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CTS CORP - Quarter Report: 2015 September (Form 10-Q)

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


FORM 10-Q


 

 

(Mark One)

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For The Quarterly Period Ended September 27, 2015

 

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)

 

 

 

 

 

1142 West Beardsley Avenue, Elkhart, IN

  

 

  

46514

(Address of principal executive offices)

  

 

  

(Zip Code)

 

Registrant’s telephone number, including area code: 574-523-3800

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes        No    

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).      Yes         No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Large accelerated filer 

  

Accelerated filer 

  

Non-accelerated filer 

  

Smaller reporting company 

 

  

 

  

(Do not check if smaller reporting company)

  

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes        No    

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of October 20, 2015: 32,637,797.

 

 

 

 

 


 

Table of Contents

CTS CORPORATION AND SUBSIDIARIES

TABLE OF CONTENTS

 

 

 

 

 

 

 

 

 

Page

 

 

 

 

 

PART I. FINANCIAL INFORMATION 

 

 

 

 

 

 

 

Item 1.

 

Financial Statements

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of (Loss) Earnings – Unaudited ‑ For the Periods Ended     September 27, 2015 and September 28, 2014

3

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive (Loss) Earnings – Unaudited ‑ For the Periods Ended September 27, 2015 and September 28, 2014

4

 

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets As of September 27, 2015 – (Unaudited) and        December 31, 2014

5

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows – Unaudited ‑ For the Periods Ended September 27, 2015 and September 28, 2014

6

 

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements ‑ Unaudited

7

 

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

27

 

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

35

 

 

 

 

 

 

Item 4.

 

Controls and Procedures

35

 

 

 

 

 

PART II. OTHER INFORMATION 

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

36

 

 

 

 

 

 

Item 1A.

 

Risk Factors

36

 

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

37

 

 

 

 

 

 

Item 6.

 

Exhibits

38

 

 

 

 

 

SIGNATURES 

39

 

 

 

 

 

 

 

 

 

 

2


 

Table of Contents

PART I - FINANCIAL INFORMATION

 

Item 1.   Financial Statements

 

CTS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF (LOSS) EARNINGS - UNAUDITED

(In thousands of dollars, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

    

September 27, 2015

    

September 28, 2014

    

September 27, 2015

    

September 28, 2014

 

Net sales

 

$

90,646

 

$

99,957

 

$

289,028

 

$

303,643

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

 

59,200

 

 

67,458

 

 

192,073

 

 

206,706

 

Selling, general and administrative expenses

 

 

12,690

 

 

13,899

 

 

43,625

 

 

43,353

 

Research and development expenses

 

 

5,692

 

 

5,807

 

 

16,378

 

 

16,765

 

Non-recurring environmental charge

 

 

14,541

 

 

 —

 

 

14,541

 

 

 —

 

Restructuring and impairment charges

 

 

2,373

 

 

1,570

 

 

5,229

 

 

4,806

 

Operating (loss) earnings

 

 

(3,850)

 

 

11,223

 

 

17,182

 

 

32,013

 

Other (expense) income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(714)

 

 

(568)

 

 

(1,955)

 

 

(1,763)

 

Interest income

 

 

713

 

 

707

 

 

2,354

 

 

1,959

 

Other

 

 

(3,072)

 

 

562

 

 

(4,641)

 

 

(1,618)

 

Total other (expense) income

 

 

(3,073)

 

 

701

 

 

(4,242)

 

 

(1,422)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) earnings before income taxes

 

 

(6,923)

 

 

11,924

 

 

12,940

 

 

30,591

 

Income tax (benefit) expense

 

 

(2,163)

 

 

3,807

 

 

(7,667)

 

 

11,033

 

Net (loss) earnings

 

$

(4,760)

 

$

8,117

 

$

20,607

 

$

19,558

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.15)

 

$

0.24

 

$

0.62

 

$

0.58

 

Diluted

 

$

(0.15)

 

$

0.24

 

$

0.61

 

$

0.57

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic weighted – average common shares outstanding:

 

 

32,770

 

 

33,599

 

 

33,083

 

 

33,683

 

Effect of dilutive securities

 

 

 —

 

 

508

 

 

485

 

 

515

 

Diluted weighted – average common shares outstanding

 

 

32,770

 

 

34,107

 

 

33,568

 

 

34,198

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared per share

 

$

0.040

 

$

0.040

 

$

0.120

 

$

0.120

 

 

See notes to unaudited condensed consolidated financial statements.

3


 

Table of Contents

CTS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS (LOSS) ‑ UNAUDITED

(In thousands of dollars)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

    

September 27, 2015

    

September 28, 2014

    

September 27, 2015

    

September 28, 2014

    

 

Net earnings (loss)

 

$

(4,760)

 

$

8,117

 

$

20,607

 

$

19,558

 

 

Other comprehensive (loss) earnings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in fair market value of hedges, net of tax

 

 

(17)

 

 

153

 

 

(34)

 

 

26

 

 

Changes in unrealized pension cost, net of tax

 

 

1,336

 

 

1,036

 

 

3,299

 

 

2,857

 

 

Cumulative translation adjustment, net of tax

 

 

(1,204)

 

 

(981)

 

 

(817)

 

 

(160)

 

 

Other comprehensive earnings

 

$

115

 

$

208

 

$

2,448

 

$

2,723

 

 

Comprehensive (loss) earnings

 

$

(4,645)

 

$

8,325

 

$

23,055

 

$

22,281

 

 

 

See notes to unaudited condensed consolidated financial statements.

4


 

Table of Contents

 

CTS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands of dollars)

 

 

 

 

 

 

 

 

 

 

 

 

(Unaudited) September 27,

 

December 31,

 

 

    

2015

    

2014

 

ASSETS

 

 

 

 

 

 

  

Current Assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

150,755

 

$

134,508

 

Accounts receivable, net

 

 

59,213

 

 

56,894

 

Inventories, net

 

 

26,974

 

 

27,887

 

Other current assets

 

 

20,766

 

 

21,112

 

Total current assets

 

 

257,708

 

 

240,401

 

Property, plant and equipment, net

 

 

68,932

 

 

71,414

 

Other Assets

 

 

 

 

 

 

 

Prepaid pension asset

 

 

38,773

 

 

32,099

 

Goodwill

 

 

32,047

 

 

32,047

 

Indefinite-lived intangible asset

 

 

690

 

 

690

 

Other intangible assets, net

 

 

32,960

 

 

35,902

 

Deferred income taxes

 

 

56,610

 

 

43,120

 

Other

 

 

1,021

 

 

1,253

 

Total other assets

 

 

162,101

 

 

145,111

 

Total Assets

 

$

488,741

 

$

456,926

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

Accounts payable

 

$

39,483

 

$

43,343

 

Accrued payroll and benefits

 

 

9,089

 

 

11,283

 

Accrued liabilities

 

 

43,031

 

 

25,356

 

Total current liabilities

 

 

91,603

 

 

79,982

 

Long-term debt

 

 

90,500

 

 

75,000

 

Post retirement obligations

 

 

2,729

 

 

3,049

 

Other long-term obligations

 

 

8,305

 

 

9,106

 

Shareholders’ Equity

 

 

 

 

 

 

 

Common stock

 

 

300,897

 

 

299,892

 

Additional contributed capital

 

 

40,481

 

 

39,153

 

Retained earnings

 

 

396,796

 

 

380,145

 

Accumulated other comprehensive loss

 

 

(101,785)

 

 

(104,233)

 

Total shareholders’ equity before treasury stock

 

 

636,389

 

 

614,957

 

Treasury stock

 

 

(340,785)

 

 

(325,168)

 

Total shareholders’ equity

 

 

295,604

 

 

289,789

 

Total Liabilities and Shareholders’ Equity

 

$

488,741

 

$

456,926

 

See notes to unaudited condensed consolidated financial statements.

5


 

Table of Contents

CTS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS ‑ UNAUDITED

(In thousands of dollars)

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

    

September 27, 2015

    

September 28, 2014

   

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

Net earnings 

 

$

20,607

 

$

19,558

 

Adjustments to reconcile net earnings to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

11,987

 

 

12,722

 

Amortization of retirement benefit adjustments

 

 

4,945

 

 

4,296

 

Equity-based compensation

 

 

2,655

 

 

1,839

 

Restructuring charges

 

 

5,229

 

 

4,806

 

Prepaid pension asset

 

 

(6,633)

 

 

(6,687)

 

Gain on sale of fixed assets

 

 

(121)

 

 

(1,915)

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

(3,518)

 

 

(1,115)

 

Inventories

 

 

(34)

 

 

1,889

 

Accounts payable

 

 

(4,967)

 

 

(1,175)

 

Accrued payroll and benefits

 

 

(1,573)

 

 

(9,207)

 

Accrued liabilities

 

 

9,945

 

 

(7,997)

 

Income taxes payable

 

 

1,715

 

 

1,599

 

Deferred income taxes

 

 

(15,428)

 

 

3,872

 

Other

 

 

(691)

 

 

(7,142)

 

Net cash provided by operating activities

 

 

24,118

 

 

15,343

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

Capital expenditures

 

 

(6,559)

 

 

(9,006)

 

Proceeds from sale of assets

 

 

1,878

 

 

1,851

 

Net cash used in investing activities

 

 

(4,681)

 

 

(7,155)

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Payments of long-term debt

 

 

(943,300)

 

 

(757,700)

 

Proceeds from borrowings of long-term debt

 

 

958,800

 

 

763,000

 

Payments of short-term notes payable

 

 

(164)

 

 

(778)

 

Proceeds from borrowings of short-term notes payable

 

 

164

 

 

778

 

Purchase of treasury stock

 

 

(15,623)

 

 

(5,084)

 

Dividends paid

 

 

(3,984)

 

 

(4,038)

 

Exercise of stock options

 

 

64

 

 

1,328

 

Other

 

 

144

 

 

235

 

Net cash used in financing activities

 

 

(3,899)

 

 

(2,259)

 

Effect of exchange rate on cash and cash equivalents

 

 

709

 

 

587

 

Net increase in cash and cash equivalents

 

 

16,247

 

 

6,516

 

Cash and cash equivalents at beginning of year

 

 

134,508

 

 

124,368

 

Cash and cash equivalents at end of year

 

$

150,755

 

$

130,884

 

Supplemental cash flow information

 

 

 

 

 

 

 

Cash paid for Interest

 

$

1,717

 

$

1,434

 

Cash paid for Income taxes, net

 

$

5,657

 

$

6,141

 

 

See notes to unaudited condensed consolidated financial statements.

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Table of Contents

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

September 27, 2015

 

NOTE 1—Basis of Presentation

 

The accompanying condensed consolidated financial statements have been prepared by CTS Corporation (“CTS” 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, 2014.

 

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.

 

Reclassifications

 

Certain reclassifications have been made for the prior periods presented in the Unaudited Condensed Consolidated Statements of Cash Flows to conform to the current period’s presentation.

