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CTS CORP - Quarter Report: 2021 March (Form 10-Q)

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

For The Quarterly Period Ended March 31, 2021

OR

 

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

For the Transition Period from                            to                           

Commission File Number: 1-4639

 

CTS CORPORATION

(Exact name of registrant as specified in its charter)

 

 

IN

 

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

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

 

Trading Symbol(s)

 

Name of Each Exchange on Which Registered

Common stock, without par value

 

CTS

 

New York Stock Exchange

 

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

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes     No  

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

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13 (a) of the Exchange Act.  

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of April 26, 2021: 32,348,360.

 

 

 

 


 

 

CTS CORPORATION AND SUBSIDIARIES

TABLE OF CONTENTS

 

 

 

Page

 

 

 

PART I. FINANCIAL INFORMATION

 

 

 

 

 

 

 

 

 

Item 1.

 

Financial Statements

 

3

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Earnings (Unaudited) For the Three Months Ended March 31, 2021 and March 31, 2020

 

3

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Earnings (Unaudited) For the Three Months Ended March 31, 2021 and March 31, 2020

 

4

 

 

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets As of March 31, 2021 (Unaudited) and December 31, 2020

 

5

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows (Unaudited) For the Three Months Ended March 31, 2021 and March 31, 2020

 

6

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Shareholder's Equity (Unaudited) For the Three Months Ended March 31, 2021 and March 31, 2020

 

7

 

 

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements ‑ (Unaudited)

 

9

 

 

 

 

 

 

 

Item 2.

 

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

 

25

 

 

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

 

32

 

 

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

33

 

 

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

33

 

 

 

 

 

 

 

Item 1A.

 

Risk Factors

 

33

 

 

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

33

 

 

 

 

 

 

 

Item 6.

 

Exhibits

 

34

 

 

 

 

 

 

SIGNATURES

 

35

 

 

2

 


 

 

PART I - FINANCIAL INFORMATION

Item 1.   Financial Statements

CTS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS - UNAUDITED

(In thousands, except per share amounts)

 

 

 

Three Months Ended

 

 

 

 

March 31,

 

 

March 31,

 

 

 

 

2021

 

 

2020

 

 

Net sales

 

$

128,427

 

 

$

103,075

 

 

Cost of goods sold

 

 

85,836

 

 

 

70,176

 

 

Gross margin

 

 

42,591

 

 

 

32,899

 

 

Selling, general and administrative expenses

 

 

18,325

 

 

 

16,759

 

 

Research and development expenses

 

 

5,687

 

 

 

7,408

 

 

Restructuring charges

 

 

81

 

 

 

240

 

 

Operating earnings

 

 

18,498

 

 

 

8,492

 

 

Other (expense) income:

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(555

)

 

 

(851

)

 

Interest income

 

 

202

 

 

 

331

 

 

Other expense, net

 

 

(3,356

)

 

 

(1,982

)

 

Total other expense, net

 

 

(3,709

)

 

 

(2,502

)

 

Earnings before income taxes

 

 

14,789

 

 

 

5,990

 

 

Income tax expense

 

 

2,799

 

 

 

2,182

 

 

Net earnings

 

$

11,990

 

 

$

3,808

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.37

 

 

$

0.12

 

 

Diluted

 

$

0.37

 

 

$

0.12

 

 

Basic weighted – average common shares outstanding:

 

 

32,319

 

 

 

32,466

 

 

Effect of dilutive securities

 

 

301

 

 

 

327

 

 

Diluted weighted – average common shares outstanding:

 

 

32,620

 

 

 

32,793

 

 

Cash dividends declared per share

 

$

0.04

 

 

$

0.04

 

 

 

See notes to unaudited condensed consolidated financial statements.

3

 


 

CTS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS UNAUDITED

(In thousands of dollars)

 

 

 

Three Months Ended

 

 

 

 

March 31,

 

 

March 31,

 

 

 

 

2021

 

 

2020

 

 

Net earnings

 

$

11,990

 

 

$

3,808

 

 

Other comprehensive earnings (loss):

 

 

 

 

 

 

 

 

 

Changes in fair market value of derivatives, net of tax

 

 

124

 

 

 

(4,414

)

 

Changes in unrealized pension cost, net of tax

 

 

1,422

 

 

 

1,285

 

 

Cumulative translation adjustment, net of tax

 

 

12

 

 

 

(139

)

 

Other comprehensive earnings (loss)

 

$

1,558

 

 

$

(3,268

)

 

Comprehensive earnings

 

$

13,548

 

 

$

540

 

 

 

See notes to unaudited condensed consolidated financial statements.

