UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

See notes to unaudited condensed consolidated financial statements.

 See notes to unaudited condensed consolidated financial statements.

(In thousands of dollars)

See notes to unaudited condensed consolidated financial statements.

 

The accompanying condensed consolidated financial statements have been prepared by CTS Corporation (“CTS” "we", "our", "us" or 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, 2017.2018.

 

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.

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

 

The core principle of Topic 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 June 30, 2018,March 31, 2019, 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 amount method based on an analysis of historical experience and current facts and circumstances, which requires 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.

Contract assets and liabilities included in our Condensed Consolidated Balance Sheets are as follows:

 

During the three and six months ended June 30, 2018,March 31, 2019, we recognized a decrease of revenues of $46 and an increase in revenues of $86, respectively,$69 for amounts that were included in contract liabilities at the beginning of the period.

The increasedecrease in contract liabilities as of June 30, 2018March 31, 2019 is primarily due to net increases in estimated futurethe settlement of customer discounts and price concessions offset by net settlementsrecognized at the beginning of products sold with rights of return.the period.

The following table presents revenues disaggregated by the major markets we serve:

 

 

 

Net pension expense (income) for our domestic and foreign plans wasis as follows:

The components of net pension expense (income) for our domestic and foreign plans include the following: 

 

Net post-retirement expense for our other post-retirement plan includes the following components:

 

Intangible assets consist of the following components:

Remaining amortization expense for other intangible assets as of June 30, 2018March 31, 2019 is as follows: 

 

Costs associated with exit and restructuring activities are recorded in the Condensed Consolidated Statement of Earnings as a separate component of Operating earnings. 

 

Total restructuring charges all related to the June 2016 Plan described below, wereis as follows:

In June 2016, we announced plans to restructure operations by phasing out production at our Elkhart facility by the end of 2018 and transitioning it into a research and development center supporting our global operations ("June 2016 Plan"). Additional organizational changes were also implemented in various other locations. During the third quarter of 2017, we revised the June 2016 Plan. The amendment added an additional $1,100 in planned costs related to the relocation of our corporate headquarters in Lisle, IL and our plant in Bolingbrook, IL, both of which will behave now been consolidated into a single facility. The total cost of the plan is expected to be approximately $13,400. The total restructuring liability related to severance and other one-time benefit arrangements under the June 2016 Plan was $1,223$537 at June 30, 2018,March 31, 2019, and $1,460$668 at December 31, 2017.2018. Additional costs related to production line movements, equipment charges, and other costs will be expensed as incurred.

The following table displays the planned restructuring charges associated with the June 2016 Plan as well as a summary of the actual costs incurred through June 30, 2018:March 31, 2019:

In April 2014, we announced plans to restructure our operations and consolidate our Canadian operations into other existing facilities as part of our overall plan to simplify our business model and rationalize our global footprint (“April 2014 Plan”).  These restructuring actions were completed in 2015. The remaining restructuring liability related to the April 2014 Plan was $433$683 at June 30, 2018,March 31, 2019, and $453$918 at December 31, 2017.2018.

The following table displays the restructuring liability activity for all plans for the sixthree months ended June 30, 2018:March 31, 2019: 

 

The components of accrued liabilities are as follows: 

Certain processes in the manufacture of our current and past products create by-products classified as hazardous waste. We have been notified by the U.S. Environmental Protection Agency, state environmental agencies, and in some cases, groups of potentially responsible parties, that we may be potentially liable for environmental contamination at several sites currently and formerly owned or operated by us. Some sites, such as Asheville, North Carolina and Mountain View, California, 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 us with respect to other environmental matters. We record reserves on an undiscounted basis. In the opinion of management, based upon presently available information relating to such matters, adequate provision for probable and estimable costs have been recorded. We do not have any known environmental obligations where a loss 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, we cannot provide assurance that our ultimate environmental liability 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.

A roll forward of remediation reserves included in accrued liabilities on the balance sheet is comprised of the following:

Unrelated to the environmental claims described above, certain other claims are pending against us with respect to matters arising in the ordinary conduct of 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 us, 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 wasis comprised of the following:

 

On August 10, 2015,February 12, 2019, we entered into aan amended and restated five-year credit agreement (“Revolving Credit Facility”)Agreement with a group of banks in order to support our financing needs.(the "Credit Agreement"). The Revolving Credit Facility originally providedAgreement provides for a credit line of $200,000. On May 23, 2016, we requested and received a $100,000 increase in the aggregate revolving credit commitmentsfacility of $300,000, which may be increased by $150,000 at the request of the Company, subject to the administrative agent's approval. This new unsecured credit facility replaces the prior $300,000 unsecured credit facility, which would have expired August 10, 2020. Borrowings of $50,000 under the existingprior credit agreement which increasedwere refinanced into the credit line from $200,000 to $300,000.  Credit Agreement. The prior agreement was terminated as of February 12, 2019.

 

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 our option, at the base rate plus the applicable margin for base rate loans or London Interbank Offered Rate ("LIBOR") plus the applicable margin for LIBOR loans.  We also pay a quarterly commitment fee on the unused portion of the Revolving Credit Facility.  The commitment fee ranges from 0.20% to 0.40%0.30% based on the our total leverage ratio. 

 

The Revolving Credit Facility requires, among other things, that we comply with a maximum total leverage ratio and a minimum fixed charge 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 June 30, 2018.March 31, 2019.  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. These costs are included in interest expense in our Condensed Consolidated Statement of Earnings. Amortization expense was approximately $36 and $46 for both the three months ended June 30,March 31, 2019 and 2018, and June 30, 2017, respectively, and approximately $93 for both the six months ended June 30, 2018 and June 30, 2017, 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.

The effective portion of derivative gains and losses are recorded in accumulated other comprehensive (loss) income until the hedged transaction affects earnings upon settlement, at which time they are reclassified to cost 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) income to other income (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, 2018,March 31, 2019, we had a net unrealized gain of $59$746 in accumulated other comprehensive (loss) income, of which $5$737 is expected to be reclassified to income within the next 12 months. At June 30, 2017March 31, 2018 we had a net unrealized gain of $428$37 in accumulated other comprehensive (loss) income. The notional amount of foreign currency forward contracts outstanding was $21.1 million$12,357 at June 30, 2018.March 31, 2019.

These swaps are treated as cash flow hedges and consequently, the changes in fair value wereare recorded in other comprehensive (loss) income. The estimated net amount of the existing gains that are reported in accumulated other comprehensive (loss) income that are expected to be reclassified into earnings within the next twelve months is approximately $524.$494. 

The location and fair values of derivative instruments designated as hedging instruments in the Condensed Consolidated Balance Sheets as of June 30, 2018,March 31, 2019, are shown in the following table:

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 $301$715 and foreign currency derivative liabilities of $225.$0.

The effect of derivative instruments on the Condensed Consolidated Statements of Earnings is as follows: