ) | (1,416 | ) | |||
Other activity (1) | 23 | (8 | ) | — | |||||
Balance at end of the period | $ | 11,444 | $ | 11,274 | $ | 17,067 | |||
(1) Other activity includes currency translation adjustments not recorded through remediation expense |
The Company operates under and in accordance with a federal consent decree, dated March 7, 2017, with the EPA for the CTS of Asheville, Inc. Superfund Site (“Site”). On February 8, 2023, the Company received a letter from the EPA (the “EPA Letter”) seeking reimbursement of its past response costs and interest thereon relating to any release or threatened release of hazardous substances at the Site in the amount of $
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.
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 have an outstanding warranty claim for which we have not yet determined the root cause of a product performance issue. Testing is ongoing. We are not able to quantify the potential impact on our operations, if any, because we have not yet determined the root cause.
We cannot provide assurance that the ultimate disposition of environmental, legal, and product warranty claims will not materially exceed the amount of our accrued losses and adversely impact our consolidated financial position, results of operations, or cash flows. Our accrued liabilities and disclosures will be adjusted accordingly if additional information becomes available in the future.
CTS CORPORATION 50
We lease certain land, buildings and equipment under non-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 have elected not to recordoccasionally enter into short term operating leases with an initial term of 12twelve months or less onless. These leases are not recorded in the balance sheet and instead recognize those lease payments on a straight-line basis over the lease term.
CTS CORPORATION 53
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 if 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, foron a straight-line basis, during the twelve monthsdeferral periods. During the year ended December 31, 2019 is as follows:
Year Ended December 31, | |||
2019 | |||
Operating lease cost | $ | 4,342 | |
Short-term lease cost | 1,013 | ||
Total lease cost | $ | 5,355 |
Components of ASC 842 was $5,726 and $4,762lease expense for the years ended December 31, 20182022, 2021, and 2017, respectively.2020 were as follows:
| Years Ended |
| |||||||||
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
Operating lease cost | $ | 4,997 |
|
| $ | 5,144 |
|
| $ | 4,763 |
|
Short-term lease cost |
| 1,338 |
|
|
| 1,403 |
|
|
| 1,015 |
|
Total lease cost | $ | 6,335 |
|
| $ | 6,547 |
|
| $ | 5,778 |
|
Supplemental cash flow information related to leases was as follows:
|
| Years Ended |
| |||||||||
|
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
Cash paid for amounts included in the measurement of lease obligations |
| $ | 5,163 |
|
| $ | 3,666 |
|
| $ | 4,654 |
|
Leased assets obtained in exchange for new operating lease obligations |
| $ | 5,990 |
|
| $ | 1,253 |
|
| $ | 1,678 |
|
Supplemental balance sheet information related to leases was as follows:
|
|
|
|
|
|
| ||
|
| As of December 31, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
Operating lease obligations |
| $ | 3,936 |
|
| $ | 3,393 |
|
Long-term operating lease obligations |
|
| 21,754 |
|
|
| 21,354 |
|
Total lease liabilities |
| $ | 25,690 |
|
| $ | 24,747 |
|
Weighted-average remaining lease terms (years) |
|
| 6.46 |
|
|
| 7.21 |
|
Weighted-average discount rate |
|
| 6.08 | % |
|
| 6.27 | % |
Remaining maturity of our existing lease liabilities as of December 31, 20192022 is as follows:
Operating Leases(1) | |||
2020 | $ | 4,467 | |
2021 | 4,461 | ||
2022 | 4,303 | ||
2023 | 3,920 | ||
2024 | 3,893 | ||
Thereafter | 16,566 | ||
Total | $ | 37,610 | |
Less: interest | (9,897 | ) | |
Present value of lease payments | $ | 27,713 |
|
| Operating Leases(1) |
| |
2023 |
| $ | 5,357 |
|
2024 |
|
| 5,200 |
|
2025 |
|
| 4,669 |
|
2026 |
|
| 3,023 |
|
2027 |
|
| 2,888 |
|
Thereafter |
|
| 11,422 |
|
Total |
| $ | 32,559 |
|
Less: interest |
|
| (6,869 | ) |
Present value of lease payments |
| $ | 25,690 |
|
CTS CORPORATION 54
Balance Sheet Classification: | |||
Operating lease obligations | $ | 2,787 | |
Long-term operating lease obligations | 24,926 | ||
Total lease liabilities | $ | 27,713 | |
Weighted-average remaining lease terms (years) | 9.04 | ||
Weighted-average discount rate | 6.54 | % | |
Supplemental cash flow information related to leases: | |||
Cash paid for amounts included in the measurement of lease liabilities | $ | 3,957 | |
Leased assets obtained in exchange for new operating lease liabilities | $ | 5,000 |
Long-term debt was comprised of the following:
|
| As of December 31, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
Total credit facility availability |
| $ | 400,000 |
|
| $ | 400,000 |
|
Balance outstanding |
|
| 83,670 |
|
|
| 50,000 |
|
Standby letters of credit |
|
| 1,640 |
|
|
| 1,740 |
|
Amount available, subject to covenant restrictions |
| $ | 314,690 |
|
| $ | 348,260 |
|
Weighted-average interest rate |
|
| 2.96 | % |
|
| 1.16 | % |
As of December 31 | ||||||
2019 | 2018 | |||||
Total credit facility | $ | 300,000 | $ | 300,000 | ||
Balance outstanding | $ | 99,700 | $ | 50,000 | ||
Standby letters of credit | $ | 1,800 | $ | 1,940 | ||
Amount available | $ | 198,500 | $ | 248,060 | ||
Weighted-average interest rate | 3.25 | % | 3.10 | % | ||
Commitment fee percentage per annum | 0.23 | % | 0.20 | % |
Borrowings of $50,000in U.S. dollars under the prior credit agreement were refinanced intoRevolving 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 Agreement. The prior agreement was terminated as of February 12, 2019.
The Revolving Credit Facility includes a swing line sublimit of $15,000$20,000 and a letter of credit sublimit of $10,000. Borrowings under the Revolving Credit Facility bear interest at the base rate defined in the Credit Agreement.$20,000. We also pay a quarterly commitment fee on the unused portion of the Revolving Credit Facility. The commitment fee ranges from 0.20%0.175% to 0.30%0.25% based on our totalnet 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. We were in compliance with all debt covenants at December 31, 2019.2022. The Revolving Credit Facility requires that we deliver quarterly financial statements, annual financial statements, auditor certifications, and compliance certificates within a specified number of days after the end of a quarter and year. Additionally, the 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; and make stock repurchases and dividend payments. Interest rates on the Revolving Credit Facility fluctuate based upon the LIBOR and the Company’s quarterly total 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 $194for the twelve monthsyear ended December 31, 2019 was approximately $1632022, $169 in 2021 and $185$168 in 2018 and 2017.2020. These costs are included in interest expense in our Consolidated StatementStatements of Earnings.Earnings (Loss).
CTS CORPORATION 52
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(loss) income until the hedged transaction affects earnings upon settlement, at which time they are reclassified to costcosts of goods sold or net sales. 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(loss) income to other income (expense).
