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CTS CORP - Quarter Report: 2018 June (Form 10-Q)

Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
 
 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For The Quarterly Period Ended June 30, 2018
 
OR
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Transition Period from _______________ to _______________

Commission File Number: 1-4639
 
CTS CORPORATION
(Exact name of registrant as specified in its charter)



 
Indiana
  
35-0225010
(State or other jurisdiction of
incorporation or organization)
  
(IRS Employer
Identification Number)
 
 
 
4925 Indiana Avenue, Lisle, IL
  
60532
(Address of principal executive offices)
  
(Zip Code)
 Registrant’s telephone number, including area code: 630-577-8800
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  x 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  x    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 x
  
Accelerated filer  o
  
Non-accelerated filer  o
  
Smaller reporting company  o
 
  
 
  
(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   x 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of July 23, 2018: 33,087,043.
 
 


Table of Contents

CTS CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


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Table of Contents

PART I - FINANCIAL INFORMATION
Item 1.   Financial Statements
CTS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS - UNAUDITED
(In thousands of dollars, except per share amounts) 
 
Three Months Ended

Six Months Ended
 
June 30,

June 30,

June 30,

June 30,
 
2018

2017

2018

2017
Net sales
$
118,021


$
105,686


$
231,551


$
205,840

Cost of goods sold
76,208


69,892


151,305


135,822

Gross Margin
41,813


35,794


80,246


70,018

Selling, general and administrative expenses
19,621


15,808


36,993


31,056

Research and development expenses
6,476


6,049


12,983


12,052

Restructuring charges
1,172


729


2,367


1,507

Operating earnings
14,544


13,208


27,903


25,403

Other income (expense):






 


 

Interest expense
(571
)

(752
)

(1,112
)

(1,436
)
Interest income
472


298


954


551

Other (expense) income, net
(2,874
)

1,170


(870
)

1,631

Total other (expense) income
(2,973
)

716


(1,028
)

746

Earnings before income taxes
11,571


13,924


26,875


26,149

Income tax expense
4,362


3,958


8,118


7,699

Net earnings
$
7,209


$
9,966


$
18,757


$
18,450

Earnings per share:






 


 

Basic
$
0.22


$
0.30


$
0.57


$
0.56

Diluted
$
0.21


$
0.30


$
0.56


$
0.55

 





 


 


Basic weighted – average common shares outstanding:
33,051


32,890


33,014


32,846

Effect of dilutive securities
513


461


513


493

Diluted weighted – average common shares outstanding
33,564


33,351


33,527


33,339

 







Cash dividends declared per share
$
0.04


$
0.04


$
0.08


$
0.08

See notes to unaudited condensed consolidated financial statements.

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CTS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME ‑ UNAUDITED
(In thousands of dollars) 
 
Three Months Ended
 
Six Months Ended
 
June 30,

June 30,
 
June 30,
 
June 30,
 
2018
 
2017
 
2018
 
2017
Net earnings
$
7,209

 
$
9,966

 
$
18,757

 
$
18,450

Other comprehensive income:
 

 
 

 
 

 
 

Changes in fair market value of derivatives, net of tax
67

 
(152
)
 
874

 
608

Changes in unrealized pension cost, net of tax
1,249

 
942

 
2,356

 
1,758

Cumulative translation adjustment, net of tax
(375
)
 
200

 
(132
)
 
288

Other comprehensive income
$
941

 
$
990

 
$
3,098

 
$
2,654

Comprehensive income
$
8,150

 
$
10,956

 
$
21,855

 
$
21,104

 See notes to unaudited condensed consolidated financial statements.

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Table of Contents

CTS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
 
 
(Unaudited)


 
June 30,

December 31,
 
2018

2017
ASSETS
 


 

Current Assets
 


 

Cash and cash equivalents
$
102,861


$
113,572

Accounts receivable, net
75,597


70,584

Inventories, net
41,671


36,596

Other current assets
11,931


12,857

Total current assets
232,060


233,609

Property, plant and equipment, net
93,630


88,247

Other Assets
 


 

Prepaid pension asset
59,938


57,050

Goodwill
71,057


71,057

Other intangible assets, net
63,557


66,943

Deferred income taxes
20,188


20,694

Other
2,123


2,096

Total other assets
216,863


217,840

Total Assets
$
542,553


$
539,696

LIABILITIES AND SHAREHOLDERS’ EQUITY
 


 

Current Liabilities
 


 

Accounts payable
51,652


49,201

Accrued payroll and benefits
9,689


11,867

Accrued liabilities
43,805


41,344

Total current liabilities
105,146


102,412

Long-term debt
57,000


76,300

Long-term pension obligations
6,998


7,201

Deferred income taxes
3,572


3,802

Other long-term obligations
6,077


6,176

Total Liabilities
178,793


195,891

Commitments and Contingencies (Note 10)





Shareholders’ Equity
 


 

Common stock
306,570


304,777

Additional contributed capital
40,034


41,084

Retained earnings
436,274


420,160

Accumulated other comprehensive loss
(75,862
)

(78,960
)
Total shareholders’ equity before treasury stock
707,016


687,061

Treasury stock
(343,256
)

(343,256
)
Total shareholders’ equity
363,760


343,805

Total Liabilities and Shareholders’ Equity
$
542,553


$
539,696

See notes to unaudited condensed consolidated financial statements.

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CTS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS ‑ UNAUDITED
(In thousands of dollars)
 
 
Six Months Ended
 
June 30,

June 30,
 
2018
 
2017
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net earnings 
$
18,757

 
$
18,450

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

 
 

Depreciation and amortization
10,961


9,673

Pension and other post-retirement plan expense (income)
213

 
(893
)
Stock-based compensation
2,186

 
1,687

Deferred income taxes
(648
)
 
4,497

Loss on sales of fixed assets
2

 
1

(Gain) loss on foreign currency hedges, net of cash
(76
)
 
73

Changes in assets and liabilities:
 

 
 

Accounts receivable
(5,452
)
 
(1,950
)
Inventories
(5,275
)
 
(4,737
)
Other assets
1,280

 
(76
)
Accounts payable
4,779

 
1,616

Accrued payroll and benefits
(2,028
)
 
(4,735
)
Accrued expenses
247

 
(1,944
)
Income taxes payable
3,034

 
(347
)
Other liabilities
(101
)
 
2,115

Pension and other post-retirement plans
(158
)
 
(159
)
Net cash provided by operating activities
27,721

 
23,271

CASH FLOWS FROM INVESTING ACTIVITIES:
 

 
 

Capital expenditures
(14,910
)
 
(9,110
)
Proceeds from sale of assets
1

 
1

Payments for acquisitions, net of cash acquired

 
(19,265
)
Net cash used in investing activities
(14,909
)
 
(28,374
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 

 
 

Payments of long-term debt
(749,200
)
 
(790,600
)
Proceeds from borrowings of long-term debt
729,900

 
794,300

Dividends paid
(2,638
)
 
(2,624
)
Taxes paid on behalf of equity award participants
(1,429
)

(1,569
)
Net cash used in financing activities
(23,367
)
 
(493
)
Effect of exchange rate changes on cash and cash equivalents
(156
)
 
(395
)
Net decrease in cash and cash equivalents
(10,711
)
 
(5,991
)
Cash and cash equivalents at beginning of period
113,572

 
113,805

Cash and cash equivalents at end of period
$
102,861

 
$
107,814

Supplemental cash flow information:
 

 
 

Cash paid for interest
$
995

 
$
1,053

Cash paid for income taxes, net
$
3,724

 
$
3,515

See notes to unaudited condensed consolidated financial statements.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(in thousands except for share and per share data)
June 30, 2018
NOTE 1—Basis of Presentation
 
The accompanying condensed consolidated financial statements have been prepared by CTS Corporation (“CTS” "we", "our", "us" or the "Company”), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations. The unaudited condensed consolidated financial statements should be read in conjunction with the financial statements, notes thereto, and other information included in the Company’s Annual Report on Form 10‑K for the year ended December 31, 2017.
 
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.

Changes in Accounting Principles

Beginning in January 2018, CTS adopted the provisions of Accounting Standards Update ("ASU") 2014-09, "Revenue from Contracts with Customers (Topic 606)" under the modified retrospective method, which requires a cumulative effect adjustment to the opening balance of retained earnings on the date of adoption. This approach was applied to contracts not completed as of December 31, 2017. At date of adoption, there was no significant change to our past revenue recognition practices and therefore no adjustment to the opening balance of retained earnings was required.

Beginning in April 2018, CTS elected to adopt the provisions of ASU No. 2017-12 "Derivatives and Hedging (Topic 815): Target Improvements to Accounting for Hedging Activities" under the modified retrospective method, which requires a cumulative effect adjustment to the opening balance of retained earnings. Prior to adoption, the company measured hedge effectiveness for all cash flow hedges quarterly and recognized any ineffectiveness in earnings in the current period. Upon adoption the company elected to review hedge effectiveness qualitatively as described further in Note 12 - Derivative Financial Instruments. At the date of adoption there was no significant hedge ineffectiveness recorded in earnings for hedged assets existing as of January 1, 2018, and therefore no adjustment to the opening balance of retained earnings was required.

Subsequent Events

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

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NOTE 2 – Revenue Recognition

The core principle of Topic 606 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance provides a five-step process to achieve that core principle:

Identify the contract(s) with a customer
Identify the performance obligations
Determine the transaction price
Allocate the transaction price
Recognize revenue when the performance obligations are met

We recognize revenue when the performance obligations specified in our contracts have been satisfied, after considering the impact of variable consideration and other factors that may affect the transaction price. Our contracts normally contain a single performance obligation that is fulfilled on the date of delivery based on shipping terms stipulated in the contract. We usually expect payment within 30 to 90 days from the shipping date, depending on our terms with the customer. None of our contracts as of June 30, 2018, contained a significant financing component. Differences between the amount of revenue recognized and the amount invoiced, collected from, or paid to our customers are recognized as contract assets or liabilities. Contract assets will be reviewed for impairment when events or circumstances indicate that they may not be recoverable.