4

 


 

CTS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands of dollars)

 

 

(Unaudited)

 

 

 

 

 

 

 

March 31,

 

 

December 31,

 

 

 

2021

 

 

2020

 

ASSETS

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

103,392

 

 

$

91,773

 

Accounts receivable, net

 

 

81,571

 

 

 

80,981

 

Inventories, net

 

 

47,558

 

 

 

45,870

 

Other current assets

 

 

14,115

 

 

 

14,607

 

Total current assets

 

 

246,636

 

 

 

233,231

 

Property, plant and equipment, net

 

 

94,848

 

 

 

97,437

 

Operating lease assets, net

 

 

23,620

 

 

 

23,281

 

Other Assets

 

 

 

 

 

 

 

 

Prepaid pension asset

 

 

56,502

 

 

 

56,642

 

Goodwill

 

 

109,468

 

 

 

109,497

 

Other intangible assets, net

 

 

76,931

 

 

 

79,121

 

Deferred income taxes

 

 

24,192

 

 

 

24,250

 

Other

 

 

2,468

 

 

 

2,590

 

Total other assets

 

 

269,561

 

 

 

272,100

 

Total Assets

 

$

634,665

 

 

$

626,049

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

53,315

 

 

$

50,489

 

Operating lease obligations

 

 

3,271

 

 

 

3,294

 

Accrued payroll and benefits

 

 

12,688

 

 

 

12,978

 

Accrued expenses and other liabilities

 

 

37,436

 

 

 

38,171

 

Total current liabilities

 

 

106,710

 

 

 

104,932

 

Long-term debt

 

 

50,000

 

 

 

54,600

 

Long-term operating lease obligations

 

 

23,510

 

 

 

23,163

 

Long-term pension obligations

 

 

7,290

 

 

 

7,466

 

Deferred income taxes

 

 

6,892

 

 

 

7,010

 

Other long-term obligations

 

 

4,547

 

 

 

5,196

 

Total Liabilities

 

 

198,949

 

 

 

202,367

 

Commitments and Contingencies (Note 11)

 

 

 

 

 

 

 

 

Shareholders’ Equity

 

 

 

 

 

 

 

 

Common stock

 

 

313,008

 

 

 

311,190

 

Additional contributed capital

 

 

39,616

 

 

 

41,654

 

Retained earnings

 

 

549,977

 

 

 

539,281

 

Accumulated other comprehensive loss

 

 

(94,363

)

 

 

(95,921

)

Total shareholders’ equity before treasury stock

 

 

808,238

 

 

 

796,204

 

Treasury stock

 

 

(372,522

)

 

 

(372,522

)

Total shareholders’ equity

 

 

435,716

 

 

 

423,682

 

Total Liabilities and Shareholders’ Equity

 

$

634,665

 

 

$

626,049

 

 

See notes to unaudited condensed consolidated financial statements.

5

 


 

CTS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS  UNAUDITED

(In thousands of dollars)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

March 31,

 

 

 

2021

 

 

2020

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net earnings

 

$

11,990

 

 

$

3,808

 

Adjustments to reconcile net earnings to net cash provided by operating

   activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

6,800

 

 

 

6,532

 

Pension and other post-retirement plan expense

 

 

1,980

 

 

 

673

 

Stock-based compensation

 

 

1,219

 

 

 

228

 

Asset impairment charges

 

 

 

 

 

1,016

 

Deferred income taxes

 

 

63

 

 

 

333

 

(Gain) on foreign currency hedges, net of cash

 

 

(42

)

 

 

(23

)

Changes in assets and liabilities, net of acquisition:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(1,121

)

 

 

6,176

 

Inventories

 

 

(2,052

)

 

 

(4,005

)

Operating lease assets

 

 

(340

)

 

 

(473

)

Other assets

 

 

168

 

 

 

799

 

Accounts payable

 

 

2,864

 

 

 

1,252

 

Accrued payroll and benefits

 

 

(210

)

 

 

(237

)

Operating lease liabilities

 

 

325

 

 

 

542

 

Accrued expenses and other liabilities

 

 

(1,398

)

 

 

(4,627

)

Pension and other post-retirement plans

 

 

(136

)

 

 

(67

)

Net cash provided by operating activities

 

 

20,110

 

 

 

11,927

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(1,638

)

 

 

(4,570

)

Net cash used in investing activities

 

 

(1,638

)

 

 

(4,570

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Payments of long-term debt

 

 

(241,600

)

 

 

(764,550

)

Proceeds from borrowings of long-term debt

 

 

237,000

 

 

 

816,050

 

Purchase of treasury stock

 

 

 

 

 

(5,304

)

Dividends paid

 

 

(1,291

)

 

 

(1,299

)

Taxes paid on behalf of equity award participants

 

 

(1,402

)

 

 

(1,903

)

Net cash (used in) provided by financing activities

 

 

(7,293

)

 

 

42,994

 

Effect of exchange rate changes on cash and cash equivalents

 

 

440

 

 

 

363

 

Net increase in cash and cash equivalents

 

 

11,619

 

 

 

50,714

 

Cash and cash equivalents at beginning of period

 

 

91,773

 

 

 

100,241

 

Cash and cash equivalents at end of period

 

$

103,392

 

 

$

150,955

 

Supplemental cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

378

 

 

$

678

 

Cash paid for income taxes, net

 

$

3,510

 

 

$

1,183

 

Non-cash financing and investing activities:

 

 

 

 

 

 

 

 

Capital expenditures incurred but not paid

 

$

1,019

 

 

$

1,843

 

 

See notes to unaudited condensed consolidated financial statements.