CTS CORPORATION 55
We assess hedge effectiveness 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. No recognition of ineffectiveness was recorded in our Consolidated Statement of Earnings (Loss) for the twelve monthsyear ended December 31, 2019.
Foreign Currency Hedges
We use forward contracts to mitigate currency risk related to a portion of our forecasted foreign currency revenues and costs. The currency forward contracts are designed as cash flow hedges and are recorded in the Consolidated Balance Sheets at fair value.
We continue to monitor the Company’s overall currency exposure and may elect to add cash flow hedges in the future. At December 31, 2019,2022, we had a net unrealized gain of $655$915 in accumulated other comprehensive loss,(loss) income, of which $595 is$849 in gains are expected to be reclassified to incomeearnings within the next 12 months. The notional amount of foreign currency forward contracts outstanding was $8,011$30,033 at December 31, 2019.
Interest Rate Swaps
We use interest rate swaps to convert a portion of our revolving credit facility's outstanding balance from a variable rate of interest to a fixed rate.
As of December 31, 2019,2022, we have agreements to fix interest rates on $50,000$50,000 of long-term debt through February 2024.December 2026. 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 are recorded in other comprehensive loss.(loss) income. The estimated net amount of the existing gains or losses that are reported in accumulated other comprehensive loss(loss) income that are expected to be reclassified into earnings within the next twelve months is approximately $82.
The location and fair values of derivative instruments designated as hedging instruments in the Consolidated Balance Sheets as of December 31, 2019,2022, are shown in the following table:
|
| As of December 31, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
Interest rate swaps reported in Other current assets |
| $ | 1,561 |
|
| $ | — |
|
Interest rate swaps reported in Other assets |
| $ | 1,434 |
|
| $ | — |
|
Interest rate swaps reported in Accrued expenses and other liabilities |
| $ | — |
|
| $ | (437 | ) |
Interest rate swaps reported in Other long-term obligations |
| $ | — |
|
| $ | (353 | ) |
Cross-currency swap reported in Accrued expenses and other liabilities |
| $ | (357 | ) |
| $ | — |
|
Foreign currency hedges reported in Other current assets |
| $ | 945 |
|
| $ | 135 |
|
As of December 31, | |||||||
2019 | 2018 | ||||||
Interest rate swaps reported in Other current assets | $ | 82 | $ | 576 | |||
Interest rate swaps reported in Other assets | $ | — | $ | 369 | |||
Interest rate swaps reported in Other long-term obligations | $ | (78 | ) | $ | — | ||
Foreign currency hedges reported in Other current assets | $ | 580 | $ | 393 |
The Company has elected to net its foreign currency derivative assets and liabilities in the balance sheet in accordance with ASC 210-20 (Balance Sheet, Offsetting). On a gross basis, there were foreign currency derivative assets of $648$1,090 and foreign currency derivative liabilities of $68$145 at December 31, 2019.2022.
CTS CORPORATION 53 56
The effect of derivative instruments on the Consolidated Statements of Earnings (Loss) is as follows:
Years Ended December 31, | |||||||||||
2019 | 2018 | 2017 | |||||||||
Foreign Exchange Contracts: | |||||||||||
Amounts reclassified from AOCI to earnings: | |||||||||||
Net sales | $ | — | $ | 383 | $ | (488 | ) | ||||
Cost of goods sold | 860 | (6 | ) | 497 | |||||||
Selling, general and administrative | 92 | 107 | 45 | ||||||||
Total amounts reclassified from AOCI to earnings | 952 | 484 | 54 | ||||||||
Loss recognized in other expense for hedge ineffectiveness | — | — | (1 | ) | |||||||
Loss recognized in other expense for derivatives not designated as cash flow hedges | — | — | (15 | ) | |||||||
Total derivative gain on foreign exchange contracts recognized in earnings | $ | 952 | $ | 484 | $ | 38 | |||||
Interest Rate Swaps: | |||||||||||
Benefit recorded in interest expense | $ | 491 | $ | 421 | $ | 37 | |||||
Total gain | $ | 1,443 | $ | 905 | $ | 75 |
|
| Years Ended December 31, |
| |||||||||
|
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
Foreign Exchange Contracts: |
|
|
|
|
|
|
|
|
| |||
Amounts reclassified from AOCI to earnings: |
|
|
|
|
|
|
|
|
| |||
Net sales |
| $ | — |
|
| $ | — |
|
| $ | (128 | ) |
Cost of goods sold |
|
| 924 |
|
|
| 1,384 |
|
|
| (754 | ) |
Selling, general and administrative expense |
|
| — |
|
|
| — |
|
|
| (5 | ) |
Total amounts reclassified from AOCI to earnings |
|
| 924 |
|
|
| 1,384 |
|
|
| (887 | ) |
Gain recognized in other expense for hedge ineffectiveness |
|
| — |
|
|
| — |
|
|
| 3 |
|
Total derivative gain (loss) on foreign exchange contracts |
| $ | 924 |
|
| $ | 1,384 |
|
| $ | (884 | ) |
Interest Rate Swaps: |
|
|
|
|
|
|
|
|
| |||
Income (Expense) recorded in interest expense |
| $ | 77 |
|
| $ | (744 | ) |
| $ | (432 | ) |
Cross-Currency Swaps: |
|
|
|
|
|
|
|
|
| |||
Income recorded in interest expense |
| $ | 461 |
|
|
| — |
|
|
| — |
|
Total gains (losses) on derivatives |
| $ | 1,462 |
|
| $ | 640 |
|
| $ | (1,316 | ) |
Cross-Currency Swap
The Company has operations and investments in various international locations and is subject to risks associated with changing foreign exchange rates. As part of the strategy to limit foreign exchange exposure, the Company entered into a cross currency interest rate swap agreement on June 27, 2022 that synthetically swapped $25,000 of variable rate debt to Krone denominated variable rate debt. Upon completion of the Ferroperm acquisition on June 30, 2022, the transaction was designated as a net investment hedge for accounting purposes and will mature on June 30, 2027. Accordingly, any gains or losses on this derivative instrument will be included in the foreign currency translation component of other comprehensive income until the net investment is sold, diluted or liquidated. Interest payments received for the cross-currency swap are excluded from the net investment hedge effectiveness assessment and are recorded in interest expense in the Condensed Consolidated Statements of Earnings. The assumptions used in measuring fair value of the cross currency-swap are considered level 2 inputs, which are based upon the Krone to United States Dollar exchange rate market. At December 31, 2022 we had a net unrealized loss of $557 in accumulated other comprehensive (loss) income.
Prior to designation as a net investment hedge, a gain of $111 was recorded in other expense within the Condensed Consolidated Statements of Earnings during the second quarter of 2022.
Derivative Contracts Not Designated as Hedges
In the second quarter of 2022, the Company used derivative contracts to manage foreign currency exchange risk related to funds to be used for the purchase price of the Ferroperm acquisition. These contracts were not designated as hedges and therefore changes in the fair values of these instruments were recognized directly in earnings. All contracts were settled in conjunction with the closing of the Ferroperm acquisition. As a result of these contracts, the Company recognized a $1,776 loss in other expense in the Consolidated Statements of Earnings (Loss) in 2022.