To the extent the transaction price includes variable consideration, we estimate the amount of variable consideration that should be included in the transaction price utilizing the most likely amount method based on an analysis of historical experience and current facts and circumstances, which requires significant judgment. Variable consideration is included in the transaction price if, in our judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur.

Contract Assets and Liabilities

Contract assets and liabilities included in our Condensed Consolidated Balance Sheets are as follows:
 
As of
 
June 30,
 
December 31,
 
2018
 
2017
Contract Assets
 
 
 
Prepaid rebates included in Other current assets
$
64

 
$
52

Prepaid rebates included in Other assets
482

 
465

Total Contract Assets
$
546

 
$
517

 
 
 
 
Contract Liabilities
 
 
 
Customer discounts and price concessions included in Accrued liabilities
$
(2,323
)
 
$
(1,133
)
Customer rights of return included in Accrued liabilities
(341
)
 
(462
)
Total Contract Liabilities
$
(2,664
)
 
$
(1,595
)
 
During the three and six months ended June 30, 2018, we recognized a decrease of revenues of $46 and an increase in revenues of $86, respectively, that were included in contract liabilities at the beginning of the period.

The increase in contract liabilities as of June 30, 2018 is primarily due to net increases in estimated future discounts and price concessions, offset by net settlements of products sold with rights of return.










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Disaggregated Revenue

The following table presents revenues disaggregated by the major markets we serve:
 
Three Months Ended
 
Six Months Ended
 
June 30, 2018
 
June 30, 2017
 
June 30, 2018
 
June 30, 2017
Aero & Defense
$
6,024

 
$
4,675

 
$
11,127

 
$
9,332

Industrial
22,773

 
19,214

 
43,129

 
36,326

Medical
9,793

 
7,474

 
19,034

 
14,288

Telecom & IT
5,525

 
5,602

 
10,050

 
10,780

Transportation
73,906

 
68,721

 
148,211

 
135,114

Total
$
118,021

 
$
105,686

 
$
231,551


$
205,840


NOTE 3 – Accounts Receivable 
The components of accounts receivable are as follows:
 
As of
 
June 30,
 
December 31,
 
2018
 
2017
Accounts receivable, gross
$
76,032

 
$
70,941

Less: Allowance for doubtful accounts
(435
)
 
(357
)
Accounts receivable, net
$
75,597

 
$
70,584


NOTE 4 – Inventories 
Inventories consist of the following:
 
As of
 
June 30,

December 31,
 
2018
 
2017
Finished goods
$
11,778

 
$
9,203

Work-in-process
12,008

 
12,065

Raw materials
23,529

 
21,150

Less: Inventory reserves
(5,644
)
 
(5,822
)
Inventories, net
$
41,671

 
$
36,596



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NOTE 5 – Property, Plant and Equipment
 
Property, plant and equipment is comprised of the following:
 
As of
 
June 30,
 
December 31,
 
2018
 
2017
Land
$
1,137

 
$
1,130

Buildings and improvements
68,778

 
64,201

Machinery and equipment
225,843

 
223,650

Less: Accumulated depreciation
(202,128
)
 
(200,734
)
Property, plant and equipment, net
$
93,630

 
$
88,247

 
 
 
 
Depreciation expense for the three months ended June 30, 2018
 
 
$
3,774

Depreciation expense for the six months ended June 30, 2018
 
 
$
7,537

 

NOTE 6 – Retirement Plans
 
Pension Plans
 
Net pension expense (income) for our domestic and foreign plans was as follows:
 
Three Months Ended
 
Six Months Ended

June 30,

June 30,

June 30,

June 30,
 
2018
 
2017
 
2018
 
2017
Net pension expense (income)
$
78

 
$
(491
)
 
$
157

 
$
(924
)


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

Three Months Ended
 
Three Months Ended
 
June 30,

June 30,

June 30,

June 30,
 
2018
 
2017
 
2018
 
2017
Service cost
$

 
$

 
$
11

 
$
12

Interest cost
1,781

 
2,068

 
11

 
9

Expected return on plan assets (1)
(3,225
)
 
(4,060
)
 
(6
)
 
(5
)
Amortization of loss
1,466

 
1,446

 
40

 
39

Expense (income), net
$
22

 
$
(546
)
 
$
56

 
$
55

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

 
Domestic Pension Plans
 
Foreign Pension Plans
 
Six Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
June 30,
 
June 30,
 
2018
 
2017
 
2018
 
2017
Service cost
$

 
$

 
$
22

 
$
24

Interest cost
3,562

 
4,136

 
22

 
17

Expected return on plan assets (1)
(6,450
)
 
(8,121
)
 
(13
)
 
(10
)
Amortization of loss
2,932

 
2,892

 
82

 
77

Other cost due to retirement

 
61

 

 

Expense (income), net
$
44

 
$
(1,032
)
 
$
113

 
$
108

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

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Other Post-retirement Benefit Plan
 
Net post-retirement expense for our other post-retirement plan includes the following components:
 
Three Months Ended

Six Months Ended
 
June 30,

June 30,

June 30,

June 30,
 
2018
 
2017
 
2018
 
2017
Service cost
$

 
$

 
$
1

 
$
1

Interest cost
39

 
40

 
78

 
80

Amortization of gain
(11
)
 
(25
)
 
(23
)
 
(50
)
Expense, net
$
28

 
$
15

 
$
56

 
$
31


 
NOTE 7 – Other Intangible Assets
 
Intangible assets consist of the following components:
 
As of
 
June 30, 2018
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net Amount
Customer lists/relationships
$
64,323

 
$
(35,387
)
 
$
28,936

Patents
10,319

 
(10,319
)
 

Technology and other intangibles
44,460

 
(12,039
)
 
32,421

In process research and development
2,200

 

 
2,200

Other intangible assets, net
$
121,302

 
$
(57,745
)
 
$
63,557

Amortization expense for the three months ended June 30, 2018


 
$
1,704

 


Amortization expense for the six months ended June 30, 2018
 

$
3,424



 
 
As of
 
December 31, 2017
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net Amount
Customer lists/relationships
$
64,323

 
$
(33,685
)
 
$
30,638

Patents
10,319

 
(10,319
)
 

Technology and other intangibles
44,460

 
(10,355
)
 
34,105

In process research and development
2,200




2,200

Other intangible assets, net
$
121,302

 
$
(54,359
)
 
$
66,943

Amortization expense for the three months ended June 30, 2017
 

 
$
1,613

 
 

Amortization expense for the three months ended June 30, 2017
 

 
$
3,149

 
 













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

Amortization
expense
2018
$
3,377

2019
6,754

2020
6,624

2021
6,467

2022
6,230

Thereafter
34,105

Total amortization expense
$
63,557

 

NOTE 8 – Costs Associated with Exit and Restructuring Activities
 
Costs associated with exit and restructuring activities are recorded in the Condensed Consolidated Statement of Earnings as a separate component of Operating earnings. 
 
Total restructuring charges, all related to the June 2016 Plan described below, were as follows:
 
Three Months Ended
 
June 30, 2018
 
June 30, 2017
Restructuring charges
$
1,172

 
$
729

 
 

 
Six Months Ended
 
June 30, 2018
 
June 30, 2017
Restructuring charges
$
2,367

 
$
1,507


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

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

 

Actual costs
 
Planned

incurred through
June 2016 Plan
Costs

June 30, 2018
Workforce reduction
$
3,075


$
3,211

Building and equipment relocation
9,025


5,518

Other charges
1,300


825

Total restructuring charges
$
13,400


$
9,554


In April 2014, we announced plans to restructure our operations and consolidate our Canadian operations into other existing facilities as part of our overall plan to simplify our business model and rationalize our global footprint (“April 2014 Plan”).  These restructuring actions were completed in 2015. The remaining restructuring liability related to the April 2014 Plan was $433 at June 30, 2018, and $453 at December 31, 2017.


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The following table displays the restructuring liability activity for all plans for the six months ended June 30, 2018
Restructuring liability at January 1, 2018
$
1,913

Restructuring charges
2,367

Cost paid
(2,603
)
Other activity (1)
(21
)
Restructuring liability at June 30, 2018
$
1,656

(1) Other activity includes the effects of currency translation and other charges that do not flow through restructuring expense.

NOTE 9 – Accrued Liabilities
 
The components of accrued liabilities are as follows: 
 
As of
 
June 30,
 
December 31,
 
2018
 
2017
Accrued product related costs
$
4,716

 
$
5,297

Accrued income taxes
8,512

 
5,475

Accrued property and other taxes
2,080

 
997

Accrued professional fees
3,055

 
2,228

Contract liabilities
2,664

 
1,595

Dividends payable
1,323

 
1,318

Remediation reserves
14,570

 
17,067

Other accrued liabilities
6,885

 
7,367

Total accrued liabilities
$
43,805

 
$
41,344


NOTE 10 – Contingencies

Certain processes in the manufacture of our current and past products create by-products classified as hazardous waste. We have been notified by the U.S. Environmental Protection Agency, state environmental agencies, and in some cases, groups of potentially responsible parties, that we may be potentially liable for environmental contamination at several sites currently and formerly owned or operated by us. Some sites, such as Asheville, North Carolina and Mountain View, California, are designated National Priorities List sites under the U.S. Environmental Protection Agency’s Superfund program. We reserve for probable remediation activities and for claims and proceedings against us with respect to other environmental matters. We record reserves on an undiscounted basis. In the opinion of management, based upon presently available information relating to such matters, adequate provision for probable and estimable costs have been recorded. We do not have any known environmental obligations where a loss is probable or reasonably possible of occurring for which we do not have a reserve, nor do we have any amounts for which we have not reserved because the amount of the loss cannot be reasonably estimated. Due to the inherent nature of environmental obligations, we cannot provide assurance that our ultimate environmental liability will not materially exceed the amount of its current reserve. Our reserve and disclosures will be adjusted accordingly if additional information becomes available in the future.
A roll forward of remediation reserves included in accrued liabilities on the balance sheet is comprised of the following:
 
As of

June 30, 2018

December 31, 2017
Balance at beginning of period
$
17,067


$
18,176

Remediation expense
1,048


307

Net remediation payments
(3,545
)

(1,416
)
Balance at end of the period
$
14,570


$
17,067


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

13
 

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NOTE 11 - Debt
 
Long-term debt was comprised of the following:
 
As of
 
June 30,

December 31,
 
2018
 
2017
Total credit facility
$
300,000

 
$
300,000

Balance outstanding
$
57,000

 
$
76,300

Standby letters of credit
$
1,940

 
$
2,065

Amount available
$
241,060

 
$
221,635

Weighted-average interest rate
3.01
%
 
2.30
%
Commitment fee percentage per annum
0.25
%
 
0.25
%
 
On August 10, 2015, we entered into a five-year credit agreement (“Revolving Credit Facility”) with a group of banks in order to support our financing needs.  The Revolving Credit Facility originally provided for a credit line of $200,000. On May 23, 2016, we requested and received a $100,000 increase in the aggregate revolving credit commitments under the existing credit agreement, which increased the credit line from $200,000 to $300,000.  
 