6

 


 

 

 

CTS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - UNAUDITED

(in thousands of dollars)

 

The following summarizes the changes in total equity for the three months ended March 31, 2021:

 

 

 

Common

Stock

 

 

Additional

Contributed

Capital

 

 

Retained

Earnings

 

 

Accumulated

Other

Comprehensive

Loss

 

 

Treasury

Stock

 

 

Total

 

Balances at December 31, 2020

 

$

311,190

 

 

$

41,654

 

 

$

539,281

 

 

$

(95,921

)

 

$

(372,522

)

 

$

423,682

 

Net earnings

 

 

 

 

 

 

 

 

11,990

 

 

 

 

 

 

 

 

 

11,990

 

Changes in fair market value of derivatives, net of tax

 

 

 

 

 

 

 

 

 

 

 

124

 

 

 

 

 

 

124

 

Changes in unrealized pension cost, net of tax

 

 

 

 

 

 

 

 

 

 

 

1,422

 

 

 

 

 

 

1,422

 

Cumulative translation adjustment, net of tax

 

 

 

 

 

 

 

 

 

 

 

12

 

 

 

 

 

 

12

 

Cash dividends of $0.04 per share

 

 

 

 

 

 

 

 

(1,294

)

 

 

 

 

 

 

 

 

(1,294

)

Issued shares on vesting of restricted stock units

 

 

1,818

 

 

 

(3,218

)

 

 

 

 

 

 

 

 

 

 

 

(1,400

)

Stock compensation

 

 

 

 

 

1,180

 

 

 

 

 

 

 

 

 

 

 

 

1,180

 

Balances at March 31, 2021

 

$

313,008

 

 

$

39,616

 

 

$

549,977

 

 

$

(94,363

)

 

$

(372,522

)

 

$

435,716

 

 

See notes to unaudited condensed consolidated financial statements.

7

 


 

CTS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - UNAUDITED

(in thousands of dollars)

 

The following summarizes the changes in total equity for the three months ended March 31, 2020:

 

 

 

Common

Stock

 

 

Additional

Contributed

Capital

 

 

Retained

Earnings

 

 

Accumulated

Other

Comprehensive

Loss

 

 

Treasury

Stock

 

 

Total

 

Balances at December 31, 2019

 

$

307,932

 

 

$

43,689

 

 

$

509,766

 

 

$

(91,726

)

 

$

(364,442

)

 

$

405,219

 

Net earnings

 

 

 

 

 

 

 

 

3,808

 

 

 

 

 

 

 

 

 

3,808

 

Changes in fair market value of derivatives, net of tax

 

 

 

 

 

 

 

 

 

 

 

(4,414

)

 

 

 

 

 

(4,414

)

Changes in unrealized pension cost, net of tax

 

 

 

 

 

 

 

 

 

 

 

1,285

 

 

 

 

 

 

1,285

 

Cumulative translation adjustment, net of tax

 

 

 

 

 

 

 

 

 

 

 

(139

)

 

 

 

 

 

(139

)

Cash dividends of $0.04 per share

 

 

 

 

 

 

 

 

(1,298

)

 

 

 

 

 

 

 

 

(1,298

)

Acquired 220,731 shares of treasury stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,304

)

 

 

(5,304

)

Issued shares on vesting of restricted stock units

 

 

2,166

 

 

 

(4,069

)

 

 

 

 

 

 

 

 

 

 

 

(1,903

)

Stock compensation

 

 

 

 

 

212

 

 

 

 

 

 

 

 

 

 

 

 

212

 

Balances at March 31, 2020

 

$

310,098

 

 

$

39,832

 

 

$

512,276

 

 

$

(94,994

)

 

$

(369,746

)

 

$

397,466

 

 

See notes to unaudited condensed consolidated financial statements.

 

8

 


 

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

(in thousands except for share and per share data)

March 31, 2021

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, 2020.

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. Certain reclassifications have been made to prior year amounts to conform to the current year presentation. The reclassifications had no impact on previously reported net earnings.

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 March 31, 2021 contained a significant financing component. Differences between the amount of revenue recognized and the amount invoiced, collected from, or paid to our customers are recognized as contract assets or liabilities. Contract assets will be reviewed for impairment when events or circumstances indicate that they may not be recoverable.

To the extent the transaction price includes variable consideration, we estimate the amount of variable consideration that should be included in the transaction price utilizing the most likely 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.