 

NOTE 2 – Accounts Receivable 

The components of accounts receivable are as follows:

 

 

 

 

 

 

 

 

 

 

 

As of

 

 

 

September 27,

 

December 31,

 

($ in thousands)

    

2015

    

2014

 

Accounts receivable, gross

 

$

59,343

 

$

56,994

 

Less: Allowance for doubtful accounts

 

 

(130)

 

 

(100)

 

Accounts receivable, net

 

$

59,213

 

$

56,894

 

 

 

NOTE 3 – Inventories 

Inventories consist of the following:

 

 

 

 

 

 

 

 

 

 

 

As of

 

 

 

September 27,

 

December 31,

 

($ in thousands)

    

2015

    

2014

 

Finished goods

 

$

9,230

 

$

11,728

 

Work-in-process

 

 

7,938

 

 

7,297

 

Raw materials

 

 

15,746

 

 

15,562

 

Less: Inventory reserves

 

 

(5,940)

 

 

(6,700)

 

Inventories, net

 

$

26,974

 

$

27,887

 

 

 

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NOTE 4 – Property, Plant and Equipment

 

Property, plant and equipment is comprised of the following:

 

 

 

 

 

 

 

 

 

 

 

As of

 

 

 

September 27,

 

December 31,

 

($ in thousands)

    

2015

    

2014

 

Land

 

$

2,286

 

$

3,044

 

Buildings and improvements

 

 

65,617

 

 

67,269

 

Machinery and equipment

 

 

191,042

 

 

185,999

 

Less: Accumulated depreciation

 

 

(190,013)

 

 

(184,898)

 

Property, plant and equipment, net

 

$

68,932

 

$

71,414

 

 

 

 

 

NOTE 5 – Retirement Plans

 

Pension Plans

 

Net pension income for our domestic and foreign plans was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

($ in thousands) 

    

September 27, 2015

    

September 28, 2014

    

September 27, 2015

    

September 28, 2014

 

Net pension income

 

$

(532)

 

$

(637)

 

$

(1,591)

 

$

(1,717)

 

 

Net pension (income) expense breakdown for our domestic and foreign plans include the following components:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Domestic Pension Plans

 

Foreign Pension Plans

 

Three months:

 

Three Months Ended

 

Three Months Ended

 

($ in thousands)

    

September 27, 2015

    

September 28, 2014

    

September 27, 2015

    

September 28, 2014

 

Service cost

 

$

42

 

$

48

 

$

16

 

$

21

 

Interest cost

 

 

2,815

 

 

3,052

 

 

124

 

 

156

 

Expected return on plan assets (1)

 

 

(5,068)

 

 

(5,209)

 

 

(135)

 

 

(172)

 

Amortization of loss

 

 

1,585

 

 

1,408

 

 

89

 

 

59

 

Other cost due to retirement

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

(Income) expense, net

 

$

(626)

 

$

(701)

 

$

94

 

$

64

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Domestic Pension Plans

 

Foreign Pension Plans

 

Nine months:

 

Nine Months Ended

 

Nine Months Ended

 

($ in thousands)

    

September 27, 2015

    

September 28, 2014

    

September 27, 2015

    

September 28, 2014

 

Service cost

 

$

128

 

$

144

 

$

49

 

$

63

 

Interest cost

 

 

8,444

 

 

9,163

 

 

371

 

 

461

 

Expected return on plan assets (1)

 

 

(15,204)

 

 

(15,625)

 

 

(402)

 

 

(509)

 

Amortization of loss

 

 

4,754

 

 

4,237

 

 

269

 

 

177

 

Other cost due to retirement

 

 

 —

 

 

172

 

 

 —

 

 

 —

 

(Income) expense, net

 

$

(1,878)

 

$

(1,909)

 

$

287

 

$

192

 

 


(1)

Expected return on plan assets is net of expected investment expenses and certain administrative expenses.

 

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Other Postretirement Benefit Plan

 

Net postretirement expense for our postretirement plan includes the following components:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

($ in thousands) 

    

September 27, 2015

    

September 28, 2014

    

September 27, 2015

    

September 28, 2014

 

Other postretirement benefit plan

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

1

 

$

1

 

$

3

 

$

3

 

Interest cost

 

 

51

 

 

57

 

 

153

 

 

172

 

Amortization of gain

 

 

(25)

 

 

(39)

 

 

(75)

 

 

(118)

 

Postretirement expense

 

$

27

 

$

19

 

$

81

 

$

57

 

 

 

NOTE 6 – Other Intangible Assets

 

Intangible assets consist of the following components:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of

 

   

   

September 27, 2015

 

($ in thousands)

    

Gross
Carrying
Amount

    

Accumulated
Amortization

    

Net Amount

 

Amortized intangible assets:

   

 

 

 

 

 

 

 

 

 

Customer lists/relationships

 

$

51,804

 

$

(26,423)

 

$

25,381

 

Patents

 

 

10,319

 

 

(10,319)

 

 

 —

 

Other intangibles

 

 

12,270

 

 

(4,691)

 

 

7,579

 

Other intangible assets, net

 

$

74,393

 

$

(41,433)

 

$

32,960

 

 

 

 

 

 

 

 

 

 

 

 

Amortization expense for the three months ended September 27, 2015

 

 

 

 

$

985

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization expense for the nine months ended September 27, 2015

 

 

 

 

$

2,942

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of

 

   

   

December 31, 2014

 

($ in thousands)

    

Gross
Carrying
Amount

    

Accumulated
Amortization

    

Net Amount

 

Amortized intangible assets:

   

 

 

 

 

 

 

 

 

 

Customer lists/relationships

 

$

51,804

 

$

(24,415)

 

$

27,389

 

Patents

 

 

10,319

 

 

(10,319)

 

 

 —

 

Other intangibles

 

 

12,270

 

 

(3,757)

 

 

8,513

 

Other intangible assets, net

 

$

74,393

 

$

(38,491)

 

$

35,902

 

 

 

 

 

 

 

 

 

 

 

 

Amortization expense for the three months ended September 28, 2014

 

 

 

 

$

1,046

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization expense for the nine months ended September 28, 2014

 

 

 

 

$

3,125

 

 

 

 

 

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Amortization expense remaining for other intangible assets is as follows:

 

 

 

 

 

 

 

($ in thousands)

    

Amortization
expense

 

2015

 

$

1,007

 

2016

 

 

3,647

 

2017

 

 

3,569

 

2018

 

 

3,484

 

2019

 

 

3,475

 

Thereafter

 

 

17,778

 

Total amortization expense

 

$

32,960

 

 

 

NOTE 7 – Costs Associated with Exit and Restructuring Activities

 

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 component of Cost of Goods Sold, and restructuring and impairment charges are reported on a separate line and included in Operating Earnings. 

 

Total restructuring, impairment and restructuring related charges were as follows:

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

September 27,

 

September 28,

($ in thousands)

    

2015

    

2014

Restructuring related charges

 

$

152

 

$

494

Restructuring and impairment charges

 

 

2,373

 

 

1,570

Total restructuring, impairment, and restructuring related charges

 

$

2,525

 

$

2,064

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

September 27,

 

September 28,

($ in thousands)

    

2015

    

2014

Restructuring related charges

 

$

444

 

$

1,404

Restructuring and impairment charges

 

 

5,229

 

 

4,806

Total restructuring, impairment, and restructuring related charges

 

$

5,673

 

$

6,210

 

During April 2014, CTS announced plans to restructure its operations and consolidate its Canadian operations into other existing CTS facilities as part of CTS’ overall plan to simplify its business model and rationalize its global footprint (“April 2014 Plan”). 

 

During the second quarter of 2015, CTS management revised the April 2014 Plan.  The amendment added an additional $4,250,000 in planned costs.  Additional administrative and legal costs are estimated to account for $1,300,000 of additional restructuring and impairment charges due to the extension of the timing of the plant shutdown.  The remaining $2,950,000 in restructuring related charges are for additional costs related to equipment relocation, training, travel and shipping costs to facilitate an effective transition.  The above actions are expected to be substantially complete in 2015.

 

These restructuring actions will result in the elimination of approximately 120 positions. These actions are expected to be completed in 2015. The following table displays the planned restructuring and restructuring-related charges associated with the April 2014 Plan, as well as a summary of the actual costs incurred through September 27, 2015:

 

 

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Actual costs

 

 

 

Planned

 

incurred through

 

($ in thousands)                                                           April 2014 Plan

    

Costs

    

September 27, 2015

 

Inventory write-down

 

$

850

 

$

 —

 

Equipment relocation

 

 

1,800

 

 

258

 

Other charges

 

 

1,400

 

 

111

 

Restructuring related charges, included in cost of goods sold

 

$

4,050

 

$

369

 

 

 

 

 

 

 

 

 

Workforce reduction

 

$

4,200

 

$

4,262

 

Asset impairment charge

 

 

 —

 

 

 —

 

Other charges, including pension termination costs

 

 

1,700

 

 

3,110

 

Restructuring and impairment charges

 

$

5,900

 

$

7,372

 

 

 

 

 

 

 

 

 

Total restructuring, impairment and restructuring related charges

 

$

9,950

 

$

7,741

 

 

Under the April 2014 Plan, total restructuring, impairment and restructuring related charges were as follows:

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

September 27,

 

September 28,

 

($ in thousands)

    

2015

    

2014

 

Restructuring related charges

 

$

152

 

$

 —

 

Restructuring and impairment charges

 

 

2,025

 

 

575

 

Total restructuring, impairment, and restructuring related charges

 

$

2,177

 

$

575

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

September 27,

 

September 28,

 

($ in thousands)

    

2015

    

2014

 

Restructuring related charges

 

$

369

 

$

 —

 

Restructuring and impairment charges

 

 

3,902

 

 

2,980

 

Total restructuring, impairment, and restructuring related charges

 

$

4,271

 

$

2,980

 

 

During June 2013, CTS announced a restructuring plan to simplify CTS’ global footprint by consolidating manufacturing facilities into existing locations (“June 2013 Plan”).  The June 2013 Plan includes the consolidation of operations from the U.K. manufacturing facility into the Czech Republic facility, the Carol Stream, Illinois manufacturing facility into the Juarez, Mexico facility and to discontinue manufacturing at its Singapore facility.   Certain Corporate functions were consolidated or eliminated as a result of the June 2013 Plan.

 

These restructuring actions will result in the elimination of approximately 350 positions. The above actions are expected to be completed in 2015.

 

During the fourth quarter of 2014, CTS management revised the June 2013 Plan.  The amendment added an additional $4,000,000 in planned costs.  Future settlement of the U.K. pension plan is estimated to account for $2,000,000 of the added cost.  The remaining $2,000,000 in restructuring and impairment charges are for severance costs and will result in the elimination of approximately 130 additional positions. The positions eliminated will be spread globally throughout CTS businesses.  The above actions are expected to be substantially complete in 2015.