The Revolving Credit Facility includes a swing line sublimit of $15,000 and a letter of credit sublimit of $10,000.  Borrowings under the Revolving Credit Facility bear interest, at our option, at the base rate plus the applicable margin for base rate loans or London Interbank Offered Rate ("LIBOR") plus the applicable margin for LIBOR loans.  We also pay a quarterly commitment fee on the unused portion of the Revolving Credit Facility.  The commitment fee ranges from 0.20% to 0.40% based on the our total leverage ratio. 
 
The Revolving Credit Facility requires, among other things, that we comply with a maximum total leverage ratio and a minimum fixed charge coverage ratio.  Failure to comply with these covenants could reduce the borrowing availability under the Revolving Credit Facility.  We were in compliance with all debt covenants at June 30, 2018.  The Revolving Credit Facility requires that we deliver quarterly financial statements, annual financial statements, auditor certifications, and compliance certificates within a specified number of days after the end of a quarter and year. Additionally, the Revolving Credit Facility contains restrictions limiting our ability to: dispose of assets; incur certain additional debt; repay other debt or amend subordinated debt instruments; create liens on assets; make investments, loans or advances; make acquisitions or engage in mergers or consolidations; engage in certain transactions with our subsidiaries and affiliates; and make stock repurchases and dividend payments.  Interest rates on the Revolving Credit Facility fluctuate based upon the LIBOR and the Company’s quarterly total leverage ratio.  
 
We have debt issuance costs related to our long-term debt that are being amortized using the straight-line method over the life of the debt. These costs are included in interest expense in our Condensed Consolidated Statement of Earnings. Amortization expense was approximately $46 for both the three months ended June 30, 2018 and June 30, 2017, respectively, and approximately $93 for both the six months ended June 30, 2018 and June 30, 2017, respectively. 

Note 12 - Derivative Financial Instruments

Our earnings and cash flows are subject to fluctuations due to changes in foreign currency exchange rates and interest rates. We selectively use derivative financial instruments including foreign currency forward contracts and interest rate swaps to manage our exposure to these risks.

The use of derivative financial instruments exposes the Company to credit risk, which relates to the risk of nonperformance by a counterparty to the derivative contracts. We manage our credit risk by entering into derivative contracts with only highly rated financial institutions and by using netting agreements.

The effective portion of derivative gains and losses are recorded in accumulated other comprehensive (loss) income until the hedged transaction affects earnings upon settlement, at which time they are reclassified to cost of goods sold or net sales. If it is probable that an anticipated hedged transaction will not occur by the end of the originally specified time period, we reclassify the gains or losses related to that hedge from accumulated other comprehensive (loss) income to other income (expense).




14
 

Table of Contents

On April 1, 2018, the company adopted the provisions of ASU 2017-12 "Derivatives and Hedging (Topic 815): Target Improvements to Accounting for Hedging Activities". As a result, hedge effectiveness was reviewed qualitatively by verifying that the critical terms of the hedging instrument and the forecasted transaction continue to match, and that there have been no adverse developments that have increased the risk that the counterparty will default. No recognition of ineffectiveness was recorded in our Condensed Consolidated Statement of Earnings for the three months ended June 30, 2018.

Foreign Currency Hedges

In January of 2016, we began using forward contracts to mitigate currency risk related to a portion of our forecasted foreign currency revenues and costs. The currency forward contracts are designed as cash flow hedges and are recorded in the Condensed Consolidated Balance Sheets at fair value.
We continue to monitor the Company’s overall currency exposure and may elect to add cash flow hedges in the future. At June 30, 2018, we had a net unrealized gain of $59 in accumulated other comprehensive (loss) income, of which $5 is expected to be reclassified to income within the next 12 months. At June 30, 2017 we had a net unrealized gain of $428 in accumulated other comprehensive (loss) income. The notional amount of foreign currency forward contracts outstanding was $21.1 million at June 30, 2018.

Interest Rate Swaps
We use interest rate swaps to convert the revolving credit facility’s variable rate of interest into a fixed rate. In the second quarter of 2012, CTS entered into four separate interest rate swap agreements to fix interest rates on $50,000 of long-term debt for the periods January 2013 to January 2017. In the third quarter of 2012, we entered into four additional interest rate swap agreements to fix interest rates on $25,000 of long-term debt for the periods January 2013 to January 2017. In the third quarter of 2016, we entered into three additional interest rate swap agreements to fix interest rates on $50,000 of long-term debt for the periods August 2017 to August 2020. The difference to be paid or received under the terms of the swap agreements will be recognized as an adjustment to interest expense when settled.
These swaps are treated as cash flow hedges and consequently, the changes in fair value were recorded in other comprehensive (loss) income. The estimated net amount of the existing gains that are reported in accumulated other comprehensive (loss) income that are expected to be reclassified into earnings within the next twelve months is approximately $524

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

June 30,
 
December 31,
 
2018
 
2017
Interest rate swaps reported in Other current assets
$
524

 
$
278

Interest rate swaps reported in Other assets
$
835

 
$
693

Foreign currency hedges reported in Other current assets
$
76

 
$

Foreign currency hedges reported in Accrued liabilities
$

 
$
(742
)

The Company has elected to net its foreign currency derivative assets and liabilities in the balance sheet in accordance with ASC 210-20 (Balance Sheet, Offsetting). On a gross basis, there were foreign currency derivative assets of $301 and foreign currency derivative liabilities of $225.


15
 

Table of Contents

The effect of derivative instruments on the Condensed Consolidated Statements of Earnings is as follows:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
June 30,

June 30,
 
2018

2017
 
2018

2017
Foreign Exchange Contracts:
 
 
 
 
 
 
 
Gain (loss) recognized in Net sales
$
21

 
$
(57
)
 
$
(37
)
 
$
(59
)
Gain (loss) recognized in Cost of goods sold
32

 
58

 
140

 
(86
)
(Loss) gain recognized in Selling, general and administrative expense
(4
)
 
13

 
(5
)
 
10

Loss recognized in Other income

 
(1
)
 
(1
)
 
(9
)
 
 
 
 
 

 

Interest Rate Swaps:
 
 
 
 

 

Benefit recorded in Interest expense
$
105

 
$

 
$
170

 
$

  Total gain (loss)
$
154

 
$
13

 
$
267

 
$
(144
)

NOTE 13 – Accumulated Other Comprehensive (Loss) Income

Shareholders’ equity includes certain items classified as accumulated other comprehensive (loss) income (“AOCI”) in the Condensed Consolidated Balance Sheets, including:
 
Unrealized gains (losses) on hedges relate to interest rate swaps to convert the revolving credit facility's variable rate of interest into a fixed rate and foreign currency forward contracts used to hedge our exposure to changes in exchange rates affecting certain revenues and costs denominated in foreign currencies. These hedges are designated as cash flow hedges, and we have deferred income statement recognition of gains and losses until the hedged transactions occur, at which time amounts are reclassified into earnings.  Further information related to our derivative financial instruments is included in Note 12 - Derivative Financial Instruments and Note 16 – 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 income / (expense).  Further information related to our pension obligations is included in Note 6 – Retirement Plans.
 
Cumulative translation adjustments relate to our non-U.S. subsidiary companies that have designated a functional currency other than the U.S. dollar. We are required to translate the subsidiary functional currency financial statements to dollars using a combination of historical, period-end, and average foreign exchange rates. This combination of rates creates the foreign currency translation adjustment component of other comprehensive income.  

Changes in exchange rates between the functional currency and the currency in which a transaction is denominated are foreign exchange transaction gains or losses. Transaction losses for the three and six months ended June 30, 2018 were $2,194 and $918, respectively and transaction gains for the three and six months ended June 30, 2017 were $1,162 and $1,557, respectively, which have been included in other income (expense) in the Condensed Consolidated Statement of Earnings.