9

 


 

Disaggregated Revenue

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

 

 

 

Three months ended

 

 

 

March 31, 2021

 

 

March 31, 2020

 

Transportation

 

$

75,854

 

 

$

61,534

 

Industrial

 

 

26,625

 

 

 

20,843

 

Medical

 

 

11,276

 

 

 

9,370

 

Aerospace & Defense

 

 

11,670

 

 

 

9,005

 

Telecom & IT

 

 

3,002

 

 

 

2,323

 

Total

 

$

128,427

 

 

$

103,075

 

 

NOTE 3 – Business Acquisitions

On December 30, 2020, we acquired 100% of the outstanding shares of Sensor Scientific, Inc. (“SSI”). SSI is a manufacturer of high-quality thermistors and temperature sensor assemblies serving original equipment manufacturers (“OEMs”) for applications that require precision and reliability in the medical, industrial and defense markets. SSI has complementary capabilities with our existing temperature sensing platform and the acquisition expands our presence in the medical end market. It also provides high quality ceramic processing capabilities and valuable customer partnerships that expands our temperature sensing product portfolio and builds on our strategy to focus on innovative products that sense, connect and move.

The purchase price, which includes assumed changes in working capital, of $10,309 has been allocated to the fair values of assets and liabilities acquired as of December 30, 2020. The allocation of the purchase price continues to be preliminary pending the completion of the valuation of intangible assets and finalization of management's estimates, which are expected to occur in the second quarter. The information included below represents our current estimate of the purchase price allocation.

The following table summarizes the consideration paid and the fair values of the assets acquired, and the liabilities assumed as of the date of acquisition of SSI:

 

 

 

Consideration

Paid

 

Cash paid, net of cash acquired of $470

 

$

8,309

 

Contingent consideration

 

 

2,000

 

Purchase price

 

$

10,309

 

 

 

 

Fair Values at

December 30, 2020

 

Current assets

 

$

2,550

 

Property, plant and equipment

 

 

67

 

Other assets

 

 

12

 

Goodwill

 

 

3,412

 

Intangible assets

 

 

5,340

 

Fair value of assets acquired

 

 

11,381

 

Less fair value of liabilities acquired

 

 

(1,072

)

Purchase price

 

$

10,309

 

 

Goodwill represents value the Company expects to be created by combining the operations of the acquired business with the Company's operations, including the expansion of customer relationships, access to new customers, and potential cost savings and synergies. Goodwill related to the acquisition is expected to be deductible for tax purposes.

All contingent consideration is payable in cash and is based on success factors related to the integration process as well as upon the achievement of a revenue performance target through the year ending December 31, 2022, with the possibility of prorated interim payments. The Company recorded $2,000 as the acquisition date fair value of the contingent consideration based on an estimate of the

10

 


 

probability of achieving the performance targets. This represents the maximum amount of contingent consideration payable by the Company. This amount is also reflected as an addition to the purchase price and will be evaluated quarterly.

As of March 31, 2021, $150 of the contingent consideration became due based on revenue targets achieved and will be paid out in the second quarter. As of March 31, 2021, and December 31, 2020, $950 and $800 were recorded in accrued expenses and other liabilities and $1,050 and $1,200 in other long-term obligations, in each case, respectively.

The following table summarizes the carrying amounts and weighted average lives of the acquired intangible assets:

 

 

 

Carrying

Value

 

 

Weighted

Average

Amortization

Period

 

Customer lists/relationships

 

$

5,200

 

 

 

11.0

 

Technology and other intangibles

 

 

140

 

 

 

3.0

 

Total

 

$

5,340

 

 

 

 

 

The amounts and assumptions included above remain estimates that may be adjusted by the Company once purchase accounting is complete.

NOTE 4 – Accounts Receivable, net

The components of accounts receivable, net are as follows:

 

 

 

As of

 

 

 

March 31,

 

 

December 31,

 

 

 

2021

 

 

2020

 

Accounts receivable, gross

 

$

82,334

 

 

$

81,745

 

Less: Allowance for credit losses

 

 

(763

)

 

 

(764

)

Accounts receivable, net

 

$

81,571

 

 

$

80,981

 

 

NOTE 5 – Inventories, net

Inventories, net consists of the following:

 

 

 

As of

 

 

 

March 31,

 

 

December 31,

 

 

 

2021

 

 

2020

 

Finished goods

 

$

10,222

 

 

$

10,647

 

Work-in-process

 

 

18,841

 

 

 

16,927

 

Raw materials

 

 

26,267

 

 

 

24,893

 

Less: Inventory reserves

 

 

(7,772

)

 

 

(6,597

)

Inventories, net

 

$

47,558

 

 

$

45,870

 

 

11

 


 

 

NOTE 6 – Property, Plant and Equipment, net

Property, plant and equipment, net is comprised of the following:

 

 

 

As of

 