NOTE 1415 — Accumulated Other Comprehensive Loss
Shareholders’ equity includes certain items classified as accumulated other comprehensive loss(loss) income (“AOCI”) in the Consolidated Balance Sheets, including:
• |
Unrealized gains (losses) on pension obligations are deferred from income statement recognition until the gains or losses are realized. Amounts reclassified to earnings |
CTS CORPORATION 54 57
The components of AOCIaccumulated other comprehensive (loss) income for 2019the year ended December 31, 2022 are as follows:
As of December 31, 2018 | Gain (Loss) Recognized in OCI | (Gain) Loss reclassified from AOCI to earnings | As of December 31, 2019 | |||||||||
Changes in fair market value of derivatives: | ||||||||||||
Gross | $ | 1,316 | $ | 786 | $ | (1,443 | ) | $ | 659 | |||
Income tax (expense) benefit | (298 | ) | (178 | ) | 326 | (150 | ) | |||||
Net | 1,018 | 608 | (1,117 | ) | 509 | |||||||
Changes in unrealized pension cost: | ||||||||||||
Gross | (132,454 | ) | — | 8,314 | (124,140 | ) | ||||||
Income tax benefit (expense) | 35,893 | — | (1,875 | ) | 34,018 | |||||||
Net | (96,561 | ) | — | 6,439 | (90,122 | ) | ||||||
Cumulative translation adjustment: | ||||||||||||
Gross | (2,291 | ) | 80 | — | (2,211 | ) | ||||||
Income tax benefit | 95 | 3 | — | 98 | ||||||||
Net | (2,196 | ) | 83 | — | (2,113 | ) | ||||||
Total accumulated other comprehensive (loss) earnings | $ | (97,739 | ) | $ | 691 | $ | 5,322 | $ | (91,726 | ) |
|
| As of |
|
| Gain (Loss) |
|
| (Gain) Loss |
|
| As of |
| ||||
Changes in fair market value of derivatives: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Gross |
| $ | (635 | ) |
| $ | 5,547 |
|
| $ | (1,001 | ) |
| $ | 3,911 |
|
Income tax benefit (expense) |
|
| 147 |
|
|
| (1,276 | ) |
|
| 230 |
|
|
| (899 | ) |
Net |
|
| (488 | ) |
|
| 4,271 |
|
|
| (771 | ) |
|
| 3,012 |
|
Changes in unrealized pension cost: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Gross |
|
| (2,744 | ) |
|
| 3,308 |
|
|
| (1,743 | ) |
|
| (1,179 | ) |
Income tax benefit (expense) |
|
| 738 |
|
|
| (760 | ) |
|
| 398 |
|
|
| 376 |
|
Net |
|
| (2,006 | ) |
|
| 2,548 |
|
|
| (1,345 | ) |
|
| (803 | ) |
Cumulative translation adjustment: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Gross |
|
| (2,032 | ) |
|
| (848 | ) |
|
| — |
|
|
| (2,880 | ) |
Income tax benefit (expense) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Net |
|
| (2,032 | ) |
|
| (848 | ) |
|
| — |
|
|
| (2,880 | ) |
Total accumulated other comprehensive (loss) income |
| $ | (4,526 | ) |
| $ | 5,971 |
|
| $ | (2,116 | ) |
| $ | (671 | ) |
The components of AOCIaccumulated other comprehensive (loss) income for 2018the year ended December 31, 2021 are as follows:
|
| As of |
|
| Gain (Loss) |
|
| (Gain) Loss |
|
| As of |
| ||||
Changes in fair market value of derivatives: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Gross |
| $ | (1,038 | ) |
| $ | 1,043 |
|
| $ | (640 | ) |
| $ | (635 | ) |
Income tax (expense) benefit |
|
| 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 (expense) benefit |
|
| 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) |
| $ | (95,921 | ) |
| $ | (3,005 | ) |
| $ | 94,400 |
|
| $ | (4,526 | ) |
CTS CORPORATION 58
As of December 31, 2017 | Gain (Loss) Recognized in OCI | (Gain) Loss reclassified from AOCI to earnings | Impact of ASU No. 2018-02 | As of December 31, 2018 | |||||||||||
Changes in fair market value of derivatives: | |||||||||||||||
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) earnings | $ | (78,960 | ) | $ | 1,184 | $ | (2,530 | ) | $ | (17,433 | ) | $ | (97,739 | ) |
Share count and par value data related to shareholders' equity are as follows:
|
| As of December 31, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
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 |
|
| 57,330,761 |
|
|
| 57,245,060 |
|
Shares outstanding |
|
| 31,680,890 |
|
|
| 32,178,715 |
|
Treasury stock |
|
|
|
|
|
| ||
Shares held |
|
| 25,649,871 |
|
|
| 25,066,345 |
|
As of December 31, | ||
2019 | 2018 | |
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 | 56,929,298 | 56,786,849 |
Shares outstanding | 32,472,406 | 32,750,727 |
Treasury stock | ||
Shares held | 24,456,892 | 24,036,122 |
On February 7, 2019,May 13, 2021, the Board of Directors authorizedapproved a stockshare repurchase program with a maximum dollar limitthat authorizes the Company to repurchase up to $50,000 of $25,000 in stock repurchases, whichthe Company’s common stock. The repurchase program has no set expiration date and replaced the previous authorized plan that wasrepurchase program approved by ourthe Board of Directors in April 2015.on February 7, 2019. During the year ended December 31, 2019 we purchased 420,7702022, 583,526 shares of common stock were repurchased for approximately $11,746, of which $566 was repurchased under the previous plan and $11,180 was repurchased under the most recent board-authorized share repurchase program. During the year ended December 31, 2018 we purchased 342,100 shares for $9,440 under the previous authorized plan.$21,447. Approximately $13,820 was$19,767 is still available for future purchases.
On February 9, 2023, the Board approved a new share repurchase program that authorizes the Company to repurchase up to $50 million of its common stock. The repurchase program has no set expiration date and supersedes and replaces the repurchase program approved by the Board in May 2021.