16
 

Table of Contents

The components of accumulated other comprehensive (loss) income for the three months ended June 30, 2018, are as follows:

 
 
 
 
 
Gain (Loss)
 
 
 
As of
 
Gain (Loss)
 
Reclassified
 
As of
 
March 31,
 
Recognized
 
from AOCI
 
June 30,

2018
 
in OCI
 
to Income
 
2018
Changes in fair market value of hedges:
 
 
 
 
 
 
 
Gross
$
1,332

 
$
240

 
$
(154
)
 
$
1,418

Income tax (benefit) expense
(341
)
 
(54
)
 
35

 
(360
)
Net
991

 
186

 
(119
)
 
1,058



 

 

 

Changes in unrealized pension cost:
 
 
 
 
 
 
 
Gross
(128,672
)
 

 
1,617

 
(127,055
)
Income tax expense (benefit)
52,520

 

 
(368
)
 
52,152

Net
(76,152
)
 

 
1,249

 
(74,903
)



 

 


 


Cumulative translation adjustment:
 

 
 
 
 

 
 

Gross
(1,747
)
 
(368
)
 

 
(2,115
)
Income tax expense (benefit)
105

 
(7
)
 

 
98

Net
(1,642
)
 
(375
)
 

 
(2,017
)
Total accumulated other comprehensive (loss) income
$
(76,803
)
 
$
(189
)
 
$
1,130

 
$
(75,862
)

The components of accumulated other comprehensive (loss) income for the three months ended June 30, 2017, are as follows:
 
 
 
 
 
Gain (Loss)
 
 
 
As of
 
Gain (Loss)
 
Reclassified
 
As of
 
March 31,
 
Recognized
 
from AOCI
 
June 30,

2017
 
in OCI
 
to Income
 
2017
Changes in fair market value of hedges:

 

 
 
 
 
Gross
$
1,308

 
$
(223
)
 
$
(15
)
 
$
1,070

Income tax (benefit) expense
(474
)
 
81

 
5

 
(388
)
Net
834

 
(142
)
 
(10
)
 
682



 

 

 

Changes in unrealized pension cost:
 
 
 
 
 
 
 
Gross
(150,322
)
 

 
1,466

 
(148,856
)
Income tax expense (benefit)
60,192

 

 
(524
)
 
59,668

Net
(90,130
)
 

 
942

 
(89,188
)
 
 
 
 
 
 
 
 
Cumulative translation adjustment:
 

 
 
 
 

 
 

Gross
(2,328
)
 
196

 

 
(2,132
)
Income tax expense
94

 
4

 

 
98

Net
(2,234
)
 
200

 

 
(2,034
)
Total accumulated other comprehensive (loss) income
$
(91,530
)
 
$
58

 
$
932

 
$
(90,540
)










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Table of Contents

The components of accumulated other comprehensive (loss) income for the six months ended June 30, 2018, are as follows:
 
 
 
 
 
Gain (Loss)
 
 
 
As of
 
Gain (Loss)
 
Reclassified
 
As of
 
December 31,
 
Recognized
 
from AOCI
 
June 30,

2017
 
in OCI
 
to Income
 
2018
Changes in fair market value of hedges:
 
 
 
 
 
 
 
Gross
$
289

 
$
1,397

 
$
(268
)
 
$
1,418

Income tax (benefit) expense
(105
)
 
(315
)
 
60

 
(360
)
Net
184

 
1,082

 
(208
)
 
1,058



 

 

 

Changes in unrealized pension cost:
 
 
 
 
 
 
 
Gross
(130,096
)
 

 
3,041

 
(127,055
)
Income tax expense (benefit)
52,837

 

 
(685
)
 
52,152

Net
(77,259
)
 

 
2,356

 
(74,903
)

 

 

 


 


Cumulative translation adjustment:


 
 
 
 

 
 

Gross
(1,985
)
 
(130
)
 

 
(2,115
)
Income tax expense (benefit)
100

 
(2
)
 

 
98

Net
(1,885
)
 
(132
)
 

 
(2,017
)
Total accumulated other comprehensive (loss) income
$
(78,960
)
 
$
950

 
$
2,148

 
$
(75,862
)


The components of accumulated other comprehensive (loss) income for the six months ended June 30, 2017, are as follows:
 
 
 
 
 
Gain (Loss)
 
 
 
As of
 
Gain (Loss)
 
Reclassified
 
As of
 
December 31,
 
Recognized
 
from AOCI
 
June 30,
 
2016
 
in OCI
 
to Income
 
2017
Changes in fair market value of hedges:
 
 
 
 
 
 
 
Gross
$
116

 
$
819

 
$
135

 
$
1,070

Income tax benefit
(42
)
 
(297
)
 
(49
)
 
(388
)
Net
74

 
522

 
86

 
682



 

 

 

Changes in unrealized pension cost:
 
 
 
 
 
 
 
Gross
(151,618
)
 

 
2,762

 
(148,856
)
Income tax expense (benefit)
60,672

 

 
(1,004
)
 
59,668

Net
(90,946
)
 

 
1,758

 
(89,188
)



 

 


 


Cumulative translation adjustment:
 

 
 
 
 

 
 

Gross
(2,414
)
 
282

 

 
(2,132
)
Income tax expense
92

 
6

 

 
98

Net
(2,322
)
 
288

 

 
(2,034
)
Total accumulated other comprehensive (loss) income
$
(93,194
)
 
$
810

 
$
1,844

 
$
(90,540
)


18
 

Table of Contents

NOTE 14 – Shareholders’ Equity

Share count and par value data related to shareholders’ equity are as follows:
 
 
As of
 
June 30,

December 31,
 
2018
 
2017
Preferred Stock
 
 
 
Par value per share
No par value

 
No par value

Shares authorized
25,000,000

 
25,000,000

Shares outstanding

 

Common Stock
 
 
 
Par value per share
No par value

 
No par value

Shares authorized
75,000,000

 
75,000,000

Shares issued
56,781,065

 
56,632,488

Shares outstanding
33,087,043

 
32,938,466

Treasury stock
 
 
 
Shares held
23,694,022

 
23,694,022

 
No common stock repurchases were made during the six months ended June 30, 2018. Through June 30, 2018, we had purchased an aggregate of $7,446 under a board-authorized share repurchase plan allowing for up to $25,000 in stock repurchases. Approximately $17,554 is available for future purchases.

A roll-forward of common shares outstanding is as follows:
 
Six Months Ended
 
June 30,
 
June 30,
 
2018
 
2017
Balance at the beginning of the year
32,938,466

 
32,762,494

Repurchases

 

Shares issued upon exercise of stock options

 

Restricted share issuances
148,577

 
170,832

Balance at the end of the period
33,087,043

 
32,933,326

 
Certain potentially dilutive restricted stock units are excluded from diluted earning per share because they are anti-dilutive. The number of awards that were anti-dilutive at June 30, 2018 and June 30, 2017 were 72,658 and 122,511, respectively.

NOTE 15 - Stock-Based Compensation
 
At June 30, 2018, we had five active stock-based compensation plans: 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”), the 2014 Performance & Incentive Plan (“2014 Plan”), and the 2018 Equity and Incentive Compensation Plan ("2018 Plan").  Future grants can only be made under the 2018 Plan.










19
 

Table of Contents

The following table summarizes the compensation expense included in selling, general and administrative expenses in the Condensed Consolidated Statements of Earnings related to stock-based compensation plans:
 
Three Months Ended
 
Six Months Ended

June 30,

June 30,

June 30,

June 30,
 
2018
 
2017
 
2018
 
2017
Service-Based RSUs
$
563

 
$
465

 
$
1,018

 
$
1,015

Performance-Based RSUs
643

 
297

 
1,153

 
680

Cash-settled RSUs
57


46

 
15


(8
)
Total
$
1,263

 
$
808

 
$
2,186

 
$
1,687

Income tax benefit
285

 
304

 
494

 
634

Net
$
978

 
$
504

 
$
1,692

 
$
1,053


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

June 30, 2018

Period
Service-Based RSUs
$
1,973


1.94
Performance-Based RSUs
3,326


1.64
Total
$
5,299


1.75
 
We recognize expense on a straight-line basis over the requisite service period for each separately vesting portion of the award as if the award was, in substance, multiple awards.
 
The following table summarizes the status of these plans as of June 30, 2018:
 
2018 Plan
 
2014 Plan
 
2009 Plan
 
2004 Plan
 
Directors' Plan
Awards originally available
2,500,000


1,500,000


3,400,000


6,500,000


N/A

Performance-based options outstanding


285,000







Maximum potential RSU and cash settled awards outstanding


732,975


92,600


35,952


5,522

Maximum potential awards outstanding

 
1,017,975

 
92,600

 
35,952

 
5,522

RSUs and cash settled awards vested and released









Awards available for grant
2,500,000

 

 

 

 

Stock Options

We have no stock options exercisable or outstanding as of June 30, 2018, other than the performance-based stock options described below.
 
Performance-Based Stock Options

During 2015 and 2016, the Compensation Committee of the Board of Directors of the Company (the “Committee”) granted a total of 350,000 performance-based stock option awards (“Performance-Based Option Awards”) for certain employees under the 2014 Plan, of which 285,000 remain outstanding after considering forfeitures.  The Performance-Based Option Awards have an exercise price of $18.37, a term of five years, and generally will become exercisable (provided the optionee remains employed by the Company or an affiliate) upon our attainment of at least $600,000 in revenues during any of our trailing four quarterly periods (as determined by the Committee) during the term.  We have not recognized any expense on these Performance-Based Option Awards

20
 

Table of Contents

for the six-month periods ended June 30, 2018 and 2017, since the revenue target was not deemed likely to be attained based on our current forecast.
Service-Based Restricted Stock Units
 
The following table summarizes the service-based RSU activity as of and for the six months ended June 30, 2018
 
Units
 
Weighted
Average
Grant Date
Fair Value
Outstanding at January 1, 2018
399,347

 
$
14.60

Granted
74,222

 
26.31

Vested and released
(130,301
)
 
14.22

Forfeited
(1,938
)
 
20.86

Outstanding at June 30, 2018
341,330

 
$
17.26

Releasable at June 30, 2018
194,674

 
$
12.82

 
Performance and Market-Based Restricted Stock Units

The following table summarizes the performance and market-based RSU activity as of and for the six months ended June 30, 2018:
 
Units
 
Weighted
Average
Grant Date
Fair Value
Outstanding at January 1, 2018
271,305

 
$
18.77

Granted
72,043

 
28.75

Attained by performance
18,600

 
17.66

Released
(72,456
)
 
18.66

Forfeited
(21,700
)
 
17.66

Outstanding at June 30, 2018
267,792

 
$
21.44

Releasable at June 30, 2018

 
$


The following table summarizes each grant of performance awards outstanding at June 30, 2018.
Description
Grant Date
Vesting Year
Vesting Dependency
Target Units Outstanding
Maximum Number of Units to be Granted
2016 - 2018 Performance RSUs
February 16, 2016
2018
35% RTSR, 35% sales growth, 30% operating cash flow
92,840

