The accompanying condensed consolidated financial statements have been prepared by CTS Corporation (“CTS” "we", "our", "us" or “the Company”the "Company”), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations. The unaudited condensed consolidated financial statements should be read in conjunction with the financial statements, notes thereto, and other information included in the Company’s Annual Report on Form 10‑K for the year ended December 31, 2015.2016.

 

The accompanying unaudited condensed consolidated financial statements reflect, in the opinion of management, all adjustments (consisting of normal recurring items) necessary for a fair statement, in all material respects, of the financial position and results of operations for the periods presented.  The preparation of financial statements in conformity with generally accepted accounting principles 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 reported period.  Actual results could differ materially from those estimates.  The results of operations for the interim periods are not necessarily indicative of the results for the entire year.

CTS hasWe have evaluated subsequent events and transactions for potential recognition or disclosure in the financial statements through the date the consolidated financial statements are issued.

 

Costs associated with exit and restructuring activities are recorded in the Condensed Consolidated Statement of Earnings as follows: restructuring related charges are recorded as a separate component of Cost of Goods Sold, and restructuring and impairment charges are reported on a separate line and included in Operating Earnings.earnings. 

In June 2016, CTSwe announced plans to restructure operations by phasing out production at the Elkhart facility by mid-2018 and transitioning it into a research and development center supporting CTS'our global operations ("June 2016 Plan"). Additional organizational changes will also occur in various other locations. The cost of the plan is preliminarily expected to range between $16,000be approximately $12,300 and $18,000, including the severance charges below, however this range may change significantly as we are still in the early stages of estimating the cost of the Plan.will impact approximately 230 employees. The total restructuring liability related to severance and other one-time benefit arrangements under the June 2016 Plan was $196$1,722 at June 30,March 31, 2017 and $1,739 at December 31, 2016. Additional liabilities related to the June 2016 Plan will be accrued following finalization of cost estimates and notification of our plans to the affected employees following negotiations with employee labor representatives.

The following table displays the planned restructuring and restructuring-related charges associated with the April 2014June 2016 Plan as well as a summary of the actual costs incurred through June 30, 2016:March 31, 2017:

Certain processes in the manufacture of CTS'our current and past products create by-products classified as hazardous waste by-products as currently defined by federal and state laws and regulations. CTS haswaste. We have been notified by the U.S. Environmental Protection Agency, state environmental agencies, and in some cases, generator groups of potentially responsible parties, that it is orwe may be a potentially responsible party regarding hazardous substancesliable for environmental contamination at several sites either presently or historicallycurrently and formerly owned leased, or operated by CTS.us. Some sites, are Superfund sites such as in Asheville, North Carolina and Mountain View, California. CTS reservesCalifornia, are designated National Priorities List sites under the U.S. Environmental Protection Agency’s Superfund program. We reserve for probable remediation activities and for claims and proceedings against CTSus with respect to other environmental matters. CTS recordsWe record reserves on aan undiscounted basis. In the opinion of management, based upon presently available information relating to all such matters, adequate provision for probable and estimable costs have been recorded. We do not have any known environmental obligations where a loss is probable or reasonably possible of occurring for which we do not have a reserve, nor do we have any amounts for which we have not reserved because the amount of the loss cannot be reasonably estimated. Due to the inherent nature of environmental obligations, CTSwe cannot provide assurance that itsour ultimate environmental investigation and clean-up costs and liabilitiesliability will not materially exceed the amount of its current reserve. Our reserve and disclosures will be adjusted accordingly if additional information becomes available in the future.

Unrelated to the environmental claims described above, certain other claims are pending against CTSus with respect to matters arising out of the ordinary conduct of CTS’our business. Although the ultimate outcome of any potential litigation resulting from these claims cannot be predicted with certainty, and some may be disposed of unfavorably to CTS, management believesus, we believe that adequate provision for anticipated costs have been established based upon all presently available information. Except as noted herein, we do not believe we have any pending loss contingencies that are probable or reasonably possible of having a material impact on our consolidated financial position, results of operations, or cash flows.

Long-term debt was comprised of the following:

On August 10, 2015, CTSwe entered into a new five-year credit agreement (“Revolving Credit Facility”) with a group of banks (“Revolving Credit Facility”) in order to support CTS’ working capital needs and other general corporate purposes.our financing needs.  The Revolving Credit Facility originally provided for a credit line of $200,000. This Revolving Credit Facility replaced a prior unsecured credit facility.  Borrowings under the previous credit agreement were refinanced under the Revolving Credit Facility and the previous credit agreement was terminated on August 10, 2015. On May 23, 2016, CTSwe requested and received a $100,000 increase in the aggregate revolving credit commitments under its existing credit agreement, which increased the credit line from $200,000 to $300,000.  