 

 

March 31,

 

 

December 31,

 

 

 

2021

 

 

2020

 

Land and land improvements

 

$

1,095

 

 

$

1,095

 

Buildings and improvements

 

 

69,346

 

 

 

69,360

 

Machinery and equipment

 

 

235,310

 

 

 

233,743

 

Less: Accumulated depreciation

 

 

(210,903

)

 

 

(206,761

)

Property, plant and equipment, net

 

$

94,848

 

 

$

97,437

 

Depreciation expense for the three months ended

   March 31, 2021

 

 

 

 

 

$

4,431

 

Depreciation expense for the three months ended

   March 31, 2020

 

 

 

 

 

$

4,237

 

 

NOTE 7 – Retirement Plans

Pension Plans

Net pension expense for our domestic and foreign plans included in other expense, net in the Condensed Consolidated Statement of Earnings is as follows:

 

 

 

Three months ended

 

 

 

March 31,

 

 

March 31,

 

 

 

2021

 

 

2020

 

Net pension expense

 

$

1,957

 

 

$

664

 

 

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

 

 

 

Domestic Pension Plans

 

 

Foreign Pension Plans

 

 

 

Three Months Ended

 

 

Three Months Ended

 

 

 

March 31,

 

 

March 31,

 

 

March 31,

 

 

March 31,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Service cost

 

$

 

 

$

 

 

$

6

 

 

$

7

 

Interest cost

 

 

1,253

 

 

 

1,443

 

 

 

4

 

 

 

7

 

Expected return on plan assets(1)

 

 

(1,113

)

 

 

(2,454

)

 

 

(3

)

 

 

(4

)

Amortization of loss

 

 

1,767

 

 

 

1,622

 

 

 

43

 

 

 

43

 

Total expense, net

 

$

1,907

 

 

$

611

 

 

$

50

 

 

$

53

 

 

(1)

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

 

In February 2020, the CTS Board of Directors authorized management to explore termination of the U.S.-based pension plan ("Plan"), subject to certain conditions. On June 1, 2020, we entered the Fifth Amendment to the Plan whereby we set an effective termination date for the Plan of July 31, 2020. In February 2021, we received a determination letter from the Internal Revenue Service that allows us to proceed with the termination process for the Plan. In connection with the termination, the Plan has offered a window extending from March 29, 2021 through May 7, 2021 to certain eligible participants to elect lump sum payments. The distribution date is June 1, 2021. The completion of the Plan termination process, including the final purchase of annuities, is expected to occur in the second half of 2021.

Upon settlement of the pension liability, we will reclassify the related pension losses, currently recorded in accumulated other comprehensive loss, to the Condensed Consolidated Statements of Earnings. As of March 31, 2021, we had gross unrecognized losses related to the Plan of $123,238 in accumulated other comprehensive loss that are expected to be recognized in the income statement in 2021. Since the amount of the settlement depends on a number of factors determined as of the liquidation date, including lump sum payout estimates, the annuity pricing interest rate environment and asset performance, we are currently unable to determine the ultimate cost of the settlement. However, we estimate non-cash settlement charges of approximately $10,000 to $20,000 will be

12

 


 

recognized in the second quarter of 2021 with the remaining amount of the gross accumulated other comprehensive loss balance to be recognized upon final settlement. We do not expect any cash contributions from the Company to the Plan as a result of this termination because Plan assets significantly exceed estimated liabilities.

Other Post-retirement Benefit Plan

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

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

March 31,

 

 

 

2021

 

 

2020

 

Service cost

 

$

 

 

$

 

Interest cost

 

 

23

 

 

 

30

 

Amortization of gain

 

 

 

 

 

(21

)

Total expense, net

 

$

23

 

 

$

9

 

 

NOTE 8 – Goodwill and Other Intangible Assets

Other Intangible Assets

Other intangible assets, net consist of the following components:

 

 

 

As of

 

 

 

March 31, 2021

 

 

 

Gross

Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net Amount

 

Customer lists/relationships

 

$

97,393

 

 

$

(45,447

)

 

$

51,946

 

Technology and other intangibles

 

 

47,441

 

 

 

(22,456

)

 

 

24,985

 

In process research and development

 

 

2,200

 

 

 

(2,200

)

 

 

 

Other intangible assets, net

 

$

147,034

 

 

$

(70,103

)

 

$

76,931

 

Amortization expense for the three months ended

   March 31, 2021

 

 

 

 

 

$

2,369

 

 

 

 

 

 

 

 

As of

 

 

 

December 31, 2020

 

 

 

Gross

Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net Amount

 

Customer lists/relationships

 

$

97,355

 

 

$

(44,002

)

 

$

53,353

 

Technology and other intangibles

 

 

47,301

 

 

 

(21,533

)

 

 

25,768

 

In process research and development

 

 

2,200

 

 

 

(2,200

)

 

 

 