A roll forward of common shares outstanding is as follows:
|
| As of December 31, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
Balance at beginning of the year |
|
| 32,178,715 |
|
|
| 32,276,787 |
|
Repurchases |
|
| (583,526 | ) |
|
| (266,722 | ) |
Restricted stock unit issuances |
|
| 85,701 |
|
|
| 168,650 |
|
Balance at end of period |
|
| 31,680,890 |
|
|
| 32,178,715 |
|
As of December 31, | ||||
2019 | 2018 | |||
Balance at beginning of the year | 32,750,727 | 32,938,466 | ||
Repurchases | (420,770 | ) | (342,100 | ) |
Restricted stock unit issuances | 142,449 | 154,361 | ||
Balance at end of period | 32,472,406 | 32,750,727 |
At December 31, 2019,2022, we had 5five 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 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 Earnings (Loss) related to stock-based compensation plans:
|
| Years Ended December 31, |
| |||||||||
|
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
Service-Based RSUs |
| $ | 2,834 |
|
| $ | 2,714 |
|
| $ | 2,601 |
|
Performance-Based RSUs |
|
| 4,469 |
|
|
| 3,113 |
|
|
| 539 |
|
Cash-settled awards |
|
| 423 |
|
|
| 278 |
|
|
| 277 |
|
Total |
| $ | 7,726 |
|
| $ | 6,105 |
|
| $ | 3,417 |
|
Income tax benefit |
|
| 1,777 |
|
|
| 1,404 |
|
|
| 786 |
|
Net |
| $ | 5,949 |
|
| $ | 4,701 |
|
| $ | 2,631 |
|
CTS CORPORATION 59
Years Ended December 31, | |||||||||
2019 | 2018 | 2017 | |||||||
Service-Based RSUs | $ | 2,207 | $ | 2,036 | $ | 1,762 | |||
Performance-Based RSUs | 2,553 | 3,089 | 2,350 | ||||||
Cash-settled awards | 255 | 131 | 72 | ||||||
Total | $ | 5,015 | $ | 5,256 | $ | 4,184 | |||
Income tax benefit | 1,133 | 1,188 | 1,573 | ||||||
Net | $ | 3,882 | $ | 4,068 | $ | 2,611 |
|
| Unrecognized |
|
| Weighted- | |
Service-Based RSUs |
| $ | 2,003 |
|
| 1.26 |
Performance-Based RSUs |
|
| 4,501 |
|
| 1.69 |
Total |
| $ | 6,504 |
|
| 1.56 |
Unrecognized compensation expense at December 31, 2019 | Weighted- average period | |||
Service-Based RSUs | $ | 1,751 | 1.24 years | |
Performance-Based RSUs | 2,433 | 1.65 years | ||
Total | $ | 4,184 | 1.48 years |
The following table summarizes the status of these plans as of December 31, 2019:2022:
|
| 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 |
|
| 724,769 |
|
|
| 35,100 |
|
|
| 30,000 |
|
|
| 14,545 |
|
|
| 4,722 |
|
Maximum potential awards outstanding |
|
| 724,769 |
|
|
| 35,100 |
|
|
| 30,000 |
|
|
| 14,545 |
|
|
| 4,722 |
|
RSUs and cash settled awards vested and |
|
| 251,360 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Awards available to be granted |
|
| 1,523,871 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
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 | — | 225,000 | — | — | — | |||||
Maximum potential RSU and cash settled awards outstanding | 266,249 | 402,216 | 92,600 | 35,952 | 5,522 | |||||
Maximum potential awards outstanding | 266,249 | 627,216 | 92,600 | 35,952 | 5,522 | |||||
RSUs and cash settled awards vested and released | 4,553 | — | — | — | — | |||||
Awards available to be granted | 2,229,198 | — | — | — | — |
Service-based RSUs entitle the holder to receive one 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 generally 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.
A summary of RSU activity for the year ended December 31, 20192022 is presented below:
|
| Units |
|
| Weighted |
|
| Weighted |
|
| Aggregate |
| ||||
Outstanding at January 1, 2022 |
|
| 283,216 |
|
| $ | 24.91 |
|
|
|
|
|
|
| ||
Granted |
|
| 86,624 |
|
|
| 35.38 |
|
|
|
|
|
|
| ||
Released |
|
| (79,563 | ) |
|
| 26.78 |
|
|
|
|
|
|
| ||
Forfeited |
|
| (8,153 | ) |
|
| 30.46 |
|
|
|
|
|
|
| ||
Outstanding at December 31, 2022 |
|
| 282,124 |
|
| $ | 27.44 |
|
|
| 17.79 |
|
| $ | 11,069 |
|
Releasable at December 31, 2022 |
|
| 135,467 |
|
| $ | 20.73 |
|
|
| 30.35 |
|
| $ | 5,340 |
|
|
| Years Ended December 31, |
| |||||||||
|
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
Weighted-average grant date fair value |
| $ | 35.38 |
|
| $ | 33.81 |
|
| $ | 27.94 |
|
Intrinsic value of RSUs released |
| $ | 2,794 |
|
| $ | 5,408 |
|
| $ | 2,503 |
|
CTS CORPORATION 60
Units | Weighted Average Grant Date Fair Value | Weighted Average Remaining Contractual Term | Aggregate Intrinsic Value | |||||
Outstanding at January 1, 2019 | 355,590 | $ | 17.91 | |||||
Granted | 103,491 | 28.61 | ||||||
Released | (72,226) | 20.53 | ||||||
Forfeited | (22,459) | 26.92 | ||||||
Outstanding at December 31, 2019 | 364,396 | $ | 19.87 | 22.56 | $ | 10,935 | ||
Releasable at December 31, 2019 | 227,474 | $ | 15.18 | 31.82 | $ | 6,826 |
Years Ended December 31, | |||||||||
2019 | 2018 | 2017 | |||||||
Weighted-average grant date fair value | $ | 28.61 | $ | 26.95 | $ | 24.32 | |||
Intrinsic value of RSUs released | $ | 2,155 | $ | 4,015 | $ | 4,485 |
|
| RSUs |
|
| Weighted |
| ||
Nonvested at January 1, 2022 |
|
| 150,549 |
|
| $ | 31.42 |
|
Granted |
|
| 86,624 |
|
|
| 35.38 |
|
Vested |
|
| (82,363 | ) |
|
| 31.73 |
|
Forfeited |
|
| (8,153 | ) |
|
| 30.46 |
|
Nonvested at December 31, 2022 |
|
| 146,657 |
|
| $ | 33.64 |
|
RSUs | Weighted Average Grant Date Fair Value | |||
Nonvested at January 1, 2019 | 146,116 | $ | 23.84 | |
Granted | 103,491 | 28.61 | ||
Vested | (90,226) | 22.75 | ||
Forfeited | (22,459) | 26.92 | ||
Nonvested at December 31, 2019 | 136,922 | $ | 27.66 |
We grant performance-based restricted stock unit awards ("PSUs") to certain executives and key employees. UnitsPSUs are usually awarded in the range from 0zero percent to 200%200% of a targeted number of shares. The award rate for the 2017-2019, 2018-2020, 2019-2021, and 2019-20212020-2022 PSUs iswas 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 PSU activity for the year ended December 31, 20192022 is presented below:
|
| Units |
|
| Weighted |
|
| Weighted |
|
| Aggregate |
| ||||
Outstanding at January 1, 2022 |
|
| 237,767 |
|
| $ | 31.35 |
|
|
|
|
|
|
| ||
Granted |
|
| 84,852 |
|
|
| 37.15 |
|
|
|
|
|
|
| ||
Added by performance factor |
|
| 5,136 |
|
|
| 29.50 |
|
|
|
|
|
|
| ||
Released |
|
| (51,848 | ) |
|
| 30.64 |
|
|
|
|
|
|
| ||
Forfeited |
|
| (15,601 | ) |
|
| 31.83 |
|
|
|
|
|
|
| ||
Outstanding at December 31, 2022 |
|
| 260,306 |
|
| $ | 33.30 |
|
|
| 1.84 |
|
| $ | 10,261 |
|
Releasable at December 31, 2022 |
|
| — |
|
| $ | — |