 

The Revolving Credit Facility includes a swing line sublimit of $15,000 and a letter of credit sublimit of $10,000.  Borrowings under the Revolving Credit Facility bear interest, at CTS’our option, at the base rate plus the applicable margin for base rate loans or LIBOR plus the applicable margin for LIBOR loans.  CTSWe also payspay a quarterly commitment fee on the unused portion of the Revolving Credit Facility.  The commitment fee ranges from 0.20% to 0.40% based on the CTS’our total leverage ratio. 

 

The Revolving Credit Facility requires, among other things, that CTSwe comply with a maximum total leverage ratio and a minimum fixed charge coverage ratio.  Failure of CTS to comply with these covenants could reduce the borrowing availability under the Revolving Credit Facility.  CTS wasWe were in compliance with all debt covenants at June 30, 2016.March 31, 2017.  The Revolving Credit Facility requires that CTSwe deliver quarterly financial statements, annual financial statements, auditors 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 CTS'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 CTS'our subsidiaries and affiliates; and make stock repurchases and dividend payments.  Interest rates on

 

CTS hasWe have debt issuance costs related to itsour long-term debt that areis being amortized using the straight-line method over the life of the debt. These costs are included in interest expense in our Condensed Consolidated Statement of Earnings. Amortization expense was approximately $32$46 and $50$32 for the three months ended June 30,March 31, 2017 and March 31, 2016, and June 28, 2015, respectively, and approximately $70 and $100 for the first six months ended June 30, 2016 and June 28, 2015, respectively. 

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.

In January of 2016, we began using 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 Condensed Consolidated Balance Sheets at fair value. At least quarterly, we assess the effectiveness of these hedging relationships based on the total change in their fair value using regression analysis. The effective portion of derivative gains and losses are recorded in accumulated other comprehensive lossincome (loss) until the hedged transaction affects earnings upon settlement, at which time they are reclassified to cost of goods sold or net sales. Ineffectiveness is recorded in other income (expense) in our Condensed Consolidated Statement of Earnings. If it becomes probable that an anticipated transaction that is hedged 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 income (loss) to other income (expenses)(expense).

We continue to monitor the Company’s overall currency exposure and may elect to add cash flow hedges in the future. At June 30, 2016,March 31, 2017, we had a net unrealized gain of $77$486 in accumulated other comprehensive income, of which $482 is expected to be reclassified to income within the next 12 months. At March 31, 2016 we had a net unrealized gain of $378 in accumulated other comprehensive income (loss). The notional amount of foreign currency forward contracts outstanding was $10.8$16.5 million at June 30, 2016.March 31, 2017.

CTS usesWe use interest rate swaps to convert the revolving credit facility’s variable rate of interest into a fixed rate. In the second quarter of 2012, CTS entered into four separate interest rate swap agreements to fix interest rates on $50,000 of long-term debt for the periods January 2013 to January 2017. In the third quarter of 2012, CTSwe entered into four additional interest rate swap agreements to fix interest rates on $25,000 of long-term debt for the periods January 2013 to January 2017. In the third quarter of 2016, we entered into three additional forward-starting interest rate swap agreements to fix interest rates on $50,000 of long-term debt for the periods August 2017 to August 2020. The difference to be paid or received under the terms of the swap agreements will be recognized as an adjustment to interest expense when settled.

These swaps are treated as cash flow hedges and consequently, the changes in fair value were recorded in other comprehensive income (loss). The estimated net amount of the existing gains or losses that are reported in accumulated other comprehensive income (loss) that is expected to be reclassified into earnings within the next twelve months is approximately $480.$64. 

The location and fair values of derivative instruments designated as hedging instruments in the Condensed Consolidated Balance Sheets as of June 30, 2016,March 31, 2017, are shown in the following table:

Shareholders’ equity includes certain items classified as accumulated other comprehensive (loss) income (“AOCI”) in the Condensed Consolidated Balance Sheets, including:

Changes in exchange rates between the functional currency and the currency in which a transaction is denominated are foreign exchange transaction gains or losses. Transaction (losses)/gains for the three months ended March 31, 2017 were $395 and six month periods ended June 30, 2016 were ($1,260) and ($1,491), respectively, andtransaction losses for the three and six month periodsmonths ended June 28, 2015March 31, 2016 were $125 and ($1,563), respectively,$231, which arehave been included in other income/(expenses)income (expense) in the Condensed Consolidated Statement of Earnings.