 

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The following table displays the planned restructuring and restructuring-related charges associated with the realignment, as well as a summary of the actual costs incurred through September 27, 2015:

 

 

 

 

 

 

 

 

 

 

 

Planned

 

Actual costs
incurred through

 

($ in thousands)                                                           June 2013 Plan

    

Costs

    

September 27, 2015

 

Inventory write-down

 

$

800

 

$

1,143

 

Equipment relocation

 

 

900

 

 

1,792

 

Other charges

 

 

100

 

 

652

 

Restructuring-related charges, included in cost of goods sold

 

$

1,800

 

$

3,587

 

 

 

 

 

 

 

 

 

Workforce reduction

 

$

10,150

 

$

9,216

 

Asset impairment charge

 

 

3,000

 

 

4,139

 

Other charges, including pension termination costs

 

 

7,650

 

 

1,784

 

Restructuring and impairment charges

 

$

20,800

 

$

15,139

 

 

 

 

 

 

 

 

 

Total restructuring and restructuring-related charges

 

$

22,600

 

$

18,726

 

 

Under the June 2013 Plan, total restructuring, impairment and restructuring related charges incurred were as follows:

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

September 27,

 

September 28,

 

($ in thousands)

    

2015

    

2014

 

Restructuring related charges

 

$

 —

 

$

494

 

Restructuring and impairment charges

 

 

348

 

 

995

 

Total restructuring, impairment, and restructuring related charges

 

$

348

 

$

1,489

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

September 27,

 

September 28,

 

($ in thousands)

    

2015

    

2014

 

Restructuring related charges

 

$

75

 

$

1,404

 

Restructuring and impairment charges

 

 

1,327

 

 

1,826

 

Total restructuring, impairment, and restructuring related charges

 

$

1,402

 

$

3,230

 

 

The following table displays the restructuring reserve activity for the period ended September 27, 2015:

 

 

 

 

 

 

 ($ in thousands)                                    June 2013 Plan and April 2014 Plan

    

 

 

Restructuring liability at January 1, 2015

 

$

3,904

 

Restructuring and restructuring-related charges, excluding asset impairments and write-offs

 

 

5,791

 

Cost paid

 

 

(7,351)

 

Restructuring liability at September 27, 2015

 

$

2,344

 

 

 

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NOTE 8 – Accrued Liabilities

 

The components of accrued liabilities are as follows:

 

 

 

 

 

 

 

 

 

 

 

As of

 

 

 

September 27,

 

December 31,

 

($ in thousands)

    

2015

    

2014

 

Accrued product related costs

 

$

4,208

 

$

5,216

 

Accrued income taxes

 

 

5,161

 

 

3,346

 

Accrued property and other taxes

 

 

2,607

 

 

2,547

 

Dividends payable

 

 

1,307

 

 

1,336

 

Remediation and monitoring reserves

 

 

19,085

 

 

3,918

 

Other accrued liabilities

 

 

10,663

 

 

8,993

 

Total accrued liabilities

 

$

43,031

 

$

25,356

 

 

Remediation and monitoring reserves of $19,085,000 as of September 27, 2015 include a non-recurring environmental charge for the third quarter of 2015 of $14,541,000 which represents the estimated liability for one of the CTS’ sites.  See further discussion in Note 9.  Other remediation and monitoring charges incurred in the normal course of business are recorded in selling, general, and administrative expenses.

 

 

NOTE 9 – Contingencies

Certain processes in the manufacture of CTS’ current and past products create hazardous waste by-products as currently defined by federal and state laws and regulations. CTS has been notified by the U.S. Environmental Protection Agency (“EPA”), state environmental agencies and, in some cases, generator groups, that it is or may be a potentially responsible party regarding hazardous substances at several sites either owned, not owned, or operated by CTS. Some sites are Superfund sites such as in Asheville, North Carolina and Mountain View, California.  Estimating our degree of responsibility for remediation is inherently difficult.  CTS recognizes and accrues for an estimated remediation liability when it determines that such liability is probable and estimable. 

 

CTS accrues for losses associated with environmental remediation obligations when such losses are probable and reasonably estimable. Accruals for estimated losses from environmental remediation obligations generally are recognized no later than completion of the remedial feasibility study. Accruals are adjusted as further information develops or circumstances change. Costs of future expenditures for environmental remediation obligations are not discounted to their present value. In addition to amounts accrued, remediation expenses are also paid as incurred.  Recoveries of environmental remediation costs from other parties are recorded as assets when their receipt is considered probable.

As a result of this practice, to provide for certain remedial work expected to commence in 2016 relating to the Asheville site, CTS increased its accrual for remediation and monitoring reserves, as set forth in Note 8.  This increased amount reflects the probable costs to remediate environmental conditions at the site for which costs can be reasonably estimated.  Based on the current projection modeling of the most probable outcome, CTS recorded an additional non-recurring environmental charge of $14,541,000 in the third quarter of 2015.

The charge recorded includes both the interim remediation proposed by CTS and accepted by the EPA and anticipated future remediation costs and monitoring for a final site-wide remediation.  As assessments and cleanups proceed, the reserve may be adjusted based on progress made in determining the extent of remedial actions and related costs.  In the opinion of management, based upon presently available information relating to all such matters, adequate provision for probable and estimable costs has been made.  CTS cannot provide assurance that its ultimate environmental investigation and cleanup costs and liabilities will not exceed the amount of its current reserve.

 

CTS manufactures accelerator pedals for a number of automobile manufacturers, including subsidiaries of Toyota Motor Corporation (“Toyota”). In January 2010, Toyota initiated a recall of a substantial number of vehicles in North America containing pedals manufactured by CTS. The recall expanded to include vehicles in Europe and Asia.  The pedal recall and associated events have led to CTS being named as a co-defendant with Toyota in certain litigation in the United States and Canada.  CTS is not aware of any legal actions filed in Asia or Europe against CTS at this time.  In February

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2010, CTS entered into an agreement with Toyota whereby Toyota agreed that it will indemnify, defend, and hold CTS harmless from, and the parties will cooperate in the defense of, third-party civil claims and actions that are filed or asserted in the United States or Canada and that arise from or relate to alleged incidents of unintended acceleration of Toyota and Lexus vehicles. The limited exceptions to indemnification restrict CTS’ share of any liability to amounts collectable from its insurers.

 

Certain other claims are pending against CTS with respect to matters arising out of the ordinary conduct of CTS’ business. In the opinion of management, based upon past experience and presently available information, either adequate provision for anticipated costs has been reserved or the ultimate anticipated costs will not materially affect CTS’ consolidated financial position, results of operations, or cash flows. 

 

NOTE 10 - Debt

 

Long-term debt was comprised of the following:

 

 

 

 

 

 

 

 

 

 

 

 

As of

 

 

 

September 27,

 

December 31,

 

($ in thousands)

    

2015

    

2014

 

Revolving credit facility due in 2020

 

$

90,500

 

$

75,000

 

Weighted average interest rate

 

 

1.5

%  

 

1.5

%

Amount available

 

$

107,185

 

$

122,535

 

Total credit facility

 

$

200,000

 

$

200,000

 

Standby letters of credit

 

$

2,315

 

$

2,465

 

Commitment fee percentage per annum

 

 

0.30

 

 

0.25

 

 

On August 10, 2015, CTS entered into a new five-year credit agreement with a group of banks (“Revolving Credit Facility”) in order to support CTS’ working capital needs and other general corporate purposes.  The Revolving Credit Facility provides for a credit line of $200,000,000, which may be increased by $100,000,000 at the request of CTS, subject to an Administrative Agent’s approval.  This Revolving Credit Facility replaces the prior unsecured credit facility.  Borrowings under the previous credit agreement were refinanced under the new Revolving Credit Facility and the previous credit agreement was terminated on August 10, 2015.

 

The revolving credit facility provided under the new credit agreement includes a swing line sublimit of $15,000,000 and a letter of credit sublimit of $10,000,000.  Borrowings under the credit facility bear interest, at CTS’ option, at the base rate plus the applicable margin for base rate loans or LIBOR plus the applicable margin for LIBOR loans.  CTS also pays a quarterly commitment fee on the unused portion of the revolving credit facility.  The commitment fee may range from 0.20% to 0.40% based on the CTS’ total leverage ratio. 

 

The revolving credit facility requires, among other things, that CTS 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 was in compliance with all debt covenants at September 27, 2015.  The revolving credit facility requires CTS to 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' 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' subsidiaries and affiliates; and make stock repurchases and dividend payments.  Interest rates on the revolving credit facility fluctuate based upon the London Interbank Offered Rate and the Company’s quarterly total leverage ratio.  CTS pays a commitment fee on the undrawn portion of the revolving credit facility.  The commitment fee varies based on the quarterly leverage ratio. 

 

CTS has debt issuance costs related to its long-term debt that are being amortized using the straight-line method over the life of the debt. Amortization expense was approximately $61,000 for the three months ended September 27, 2015 and approximately $165,000 for the nine months ended September, 27, 2015 and was recognized as interest expense.

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CTS uses 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 $50,000,000 of long-term debt for the periods January 2013 to January 2017. In the third quarter of 2012, CTS entered into four separate interest rate swap agreements to fix interest rates on $25,000,000 of long-term debt for the periods January 2013 to January 2017. 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 (loss) income. The estimated net amount of the existing gains or losses that are reported in accumulated other comprehensive (loss) income that is expected to be reclassified into earnings within the next twelve months is approximately $556,000.  Interest rate swaps activity recorded in Other comprehensive (loss) earnings before tax includes the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

($ in thousands)

    

September 27, 2015

    

September 28, 2014

    

September 27, 2015

    

September 28, 2014

 

Unrealized (loss) gain

 

$

(219)

 

$

124

 

$

(628)

 

$

(288)

 

Realized gain reclassified to interest expense

 

$

192

 

$

123

 

$

574

 

$

363

 

 

Interest rate swaps included on the balance sheets are comprised of the following:

 

 

 

 

 

 

 

 

 

 

 

As of

 

 

 

September 27,

 

December 31,

 

($ in thousands)

    

2015

    

2014

 

Accrued liabilities

 

$

892

 

$

640

 

Other long-term obligations

 

$

181

 

$

380

 

 

 

NOTE 11 – Other Comprehensive (Loss) Earnings

 

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

 

·

Unrealized gains (losses) on hedges relate to interest rate swaps to convert the line of credit’s variable rate of interest into a fixed rate. These hedges are designated as cash flow hedges, and CTS has deferred income statement recognition of gains and losses until the hedged transaction occurs.  Amounts reclassified to income from AOCI for hedges are included in interest expense.  Further information related to CTS’ interest rate swaps is included in NOTE 10 – Debt and NOTE 14 – Fair Value Measurements.

 

·

Unrealized gains (losses) on pension obligations are deferred from income statement recognition until the gains or losses are realized.  Amounts reclassified to income from AOCI are included in net periodic pension expense.  Further information related to CTS’ pension obligations is included in NOTE 5 – Retirement Plans.

 

·

Cumulative translation adjustment relates to our non-U.S. subsidiary companies that have designated a functional currency other than the U.S. dollar. CTS is required to translate the subsidiary functional currency financial statements to dollars using a combination of historical, period-end, and average foreign exchange rates. This combination of rates creates the foreign currency translation adjustment component of other comprehensive (loss) income.  Changes in exchange rates between the functional currency and the currency in which a transaction is denominated is a foreign exchange transaction gain or loss. Transaction loss for the nine month period ended September 27, 2015 was $4,640,000 which is included in Other in the Condensed Consolidated Statement of (Loss) Earnings.