185,680

2017 - 2019 Performance RSUs
February 9, 2017
2019
35% RTSR, 35% sales growth, 30% operating cash flow
71,796

143,592

2017 - 2019 Performance RSUs
February 9, 2017
2018 - 2020
Operating Income
27,113

27,113

2018 - 2020 Performance RSUs
February 8, 2018
2020
35% RTSR, 35% sales growth, 30% operating cash flow
40,223

80,446

2018 - 2020 Performance RSUs
February 16, 2018
2020
35% RTSR, 35% sales growth, 30% operating cash flow
31,820

63,640

Single Crystal Performance RSUs
March 31, 2016
2018
Various
4,000

8,000










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Table of Contents

Cash-Settled Restricted Stock Units

Cash-Settled RSUs entitle the holder to receive the cash equivalent of one share of common stock for each unit when the unit vests. These RSUs are issued to key employees residing in foreign locations as direct compensation. Generally, these RSUs vest over a three-year period. Cash-Settled RSUs are classified as liabilities and are remeasured at each reporting date until settled. At June 30, 2018 and December 31, 2017 we had 17,248 and 14,082 cash-settled RSUs outstanding, respectively. At June 30, 2018 and December 31, 2017, liabilities of $184 and $241, respectively were included in Accrued liabilities on our Condensed Consolidated Balance Sheets.

NOTE 16 — Fair Value Measurements
 
We use interest rate swaps to convert our Revolving Credit Facility’s variable rate of interest into a fixed rate and foreign currency forward contracts to hedge the effect of foreign currency changes on certain revenues and costs denominated in foreign currencies. These derivative financial instruments are measured at fair value on a recurring basis. 

The table below summarizes our financial assets that were measured at fair value on a recurring basis at June 30, 2018:
 
 
 
Quoted
 
 
 
 
 
 

 
Prices
 
 
 
 
 
 
Asset
 
in Active
 
Significant
 
 
 
 
Carrying
 
Markets for
 
Other
 
Significant
 
 
Value at
 
Identical
 
Observable
 
Unobservable
 
 
June 30,
 
Instruments
 
Inputs
 
Inputs
 

2018
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
Interest rate swaps
$
1,359

 
$

 
$
1,359

 
$

 
Foreign currency hedges
$
76

 
$

 
$
76

 
$

 
 
The table below summarizes the financial assets (liabilities) that were measured at fair value on a recurring basis as of December 31, 2017:
 
 
 
Quoted
 
 
 
 
 
Asset
 
Prices
 
 
 
 
 
(Liability)
 
in Active
 
Significant
 
 
 
Carrying
 
Markets for
 
Other
 
Significant
 
Value at
 
Identical
 
Observable
 
Unobservable
 
December 31,
 
Instruments
 
Inputs
 
Inputs

2017
 
(Level 1)
 
(Level 2)
 
(Level 3)
Interest rate swaps
$
971

 
$

 
$
971

 
$

Foreign currency hedges
$
(742
)

$


$
(742
)

$

 
The fair value of our interest rate swaps and foreign currency hedges were measured using standard valuation models using market-based observable inputs over the contractual terms, including forward yield curves, among others. There is a readily determinable market for these derivative instruments, but that market is not active and therefore they are classified within Level 2 of the fair value hierarchy.








22
 

Table of Contents

The table below provides a reconciliation of the recurring financial assets (liabilities) for our derivative instruments:
 
 
 
Foreign
 
Interest
 
Currency
Total gains (losses) for the period:
Rate Swaps
 
Hedges
Balance at January 1, 2017
$
753

 
$
(601
)
Settled in cash


(132
)
Included in earnings

 
38

Included in other comprehensive earnings
218

 
(47
)
Balance at December 31, 2017
$
971

 
$
(742
)
Settled in cash


(21
)
Included in earnings
(170
)
 
97

Included in other comprehensive earnings
558

 
742

Balance at June 30, 2018
$
1,359

 
$
76

 
Our long-term debt consists of the Revolving Credit Facility which is recorded at its carrying value. There is a readily determinable market for our long-term debt and it is classified within Level 2 of the fair value hierarchy as the market is not deemed to be active. The fair value of long-term debt approximates carrying value and was determined by valuing a similar hypothetical coupon bond and attributing that value to our long-term debt under the Revolving Credit Facility.

NOTE 17 — Income Taxes
The effective tax rates for the three and six-month periods ended June 30, 2018 and 2017 were:
 
Three Months Ended
 
Six Months Ended
 
June 30,

June 30,

June 30,

June 30,
 
2018

2017
 
2018

2017
Effective tax rate
37.7
%
 
28.4
%
 
30.2
%
 
29.4
%
 
Our effective income tax rate was 37.7% and 28.4% in the second quarters of 2018 and 2017, respectively. The increase in the effective tax rate for the three months ended June 30, 2018, compared with the same period in 2017, was primarily attributed to tax expense of $1,703 related to a one-time cash distribution from Taiwan, offset by a reduction in our statutory tax rate as a result of the 2017 Tax and Jobs Act (the "Tax Act"). The tax rate in the second quarter of 2018 was higher than the U.S. statutory federal tax rate primarily due to foreign withholding taxes, state taxes and foreign earnings that are taxed at higher rates. The tax rate in the second quarter of 2017 was lower than the U.S. statutory federal tax rate primarily due to lower foreign tax rates applicable on foreign earnings.

Our effective income tax rate was 30.2% and 29.4% in the first half of 2018 and 2017, respectively. The increase in the effective tax rate for the six months ended June 30, 2018, compared with the same period in 2017, was primarily attributed to tax expense of $1,703 related to a one-time cash distribution from Taiwan, offset by the previously mentioned statutory tax rate reduction resulting from the Tax Act. The tax rate in the first half of 2018 was higher than the U.S. statutory federal tax rate primarily due to foreign withholding taxes, state taxes, and foreign earnings that are taxed at higher rates. The tax rate in the first half of 2017 was lower than the U.S. statutory federal tax rate primarily due to tax benefits recorded upon vesting of restricted stock units, a release of valuation allowances recorded against realizable foreign NOLs, and favorable tax rates on foreign earnings, offset by the impact of state taxes, tax expense for withholding taxes on the anticipated distribution of earnings in China, and other various permanent items.

We recognized the income tax effects of the Tax Act in the audited consolidated financial statements included in our 2017 Annual Report on Form 10-K. Staff Accounting Bulletin No. 118 provides Securities and Exchange Commission staff guidance for the application of ASC Topic 740, Income Taxes, which allows for a measurement period of up to one year from the enactment date for companies to complete their accounting for the U.S. tax law changes. As such, our 2017 financial results reflected a provisional amount of $6,267 that was recorded as deferred tax expense related to the revaluation of deferred tax assets and liabilities, and a provisional amount of $11,734 that was recorded as current tax expense related to the transition tax on the mandatory deemed repatriation of foreign earnings. During the three and six months ended June 30, 2018, we recognized measurement period adjustments that resulted in additional tax expense of $0 and $241, respectively. Any subsequent adjustments to our provisional estimated amounts will be recorded to tax expense in the quarter when the analysis is complete.
For the calendar year beginning in 2018, we are subject to several new provisions of the Tax Act including but not limited to the Global Intangible Low-Taxed Income (GILTI) tax. We have provisionally elected to account for any GILTI tax in the period in

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which it is incurred, and therefore have not provided any deferred tax impacts in our consolidated financial statements. For these computations, we have recorded an estimate in our effective tax rate for the three-months ended June 30, 2018. The company will continue to refine our estimates as additional guidance and information becomes available.
In general, outside of Canada and the U.K., it has been our historical practice to permanently reinvest the earnings of our non-U.S. subsidiaries into those operations. However, as a result of the Tax Act, we can repatriate our cumulative undistributed foreign earnings to the U.S. as needed with minimal U.S. income tax consequences other than the one-time deemed repatriation tax. We will continue to evaluate whether to repatriate all or a portion of the cumulative undistributed foreign earnings based on expansion needs and as circumstances change. We are still evaluating whether to change our indefinite reinvestment assertion in light of the Tax Act and consider that conclusion to be incomplete under guidance issued by SAB 118. If we subsequently change our assertion during the measurement period, we will account for the change in assertion as part of the Tax Act enactment.
Our continuing practice is to recognize interest and/or penalties related to income tax matters as income tax expense. For the three and six months ended June 30, 2018, and 2017, we recorded interest and penalties of $0 and $176, and $14 and $352, respectively.

NOTE 18 - Business Combinations

On May 15, 2017, we acquired 100% of the equity interest in Noliac A/S, a privately-held company, for $19.3 million in cash. Noliac A/S is a designer and manufacturer of tape cast and bulk piezoelectric material as well as transducers for use in the telecommunications, industrial, medical, and defense industries. This acquisition enabled us to increase our product base within our ceramics product lines as well as expand our presence in the European market.

The purchase price of $19,121, net of cash acquired of $199, has been allocated to the assets acquired and liabilities assumed on the acquisition date based on their fair values.
 
Fair Values at May 15, 2017
Current assets
$
2,836

Property, plant and equipment
580

Other assets
395

Goodwill
9,313

Intangible assets
9,142

Fair value of assets acquired
22,266

Less fair value of liabilities acquired
(3,145
)
Net cash paid
$
19,121


Goodwill recorded in connection with this acquisition represents the value we expect to be created by combining the operations of the acquired business with our existing operations, including the expansion into markets within our existing business, access to new customers, and potential cost savings and synergies. Goodwill related to this acquisition is expected to be deductible for tax purposes.

We incurred $291 in transaction related costs during the six months ended June 30, 2017. These costs are included in selling, general and administrative costs in our Consolidated Statements of Earnings.