Other intangible assets, net

 

$

146,856

 

 

$

(67,735

)

 

$

79,121

 

Amortization expense for the three months ended

   March 31, 2020

 

 

 

 

 

$

2,295

 

 

 

 

 

 

Remaining amortization expense for other intangible assets as of March 31, 2021 is as follows:

 

 

Amortization

expense

 

2021

 

$

7,170

 

2022

 

 

9,173

 

2023

 

 

7,167

 

2024

 

 

7,005

 

2025

 

 

6,783

 

Thereafter

 

 

39,633

 

Total amortization expense

 

$

76,931

 

 

Goodwill

13

 


 

Changes in the net carrying amount of goodwill were as follows:

 

 

Total

 

Goodwill as of December 31, 2020

 

$

109,497

 

     Decrease from purchase accounting adjustments

 

 

(29

)

Goodwill as of March 31, 2021

 

 

109,468

 

 

NOTE 9 – Costs Associated with Exit and Restructuring Activities

Restructuring charges are reported as a separate line within operating earnings in the Condensed Consolidated Statement of Earnings.

Total restructuring charges are as follows:

 

 

 

Three Months Ended

 

 

 

March 31, 2021

 

 

March 31, 2020

 

Restructuring charges

 

$

81

 

 

$

240

 

 

September 2020 Plan

In September 2020, we initiated a restructuring plan focused on optimizing our manufacturing footprint and improving operational efficiency by better utilizing our systems capabilities (the "September 2020 Plan"). This plan includes transitioning certain administrative functions to a shared service center, realignment of manufacturing locations, and certain other efficiency improvement actions. The restructuring cost of the September 2020 Plan is estimated to be in the range of $4,600 and $6,000, including workforce reduction charges, building and equipment relocation charges and other contract and asset-related costs. In addition to these charges, we expect an additional $4,000 to $5,100 of other costs to be incurred related to initiatives that would not qualify as restructuring charges. These costs would include certain employee overlap and training costs as well as additional capital expenditures. Restructuring charges under the September 2020 Plan were $(17) during the three months ended March 31, 2021, consisting of $36 of workforce reduction costs and $(53) of other contract termination and facility closure costs. The total restructuring liability related to the September 2020 Plan was $130 at March 31, 2021 and $512 at December 31, 2020.

June 2016 Plan

In June 2016, we announced plans to restructure operations by phasing out production at our Elkhart, IN facility and transitioning it into a research and development center supporting our global operations (the "June 2016 Plan"). Additional organizational changes were also implemented in various other locations. In 2017, we revised the June 2016 Plan to include 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 have now been consolidated into a single facility. These restructuring actions were completed as of March 31, 2021. Restructuring charges under the June 2016 Plan were $(3) and $(32) during the three months ended March 31, 2021 and March 31, 2020, respectively. The total restructuring liability related to the June 2016 Plan was $0 at March 31, 2021 and $3 at December 31, 2020.

April 2014 Plan

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 (the “April 2014 Plan”). These restructuring actions were substantially completed during 2015. There were no restructuring charges incurred under the April 2014 Plan during the three months ended March 31, 2021 and March 31, 2020, respectively. The total restructuring liability related to the April 2014 Plan was $847 at March 31, 2021 and $839 at December 31, 2020. The remaining liability is expected to be settled in the second quarter of 2021.

14

 


 

Other Restructuring Activities

From time to time we undertake other restructuring activities that are not part of a formal plan. During the three months ended March 31, 2021 and March 31, 2020, we incurred restructuring charges of $101 and $272, respectively, primarily related to workforce reduction costs. The total restructuring liability associated with these actions was $83 at March 31, 2021 and $9 at December 31, 2020.

The following table displays the restructuring liability activity included in accrued expenses and other liabilities for all plans for the three months ended March 31, 2021:

 

Restructuring liability at January 1, 2021

 

$

1,363

 

Restructuring charges

 

 

81

 

Cost paid

 

 

(232

)

Other activity(1)

 

 

(152

)

Restructuring liability at March 31, 2021

 

$

1,060

 

 

(1)

Other activity includes the effects of currency translation, non-cash asset write-downs and other charges that do not flow through restructuring expense.