 

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The components of other comprehensive (loss) income for the three months ended September 27, 2015 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

    

Gain (Loss)

    

 

 

 

 

As of

 

Gain (Loss)

 

reclassified

 

As of

 

 

 

June 28, 

 

Recognized

 

from AOCI

 

September 27,

 

($ in thousands)

  

2015

  

in OCI

  

to income

  

2015

 

Changes in fair market value of hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

$

(1,047)

 

$

(219)

 

$

192

 

$

(1,074)

 

Income tax (benefit)

 

 

(394)

 

 

(82)

 

 

72

 

 

(404)

 

Net

 

 

(653)

 

 

(137)

 

 

120

 

 

(670)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in unrealized pension cost:

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

 

(166,161)

 

 

2,039

 

 

 —

 

 

(164,122)

 

Income tax (benefit)

 

 

(63,957)

 

 

703

 

 

 —

 

 

(63,254)

 

Net

 

 

(102,204)

 

 

1,336

 

 

 —

 

 

(100,868)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative translation adjustment:

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

 

572

 

 

(1,056)

 

 

 —

 

 

(484)

 

Income tax (benefit)

 

 

(385)

 

 

148

 

 

 —

 

 

(237)

 

Net

 

 

957

 

 

(1,204)

 

 

 —

 

 

(247)

 

Total accumulated other comprehensive (loss) income

 

$

(101,900)

 

$

(5)

 

$

120

 

$

(101,785)

 

 

The components of other comprehensive (loss) income for the three months ended September 28, 2014 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

    

Gain (Loss)

    

 

 

 

 

As of

 

Gain (Loss)

 

reclassified

 

As of

 

 

 

June 29, 

 

Recognized

 

from AOCI

 

September 28,

 

($ in thousands)

  

2014

  

in OCI

  

to income

  

2014

 

Changes in fair market value of hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

$

(1,170)

 

$

124

 

$

123

 

$

(923)

 

Income tax (benefit)

 

 

(447)

 

 

47

 

 

47

 

 

(353)

 

Net

 

 

(723)

 

 

77

 

 

76

 

 

(570)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in unrealized pension cost:

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

 

(135,180)

 

 

1,575

 

 

 —

 

 

(133,605)

 

Income tax (benefit)

 

 

(53,896)

 

 

539

 

 

 —

 

 

(53,357)

 

Net

 

 

(81,284)

 

 

1,036

 

 

 —

 

 

(80,248)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative translation adjustment:

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

 

1,470

 

 

(590)

 

 

 —

 

 

880

 

Income tax (benefit)

 

 

(1,155)

 

 

391

 

 

 —

 

 

(764)

 

Net

 

 

2,625

 

 

(981)

 

 

 —

 

 

1,644

 

Total accumulated other comprehensive (loss) income

 

$

(79,382)

 

$

132

 

$

76

 

$

(79,174)

 

 

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The components of other comprehensive (loss) income for the nine months ended September 27, 2015 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

    

Gain (Loss)

    

 

 

 

 

As of

 

Gain (Loss)

 

reclassified

 

As of

 

 

  

December 31,

 

Recognized

 

from AOCI

 

September 27,

 

($ in thousands)

 

2014

 

in OCI

 

to income

 

2015

 

Changes in fair market value of hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

$

(1,020)

 

$

(628)

 

$

574

 

$

(1,074)

 

Income tax (benefit)

 

 

(384)

 

 

(236)

 

 

216

 

 

(404)

 

Net

 

 

(636)

 

 

(392)

 

 

358

 

 

(670)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in unrealized pension cost:

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

 

(169,291)

 

 

5,169

 

 

 —

 

 

(164,122)

 

Income tax (benefit)

 

 

(65,124)

 

 

1,870

 

 

 —

 

 

(63,254)

 

Net

 

 

(104,167)

 

 

3,299

 

 

 —

 

 

(100,868)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative translation adjustment:

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

 

245

 

 

(729)

 

 

 —

 

 

(484)

 

Income tax (benefit)

 

 

(325)

 

 

88

 

 

 —

 

 

(237)

 

Net

 

 

570

 

 

(817)

 

 

 —

 

 

(247)

 

Total accumulated other comprehensive (loss) income

 

$

(104,233)

 

$

2,090

 

$

358

 

$

(101,785)

 

 

The components of other comprehensive (loss) income for the nine months ended September 28, 2014 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

    

Gain (Loss)

    

 

 

 

 

As of

 

Gain (Loss)

 

reclassified

 

As of

 

 

  

December 31,

 

Recognized

 

from AOCI

 

September 28,

 

($ in thousands)

 

2013

 

in OCI

 

to income

 

2014

 

Changes in fair market value of hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

$

(998)

 

$

(288)

 

$

363

 

$

(923)

 

Income tax (benefit)

 

 

(402)

 

 

(90)

 

 

139

 

 

(353)

 

Net

 

 

(596)

 

 

(198)

 

 

224

 

 

(570)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in unrealized pension cost:

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

 

(138,133)

 

 

4,356

 

 

172

 

 

(133,605)

 

Income tax (benefit)

 

 

(55,028)

 

 

1,605

 

 

66

 

 

(53,357)

 

Net

 

 

(83,105)

 

 

2,751

 

 

106

 

 

(80,248)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative translation adjustment:

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

 

949

 

 

(69)

 

 

 —

 

 

880

 

Income tax (benefit)

 

 

(855)

 

 

91

 

 

 —

 

 

(764)

 

Net

 

 

1,804

 

 

(160)

 

 

 —

 

 

1,644

 

Total accumulated other comprehensive (loss) income

 

$

(81,897)

 

$

2,393

 

$

330

 

$

(79,174)

 

 

 

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NOTE 12 – Shareholders’ Equity

Share count and par value data related to shareholders’ equity are as follows:

 

 

 

 

 

 

 

 

 

 

 

As of

 

 

    

September 27,

    

December 31,

 

 

 

2015

 

2014

 

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

 

 

56,241,819

 

 

56,101,700

 

Shares outstanding

 

 

32,680,297

 

 

33,392,060

 

Treasury stock

 

 

 

 

 

 

 

Shares held

 

 

23,561,522

 

 

22,709,640

 

 

CTS uses the cost method to account for its common stock purchases. During the nine month period ended September 27, 2015, CTS purchased 851,882 shares of common stock for an aggregate of $15,623,000 under a board-authorized share repurchase plan. For the nine month period ended September 28, 2014, CTS purchased 288,382 shares of common stock for an aggregate of $5,084,000. Approximately 9,742,922 shares are available for future issuances.

A roll forward of common shares outstanding is as follows:

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

September 27, 2015

    

September 28, 2014

  

 

 

 

 

 

 

 

 

Balance at the beginning of the year

 

 

33,392,060

 

 

33,558,864

 

Repurchases

 

 

(851,882)

 

 

(288,382)

 

Shares issued upon exercise of stock options

 

 

5,200

 

 

101,350

 

Restricted share issuances

 

 

134,919

 

 

172,891

 

Balance at the end of the period

 

 

32,680,297

 

 

33,544,723

 

 

 

 

NOTE 13 - Equity-Based Compensation

 

At September 27, 2015, CTS had five equity-based compensation plans:  the 2001 Stock Option Plan (“2001 Plan”), the Nonemployee 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”), and the 2014 Performance & Incentive Plan (“2014 Plan”).  Future grants can only be made under the 2014 Plan.

 

The 2009 Plan, and previously the 2001 Plan and 2004 Plan, provides for grants of incentive stock options or nonqualified stock options to officers, key employees, and nonemployee members of CTS’ Board of Directors.  In addition, the 2014 Plan, the 2009 Plan and the 2004 Plan allow for grants of stock appreciation rights, restricted stock, RSUs, performance shares, performance units, and other stock awards.

 

The following table summarizes the compensation expense included in Selling, general and administrative expenses in the Consolidated Statements of Earnings related to equity-based compensation plans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

($ in thousands)

    

September 27, 2015

    

September 28, 2014

    

September 27, 2015

    

September 28, 2014

 

Service-Based RSUs

 

$

295

 

$

397

 

$

1,244

 

$

1,080

 

Performance-Based RSUs

 

 

(62)

 

 

146

 

 

709

 

 

419

 

Market-Based RSUs

 

 

60

 

 

117

 

 

702

 

 

340

 

Total

 

$

293

 

$

660

 

$

2,655

 

$

1,839

 

Income tax benefit

 

$

110

 

$

252

 

$

998

 

$

703

 

 

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The following table summarizes the unrecognized compensation expense related to non-vested RSUs by type and the weighted-average period in which the expense is to be recognized:

 

 

 

 

 

 

 

 

 

 

 

 

Unrecognized

 

 

 

 

 

 

compensation

 

Weighted-

 

 

 

expense at

 

average

 

($ in thousands)

    

September 27, 2015

    

period

 

Service-Based RSUs

 

$

1,548

 

1.2

years

 

Performance-Based RSUs

 

 

1,118

 

1.2

years

 

Market-Based RSUs

 

 

614

 

1.0

years

 

Total

 

$

3,280

 

 

 

 

 

CTS recognizes expense on a straight-line basis over the requisite service period for each separately vesting portion of the award as if the award was, in substance, multiple awards.

 

The following table summarizes the status of these plans as of September 27, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

    

2014 Plan

    

2009 Plan

    

2004 Plan

    

2001 Plan

 

Awards originally available

 

1,500,000

 

3,400,000

 

6,500,000

 

2,000,000

 

Stock options outstanding

 

 —

 

 —

 

 —

 

 —

 

RSUs outstanding

 

78,947

 

240,091

 

131,857

 

 —

 

Options exercisable

 

 —

 

 —

 

 —

 

 —

 

Awards available for grant

 

1,349,075

 

1,627,069

 

106,423

 

 —

 

Stock Options

 

Stock options are exercisable in cumulative annual installments over a maximum 10-year period, commencing at least one year from the date of grant.   Stock options are generally granted with an exercise price equal to the market price of CTS’ stock on the date of grant.  The stock options generally vest over four years and have a 10-year contractual life.  The awards generally contain provisions to either accelerate vesting or allow vesting to continue on schedule upon retirement if certain service and age requirements are met.   The awards also provide for accelerated vesting if there is a change in control event.

 

CTS estimated the fair value of the stock option on the grant date using the Black-Scholes option-pricing model and assumptions for expected price volatility, option term, risk-free interest rate, and dividend yield.  Expected price volatilities were based on historical volatilities of CTS’ common stock.  The expected option term is derived from historical data on exercise behavior. The dividend yield was based on historical dividend payments.  The risk-free rate for periods within the contractual life of the option was based on the U.S. Treasury yield curve in effect at the time of grant. 

 

A summary of the status of stock options as of September 27, 2015, and changes during the period then ended, is presented below:

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

September 27, 2015

 

 

 

 

 

Weighted

 

 

 

 

 

Average

 

 

 

 

 

 Exercise

 

 

    

Options

    

Price

 

Outstanding at beginning of year

 

5,200

 

$

12.35

 

Exercised

 

(5,200)

 

$

12.35

 

Outstanding at end of period

 

 —

 

$

 —

 

Exercisable at end of period

 

 —

 

$

 —

 

 

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Performance-Based Stock Options

 

During the second quarter of 2015, the Compensation Committee of the Board of Directors of the Company (the “Committee”) granted a total of 430,000 performance-based stock option awards (“Performance-Based Option Awards”) for certain CTS employees under the 2014 Plan.  The Performance-Based Option Awards, which have a grant date of May 26, 2015 and a grant date fair value of $18.37, are subject to the terms of the 2014 Plan.  The Performance-Based Option Awards generally have a term of five years and generally will become exercisable (provided the optionee remains employed by CTS or an affiliate) upon CTS’ attainment of at least $600,000,000 in revenues during any of CTS’ four-fiscal-quarter trailing periods (as determined by the Committee) during the term.  CTS has not recognized any expense on these Performance-Based Option Awards for the nine months ended September 27, 2015 since the revenue target is not likely to be attained, based upon the CTS’ earnings history and forecast, at this time.

Service-Based Restricted Stock Units

 

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 vest one month after granted.  Upon vesting, the non-employee directors elect to either receive the stock associated with the RSU immediately, or defer receipt of the stock until their retirement from the Board of Directors.  The fair value of the RSUs is equivalent to the trading value of CTS’ common stock on the grant date.

 

A summary of the status of RSUs is presented below:

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

September 27, 2015

 

 

 

 

 

Weighted

 

 

 

 

 

Average

 

 

 

 

 

Grant Date

 

 

 

Units

    

Fair Value

 

Outstanding at January 1, 2015

 

517,965

 

$

12.06

 

Granted

 

125,525

 

 

17.10

 

Converted

 

(165,801)

 

 

12.41

 

Forfeited

 

(26,794)

 

 

17.20

 

Outstanding at September 27, 2015

 

450,895

 

$

13.03

 

 

Performance-Based Restricted Stock Units

 

CTS grants performance-based restricted stock unit awards for certain executives. Vesting may occur in the range from zero percent to 200% of the target amount.   Vesting is subject to certification of the fiscal results of the year prior to the target year by CTS’ independent auditors. Vesting is dependent upon CTS’ achievement of either sales growth targets or cash flow targets as noted in the table below.