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NOTE 19 — Recent Accounting Pronouncements
ASU 2018-02 "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income"
In February 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2018-02 "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income". This ASU allows for a reclassification from accumulated comprehensive income to retained earnings for the stranded tax effects resulting from the Tax Cuts and Jobs Act enacted in December 2017. This ASU is effective for annual periods beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted in any interim period for which financial statements have not been issued. We are evaluating the impact this ASU may have on our financial statements.
ASU 2017-12 "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities"
In August 2017, the FASB issued ASU No. 2017-12 "Derivatives and Hedging (Topic 815): Target Improvements to Accounting for Hedging Activities". This ASU is meant to better align an entity's risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and presentation of the effects of the hedging instrument and the hedged item in the financial statements. This ASU also allows an entity to assess hedge effectiveness on a qualitative basis subsequent to the initial quantitative assessment if the facts and circumstances related to the hedging relationship have not changed such that the entity can assert qualitatively that the hedging relationship was and continues to be highly effective. This ASU is effective for annual periods beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted in any interim period after issuance. Any changes should be applied to all hedging relationships that exist at the date of adoption by applying a cumulative-effect adjustment related to eliminating the separate measurement of ineffectiveness to accumulated other comprehensive income with a corresponding adjustment to the opening balance of retained earnings as of the beginning of the fiscal year of adoption. Presentation and disclosure guidance is to be applied prospectively. We adopted the provisions of ASU 2017-12 as of April 1, 2018, see Note 1, Basis of Presentation.
ASU 2017-07 "Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Post-retirement Benefit Cost"
In March 2017, the FASB issued ASU No. 2017-07 "Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and net Periodic Post-retirement Benefit Cost". This ASU is meant to improve the presentation of net periodic pension and net periodic post-retirement benefits costs. Currently, pension and post-retirement benefit costs are comprised of several components reflecting the different aspects of an employer's financial arrangements and cost of providing benefits to employees. These components are aggregated for reporting, but prior guidance does not prescribe where the net cost should be presented in the income statement or capitalized in assets. This ASU requires disaggregation of the service cost component from other components of net benefit cost and provides explicit guidance on how to present the service cost and other components in the income statement, allowing only the service cost component of net benefit costs to be eligible for capitalization. These amendments should be applied retrospectively for the presentation of service cost and other components of net periodic pension and net post-retirement benefit cost in the income statement and prospectively for the capitalization of service cost and net periodic pension cost and periodic post-retirement benefit in assets. We adopted this ASU as of January 1, 2018. It did not have a material impact on our financial statements because the service cost component of our pension cost is immaterial to our financial results on a prospective basis.
ASU 2017-04 "Intangibles -Goodwill and Other (Topic 305): Simplifying the Test for Goodwill Impairment"
In January 2017, the FASB issued ASU No. 2017-04 "Intangibles - Goodwill and Other (Topic 305): Simplifying the Test for Goodwill Impairment". This ASU is meant to simplify the subsequent measurement of goodwill for impairment by eliminating the current Step 2 analysis in computing the implied fair value of goodwill. In addition, this ASU requires an entity to consider income tax effects on any tax deductible goodwill on the carrying amount of the reporting unit when measuring an impairment loss, if applicable. Under this ASU, impairment is determined by comparing the reporting unit's fair value to the carrying value. This amendment is effective for fiscal years beginning after December 15, 2019, with early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We do not expect this guidance to have an impact on our financial statements.





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ASU 2017-01 "Business Combinations (Topic 805): Clarifying the Definition of Business"
In January 2017, the FASB issued ASU No. 2017-01 "Business Combinations (Topic 805): Clarifying the Definition of Business". This ASU is meant to clarify the definition of a business to add guidance when determining when an acquisition or disposal should be accounted for as a sale of assets or business. This ASU provides a more robust framework to use in determining when a set of assets or activities should be classified as a business, providing more consistency in accounting for business or asset acquisitions. We adopted this ASU on January 1, 2018 and it will be applied to any business combinations subsequent to that date.
ASU 2016-16 "Income Taxes (Topic 740) Intra-Entity Transfers of Assets Other Than Inventory"
In October 2016, the FASB issued ASU No. 2016-16, "Intra-Entity Transfers of Assets Other Than Inventory". This ASU is meant to improve the accounting for the income tax effect of intra-entity transfers of assets other than inventory. Currently, U.S. GAAP prohibits the recognition of current and deferred income taxes for intra-entity asset transfers until the asset is sold to a third party. This ASU will now require companies to recognize the income tax effect of an intra-entity asset transfer (other than inventory) when the transaction occurs. This ASU is effective for public companies, for fiscal years beginning after December 15, 2019 and interim periods within those annual reporting periods. Early adoption is permitted and is to be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. This guidance is not expected to have a material impact on our consolidated financial statements.
ASU 2016-15 "Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments"
In August 2016, the FASB issued ASU No. 2016-15, "Classification of Certain Cash Receipts and Cash Payments". This ASU reduces the diversity in reporting of eight specific cash flow issues due to accounting guidance that is unclear or does not exist. The eight issues relate to certain debt activities, business combination activities, insurance settlements and other various activities. We adopted this ASU as of January 1, 2018 and it did not have an impact on our financial statements.
ASU 2016-02 "Leases (Topic 842)"
In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)". This amendment created a new Topic under the accounting standards codification to account for the provisions of the ASU. This amendment is meant to provide transparency and to improve comparability between entities. The ASU requires companies to record an asset and liability on the balance sheet for leases that were formerly designated as operating leases as well as leases designated as financing leases. The provisions of the ASU predominately change the recognition of leases for lessees; the provisions do not substantially change the accounting for lessors. This ASU will supersede the provisions of Topic 840 Leases.
The liability recorded for a lease is meant to recognize the lease payments and the asset as a right to use the underlying asset for the lease, including optional periods if it is reasonably certain the option will be exercised. Recording of the liability should be based on the present value of the lease payments. If a lease term is less than twelve months, a company is allowed to elect not to record the asset and liability. Expense related to these leases are to be amortized on a straight-line basis over the expected term of the lease.
Additionally, the provisions of this ASU provide additional guidance on separating lease terms from maintenance and other type of provisions that provide a good or service, accounting for sale-leaseback provisions, and leveraged leases.
Reporting in the cash flow statement remains virtually unchanged. Additional qualitative and quantitative disclosures are required.
These updates are required to be applied under a modified retrospective approach from the beginning of the earliest period presented in our financial statements upon adoption. The modified approach provides optional practical expedients that may be elected, which will allow companies to continue to account for leases under the previous guidance for leases that commenced prior to the effective date.
The provisions of this ASU are effective for fiscal years beginning after December 15, 2018 and early adoption is permitted. We have begun the process of reviewing existing agreements and are evaluating the impact of this ASU on our financial statements. We expect certain operating leases to be recognized as assets and liabilities as a result of adopting the standard.



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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”)
(in thousands, except percentages and per share amounts)
 
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, 2017.
Overview
CTS Corporation (“CTS”, “we”, “our” or “us”) is a leading designer and manufacturer of products that Sense, Connect and Move. We manufacture sensors, actuators, and electronic components in North America, Europe, and Asia, and provide engineered products to customers in the aerospace/defense, industrial, medical, telecommunications/IT, and transportation markets.
Results of Operations: Second Quarter 2018 versus Second Quarter 2017
 
The following table highlights changes in significant components of the Unaudited Condensed Consolidated Statements of Earnings for the quarters ended June 30, 2018, and June 30, 2017:
 
 
Three Months Ended
 
 
 
Percent of
 
Percent of
 
June 30,
 
June 30,
 
Percent
 
Net Sales – 
 
Net Sales – 
 
2018
 
2017
 
Change
 
2018
 
2017
Net sales
$
118,021

 
$
105,686

 
11.7

 
100.0

 
100.0
Cost of goods sold
76,208

 
69,892

 
9.0

 
64.6

 
66.1
Gross margin
41,813

 
35,794

 
16.8

 
35.4

 
33.9
Selling, general and administrative expenses
19,621

 
15,808

 
24.1

 
16.6


15.0
Research and development expenses
6,476

 
6,049

 
7.1

 
5.5


5.7
Restructuring charges
1,172

 
729

 
60.8

 
1.0


0.7
Total operating expenses
27,269

 
22,586

 
20.7

 
23.1

 
21.4
Operating earnings
14,544

 
13,208

 
10.1

 
12.3


12.5
Total other (expense) income
(2,973
)
 
716

 
(515.2
)
 
(2.5
)

0.7
Earnings before income taxes
11,571

 
13,924

 
(16.9
)
 
9.8

 
13.2
Income tax expense
4,362

 
3,958

 
10.2

 
3.7


3.7
Net earnings
$
7,209

 
$
9,966

 
(27.7
)
 
6.1

 
9.5
Earnings per share:
 
 
 
 
 
 
 
 
 
Diluted net earnings per share
$
0.21

 
$
0.30

 
 
 
 
 
 
 
Sales were $118,021 in the second quarter of 2018, an increase of $12,335 or 11.7% from the second quarter of 2017. Sales to transportation markets increased $5,185 or 7.5%.  Other sales increased $7,150 or 19.3%. The Noliac acquisition, which was completed in May 2017, added $2,508 in sales in the second quarter of 2018 and $1,543 in the second quarter of 2017.  Changes in foreign exchange rates increased sales by $1,794 year-over-year due to the U.S. Dollar depreciating compared to the Euro and Chinese Renminbi and relating mostly to sales of transportation products.
Gross margin as a percent of sales was 35.4% in the second quarter of 2018 compared to 33.9% in the second quarter of 2017. Major drivers for the improvement include savings related to product line transfers and favorable foreign exchange impact. The second quarter of 2017 also included costs related to certain production rework issues resolved in the first quarter of 2017.
Selling, general and administrative ("SG&A") expenses were $19,621 or 16.6% of sales in the second quarter of 2018 versus $15,808 or 15.0% of sales in the second quarter of 2017. The 2018 SG&A costs include a $950 environmental charge, $525 for tax projects, a full quarter of amortization of intangibles and other operating costs associated with our Noliac acquisition, higher stock-based compensation, and non-cash pension expense versus income in 2017. The environmental charge relates to soil remediation at one of our older facilities in Asia.