|
|
|
|
| $ | — |
|
Units | Weighted Average Grant Date Fair Value | Weighted Average Remaining Contractual Term | Aggregate Intrinsic Value | |||||
Outstanding at January 1, 2019 | 267,792 | $ | 21.44 | |||||
Granted | 83,853 | 31.01 | ||||||
Released | (160,889) | 14.34 | ||||||
Forfeited | (34,306) | 24.77 | ||||||
Added by performance factor | 60,779 | 13.54 | ||||||
Outstanding at December 31, 2019 | 217,229 | $ | 27.73 | 1.15 | $ | 6,519 | ||
Releasable at December 31, 2019 | — | $ | — | $ | — |
CTS CORPORATION 58
Description |
| Grant Date |
| Vesting Year |
| Vesting Dependency |
| Target Units |
|
| Maximum Number |
| ||
2020 - 2022 QTI Performance RSUs |
| September 24, 2019 |
| 2022 |
| 50% EBITDA growth, 50% Sales growth |
|
| 1,750 |
|
|
| 3,500 |
|
2020 - 2022 Performance RSUs |
| February 6, 2020 |
| 2022 |
| 25% RTSR, 40% sales growth, 35% operating cash flow |
|
| 59,475 |
|
|
| 118,950 |
|
2021 - 2023 Performance RSUs |
| Varies |
| 2023 |
| 25% RTSR, 40% sales growth, 35% operating cash flow |
|
| 67,569 |
|
|
| 135,138 |
|
2022 - 2024 Performance RSUs |
| February 10, 2022 |
| 2024 |
| 35% RTSR, 35% sales growth, 30% operating cash flow |
|
| 77,862 |
|
|
| 155,724 |
|
Focus 2025 Performance RSUs |
| Varies |
| 2024 |
| Cumulative revenues of $750 million over a trailing four-quarter period |
|
| 53,650 |
|
|
| 53,650 |
|
Total |
|
|
|
|
|
|
|
| 260,306 |
|
|
| 466,962 |
|
Description | Grant Date | Vesting Year | Vesting Dependency | Target Units Outstanding | Maximum Number of Units to be Granted | ||
2017-2019 Performance RSUs | February 9, 2017 | 2019 | 35% RTSR, 35% sales growth, 30% operating cash flow | 68,346 | 136,692 | ||
2017-2019 Performance RSUs | February 9, 2017 | 2018-2020 | Operating Earnings | 13,556 | 13,556 | ||
2018-2020 Performance RSUs | February 8, 2018 | 2020 | 35% RTSR, 35% sales growth, 30% operating cash flow | 31,398 | 62,796 | ||
2018-2020 Performance RSUs | February 16, 2018 | 2020 | 35% RTSR, 35% sales growth, 30% operating cash flow | 31,820 | 63,640 | ||
2019-2021 Performance RSUs | February 7, 2019 | 2021 | 35% RTSR, 35% sales growth, 30% operating cash flow | 63,414 | 126,828 | ||
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, 50% Sales growth | 1,750 | 3,500 | ||
Total | 217,229 | 420,902 |
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, 2019,2022, and 2018,2021, we had 17,27146,641 and 17,24832,085 cash-settled RSUs outstanding, respectively. At December 31, 2019,2022, and 2018,2021, liabilities of $353$566 and $300,$400, respectively were included in Accruedaccrued expenses and other liabilities on our Consolidated Balance Sheets.
NOTE 1718 — Fair Value Measurements
The table below summarizes the financial assets and liabilities that were measured at fair value on a recurring basis as of December 31, 2022 and the gain recorded during the year ended December 31, 2022:
|
| Asset (Liability) Carrying |
|
| Quoted Prices |
|
| Significant |
|
| Significant |
|
| Gain for |
| |||||
Interest rate swap |
| $ | 2,995 |
|
| $ | — |
|
| $ | 2,995 |
|
| $ | — |
|
| $ | 77 |
|
Foreign currency hedges |
| $ | 945 |
|
| $ | — |
|
| $ | 945 |
|
| $ | — |
|
| $ | 924 |
|
Cross-currency swap |
| $ | (357 | ) |
| $ | — |
|
| $ | (357 | ) |
| $ | — |
|
| $ | 461 |
|
Qualified replacement plan assets |
| $ | 15,249 |
|
| $ | 15,249 |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
The table below summarizes the financial assets that were measured at fair value on a recurring basis as of December 31, 2021 and the (loss) recorded during the year ended December 31, 2021:
|
| (Liability) Asset Carrying |
|
| Quoted Prices |
|
| Significant |
|
| Significant |
|
| (Loss) Gain for |
| |||||
Interest rate swap |
| $ | (790 | ) |
| $ | — |
|
| $ | (790 | ) |
| $ | — |
|
| $ | (744 | ) |
Foreign currency hedges |
| $ | 135 |
|
| $ | — |
|
| $ | 135 |
|
| $ | — |
|
| $ | 1,384 |
|
Contingent consideration |
| $ | (1,200 | ) |
| $ | — |
|
| $ | — |
|
| $ | (1,200 | ) |
| $ | — |
|
We use interest ratesrate swaps to convert a portion of our Revolving Credit Facility'sFacility’s outstanding balance from a variable rate of interest tointo 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. In addition, the Company entered into a cross currency swap agreement in order to manage its exposure to changes in interest rates related to foreign debt. These derivative financial instruments are measured at fair value on a recurring basis.
Asset Carrying Value at December 31, 2019 | Quoted Prices in Active Markets for Identical (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | (Gain) loss for Year Ended December 31, 2019 | |||||||||||
Interest rate swap | $ | 4 | $ | — | $ | 4 | $ | — | $ | (491 | ) | ||||
Foreign currency hedges | $ | 580 | $ | — | $ | 580 | $ | — | $ | (952 | ) |
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) | (Gain) loss for Year Ended December 31, 2018 | |||||||||||
Interest rate swap | $ | 945 | $ | — | $ | 945 | $ | — | $ | (421 | ) | ||||
Foreign currency hedges | $ | 393 | $ | — | $ | 393 | $ | — | $ | (484 | ) |
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 QRP assets consist of investment funds maintained for future contributions to the Company’s U.S. 401(k) program. The investments are Level 1 marketable securities and are recorded in Other Assets on our Condensed Consolidated Balance Sheets. Refer to Note 7 - "Retirement Plans" for further information on the QRP.
The fair value of the contingent consideration required 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 timing of events and activities that are expected to take place.
A roll-forward of the contingent consideration is as follows:
CTS CORPORATION 62
|
| Contingent |
| |
|
| Consideration |
| |
Balance at December 31, 2021 in accrued expenses and other liabilities |
| $ | 1,200 |
|
Settled in cash |
|
| (1,050 | ) |
Change in fair value |
|
| (150 | ) |
Balance at December 31, 2022 in accrued expenses and other liabilities |
| $ | — |
|
Our long-term debt consists of debt outstanding under the Revolving credit facilityCredit Facility which is recorded at its carrying value. There is a readily determinable market for our long-term debt and it is classified within Level 2 of the fair value hierarchy as the market is not deemed to be active.