Performance-Based RSUs include the following components:

 

 

 

 

 

 

 

 

 

 

 

 

 

Target

 

Vesting

 

Vesting

 

Units

 

Grant Date

    

Units

    

Year

    

Dependency

    

Awarded

 

February 11, 2013

 

47,164

 

2016

 

Sales growth

 

 —

 

February 11, 2013

 

40,425

 

2016

 

Cash flow

 

 —

 

February 14, 2014

 

15,071

 

2017

 

Sales growth

 

 —

 

February 14, 2014

 

12,918

 

2017

 

Cash flow

 

 —

 

February 13, 2015

 

24,150

 

2018

 

Sales growth

 

 —

 

February 13, 2015

 

20,700

 

2018

 

Cash flow

 

 —

 

 

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Market-Based Restricted Stock Units

 

CTS grants market-based restricted stock unit awards for certain executives and key employees. Vesting may occur in the range from zero percent to 200% of the target amount.   Vesting is subject to certification of the fiscal results of the year prior to the target year by CTS’ independent auditors.  The vesting rate will be determined using a matrix based on a percentile ranking of CTS total stockholder return with peer group total shareholder return over a three-year period. Vesting is tied exclusively to CTS total stockholder return relative to peer group companies’ total stockholder return rates. 

 

Market-Based RSUs include the following components:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of

 

 

 

 

 

Target

 

Vesting

 

Peer Group

 

Units

 

Grant Date

    

Units

    

Year

    

Companies

    

Awarded

 

February 11, 2013

 

40,425

 

2016

 

20

 

 —

 

February 11, 2013

 

48,750

 

2016

 

20

 

 —

 

February 14, 2014

 

15,071

 

2017

 

15

 

 —

 

February 13, 2015

 

24,150

 

2018

 

23

 

 —

 

 

 

NOTE 14 — Fair Value Measurements

 

CTS uses interest rate swaps to convert the line of credit’s variable rate of interest into a fixed rate. The interest rate swaps are measured at fair value on a recurring basis.  The table below summarizes CTS’ financial liability that was measured at fair value as of three month period September 27, 2015 and the loss recorded during the nine month period ended September 27, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quoted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Prices

 

 

 

 

 

 

 

 

 

 

 

 

 

in Active

 

Significant

 

 

 

 

 

 

 

Carrying

 

Markets for

 

Other

 

Significant

 

Loss for

 

 

 

Value at

 

Identical

 

Observable

 

Unobservable

 

Nine Months Ended

 

 

 

September 27,

 

Instruments

 

Inputs

 

Inputs

 

September 27,

 

($ in thousands)

    

2015

    

(Level 1)

    

(Level 2)

    

(Level 3)

    

2015

 

Interest rate swap – cash flow hedge

 

$

1,074

 

$

 —

 

$

1,074

 

$

 —

 

$

574

 

 

The table below summarizes the financial liability that was measured at fair value on a recurring basis as of December 31, 2014 and the loss recorded during the year ended December 31, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quoted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Prices

 

 

 

 

 

 

 

 

 

 

 

 

 

in Active

 

Significant

 

 

 

 

 

 

 

Carrying

 

Markets for

 

Other

 

Significant

 

Loss for

 

 

 

Value at

 

Identical

 

Observable

 

Unobservable

 

Year Ended

 

 

 

December 31,

 

Instruments

 

Inputs

 

Inputs

 

December 31,

 

($ in thousands)

    

2014

    

(Level 1)

    

(Level 2)

    

(Level 3)

    

2014

 

Interest rate swap – cash flow hedge

 

$

1,020

 

$

 —

 

$

1,020

 

$

 —

 

$

488

 

 

The fair value of CTS’ interest rate swaps were measured using a market approach which uses current industry information. There is a readily determinable market and these swaps are classified within level 2 of the fair value hierarchy.

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The table below provides a reconciliation of the recurring financial liability related to interest rate swaps:

 

 

 

 

 

 

 

 

Interest

 

($ in thousands)

    

Rate Swaps

 

Balance at January 1, 2014

 

$

(998)

 

Total gains (losses) for the period:

 

 

 

 

Included in earnings

 

 

488

 

Included in other comprehensive earnings

 

 

(510)

 

Balance at December 31, 2014

 

$

(1,020)

 

Total gains (losses) for the period:

 

 

 

 

Included in earnings

 

 

574

 

Included in other comprehensive earnings

 

 

(628)

 

Balance at September 27, 2015

 

$

(1,074)

 

 

CTS’ long-term debt consists of a revolving credit facility which is recorded at its carrying value. There is a readily determinable market for CTS’ revolving credit debt and it is classified within Level 2 of the fair value hierarchy as the market is not deemed to be active. The fair value of long-term debt was measured using a market approach which uses current industry information and approximates carrying value.

NOTE 15 — Income Taxes

The effective tax rates for 2015 and 2014 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

    

September 27, 2015

 

September 28, 2014

    

September 27, 2015

 

September 28, 2014

 

Effective tax rate

 

31.2

%  

31.9

%  

(59.2)

%  

36.1

%

 

The 2015 effective tax rate for the three months ended September 27, 2015 reflects the change in the mix of earnings  by jurisdiction as well as the impact of true ups related to the filing of 2014 tax returns.  For the nine months ended September 27, 2015, the effect of the uncertain tax benefits increased the effective tax rate by 42.9 percentage points and the effect of amending the tax returns for 2006 to 2013 decreased the effective rate by 122.1 percentage points

 

The 2014 effective tax rate reflected higher profits, primarily from a change in the mix of earnings by jurisdiction, and the effect of tax adjustments which decreased the effective rate by 3.3 percentage points in the third quarter of 2014 and increased the effective rate by 0.4 percentage points in the first nine months of 2014.

 

CTS’ continuing practice is to recognize interest and/or penalties related to income tax matters as income tax expense. For the three and nine months ended September 27, 2015 and September 28, 2014, CTS included $136,000 and $957,000 of interest or penalties in income tax expense.  CTS did not accrue any interest or penalties into income tax expense for the three and nine months ended September 28, 2014.

NOTE 16 — Recent Accounting Pronouncements

ASU 2015-16. “Business Combinations (Topic 805):  Simplifying the Accounting for Measurement-Period Adjustments”

In September 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-16, "Business Combinations (Topic 805) Simplifying the Accounting for Measurement-Period Adjustments of Inventory". The amendments clarify that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined.  The acquirer needs to record, in the same period’s financial statements, the effect of changes in depreciation, amortization, or other income as a result of the change to the provisional amounts as if the accounting had been completed at the acquisition date.  This amendment requires an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current period earnings by line item as if the provisional adjustments had

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been recognized as of the acquisition date.  This ASU is effective for fiscal years beginning after December 15, 2015 including interim periods within those fiscal years.  These provisions are not anticipated to have a material impact on our financial statements. 

ASU 2015-11. “Inventory (Topic 330):  Simplifying the Measurement of Inventory”

In July 2015, the FASB issued ASU 2015-11, "Inventory (Topic 330) Simplifying the Measurement of Inventory". The amendments clarify that an entity should measure inventory within the scope of this update at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Substantial and unusual losses that result from subsequent measurement of inventory should be disclosed in the financial statements. This ASU is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The amendments are to be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. These provisions are not anticipated to have a material impact on our financial statements. 

ASU 2015-08, “Business Combinations (Topic 805): Pushdown Accounting – amendments to SEC Paragraphs Pursuant to Staff Accounting Bulletin No. 115

In May 2015, the FASB issued ASU 2015-08, “Business Combinations (Topic 805): Pushdown Accounting – amendments to SEC Paragraphs Pursuant to Staff Accounting Bulletin No. 115”.  This ASU amends various SEC paragraphs included in the FASB’s ASC to reflect the issuance of Staff Accounting Bulletin (“SAB”) No. 115. SAB 115 rescinds portions of the interpretive guidance included in the SEC’s Staff Accounting Bulletin series and brings existing guidance into conformity with ASU 2014-17, Pushdown Accounting, which provides an acquired entity with an option to apply pushdown accounting in its separate financial statements upon occurrence of an event in which an acquirer obtains control of the acquired entity.

An acquired entity is not only able to apply this amendment to change in control events occurring after the effective date, but is also permitted to apply pushdown accounting as a change in accounting principle to its most recent change in control event that had occurred before the effective date of this new amendment. The decision to apply pushdown accounting to a specific change in control event, if elected by an acquiree, is irrevocable.

The amendment also amends the reporting for a bargain purchase option. The acquired entity would not report a gain in its income statement as a result of a bargain purchase. Rather, the acquiree shall recognize the bargain purchase gain recognized by the acquirer as an adjustment to additional paid-in capital.

This amendment is effective immediately.  This amendment does not have a material impact on our financial statements.

ASU 2015-07, “Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)

In May 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (“ASU”) 2015-07, “Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)”.  This ASU permits a reporting entity, as a practical expedient, to measure the fair value of certain investments using the net asset value per share of the investment.  This amendment applies to reporting entities that elect to measure the fair value of an investment within the scope of paragraphs 820-10-15-4 through 15-5 using the net asset value per share (or its equivalent) practical expedient in paragraph 820-10-35-59.  This amendment removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient.  It also removes the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient.  Rather, those disclosures are limited to investments for which the entity has elected to measure the fair value using that practical expedient.

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The amendments will be effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015.  Early adoption is permitted. An entity should apply the amendments retrospectively to all periods presented.  The retrospective approach requires that an investment for which fair value is measured using the net asset value per share practical expedient be removed from the fair value hierarchy in all periods presented in an entity’s financial statements. These provisions are not anticipated to have a material impact on our financial statements.

ASU 2015-04, “Compensation – Retirement Benefits (Topic 715): Practical Expedient for the Measurement Date of an Employer’s Benefit Obligation and Plan Assets

In April 2015, FASB issued ASU 2015-04, “Compensation –Retirement Benefits (Topic 715): Practical Expedient for the Measurement Date of an Employer’s Defined Benefit Obligation and Plan Assets”.  The amended guidance permits companies to use a practical expedient which allows an employer to measure defined benefit plan assets and obligations as of the month-end date that is closest to the employer’s fiscal year-end (alternative measurement date).  An employer using this policy election must apply it consistently to all of its defined benefit plans. 

In accordance with this ASU, an employer using the practical expedient is required to adjust the funded status for contributions and other significant events (as defined in paragraph 715-30-35-66) occurring between the alternative measurement date and its fiscal year-end.  Paragraph 715-30-35-66 defines a significant event as: a plan amendment, settlement, or curtailment that calls for remeasurement.  This ASU also allows employers the use of the practical expedient in interim remeasurements of significant events.

The employer would be required to disclose the election to use the practical expedient and the measurement date of the plan assets and obligations.  Early application of this ASU is permitted.  Entities must apply the guidance prospectively. 

The guidance is effective for financial statements for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years.  The changes would be effective for employee benefit plans for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. These provisions are not anticipated to have a material impact on our financial statements.