NOTE 10 – Accrued Expense and Other Liabilities

The components of accrued expenses and other liabilities are as follows:

 

 

 

As of

 

 

 

March 31,

 

 

December 31,

 

 

 

2021

 

 

2020

 

Accrued product related costs

 

$

4,013

 

 

$

4,470

 

Accrued income taxes

 

 

6,461

 

 

 

7,320

 

Accrued property and other taxes

 

 

1,590

 

 

 

2,478

 

Accrued professional fees

 

 

1,199

 

 

 

1,663

 

Accrued customer related liabilities

 

 

4,536

 

 

 

3,815

 

Dividends payable

 

 

1,294

 

 

 

1,291

 

Remediation reserves

 

 

10,431

 

 

 

10,642

 

Derivative liabilities

 

 

673

 

 

 

671

 

Other accrued liabilities

 

 

7,239

 

 

 

5,821

 

Total accrued expenses and other liabilities

 

$

37,436

 

 

$

38,171

 

 

NOTE 11 – Commitments and 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. Two of those sites, Asheville, North Carolina and Mountain View, California, are designated National Priorities List sites under the U.S. Environmental Protection Agency’s Superfund program. We accrue a liability for probable remediation activities, claims and proceedings against us with respect to environmental matters if the amount can be reasonably estimated, and provide disclosures including the nature of a loss whenever it is probable or reasonably possible that a potentially material loss may have occurred but cannot be estimated. We record contingent loss accruals on an undiscounted basis.

15

 


 

A roll-forward of remediation reserves included in accrued expenses and other liabilities on the Condensed Consolidated Balance Sheets is comprised of the following:

 

 

 

As of

 

 

 

March 31,

 

 

December 31,

 

 

 

2021

 

 

2020

 

Balance at beginning of period

 

$

10,642

 

 

$

11,444

 

Remediation expense

 

 

199

 

 

 

2,769

 

Net remediation payments

 

 

(398

)

 

 

(3,639

)

Other activity(1)

 

 

(12

)

 

 

68

 

Balance at end of the period

 

$

10,431

 

 

$

10,642

 

 

(1)

Other activity includes currency translation adjustments not recorded through remediation expense.

Unrelated to the environmental claims described above, certain other legal claims are pending against us with respect to matters arising out of the ordinary conduct of our business.

We provide product warranties when we sell our products and accrue for estimated liabilities at the time of sale. Warranty estimates are forecasts based on the best available information and historical claims experience. We accrue for specific warranty claims if we believe that the facts of a specific claim make it probable that a liability in excess of our historical experience has been or will be incurred, and provide disclosures for specific claims whenever it is reasonably possible that a material loss may be incurred which cannot be estimated.

We cannot provide assurance that the ultimate disposition of environmental, legal, and product warranty claims will not materially exceed the amount of our accrued losses and adversely impact our consolidated financial position, results of operations, or cash flows. Our accrued liabilities and disclosures will be adjusted accordingly if additional information becomes available in the future.

NOTE 12 — Leases

We lease certain land, buildings and equipment under non-cancellable operating leases used in our operations. Operating lease assets represent our right to use an underlying asset for the lease term. Operating lease liabilities represent the present value of lease payments over the lease term, discounted using an estimate of our secured incremental borrowing rate because none of our leases contain a rate implicit in the lease arrangement.

Components of lease expense for the three months ended March 31, 2021 were as follows:

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

March 31,

 

 

 

2021

 

 

2020

 

Operating lease cost

 

$

1,232

 

 

$

1,199

 

Short-term lease cost

 

 

278

 

 

 

167

 

Total lease cost

 

$

1,510

 

 

$

1,366

 

 

Supplemental cash flow information related to leases was as follows:

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

March 31,

 

 

 

2021

 

 

2020

 

Cash paid for amounts included in the measurement of lease

   liabilities

 

$

1,221

 

 

$

1,130

 

Leased assets obtained in exchange for new operating lease

   liabilities

 

$

1,157

 

 

$

1,179

 

 

16

 


 

 

Supplemental balance sheet information related to leases was as follows:

 

 

 

As of

 

 

 

March 31,

 

 

December 31,

 

 

 

2021

 

 

2020

 

Balance Sheet Classification:

 

 

 

 

 

 

 

 

Operating lease obligations

 

$

3,271

 

 

$

3,294

 

Long-term operating lease obligations

 

 

23,510

 

 

 

23,163

 

Total lease liabilities

 

$

26,781

 

 

$

26,457

 

Weighted-average remaining lease terms (years)

 

 

7.75

 

 

 

7.88

 

Weighted-average discount rate

 

 

6.41

%

 

 

6.40

%

 

Remaining maturity of our existing lease liabilities as of March 31, 2021 is as follows:

 

 

 

Operating

Leases(1)

 

2021

 

$

3,653

 

2022

 

 

4,713

 

2023

 

 

4,423

 

2024

 

 

4,285

 

2025

 

 

3,731

 

Thereafter

 

 

14,297

 

Total

 

$

35,102

 

Less: interest

 

 

(8,321

)

Present value of lease liabilities

 

$

26,781

 

 

(1)

Operating lease payments include $3,822 of payments related to options to extend lease terms that are reasonably expected to be exercised.