NOTE 1819 — Income Taxes
Earnings (Loss) before income taxes consist of the following:
|
| Years Ended December 31, |
| |||||||||
|
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
U.S. |
| $ | 1,005 |
|
| $ | (128,699 | ) |
| $ | (7,101 | ) |
Non-U.S. |
|
| 79,732 |
|
|
| 67,819 |
|
|
| 52,580 |
|
Total |
| $ | 80,737 |
|
| $ | (60,880 | ) |
| $ | 45,479 |
|
Years Ended December 31, | |||||||||
2019 | 2018 | 2017 | |||||||
U.S. | $ | 15,103 | $ | 30,815 | $ | 9,315 | |||
Non-U.S. | 35,163 | 27,288 | 30,938 | ||||||
Total | $ | 50,266 | $ | 58,103 | $ | 40,253 |
|
| Years Ended December 31, |
| |||||||||
|
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
Current: |
|
|
|
|
|
|
|
|
| |||
U.S. |
| $ | 1,365 |
|
| $ | 36 |
|
| $ | 211 |
|
Non-U.S. |
|
| 19,305 |
|
|
| 11,932 |
|
|
| 11,275 |
|
Total Current |
|
| 20,670 |
|
|
| 11,968 |
|
|
| 11,486 |
|
Deferred: |
|
|
|
|
|
|
|
|
| |||
U.S. |
|
| 249 |
|
|
| (35,979 | ) |
|
| (2,815 | ) |
Non-U.S. |
|
| 243 |
|
|
| 4,997 |
|
|
| 2,122 |
|
Total Deferred |
|
| 492 |
|
|
| (30,982 | ) |
|
| (693 | ) |
Total provision for income taxes |
| $ | 21,162 |
|
| $ | (19,014 | ) |
| $ | 10,793 |
|
CTS CORPORATION 63
Years Ended December 31, | |||||||||
2019 | 2018 | 2017 | |||||||
Current: | |||||||||
U.S. | $ | (391 | ) | $ | (397 | ) | $ | 1,635 | |
Non-U.S. | 10,666 | 12,538 | 7,150 | ||||||
Total Current | 10,275 | 12,141 | 8,785 | ||||||
Deferred: | |||||||||
U.S. | 558 | (330 | ) | 17,597 | |||||
Non-U.S. | 3,287 | (240 | ) | (577 | ) | ||||
Total Deferred | 3,845 | (570 | ) | 17,020 | |||||
Total provision for income taxes | $ | 14,120 | $ | 11,571 | $ | 25,805 |
As of December 31, | ||||||
2019 | 2018 | |||||
Post-retirement benefits | $ | 1,100 | $ | 1,061 | ||
Inventory reserves | 708 | 1,236 | ||||
Loss carry-forwards | 4,724 | 4,647 | ||||
Credit carry-forwards | 15,964 | 16,909 | ||||
Accrued expenses | 4,932 | 5,685 | ||||
Research expenditures | 17,953 | 16,847 | ||||
Operating lease liabilities | 6,211 | — | ||||
Stock compensation | 2,232 | 2,142 | ||||
Foreign exchange loss | 1,986 | 2,245 | ||||
Other | 230 | 207 | ||||
Gross deferred tax assets | 56,040 | 50,979 | ||||
Depreciation and amortization | 12,453 | 11,500 | ||||
Pensions | 13,552 | 11,736 | ||||
Operating lease assets | 5,963 | — | ||||
Subsidiaries' unremitted earnings | 1,903 | 1,258 | ||||
Gross deferred tax liabilities | 33,871 | 24,494 | ||||
Net deferred tax assets | 22,169 | 26,485 | ||||
Deferred tax asset valuation allowance | (8,011 | ) | (8,274 | ) | ||
Total net deferred tax assets | $ | 14,158 | $ | 18,211 |
|
| As of December 31, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
Post-retirement benefits |
| $ | 947 |
|
| $ | 1,226 |
|
Inventory reserves |
|
| 251 |
|
|
| 69 |
|
Loss carry-forwards |
|
| 4,547 |
|
|
| 5,070 |
|
Credit carry-forwards |
|
| 10,467 |
|
|
| 19,665 |
|
Accrued expenses |
|
| 4,543 |
|
|
| 4,917 |
|
Research and development expenditures |
|
| 19,448 |
|
|
| 19,226 |
|
Operating lease liabilities |
|
| 5,865 |
|
|
| 5,643 |
|
Stock compensation |
|
| 2,426 |
|
|
| 1,970 |
|
Foreign exchange loss |
|
| 2,075 |
|
|
| 2,052 |
|
Other |
|
| 835 |
|
|
| 769 |
|
Gross deferred tax assets |
|
| 51,404 |
|
|
| 60,607 |
|
Depreciation and amortization |
|
| 23,067 |
|
|
| 13,386 |
|
Pensions |
|
| — |
|
|
| 10,958 |
|
Qualified replacement plan |
|
| 3,507 |
|
|
| — |
|
Operating lease assets |
|
| 5,531 |
|
|
| 5,307 |
|
Subsidiaries' unremitted earnings |
|
| 2,562 |
|
|
| 1,947 |
|
Other |
|
| 900 |
|
|
| — |
|
Gross deferred tax liabilities |
|
| 35,567 |
|
|
| 31,598 |
|
Net deferred tax assets |
|
| 15,837 |
|
|
| 29,009 |
|
Deferred tax asset valuation allowance |
|
| (8,386 | ) |
|
| (9,489 | ) |
Total net deferred tax assets |
| $ | 7,451 |
|
| $ | 19,520 |
|
CTS CORPORATION 60
|
| As of December 31, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
Non-current deferred tax assets |
| $ | 23,461 |
|
| $ | 25,414 |
|
Non-current deferred tax liabilities |
| $ | (16,010 | ) |
| $ | (5,894 | ) |
Total net deferred tax assets |
| $ | 7,451 |
|
| $ | 19,520 |
|
As of December 31, | ||||||
2019 | 2018 | |||||
Non-current deferred tax assets | $ | 19,795 | $ | 22,201 | ||
Non-current deferred tax liabilities | $ | (5,637 | ) | $ | (3,990 | ) |
Total net deferred tax assets | $ | 14,158 | $ | 18,211 |
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, 2019,2022, and 2018,2021, we recorded deferred tax assets related to certain U.S. state and non-U.S. income tax loss carryforwards of $4,724$4,547 and $4,647,$5,070, respectively, and U.S. and non-U.S. tax credits of $15,964$10,467 and $16,909,$19,665, respectively. The deferred tax assets expire in various years primarily between 20212023 and 2039.