ASU 2015-05, “Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40) Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement

In April 2015, the FASB issued ASU 2015-05, “Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40) Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement”.  The amendments in this ASU provide guidance to customers about a customer’s accounting for fees paid in a cloud computing arrangement.  This ASU clarifies that if a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The guidance will not change U.S. GAAP for a customer’s accounting for service contracts.  All software licenses within the scope of Subtopic 350-40 will be accounted for consistent with other licenses of intangible assets.

The amendments will be effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015.  Early adoption is permitted. An entity can elect to adopt the amendments either prospectively to all arrangements entered into or materially modified after the effective date or retrospectively. For prospective transition, the disclosure requirements at transition include the nature of and reason for the change in accounting principle, the transition method, and a qualitative description of the financial statement line items affected by the change. For retrospective transition, the disclosure requirements at transition include the requirements for prospective transition and quantitative information about the effects of the accounting change. These provisions are not anticipated to have a material impact on our financial statements.

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ASU 2015-03, “Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs

In April 2015, the FASB issued ASU 2015-03, “Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs”.  The amended guidance require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. The amendments in this ASU are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years.

Early adoption of this ASU is permitted for financial statements that have not been previously issued.  Entities must apply the new guidance on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance. Upon transition, an entity is required to comply with the applicable disclosures for a change in an accounting principle.  These provisions are not anticipated to have a material impact on our financial statements.

ASU 2014-12, “Compensation – Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period

In June 2014, the FASB issued ASU 2014-12, “Compensation — Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period”. The amended guidance requires that a performance target that affects vesting and that could be achieved after the requisite service period should be treated as a performance condition.

Current U.S. GAAP does not contain explicit guidance on whether to treat a performance target that could be achieved after the requisite service period as a performance condition that affects vesting or as a nonvesting condition that affects the grant-date fair value of an award. The amendments in this update provide explicit guidance for those awards.

The amendments are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. Entities may apply the amendments either prospectively to all awards granted or modified after the effective date, or retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. These provisions are not anticipated to have a material impact on our financial statements.

ASU 2014-09, “Revenue from Contracts with Customers

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers”. The guidance in this ASU affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (for example, insurance contracts or lease contracts). The new revenue recognition guidance more closely aligns U.S. GAAP with International Financial Reporting Standards ("IFRS"). The core principle of the guidance 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.

To achieve that core principle, an entity should apply the following steps:

Step 1:Identify the contract(s) with a customer.

Step 2:Identify the performance obligations in the contract.

Step 3:Determine the transaction price.

Step 4:Allocate the transaction price to the performance obligations in the contract.

Step 5:Recognize revenue when (or as) the entity satisfies a performance obligation.

 

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The guidance is effective for annual periods beginning on or after December 15, 2017 and interim periods within that reporting period. Early adoption is permitted provided that it is not before the original effective date of December 15, 2016. These provisions of this guidance are still being evaluated. The impact on CTS' financial statements has not yet been determined.

 

 

 

 

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”)

 

The following discussion should be read in conjunction with our unaudited Condensed Consolidated Financial Statements and notes included under Item 1, as well as our Consolidated Financial Statements and notes and related Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2014.

Overview

CTS Corporation (“CTS”, “we”, “our” or “us”) is a global manufacturer of electronic components and sensors used primarily in the automotive, communications, defense and aerospace, medical, industrial and computer markets.

Results of Operations: Third Quarter 2015 versus Third Quarter 2014

 

The following table highlights changes in significant components of the Unaudited Condensed Consolidated Statements of Earnings for the quarters ended September 27, 2015 and September 28, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

Percent of

 

Percent of

 

(Amounts in thousands, except 

 

    September 27,    

  

September 28,

  

Percent

  

Net Sales – 

  

Net Sales – 

 

percentages and per share amounts)

    

2015

    

2014

    

  Change  

    

2015

    

2014

 

Net sales

 

$

90,646

 

$

99,957

 

(9.3)

 

100.0

 

100.0

 

Cost of goods sold(1)

 

 

59,200

 

 

67,458

 

(12.2)

 

65.3

 

67.5

 

Gross margin

 

 

31,446

 

 

32,499

 

(3.2)

 

34.7

 

32.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

 

12,690

 

 

13,899

 

(8.7)

 

14.0

 

13.9

 

Research and development expenses

 

 

5,692

 

 

5,807

 

(2.0)

 

6.3

 

5.8

 

Non-recurring environmental charge

 

 

14,541

 

 

 —

 

 —

 

16.0

 

 —

 

Restructuring and impairment charges

 

 

2,373

 

 

1,570

 

51.1

 

2.6

 

1.6

 

Total operating expenses

 

 

35,296

 

 

21,276

 

65.9

 

38.9

 

21.3

 

Operating (loss) earnings

 

 

(3,850)

 

 

11,223

 

(134.3)

 

(4.2)

 

11.2

 

Other (expense) income

 

 

(3,073)

 

 

701

 

(538.4)

 

(3.4)

 

0.7

 

Earnings before income taxes

 

 

(6,923)

 

 

11,924

 

(158.1)

 

(7.6)

 

11.9

 

Income tax expense (benefit)

 

 

(2,163)

 

 

3,807

 

(156.8)

 

(2.4)

 

3.8

 

Net (loss) earnings

 

$

(4,760)

 

$

8,117

 

(158.6)

 

(5.2)

 

8.1

 

(Loss) earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted net earnings per share

 

$

(0.15)

 

$

0.24

 

 

 

 

 

 

 

 


(1)

Cost of goods sold includes restructuring related charges of $152 in 2015 and $494 in 2014.

 

Sales of $90,646,000 in the third quarter of 2015 decreased $9,311,000 or 9.3% from the third quarter of 2014. Sales to automotive markets declined $4,486,000 due to lower volumes and unfavorable foreign exchange impact.  Other sales declined $4,825,000 due to lower volume of electronic components.  Changes in foreign exchange rates caused $1,700,000 of the total sales decrease, driven by the U.S. Dollar appreciating compared to the Euro and relating mostly to sales of automotive products. 

Gross margin as a percent of sales was 34.7% in the third quarter of 2015 compared to 32.5% in the third quarter of 2014. The increase in gross margin resulted from continued efficiency gains, material and labor productivity projects and savings from restructuring projects. In addition, foreign exchange rates had a favorable impact on manufacturing costs as the U.S. Dollar appreciated against various local currencies in countries in which we have manufacturing operations.

Selling, general and administrative expenses were $12,690,000 or 14.0% of sales in the third quarter of 2015 versus $13,899,000 or 13.9% of sales in the comparable quarter of 2014. The decrease was primarily due to continued

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efficiency gains from restructuring projects implemented over the past several quarters as well as cost containment efforts.

Research and development expenses were $5,692,000 or 6.3% of sales in the third quarter of 2015 compared to $5,807,000 or 5.8% of sales in the comparable quarter of 2014. Research and development expenses are focused on expanded applications of existing products and new product development as well as current product and process enhancements. 

A non-recurring environmental charge of $14,541,000 that was recorded in the third quarter of 2015 related to a site in Asheville, North Carolina.  The charge recorded includes both the interim remediation proposed by CTS and accepted by the Environmental Protection Agency (“EPA”) and anticipated future remediation costs and monitoring for a final site-wide remediation.  As assessments and cleanups proceed, CTS may need to adjust its reserve for the Asheville site based on progress made in determining the extent of remedial actions and related costs.

Restructuring and impairment charges in the third quarter totaled $2,373,000 and consist primarily of severance, transition and shutdown costs related to the consolidation of CTS’ Canadian operation in Streetsville, Ontario into other CTS facilities. Also included in the third quarter charges are severance and restructuring costs in Singapore and China. The third quarter 2014 restructuring charges totaled $1,570,000 and consisted primarily of accruals for severance costs related to the consolidation of CTS’ Canadian operation into other CTS facilities, severance costs in China and at CTS’s corporate office as well as a lease impairment charge in the UK.

Operating loss was $3,850,000 or 4.2% of sales in the third quarter of 2015 compared to earnings of $11,223,000 or 11.2% of sales in the comparable quarter of 2014 as a result of the items discussed above. Other income and expense items are summarized in the following table:

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

    

September 27,

    

September 28,

 

($ in thousands)

 

2015

 

2014

 

Interest expense

 

$

(714)

 

$

(568)

 

Interest income

 

 

713

 

 

707

 

Other (expense) income, net

 

 

(3,072)

 

 

562

 

Total other (expense) income

 

$

(3,073)

 

$

701

 

 

Interest expense increased in the third quarter of 2015 versus the third quarter of 2014 primarily due to higher outstanding debt in 2015.  Interest income increased slightly due to higher cash balances.  The increase in other expense in the third quarter of 2015 was driven by unfavorable foreign currency losses, primarily due to the appreciation of the U.S. Dollar compared to the Chinese Renminbi, while other income in the third quarter of 2014 was driven by collection of bad debts and favorable foreign exchange impact related to the appreciation of the Chinese Renminbi which was partially offset by unfavorable foreign exchange impact related to the depreciation of the Euro.

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

    

September 27,

    

September 28,

 

 

 

2015

 

2014

 

Effective tax rate

 

31.2

%  

31.9

%

 

The effective income tax rate for the third quarter of 2015 was 31.2%, which reflects the change in the mix of earnings  by jurisdiction as well as the impact of true ups related to the filing of 2014 tax returns.  In the third quarter of 2014, the effective tax rate was 31.9%, which reflected higher profits, primarily from a change in the mix of earnings by jurisdiction and the effect of tax adjustments which decreased the effective rate by 3.3%. 

 

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Results of Operations: Nine months ended September 27, 2015 versus nine months ended September 28, 2014

The following table highlights changes in significant components of the Unaudited Condensed Consolidated Statements of Earnings for the nine month periods ended September 27, 2015 and September 28, 2014:

(Amounts in thousands, except percentages and per share amounts):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended

 

 

 

Percent of

 

Percent of

 

(Amounts in thousands, except 

 

September 27,

  

September 28,

  

Percent

  

Net Sales –

  

Net Sales –

 

percentages and per share amounts)

    

2015

    

2014

    

Change

    

2015

    

2014

 

Net sales

 

$

289,028

 

$

303,643

 

(4.8)

 

100.0

 

100.0

 

Cost of goods sold(1)

 

 

192,073

 

 

206,706

 

(7.1)

 

66.5

 

68.1

 

Gross margin

 

 

96,955

 

 

96,937

 

0.0

 

33.5

 

31.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling and general and administrative expenses

 

 

43,625

 

 

43,353

 

0.6

 

15.1

 

14.3

 

Research and development expenses

 

 

16,378

 

 

16,765

 

(2.3)

 

5.7

 

5.5

 

Non-recurring environmental charge

 

 

14,541

 

 

 —

 

 —

 

5.0

 

 —

 

Restructuring and impairment charges

 

 

5,229

 

 

4,806

 

8.8

 

1.8

 

1.6

 

Total operating expenses

 

 

79,773

 

 

64,924

 

22.9

 

27.6

 

21.4

 

Operating earnings

 

 

17,182

 

 

32,013

 

(46.3)

 

5.9

 

10.5

 

Other expense

 

 

(4,242)

 

 

(1,422)

 

198.3

 

(1.4)

 

(0.5)

 

Earnings before income taxes

 

 

12,940

 

 

30,591

 

(57.7)

 

4.5

 

10.1

 

Income tax expense (benefit)

 

 

(7,667)

 

 

11,033

 

(169.5)

 

(2.6)

 

3.6

 

Net earnings

 

$

20,607

 

$

19,558

 

5.4

 

7.1

 

6.4

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted net earnings per share

 

$

0.61

 

$

0.57

 

 

 

 

 

 

 

 


(1) Cost of goods sold includes restructuring related costs of $444 in 2015 and $1,404 in 2014.