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Research and development expenses were $6,476 or 5.5% of sales in the second quarter of 2018 compared to $6,049 or 5.7% of sales in the comparable quarter of 2017. Research and development expenses are focused on expanded applications of existing products and new product development as well as current product and process enhancements.
Restructuring charges were $1,172 or 1.0% of sales in the second quarter of 2018. The charges were mainly for building and equipment relocation, severance, and travel costs related to the restructuring of certain operations as part of the 2016 Restructuring Plan. Restructuring charges were $729 or 0.7% of sales in the first quarter of 2017.
Operating earnings were $14,544 or 12.3% of sales in the second quarter of 2018 compared to operating earnings of $13,208 or 12.5% of sales in the comparable quarter of 2017 as a result of the items discussed above.
Other income and expense items are summarized in the following table:
 
Three Months Ended
 
June 30,

June 30,
 
2018
 
2017
Interest expense
$
(571
)
 
$
(752
)
Interest income
472

 
298

Other (expense) income, net
(2,874
)
 
1,170

Total other (expense) income
$
(2,973
)
 
$
716

Interest expense decreased mainly as a result of the reduction in debt year-over-year. Interest income increased due to higher interest rates. Other expense in the second quarter of 2018 was principally driven by foreign currency translation losses, mainly due to the appreciation of the U.S. Dollar compared to the Chinese Renminbi and Euro during the quarter.
 
 
Three Months Ended
 
June 30,
 
June 30,
 
2018
 
2017
Effective tax rate
37.7
%
 
28.4
%
 
Our effective income tax rate was 37.7% and 28.4% in the second quarters of 2018 and 2017, respectively. The increase in the effective tax rate for the three months ended June 30, 2018, compared with the same period in 2017, was primarily attributed to tax expense of $1,703 related to a one-time cash distribution from Taiwan, offset by a reduction in our statutory tax rate as a result of the 2017 Tax and Jobs Act.
























28
 

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Results of Operations: Six Months Ended June 30, 2018 versus Six Months Ended June 30, 2017
 
The following table highlights changes in significant components of the Unaudited Condensed Consolidated Statements of Earnings for the six months ended June 30, 2018, and June 30, 2017:

 
Six Months Ended
 
 
 
Percent of
 
Percent of
 
June 30,
 
June 30,
 
Percent
 
Net Sales – 
 
Net Sales – 
 
2018
 
2017
 
Change
 
2018
 
2017
Net sales
$
231,551


$
205,840

 
12.5

 
100.0

 
100.0
Cost of goods sold
151,305


135,822

 
11.4

 
65.3

 
66.0
Gross margin
80,246


70,018

 
14.6

 
34.7

 
34.0
Selling, general and administrative expenses
36,993


31,056

 
19.1

 
16.0

 
15.1
Research and development expenses
12,983


12,052

 
7.7

 
5.6

 
5.9
Restructuring charges
2,367


1,507

 
57.1

 
1.0

 
0.7
Total operating expenses
52,343

 
44,615

 
17.3

 
22.6

 
21.7
Operating earnings
27,903


25,403

 
9.8

 
12.1

 
12.3
Total other (expense) income
(1,028
)
 
746

 
(237.8
)
 
(0.4
)
 
0.4
Earnings before income taxes
26,875

 
26,149

 
2.8

 
11.6

 
12.7
Income tax expense
8,118

 
7,699

 
5.4

 
3.5

 
3.7
Net earnings
$
18,757

 
$
18,450

 
1.7

 
8.1

 
9.0
Earnings per share:
 
 
 
 
 
 
 
 
 
Diluted net earnings per share
$
0.56

 
$
0.55

 
 
 
 
 
 

Sales were $231,551 in the six months ended June 30, 2018, an increase of $25,711 or 12.5% from the six months ended June 30, 2017. Sales to transportation markets increased $13,097 or 9.7%. Other sales increased $12,614 or 17.8%. The Noliac acquisition, which was completed in May 2017, added $5,104 in sales in the first half of 2018 and $1,543 in the first half of 2017.  Changes in foreign exchange rates increased sales by $4,558 year-over-year due to the U.S. Dollar depreciating compared to the Euro and Chinese Renminbi and relating mostly to sales of transportation products.

Gross margin as a percent of sales was 34.7% in the first half of 2018 compared to 34.0% in the first half of 2017. Major drivers for the improvement include savings related to product line transfers and favorable foreign exchange impact. The first half of 2017 also included costs related to certain production rework issues resolved in the first quarter of 2017.

Selling, general and administrative expenses were $36,993 or 16.0% of sales in the six months ended June 30, 2018 versus $31,056 or 15.1% of sales in the comparable year-to-date period in 2017. The 2018 SG&A costs include a $950 environmental charge, $840 for tax projects, amortization of intangibles and other operating costs associated with our Noliac acquisition, higher stock-based compensation, and non-cash pension expense versus income in 2017. The environmental charge relates to soil remediation at one of our older facilities in Asia.

Research and development expenses were $12,983 or 5.6% of sales in the six months ended June 30, 2018 compared to $12,052 or 5.9% of sales in the comparable prior year period. Research and development expenses are focused on expanded applications of existing products and new product development as well as current product and process enhancements. 

Restructuring charges were $2,367 or 1.0% of sales in the first half of 2018. The charges were mainly for building and equipment relocation, severance, and travel costs related to the restructuring of certain operations as part of the 2016 Restructuring Plan. Restructuring charges were $1,507 or 0.7% of sales in the first half of 2017.










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Other income and expense items are summarized in the following table:
 
Six Months Ended
 
June 30,
 
June 30,
 
2018
 
2017
Interest expense
$
(1,112
)
 
$
(1,436
)
Interest income
954

 
551

Other (expense) income, net
(870
)
 
1,631

Total other (expense) income
$
(1,028
)
 
$
746


Interest expense decreased in the first six months of 2018 versus the same period of 2017 mainly as a result of the reduction in debt year-over-year. Interest income increased due to higher interest rates. Other expense in the first six months of 2018 was principally driven by foreign currency translation losses, mainly due to the appreciation of the U.S. Dollar compared to the Chinese Renminbi and Euro during the first half of the year.
 
Six Months Ended
 
June 30,
 
June 30,
 
2018
 
2017
Effective tax rate
30.2
%
 
29.4
%

Our effective income tax rate was 30.2% and 29.4% in the first half of 2018 and 2017, respectively. The increase in the effective tax rate for the six months ended June 30, 2018, compared with the same period in 2017, was primarily attributed to tax expense of $1,703 related to a one-time cash distribution from Taiwan, offset by a reduction in our statutory tax rate as a result of the 2017 Tax and Jobs Act.

Liquidity and Capital Resources

Cash and cash equivalents were $102,861 at June 30, 2018, and $113,572 at December 31, 2017, of which $94,507 and $112,531, respectively, were held outside the United States. The decrease in cash and cash equivalents of $10,711 was primarily driven by capital expenditures of $14,910 and net long-term debt payments of $19,300, which were partially offset by cash generated from operating activities of $27,721. Total long-term debt was $57,000 as of June 30, 2018 and $76,300 as of December 31, 2017. Total debt as a percentage of total capitalization, defined as long-term debt as a percentage of total debt and shareholders' equity, was 13.5% at June 30, 2018, compared to 18.2% at December 31, 2017.

Working capital decreased by $4,283 during the six months ended June 30, 2018, primarily due the decrease in cash and cash equivalents as well as the increase in accounts payable, which were partially offset by higher accounts receivable and inventory.
Cash Flows from Operating Activities
Net cash provided by operating activities was $27,721 during the first six months of 2018. Components of net cash provided by operating activities included net earnings of $18,757, depreciation and amortization expense of $10,961, other net non-cash items of $1,677, and a net cash outflow from changes in assets and liabilities of $3,674.
Cash Flows from Investing Activities
Net cash used in investing activities for the first six months of 2018 was $14,909, driven almost entirely by capital expenditures relating to our ongoing ERP project and production line movements.
Cash Flows from Financing Activities
Net cash used in financing activities for the first six months of 2018 was $23,367. These cash outflows were the result of net long-term debt payments of $19,300, dividend payments of $2,638, and taxes paid on behalf of equity award participants in the amount of $1,429.




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Capital Resources
Long‑term debt was comprised of the following: 
 
As of
 
June 30,
 
December 31,
 
2018
 
2017
Total credit facility
$
300,000

 
$
300,000

Balance outstanding
$
57,000

 
$
76,300

Standby letters of credit
$
1,940

 
$
2,065

Amount available
$
241,060

 
$
221,635

Weighted-average interest rate
3.01
%
 
2.30
%
Commitment fee percentage per annum
0.25
%
 
0.25
%
 
On August 10, 2015, we entered into a five-year credit agreement (“Revolving Credit Facility”) with a group of banks in order to support our financing needs.  The Revolving Credit Facility originally provided for a credit line of $200,000. On May 23, 2016, we requested and received a $100,000 increase in the aggregate revolving credit commitments under the existing credit agreement, which increased the credit line from $200,000 to $300,000
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 to comply with these covenants could reduce the borrowing availability under the Revolving Credit Facility.  We were in compliance with all debt covenants at June 30, 2018
We use interest rate swaps to convert the Revolving Credit Facility’s variable rate of interest into a fixed rate. In the second quarter of 2012, we entered into four separate interest rate swap agreements to fix interest rates on $50,000 of long-term debt for the periods January 2013 to January 2017. In the third quarter of 2012, we entered into four additional interest rate swap agreements to fix interest rates on $25,000 of long-term debt for the periods January 2013 to January 2017. In the third quarter of 2016, we entered into three additional forward-starting interest rate swap agreements to fix interest rates on $50,000 of long-term debt for the periods August 2017 to August 2020. The difference to be paid or received under the terms of the swap agreements will be recognized as an adjustment to interest expense when settled.
In general, other than in Canada and the U.K., it has been our historical practice to permanently reinvest the earnings of our non-U.S. subsidiaries in those operations. However, as a result of the Tax Cuts and Jobs Act (the "Act"), we can repatriate our cumulative undistributed foreign earnings to the U.S. when needed with minimal U.S. income tax consequences other than the one-time deemed repatriation charge. We will continue to evaluate whether to repatriate all or a portion of the cumulative undistributed foreign earnings based on our business needs. We are still evaluating whether to change our indefinite reinvestment assertion in light of the Act and consider that conclusion to be incomplete under guidance issued by SAB 118. If we subsequently change our assertion during the measurement period, we will account for the change in assertion as a change in estimate related to the enactment of the Act.
We have historically funded our capital and operating needs primarily through cash flows from operating activities, supported by available credit under our Revolving Credit Facility. We believe that cash flows from operating activities and available borrowings under our Revolving Credit Facility will be adequate to fund our working capital needs, capital expenditures, and debt service requirements for at least the next twelve months. However, we may choose to pursue additional equity and debt financing to provide additional liquidity or to fund acquisitions.