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 $8,011$8,386 and $8,274$9,489 should be provided for certain deferred tax assets at December 31, 2019,2022, and 2018,2021, respectively. As of December 31, 2019,2022, 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 $172 was recorded in 20192022 against the U.S. federal foreign tax credit carryforwards of $5,785, which$362. These credits begin to expire in varying amounts between 20232028 and 2029 as well as2032. No valuation allowance was recorded in 2022 against the U.S. federal research and development tax credits of $7,495, which$8,082. These credits begin to expire in varying amounts between 20212023 and 2039.2042. 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 64
The following table reconciles taxes at the U.S. federal statutory rate to the effective income tax rate:
|
| Years Ended December 31, | ||||
|
| 2022 |
| 2021 |
| 2020 |
Taxes at the U.S. statutory rate |
| 21.0% |
| 21.0% |
| 21.0% |
State income taxes, net of federal income tax benefit |
| 0.2% |
| 4.3% |
| (0.1)% |
Non-U.S. earnings taxed at rates different than the U.S. statutory rate |
| (3.2)% |
| 3.1% |
| (0.9)% |
Foreign source earnings, net of associated foreign tax credits |
| (0.6)% |
| 0.1% |
| (0.7)% |
Benefit of tax credits |
| (0.2)% |
| 0.8% |
| (0.7)% |
Non-deductible expenses |
| 2.6% |
| (1.6)% |
| (0.5)% |
Stock compensation - excess tax benefits |
| (0.2)% |
| 0.7% |
| (0.1)% |
Adjustment to valuation allowances |
| 1.4% |
| (3.1)% |
| 1.6% |
Change in unrecognized tax benefits |
| (0.1)% |
| 0.4% |
| (0.7)% |
Impacts of unremitted foreign earnings |
| 2.7% |
| (4.5)% |
| 5.2% |
Release of disproportionate tax effects of OCI |
| — |
| 8.8% |
| — |
Excise tax paid upon U.S. pension termination |
| 1.8% |
| — |
| — |
Other |
| 0.8% |
| 1.2% |
| (0.4)% |
Effective income tax rate |
| 26.2% |
| 31.2% |
| 23.7% |
Years Ended December 31, | ||||||
2019 | 2018 | 2017 | ||||
Taxes at the U.S. statutory rate | 21.0 | % | 21.0 | % | 35.0 | % |
State income taxes, net of federal income tax benefit | 0.4 | % | 1.2 | % | 1.1 | % |
Non-U.S. earnings taxed at rates different than the U.S. statutory rate | 1.3 | % | 0.8 | % | (9.0 | )% |
Foreign source earnings, net of associated foreign tax credits | 0.3 | % | 4.1 | % | 0.1 | % |
Benefit of tax credits | (1.5 | )% | (0.9 | )% | (1.4 | )% |
Non-deductible expenses | 4.1 | % | 1.3 | % | 1.5 | % |
Stock compensation - excess tax benefits | (1.1 | )% | (0.9 | )% | (1.5 | )% |
Adjustment to valuation allowances | (0.4 | )% | (0.6 | )% | (4.4 | )% |
Other changes in tax laws and rates | 0.1 | % | (6.1 | )% | — | % |
Change in unrecognized tax benefits | 3.3 | % | (1.7 | )% | 2.0 | % |
Impacts of unremitted foreign earnings | 1.3 | % | 1.1 | % | 0.9 | % |
Impacts related to the 2017 Tax Cuts and Jobs Act | — | % | (0.6 | )% | 44.7 | % |
Other | (0.7 | )% | 1.2 | % | (4.9 | )% |
Effective income tax rate | 28.1 | % | 19.9 | % | 64.1 | % |
In 2020, the Tax Cuts and Jobs ActCompany began the termination of 2017 (the “Tax Act”) was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to,U.S.-based pension plan. As a corporateresult of the final settlement of the pension liability in 2021, we reclassified the disproportionate 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 a one-time transition tax on the mandatory deemed 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 $11,734effect related to the mandatory deemed one-time transitionpension plan of $5,375 that was previously recorded in accumulated other comprehensive loss to income tax expense. In 2022, the remaining assets of the pension plan were liquidated and $6,267reverted back to CTS. These funds are subject to both income and excise taxes. The excise taxes of $6,803 are nondeductible for U.S. tax purposes. Further information related to the remeasurement of certain deferred tax assets and liabilities.
Following the enactment of the 2017 Tax Cut and Jobs Act ("Tax Act") and the associated one-time transition tax, in general, repatriation of foreign earnings to the USU.S. can be completed with no incremental US Tax.U.S. tax. However, there are limited other taxes that continue to apply such as foreign withholding and certain state taxes. The companyCompany records a deferred tax liability for the estimated foreign earnings and state tax cost associated with the undistributed foreign earnings that are not permanently reinvested.
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 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, 2019,2022, we have approximately $5,016$2,079 of unrecognized tax benefits, which if recognized, would impact the effective tax rate. We do not anticipate any significant changes inreducing our unrecognized tax benefits withinby approximately $222 in the next 12 months.
A reconciliation of the beginning and ending unrecognized tax benefits is provided below:
|
| As of December 31, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
Balance at January 1 |
| $ | 2,196 |
|
| $ | 3,128 |
|
Increase related to current year tax positions |
|
| 48 |
|
|
| 70 |
|
Decrease related to prior year tax positions |
|
| (165 | ) |
|
| (237 | ) |
Decrease related to lapse in statute of limitation |
|
| — |
|
|
| (125 | ) |
Decrease related to settlements with taxing authorities |
|
| — |
|
|
| (640 | ) |
Balance at December 31 |
| $ | 2,079 |
|
| $ | 2,196 |
|
As of December 31, | ||||||
2019 | 2018 | |||||
Balance at January 1 | $ | 3,649 | $ | 4,670 | ||
Increase related to current year tax positions | 2,834 | 55 | ||||
(Decrease) increase related to prior year tax positions | (10 | ) | 46 | |||
Decrease related to lapse in statute of limitation | (1,457 | ) | (1,076 | ) | ||
Decrease related to settlements with taxing authorities | — | (46 | ) | |||
Balance at December 31 | $ | 5,016 | $ | 3,649 |
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 20162019 through 2018;2021; however, U.S. tax authorities also have the ability to review prior tax years to the extent loss carryforwards and tax credit carryforwards are utilized. The open years for the non-U.S. tax returns range from 20082013 through 20182021 based on local statutes.
CTS CORPORATION 62 65
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 |
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 |
For the period July 31, 2019 through December 31, 2019 | |||
Net sales | $ | 9,252 | |
Net loss | $ | (465 | ) |
Financial information relating to our operations by geographic area were as follows:
Net Sales | Years Ended December 31, | ||||||||
2019 | 2018 | 2017 | |||||||
United States | $ | 279,904 | $ | 313,489 | $ | 287,092 | |||
Singapore | 32,957 | 6,724 | 5,596 | ||||||
Taiwan | 19,810 | 20,802 | 18,586 | ||||||
China | 87,342 | 79,380 | 66,510 | ||||||
Czech Republic | 33,214 | 36,528 | 34,476 | ||||||
Other non-U.S. | 15,772 | 13,560 | 10,733 | ||||||
Consolidated net sales | $ | 468,999 | $ | 470,483 | $ | 422,993 |
|
| Years Ended December 31, |
| |||||||||
Net Sales |
| 2022 |
|
| 2021 |
|
| 2020 |
| |||
United States |
| $ | 326,561 |
|
| $ | 297,322 |
|
| $ | 241,823 |
|
China |
|
| 115,980 |
|
|
| 106,700 |
|
|
| 88,129 |
|
Singapore |
|
| 48,288 |
|
|
| 37,742 |
|
|
| 31,985 |
|
Czech Republic |
|
| 35,990 |
|
|
| 36,252 |
|
|
| 27,143 |
|
Taiwan |
|
| 30,199 |
|
|
| 27,768 |
|
|
| 21,849 |
|
Other non-U.S. |
|
| 29,851 |
|
|
| 7,141 |
|
|
| 13,137 |
|
Consolidated net sales |
| $ | 586,869 |
|
| $ | 512,925 |
|
| $ | 424,066 |
|
Sales are attributed to countries based upon the origin of the sale.