Sales of $289,028,000 in the first nine months of 2015 decreased $14,615,000 or 4.8% from the comparable period of 2014.  Sales to automotive markets decreased $11,008,000 due to lower volumes and unfavorable foreign exchange impact.  Other sales declined $3,607,000 due to lower volumes of electronic components.    Changes in foreign exchange rates caused $6,200,000 of the total sales decrease, driven by the U.S Dollar appreciating compared to the Euro and relating mostly to sales of automotive products.

Gross margin as a percent of sales was 33.5% in the first nine months of 2015 versus 31.9% in the comparable period of 2014.  The increase in gross margin resulted from continued efficiency gains, material and labor productivity projects and savings from restructuring projects. In addition, foreign exchange rates had a favorable impact on manufacturing costs as the U.S. Dollar appreciated against various local currencies in countries in which we have manufacturing operations.

Selling, general and administrative expenses were $43,625,000 or 15.1% of sales in the nine month period of 2015 versus $43,353,000 or 14.3% of sales in the comparable period of 2014.

Research and development expenses were $16,378,000 or 5.7% of sales in the nine month period of 2015 compared to $16,765,000 or 5.5% of sales in the comparable period of 2014.  Research and development expenses are primarily focused on expanded applications of existing products and new product development as well as current product and process enhancements.

A non-recurring environmental charge of $14,541,000 that was recorded in the third quarter of 2015 related to a site in Asheville, North Carolina.  The charge recorded includes both the interim remediation proposed by CTS and accepted by the EPA and anticipated future remediation costs and monitoring for a final site-wide remediation. As assessments and

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cleanups proceed, CTS may need to adjust its reserve for the Asheville site based on progress made in determining the extent of remedial actions and related costs.

Restructuring and impairment charges for the nine month period ending September 27, 2015 totaled $5,229,000 and consist primarily of severance, training and shutdown costs related to the consolidation of CTS’ Canadian operation in Streetsville, Ontario into other CTS facilities.  Also included in 2015 are costs to close the Brugg facility as well as other severance and restructuring costs in Singapore and China.  Restructuring and impairment charges for the nine month period ending September 28, 2014 totaled $4,806,000 and consisted primarily of severance costs related to the consolidation of CTS’ Canadian operation into other CTS facilities, severance costs in China and at CTS’ corporate office and lease impairment costs in the UK.

Operating earnings were $17,182,000 or 5.9% of sales for the nine month period ending September 27, 2015 compared to $32,013,000 or 10.5% of sales in the comparable period of 2014 as a result of the items discussed above.  Other income and expense items are summarized in the following table:

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

    

September 27,

    

September 28,

 

($ in thousands)

 

2015

 

2014

 

Interest expense

 

$

(1,955)

 

$

(1,763)

 

Interest income

 

 

2,354

 

 

1,959

 

Other income, net

 

 

(4,641)

 

 

(1,618)

 

Total other income (expense)

 

$

(4,242)

 

$

(1,422)

 

 

Interest expense increased in the nine month period of 2015 versus the comparable period in 2014 as a result of higher outstanding borrowings in 2015.  Interest income increased primarily due to higher cash balances. Other expense in the nine month period of 2015 increased as the amount of currency related impact in 2015 was significantly higher than foreign currency impact in same period of 2014. The foreign currency loss in 2015 and 2014 was primarily due to the appreciation of the U.S. Dollar compared to the Chinese Renminbi and the Euro.

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

    

September 27,

    

September 28,

 

 

2015

 

2014

 

Effective tax rate

 

(59.2)

%  

36.1

%

 

The effective income tax rate for the nine months ending September 27, 2015 was a negative 59.2%.  The effect of uncertain tax benefits increased the effective tax rate by 42.9 percentage points and the effect of amending the tax returns for 2006 to 2013 decreased the effective rate by 122.1 percentage points.   The effective income tax rate for the nine months ending September 28, 2014 was 36.1%. The 2014 effective rate reflects higher profits primarily from a change in the mix of earnings by jurisdiction and the effect of tax adjustments made in the comparable period of 2014.

 

Liquidity and Capital Resources

Cash and cash equivalents were $150,755,000 at September 27, 2015 and $134,508,000 at December 31, 2014. The increase in cash and cash equivalents was driven by cash generated from operations which exceeded the cash used for financing and investing activities. Total debt as of September 27, 2015 was $90,500,000 and at December 31, 2014 was $75,000,000. Total debt as a percentage of total capitalization was 23.4% at September 27, 2015 compared to 20.6% at December 31, 2014. Total debt as a percentage of total capitalization is defined as the sum of notes payable and long-term debt as a percentage of total debt and shareholders’ equity.

Working capital increased by $5,686,000 from December 31, 2014 to September 27, 2015, primarily due to a $16,247,000 increase cash and cash equivalents and a $3,860,000 decrease in accounts payable which were partially offset by a $15,481,000 increase in accrued liabilities and payroll and benefits.  The increase in accrued liabilities was driven by a $14,541,000 environmental charge noted in the Results of Operations section of the MD&A.

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Cash Flows from Operating Activities

Net cash provided by operating activities was $24,118,000 during the first nine months of 2015. Components of net cash provided by operating activities included net earnings of $20,607,000, an environmental charge of $14,541,000, depreciation and amortization expense of $11,987,000 and net changes of other non-cash items such as amortization of retirement benefits adjustments, equity based compensation, restructuring charges and prepaid pension asset totaling $6,075,000 which were offset by net changes in assets and liabilities of $29,092,000. The net changes in assets and liabilities were primarily driven by increases in deferred income taxes and accounts receivable and decreases in accounts payable and accrued liabilities.

Cash Flows from Investing Activities

Net cash used in investing activities for the first nine months of 2015 was $4,681,000, which was comprised of $6,559,000 for capital expenditures partially offset by a $1,878,000 gain on sale of assets.

Cash Flows from Financing Activities

Net cash used by financing activities for the first nine months of 2015 was $3,899,000. The primary driver for the cash outflow from financing activities were $15,623,000 paid to purchase shares of CTS common stock and $3,984,000 of dividend payments which were partially offset by a $15,500,000 increase in net borrowings.

Capital Resources

On August 10, 2015, CTS entered into a five-year credit agreement with a group of banks (“Revolving Credit Facility”) in order to support CTS’ working capital needs and other general corporate purposes.  The Revolving Credit Facility provides for a credit line of $200,000,000, which may be increased by $100,000,000 at the request of CTS, subject to an Administrative Agent’s approval.  This Revolving Credit Facility replaces the prior unsecured credit facility.  Borrowings of $93,000,000 under the previous credit agreement were refinanced under the new Revolving Credit Facility and the previous credit agreement was terminated as of August 10, 2015.

 

Long‑term debt was comprised of the following:

 

 

 

 

 

 

 

 

 

 

 

As of

 

 

 

September 27,

 

December 31,

 

($ in thousands)

    

2015

    

2014

 

Revolving credit facility due in 2020

 

$

90,500

 

$

75,000

 

Weighted average interest rate

 

 

1.5

%  

 

1.5

%

Amount available

 

$

107,185

 

$

122,535

 

Total credit facility

 

$

200,000

 

$

200,000

 

Standby letters of credit

 

$

2,315

 

$

2,465

 

Commitment fee percentage per annum

 

 

0.30

 

 

0.25

 

 

The revolving credit facility requires, among other things, that CTS 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 was in compliance with all debt covenants at September 27, 2015.

CTS uses 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 $50,000,000 of long-term debt for the periods January 2013 to January 2017. In the third quarter of 2012, CTS entered into four separate interest rate swap agreements to fix interest rates on $25,000,000 of long-term debt for the periods January 2013 to January 2017. 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.

During the first nine months of 2015, we repurchased 851,882 shares of CTS common stock at a total cost of $15,623,000, or an average price of $18.34 per share.

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As of September 27, 2015, CTS’ intent is to permanently reinvest funds outside the U.S. Any repatriation may not result in significant cash income tax payments as the taxable event would likely be offset by the utilization of the then available net operating losses and tax credits. CTS does not provide for U.S. income taxes on undistributed earnings of its foreign subsidiaries that are intended to be permanently reinvested.

We have historically funded our capital and operating needs primarily through cash flows from operating activities, supported by available credit under our credit agreements. We believe that cash flows from operating activities and available borrowings under our current credit agreements will be adequate to fund our working capital, capital expenditures and debt service requirements for at least the next twelve months. However, we may choose to pursue additional equity and debt financing to provide additional liquidity or to fund acquisitions.

Critical Accounting Policies and Estimates

Management prepared the consolidated financial statements of CTS under accounting principles generally accepted in the United States of America. These principles require the use of estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions we used are reasonable, based upon the information available.

Our estimates and assumptions affect the reported amounts in our financial statements. The following accounting policies comprise those that we believe are the most critical in understanding and evaluating CTS’ reported financial results.

Revenue Recognition

Product revenue is recognized once four criteria are met: (1) we have persuasive evidence that an arrangement exists; (2) delivery has occurred and title has passed to the customer, which generally happens at the point of shipment provided that no significant obligations remain; (3) the price is fixed and determinable; and (4) collectability is reasonably assured.

Accounts Receivable

We have standardized credit granting and review policies and procedures for all customer accounts, including:

Credit reviews of all new customer accounts,

Ongoing credit evaluations of current customers,

Credit limits and payment terms based on available credit information,

Adjustments to credit limits based upon payment history and the customer’s current credit worthiness,

An active collection effort by regional credit functions, reporting directly to the corporate financial officers, and

Limited credit insurance on the majority of our international receivables.

We reserve for estimated credit losses based upon historical experience and specific customer collection issues. Over the last three years, accounts receivable allowance varied from 0.2% to 0.5% of total accounts receivable. We believe our allowance for doubtful accounts is appropriate considering the quality of the portfolio. While credit losses have historically been within expectations and the provisions established, we cannot guarantee that our credit loss experience will continue to be consistent with historical experience.

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 the current estimated market value. We review inventory quantities on hand and record a reserve for excess and obsolete inventory based on forecasts of product demand and production requirements.

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Over the last three years, our reserves for excess and obsolete inventories have ranged from 8.1% to 15.3% of gross inventory. We believe our reserve level is appropriate considering the quantities and quality of the inventories.

Retirement Plans

Actuarial assumptions are used in determining pension income and expense and our pension benefit obligation. We utilize actuaries from consulting companies in each country to develop our discount rates that match high‑quality bonds currently available and expected to be available during the period to maturity of the pension benefit in order to provide the necessary future cash flows to pay the accumulated benefits when due. After considering the recommendations of our actuaries, we have assumed a discount rate, expected rate of return on plan assets and a rate of compensation increase in determining our annual pension income and expense and the projected benefit obligation. During the fourth quarter of each year, we review our actuarial assumptions in light of current economic factors to determine if the assumptions need to be adjusted. Changes in the actuarial assumptions could have a material effect on our results of operations.

Valuation of Goodwill

Goodwill of a reporting unit is tested for impairment between annual tests 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:

Significant adverse change in legal factors or in the business climate,

Adverse action or assessment by a regulator,

Unanticipated competition,

Loss of key personnel,

More‑likely‑than‑not expectation that a reporting unit or a significant portion of a reporting unit will be sold or otherwise disposed of,

Testing for recoverability of a significant asset group within a reporting unit, and

Allocation of a portion of goodwill to a business to be disposed of.