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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 our reported financial results.
Revenue Recognition
We recognize revenue upon the transfer of promised goods to our customers in an amount that reflects the consideration to which we expect to be entitled by applying the following five-step process specified in Accounting Standard Codification ("ASC") Topic 606:

Identify the contract(s) with a customer
Identify the performance obligations
Determine the transaction price
Allocate the transaction price
Recognize revenue when the performance obligations are met

Our contracts normally contain a single performance obligation that is fulfilled on the date of delivery based on shipping terms stipulated in the contract. We recognize revenue when (or as) the performance obligation has been satisfied after considering the impact of variable consideration and other factors that may affect the transaction price. Differences between the amount of revenue recognized and the amount invoiced, collected from, or paid to our customers are recognized as contract assets or liabilities. Contract assets will be reviewed for impairment when events or circumstances indicate that they may not be recoverable.
Product Warranties
Provisions for estimated warranty expenses related to our automotive products are made at the time products are sold. These estimates are established using a quoted industry rate. We adjust our warranty reserve for any known or anticipated warranty claims as new information becomes available. We evaluate our warranty obligations at least quarterly and adjust our accruals if it is probable that future costs will be different than our current reserve.
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 on historical experience and specific customer collection issues. Over the last three years, accounts receivable reserves have been approximately 0.2% to 0.7% of total accounts receivable. We believe our reserve level is appropriate considering the quality of the portfolio. While credit losses have historically been within expectations and the reserves 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 net realizable value. We review inventory quantities on hand and record a provision for excess and obsolete inventory based on forecasts of product demand and production requirements.
Over the last three years, our reserves for excess and obsolete inventories have ranged from 11.9% to 20.1% of gross inventory. We believe our reserve level is appropriate considering the quantities and quality of the inventories.


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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 applicable 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 annually, or more frequently, if an event occurs or circumstances change that would more-likely-than-not reduce the fair value of a reporting unit below its carrying amount. Examples of such events or circumstances include, but are not limited to, the following:
Significant decline in market capitalization relative to net book value,
Significant adverse change in legal factors or in the business climate,
Adverse action or assessment by a regulator,
Unanticipated competition,
More-likely-than-not expectation that a reporting unit or a significant portion of a reporting unit will be sold or otherwise disposed of,
Testing for recoverability of a significant asset group within a reporting unit, and
Allocation of a portion of goodwill to a business to be disposed.
If we believe that one or more of the above indicators of impairment have occurred, we perform an impairment test. The test involves comparing the fair values of our reporting units with their carrying values. We recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value, but only to the extent of goodwill recognized.
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 October 1, 2017.
Under the "Income Approach — Discounted Cash Flow Method", the key assumptions include sales, cost of sales, and operating expense projections through the year 2021. These assumptions were determined by management utilizing our internal operating plan and assuming growth rates for revenues, operating expenses, and gross margin assumptions. The fourth key assumption under this approach is the discount rate, which is determined by looking at current risk-free rates, current market interest rates and the evaluation of risk premium relevant to the business segment. If any of our assumptions 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 which we believe have significant relevant similarities to CTS. For these eight companies, we calculated a range of EBITDA multiples derived from the ratio of enterprise value to EBITDA and compared these multiples to the corresponding multiples for each of our reporting units. Similar to the income approach discussed above, sales, cost of sales, operating expenses and growth rates were key assumptions utilized in developing projected EBITDA levels for each of our reporting units. The market prices of CTS and the other guideline company's shares are also key assumptions as they are used to calculate enterprise value. The Market approach is based upon historical and current economic conditions, which might not reflect the long-term prospects or opportunities for our reporting units being evaluated.
The results of these two methods are weighted based upon management's determination.
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, if any. This 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 updates to the assumptions to reflect the current market environment. Based upon our latest assessment, we determined that our goodwill was not impaired as of October 1, 2017. We will monitor future results and will perform a test if indicators trigger an impairment review.

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Valuation of Other Intangible and Long-Lived Assets
We evaluate the impairment of identifiable intangibles and other long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors considered that may trigger an impairment review consist of, but are not limited to, the following:
Significant decline in market capitalization relative to net book value,
Significant underperformance relative to expected historical or projected future operating results,
Significant changes in the manner of use of the acquired assets or the strategy for the overall business,
Significant negative industry or economic trends.
If we believe that one or more indicators of impairment have occurred, we perform a recoverability test by comparing the carrying amount of an asset or asset group to the sum of the undiscounted cash flows expected to result from the use and the eventual disposition of the asset or asset group. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value. No indicators of impairment were identified as of June 30, 2018.
Income Taxes
Our income tax expense, deferred tax assets and liabilities, and liabilities for unrecognized tax benefits reflect management’s best estimate of current and future taxes to be paid. We are subject to income taxes in the United States and numerous foreign jurisdictions. Significant judgments and estimates are required in the determination of the consolidated income tax expense.
Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, which will result in taxable or deductible amounts in the future. In evaluating our ability to recover our deferred tax assets in the jurisdiction from which they arise, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax-planning strategies, and results of recent operations. The assumptions about future taxable income require the use of significant judgment and are consistent with the plans and estimates we are using to manage the underlying businesses.
The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in a multitude of jurisdictions across our global operations. ASC 740 states that a tax benefit from an uncertain tax position may be recognized when it is more-likely-than-not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, on the basis of its technical merits.  We record unrecognized tax benefits as liabilities in accordance with ASC 740 and adjust these liabilities when our judgment changes as a result of the evaluation of new information not previously available. Because of the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the unrecognized tax liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which new information is available.
Our practice is to recognize interest and penalties related to income tax matters as part of income tax expense.
We earn a significant amount of our operating income outside of the U.S., which is generally deemed to be permanently reinvested in foreign jurisdictions except in Canada and the U.K. In 2015, as a result of changes in the business, the foreign earnings of these two subsidiaries were no longer permanently reinvested. Therefore, a provision for the expected taxes on repatriation of those earnings was recorded. However, as a result of the Tax Cuts and Jobs Act, we can repatriate our cumulative undistributed foreign earnings back to the U.S. when needed with minimal U.S. income tax consequences other than the one-time deemed repatriation charge. We will continue to evaluate whether to repatriate all or a portion of the cumulative undistributed foreign earnings based on expansion needs and as circumstances change. We are still evaluating whether to change our indefinite reinvestment assertion in light of the Act and consider that conclusion to be incomplete under guidance issued by SAB 118. If we subsequently change our assertion during the measurement period, we will account for the change in assertion as a change in estimate related to enactment of the Act.







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Significant Customers
Our net sales to customers representing at least 10% of total net sales were as follows:
 
Three Months Ended

Six Months Ended
 
June 30,

June 30,

June 30,

June 30,
 
2018
 
2017
 
2018
 
2017
Cummins Inc.
14.0
%

13.2
%

14.1
%

13.0
%
Toyota Motor Corporation
10.8
%
 
10.0
%
 
11.0
%

10.4
%
Honda Motor Co.
9.7
%
 
10.7
%
 
10.3
%

10.3
%

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 CTS' Annual Report on Form 10‑K for the fiscal year ended December 31, 2017. 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.

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Item 3.   Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in our market risk since December 31, 2017.
 
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 June 30, 2018.
Changes in Internal Control Over Financial Reporting
Beginning January 1, 2018, we adopted ASC 606 "Revenue from Contracts with Customers". It is expected to have an immaterial impact on our ongoing net income; however, we implemented changes to our processes related to revenue recognition and related internal controls. These changes included the development of new policies related to the five-step model, training, ongoing contract review requirements, and gathering of information to comply with disclosure requirements.  

PART II - OTHER INFORMATION

Not applicable

Item 1.  Legal Proceedings
From time to time we are involved in litigation with respect to matters arising from the ordinary conduct of our business, and currently certain claims are pending against us. In the opinion of management, 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.

Item 1A.  Risk Factors
There have been no significant changes to our risk factors since December 31, 2017.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
On April 27, 2015, we announced that our 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. As shown in the following table, there were no stock repurchases during the quarter ended June 30, 2018.
 
 
 
 
 
(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 December 31, 2017
 
 
 
 
 
 
$
17,554

January 1, 2018 - June 30, 2018

 

 

 
$

Total

 

 

 
$
17,554


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Item 6.  Exhibits 
(10)(a)
 
 
(10)(b)
 
 
(31)(a)
 
 
(31)(b)
 
 
(32)(a)
 
 
(32)(b)
 
 
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

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/ William M. Cahill
 
/s/ Ashish Agrawal
William M. Cahill
Chief Accounting Officer
 
Ashish Agrawal
Vice President and Chief Financial Officer
(Principal Accounting Officer)
 
(Principal Financial Officer)
 
 
 
Dated: July 26, 2018
 
Dated: July 26, 2018

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