|
| Years Ended December 31, |
| |||||
Long-Lived Tangible Assets |
| 2022 |
|
| 2021 |
| ||
United States |
| $ | 32,694 |
|
| $ | 37,409 |
|
China |
|
| 28,255 |
|
|
| 30,461 |
|
Mexico |
|
| 17,050 |
|
|
| 13,311 |
|
Czech Republic |
|
| 8,519 |
|
|
| 9,728 |
|
Taiwan |
|
| 6,446 |
|
|
| 5,679 |
|
Other non-U.S |
|
| 4,336 |
|
|
| 288 |
|
Consolidated long-lived assets |
| $ | 97,300 |
|
| $ | 96,876 |
|
Long-Lived Assets | Years Ended December 31, | |||||
2019 | 2018 | |||||
United States | $ | 53,767 | $ | 53,950 | ||
China | 32,751 | 32,973 | ||||
Taiwan | 4,593 | 3,752 | ||||
Czech Republic | 10,946 | 5,976 | ||||
Other non-U.S | 2,981 | 2,750 | ||||
Consolidated long-lived assets | $ | 105,038 | $ | 99,401 |
First | Second | Third | Fourth | |||||||||
2019 | ||||||||||||
Net sales | $ | 117,625 | $ | 120,684 | $ | 115,651 | $ | 115,040 | ||||
Gross margin | $ | 40,615 | $ | 41,204 | $ | 37,057 | $ | 38,700 | ||||
Operating earnings | $ | 14,218 | $ | 17,083 | $ | 10,124 | $ | 12,391 | ||||
Net earnings | $ | 11,419 | $ | 11,943 | $ | 2,722 | $ | 10,062 | ||||
Basic earnings per share | $ | 0.35 | $ | 0.36 | $ | 0.08 | $ | 0.31 | ||||
Diluted earnings per share | $ | 0.34 | $ | 0.36 | $ | 0.08 | $ | 0.31 | ||||
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 |
CTS CORPORATION 64 66
CTS CORPORATION
CTS CORPORATION 67
(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, 2019 Allowance for doubtful accounts | $ | 384 | $ | 141 | $ | (9 | ) | $ | (255 | ) | $ | 261 | |||
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 |
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A. Controls and Procedures
(a) Evaluation of Disclosure and Controls
Our management, with the participation 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 on Form 10-K. Based on that 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 the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within CTS Corporation have been detected.
(b) Management’s Annual Report on Internal 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)"Exchange Act")). Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2019.2022. 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). We have excluded from the scope of our assessment of internal control over financial reporting the operations and related assets of Quality Thermistor, Inc.,TEWA Temperature Sensors SP. Zo.o. and Ferroperm Piezoceramics A/S, which we acquired in 2019.2022. At December 31, 20192022 and for the period from acquisitionacquisitions through December 31, 2019,2022, total assets and revenues subject to QTI'sour internal control over financial reporting represented 12% and 2%15% of our consolidated total assets and 4% of our consolidated total revenues as of and for the year ended December 31, 2019. net revenues.
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, 2019.2022. The effectiveness of our internal control over financial reporting as of December 31, 20192022 has been audited by Grant Thornton LLP, an independent registered public accounting firm, as stated in their report that is included herein.
(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, 20192022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
CTS CORPORATION 66 68
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, 2019,2022, based on criteria established in the 2013 Internal Control-IntegratedControl—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, 2019,2022, based on criteria established in the 2013 Internal Control-IntegratedControl—Integrated Frameworkissued 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, 2019,2022, and our report dated February 20, 202024, 2023 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.
Our audit of, and opinion on, the Company’s internal control over financial reporting does not include the internal control over financial reporting of QTI, aTEWA Temperature Sensors SP. Zo.o. and Ferroperm Piezoceramics A/S, both wholly-owned subsidiary,subsidiaries, whose combined financial statements reflect total assets and revenues constituting 12%15 and 2%,4 percent, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2019.2022. As indicated in Management’s Report, QTI wasTEWA Temperature Sensors SP. Zo.o. and Ferroperm Piezoceramics A/S were both acquired during 2019.2022. Management’s assertion on the effectiveness of the Company’s internal control over financial reporting excluded internal control over financial reporting of QTI.
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 20, 2020
Not applicable.
CTS CORPORATION 68
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Please 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 20202023 Annual Meeting of Shareholders. Such information is incorporated herein by reference.
Item 11. Executive Compensation
Information with respect to this item may be found in our definitive proxy statement to be delivered to shareholders in connection with our 20202023 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, 2019:
Plan Category |
| (a) |
|
| (b) |
|
| (c) |
| |||
Equity compensation plans approved by security holders |
|
| 979,568 |
|
| $ | 30.20 |
|
|
| 1,523,871 |
|
Equity compensation plans not approved by security holders(1) |
|
| 4,722 |
|
|
| — |
|
|
| — |
|
Total |
|
| 984,290 |
|
|
|
|
|
| 1,523,871 |
|
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 | 1,004,746 | $ | 16.44 | 2,229,198 | |||
Equity compensation plans not approved by security holders(1) | 5,522 | — | — | ||||
Total | 1,010,268 | 2,229,198 |
CTS CORPORATION 70
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
Information with respect to this item may be found in our definitive proxy statement to be delivered to shareholders in connection with our 20202023 Annual Meeting of Shareholders. Such information is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information with respect to this item may be found in our definitive proxy statement to be delivered to shareholders in connection with our 20202023 Annual Meeting of Shareholders. Such information is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
Information with respect to this itemthe 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 20202023 Annual Meeting of Shareholders. Such information is incorporated herein by reference.
Item 15. Exhibits and Financial Statements Schedules
The following Consolidatedfinancial statements are filed as part of this Annual Report on Form 10-K under “Item 8. Financial Statements of CTS Corporation and Subsidiaries are included herein:
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) | |||
(4)(1) | Description of Securities Registered under Section 12 of the Securities Exchange Act of 1934 | ||
(10)(a) | |||
(10)(b) | |||
(10)(c) | |||
(10)(d) | |||
(10)(e) | |||
(10)(f) | |||
(10)(g) | |||
(10)(h) | |||
(10)(i) | |||
(10)(j) | |||
(10)(k) |
CTS CORPORATION 72
(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, | ||
104 | The cover page from the Company's Annual Report on Form 10-K for the year ended December 31, |
* Management contract or compensatory plan or arrangement.
Item 16. Form 10-K Summary
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 | By: | /s/ Ashish Agrawal | |
Ashish Agrawal Vice President and Chief Financial Officer (Principal Financial Officer) | |||
Date: February | By: | /s/ | |
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 | 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/ William S. Johnson | |||
William S. Johnson Director | |||
Date: February | By: | /s/ | |
Alfonso G. Zulueta Director | |||
Date: February 24, 2023 | By: | /s/ Ye Jane Li | |
Ye Jane Li | |||
Date: February 24, 2023 | By: | /s/ Donna M. Costello | |
Donna M. Costello | |||
Date: February 24, 2023 | By: | /s/ Randy Stone | |
Randy Stone |
CTS CORPORATION 72 74