If CTS believes that one or more of the above indicators of impairment have occurred, it performs an impairment test. The performance of the test involves a two‑step process. The first step of the impairment test involves comparing the fair values of the applicable reporting units with their aggregate carrying values, including goodwill. We generally determine the fair value of our reporting units using two valuation methods: Income Approach — Discounted Cash Flow Method and Market Approach — Guideline Public Company Method. The approach defined below is based upon our last impairment test conducted as of December 31, 2014.

Under the “Income Approach — Discounted Cash Flow Method”, the key assumptions consider sales, cost of sales and operating expenses projected through the year 2018. These assumptions were determined by management utilizing our internal operating plan and assuming growth rates for revenues and operating expenses, and margin assumptions. The fourth key assumption under this approach is the discount rate which is determined by looking at current risk‑free rates of capital, current market interest rates and the evaluation of risk premium relevant to the business segment. If our assumptions relative to growth rates were to change or were incorrect, our fair value calculation may change which could result in impairment.

Under the “Market Approach — Guideline Public Company Method”, we identified eight publicly traded companies, including CTS, which we believe have significant relevant similarities. For these eight companies, we calculated the mean ratio of invested capital to revenues and invested capital to EBITDA. Similar to the Income approach discussed above, sales, cost of sales, operating expenses and their respective growth rates were the key assumptions utilized. The market prices of CTS and other guideline company shares are key assumptions. If these market prices increase, the estimated market value would increase. If the market prices decrease, the estimated market value would decrease.

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The results of these two methods are weighted based upon management’s determination. The Market approach is based upon historical and current economic conditions, which might not reflect the long‑term prospects or opportunities for CTS’ business being evaluated.

If the carrying amount of a reporting unit exceeds the reporting unit’s fair value, we perform the second step of the goodwill impairment test to determine the amount of impairment loss. The second step of the goodwill impairment test involves comparing the implied fair value of the affected reporting unit’s goodwill with the carrying value of that goodwill.

There have not been any significant changes to our impairment testing methodology other than updating the assumptions to reflect the current market environment. As discussed above, key assumptions used in the first step of the goodwill impairment test were determined by management utilizing the internal operating plan. The key assumptions utilized include forecasted growth rates for revenues and operating expenses as well as a discount rate which is determined by looking at current risk‑free rates of capital, current market interest rates and the evaluation of a risk premium relevant to the business segment. CTS will monitor future results and will perform a test if indicators trigger an impairment review.

We test the impairment of goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Based upon our latest assessment, we determined that our goodwill was not impaired as of the end of December 2014.

Valuation of Long‑Lived and Other Intangible 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:

Significant underperformance relative to expected historical or projected future operating results,

Significant changes in the manner of use of the acquired assets or the strategy for the overall business,

Significant negative industry or economic trends,

Significant decline in CTS’ stock price for a sustained period, and

Significant decline in market capitalization relative to net book value.

If CTS believes that one or more of the above indicators of impairment have occurred and the undiscounted cash flow test has failed in the case of amortizable assets, it measures impairment based on projected discounted cash flows using a discount rate that incorporates the risk inherent in the cash flows.

Income Taxes

CTS has identified, evaluated, and measured the amount of income tax benefits to be recognized for all of our income tax positions. Included in deferred tax assets are amounts related to federal, state and foreign net operating losses. CTS intends to utilize these net operating loss carryforwards to offset future income taxes.

CTS’ practice is to recognize interest and penalties related to income tax matters as part of income tax expense.

CTS earns a significant amount of its operating income outside of the U.S., which is deemed to be permanently reinvested in foreign jurisdictions. CTS does not intend to repatriate funds, however, should CTS require more capital in the U.S. than is generated by our operations locally, CTS could elect to repatriate funds held in foreign jurisdictions or raise capital in the U.S. through debt or equity issuances. Repatriation could result in higher effective tax rates. Borrowing in the U.S. would result in increased interest expense.

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Significant Customer

Our net sales to significant customers as a percentage of total net sales were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 27,

 

September 28,

 

September 27,

 

September 28,

 

 

    

2015

    

2014

 

2015

    

2014

 

Customer A

 

11.7

%  

11.3

%  

10.5

%  

10.6

 

Customer B

 

10.3

%  

8.7

%  

9.5

%  

7.9

 

Customer C

 

10.0

%  

7.9

%  

9.0

%  

7.6

 

 

No other customer accounted for 10% or more of total net sales during these periods.

 

Forward‑Looking Statements

This document contains statements that are, or may be deemed to be, forward‑looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward‑looking statements include, but are not limited to, any financial or other guidance, statements that reflect our current expectations concerning future results and events, and any other statements that are not based solely on historical fact. Forward‑looking statements are based on management’s expectations, certain assumptions and currently available information. Readers are cautioned not to place undue reliance on these forward‑looking statements, which speak only as of the date hereof and are based on various assumptions as to future events, the occurrence of which necessarily are subject to uncertainties. These forward‑looking statements are made subject to certain risks, uncertainties and other factors, which could cause our 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: changes in the economy generally and in respect to the business in which CTS operates; unanticipated issues in integrating acquisitions; the results of actions to reposition our business; rapid technological change; general market conditions in the automotive, communications, and computer industries, as well as conditions in the industrial, defense and aerospace, and medical markets; reliance on key customers; unanticipated natural disasters or other events; the ability to protect our intellectual property; pricing pressures and demand for our products; unanticipated developments that could occur with respect to contingencies such as litigation and environmental matters as well as any product liability claims; and risks associated with our international operations, including trade and tariff barriers, exchange rates and political and geopolitical risks. Many of these and other risks and uncertainties are discussed in further detail in Item 1A. of this Annual Report on Form 10‑K for the fiscal year ended December 31, 2014. We undertake no obligation to publicly update our forward‑looking statements to reflect new information or events or circumstances that arise after the date hereof, including market or industry changes.

 

Item 3.   Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in our market risk since December 31, 2014.

 

Item 4.   Controls and Procedures

Pursuant to Rule 13a-15(e) of the Securities and Exchange Act of 1934, management, under the direction of our Chief Executive Officer and Chief Financial Officer, evaluated our disclosure controls and procedures.  Based on such evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 27, 2015.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting for the quarter ended September 27, 2015 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting. 

 

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PART II - OTHER INFORMATION

 

Item 1.  Legal Proceedings

We manufacture accelerator pedals for a number of automobile manufacturers, including subsidiaries of Toyota. In January 2010, Toyota initiated a recall of a substantial number of vehicles in North America containing pedals manufactured by CTS. The recall expanded to include vehicles in Europe and Asia. The pedal recall and associated events have led to us being named as a co‑defendant with Toyota in certain litigation in the United States and Canada. CTS is not aware of any legal actions filed in Asia or Europe against CTS at this time.

In February 2010, we entered into an agreement with Toyota whereby Toyota agreed that it will indemnify, defend, and hold us harmless from, and the parties will cooperate in the defense of, certain third‑party civil claims and actions that are filed or asserted in the United States or Canada and that arise from or relate to alleged incidents of unintended acceleration of Toyota and Lexus vehicles.  Under our agreement with Toyota, if it is determined that CTS acted negligently in selecting materials or processes where we had sole control over the selection process, in failing to meet Toyota’s specifications, or in making unapproved changes in component design or materials, and such negligence caused or contributed to a claim, we will be responsible for any judgment that may be rendered against us individually, or any portion of a judgment that may be allocated to us, but limited only to the extent of insurance collected from our insurers. Toyota would remain responsible to defend CTS in these actions and would remain responsible for any balance of the remaining liability over amounts recovered by insurance. The agreement also does not cover costs or liabilities in connection with government investigations, government hearings, or government recalls.

Presently, we have been served process and are a named co‑defendant with Toyota in approximately thirty‑one lawsuits. The claims generally fall into two categories, those that allege sudden unintended acceleration of Toyota vehicles led to injury or death, and those that allege economic harm to owners of Toyota vehicles related to vehicle defects. Some suits combine elements of both. Claims include demands for compensatory and special damages. To date, the only actions filed where we are aware we have been named as a co‑defendant are civil actions filed in the Unites States or Canada. All currently open lawsuits are subject to the indemnification agreement described above. Some of these lawsuits arise out of incidents involving models for which we do not manufacture the pedal, such as all Lexus models, the Toyota Prius, and the Toyota Tacoma, or for which we manufacture only a portion of the pedals, such as the Toyota Camry. Many lawsuits have been consolidated in federal multidistrict litigation in the United States District Court, Southern District of California, though some remain in various other courts.

Certain other claims are pending against us with respect to matters arising out of the ordinary conduct of our business.  For all other claims, in the opinion of management, based upon presently available information, either adequate provision for anticipated costs have been accrued or the ultimate anticipated costs will not materially affect our consolidated financial position, results of operations or cash flows.  However, given the uncertainty, the complexity and the many variables involved in litigation and other claims, our actual costs may differ from our estimates.

Item 1A.  Risk Factors

There have been no significant changes to our risk factors since December 31, 2014.

 

 

 

 

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Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

The following table summarizes the repurchases of CTS common stock during the three months ended September 27, 2015 made by the Company under the expanded repurchase program announced on April 27, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

 

    

(c)

 

    

 

 

 

 

 

 

 

 

Total Number

 

 

(d)

 

 

(a)

 

 

 

 

of Shares

 

 

Maximum Dollar Value

 

 

Total Number of

 

(b)

 

Purchased as

 

 

of Shares That May Yet Be

 

 

Shares

 

Average Price

 

Part of Plans or

 

 

Purchased Under the

 

 

Purchased

 

Paid per Share

 

Program

 

 

Plans or Programs(2)

 

 

 

 

 

 

 

 

 

 

 

Balance at June 28, 2015

 

 

 

 

 

 

 

 

$

24,272,100

June 29, 2015 – July 26, 2015

 

95,000

 

$

19.11

 

95,000

 

$

22,456,732

July 27, 2015 – August 23, 2015

 

70,000

 

$

18.94

 

70,000

 

$

21,130,813

August 24, 2015 – September 27, 2015

 

60,000

 

$

18.54

 

60,000

 

$

20,018,377

Total

 

225,000

 

$

18.91

 

225,000

 

 

 

 

(1)

On April 27, 2015, CTS announced that its Board of Directors authorized an expansion to its repurchase program by authorizing the purchase of an additional $25 million dollars of its common stock in the open market.   This authorization has no expiration.

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Item 6.  Exhibits 

 

 

(10)(a)

Credit Agreement between CTS Corporation and BMO Harris Bank N.A dated August 10, 2015 (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, filed with the SEC on

August 12, 2015).

 

 

(31)(a)

Certification pursuant to Section 302 of the Sarbanes‑Oxley Act of 2002.

 

 

(31)(b)

Certification pursuant to Section 302 of the Sarbanes‑Oxley Act of 2002.

 

 

(32)(a)

Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes‑Oxley Act of 2002.

 

 

(32)(b)

Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes‑Oxley Act of 2002.

 

 

101.INS

XBRL Instance Document

 

 

101.SCH

XBRL Taxonomy Extension Schema Document

 

 

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

 

 

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

 

 

101.LAB

XBRL Taxonomy Extension Label Linkbase Document

 

 

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 

 

 

 

 

CTS Corporation

 

CTS Corporation

 

 

 

 

 

   

 

/s/ Luis F. Machado

 

/s/ Ashish Agrawal

   

 

Luis F. Machado
Vice President, General Counsel and Secretary

 

Ashish Agrawal
Vice President and Chief Financial Officer

 

 

 

 

 

   

 

Dated: October 27, 2015

 

 Dated: October 27, 2015

   

 

 

 

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