NOTE 13 - Debt

Long-term debt was comprised of the following:

 

 

 

As of

 

 

 

March 31,

 

 

December 31,

 

 

 

2021

 

 

2020

 

Total credit facility

 

$

300,000

 

 

$

300,000

 

Balance outstanding

 

 

50,000

 

 

 

54,600

 

Standby letters of credit

 

 

1,740

 

 

 

1,740

 

Amount available, subject to covenant restrictions

 

$

248,260

 

 

$

243,660

 

Weighted-average interest rate

 

 

1.30

%

 

 

1.92

%

Commitment fee percentage per annum

 

 

0.20

%

 

 

0.23

%

 

On February 12, 2019, we entered an amended and restated five-year Credit Agreement with a group of banks (the "Credit Agreement") to extend the term of the facility. The Credit Agreement provides for a revolving credit facility of $300,000, which may be increased by $150,000 at the request of the Company, subject to the administrative agent's approval.

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 the base rate defined in the Credit Agreement. We also pay a quarterly commitment fee on the unused portion of the revolving credit facility. The commitment fee ranges from 0.20% to 0.30% based on our total leverage ratio.

The Credit Agreement 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 compliant with all debt covenants at March 31, 2021. The Credit Agreement 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, it 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

17

 


 

repurchases and dividend payments. Interest rates on the credit facility fluctuate based upon the LIBOR and the Company’s quarterly total leverage ratio.

We have debt issuance costs related to our long-term debt that are being amortized using the straight-line method over the life of the debt. Amortization expense for three months ended March  31, 2021 and March 31, 2020 was approximately $42 and $42, respectively. These costs are included in interest expense in our Condensed Consolidated Statement of Earnings.

We use interest rate swaps to convert the revolving credit facility's variable rate of interest into a fixed rate on a portion of the debt as described more fully in Note 14 "Derivative Financial Instruments". These swaps are treated as cash flow hedges and consequently, the changes in fair value were recorded in other comprehensive earnings.

Note 14 - 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 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 expense, net.

We assess hedge effectiveness qualitatively by verifying that the critical terms of the hedging instrument and the forecasted transaction continue to match, and that there have been no adverse developments that have increased the risk that the counterparty will default. No recognition of ineffectiveness was recorded in our Condensed Consolidated Statements of Earnings for the three months ended March 31, 2021.

Foreign Currency Hedges

We use forward contracts to mitigate currency risk related to a portion of our forecasted foreign currency revenues and costs. The currency forward contracts are designed as cash flow hedges and are recorded in the 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 March 31, 2021, we had a net unrealized gain of $670 in accumulated other comprehensive (loss) income, of which $668 is expected to be reclassified to earnings within the next 12 months. At March 31, 2020, we had a net unrealized loss of $2,076 in accumulated other comprehensive (loss) income. The notional amount of foreign currency forward contracts outstanding was $16,445 at March 31, 2021.

Interest Rate Swaps

We use interest rate swaps to convert a portion of our revolving credit facility’s outstanding balance from a variable rate of interest to a fixed rate. As of March 31, 2021, we have agreements to fix interest rates on $50,000 of long-term debt through February 2024. 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.

18

 


 

These swaps are treated as cash flow hedges and consequently, the changes in fair value are recorded in other comprehensive (loss) income. The estimated net amount of the existing losses that are reported in accumulated other comprehensive (loss) income that are expected to be reclassified into earnings within the next twelve months is approximately $518.

The location and fair values of derivative instruments designated as hedging instruments in the Condensed Consolidated Balance Sheets as of March 31, 2021, are shown in the following table:

 

 

 

As of

 

 

 

March 31,

 

 

December 31,

 

 

 

2021

 

 

2020

 

Interest rate swaps reported in accrued liabilities

 

$

(673

)

 

$

(671

)

Interest rate swaps reported in other long-term obligations

 

$

(1,072

)

 

$

(1,546

)

Foreign currency hedges reported in other current assets

 

$

856

 

 

$

1,125

 

 

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 $856 and foreign currency derivative liabilities of $0  at March 31, 2021.

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

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

March 31,

 

 

 

2021

 

 

2020

 

Foreign Exchange Contracts:

 

 

 

 

 

 

 

 

Amounts reclassified from AOCI to earnings:

 

 

 

 

 

 

 

 

Cost of goods sold

 

$

221

 

 

$

248

 

Selling, general and administrative expense

 

 

 

 

 

(5

)

Total gain reclassified from AOCI to earnings

 

 

221

 

 

 

243

 

Gain (loss) recognized in other expense for hedge ineffectiveness

 

 

 

 

 

 

Total derivative gain on foreign exchange contracts recognized in earnings

 

$

221

 

 

$

243

 

Interest Rate Swaps:

 

 

 

 

 

 

 

 

(Expense) benefit recorded in Interest expense

 

$

(176

)

 

$

38

 

Total gains on derivatives

 

$

45

 

 

$

281

 

 

 

 

NOTE 15 – 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 a portion of our revolving credit facility's outstanding balance from a 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 14 - Derivative Financial Instruments and Note 18 – 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 7 – 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.

19

 


 

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 months ended March 31, 2021 and March 31, 2020 were $1,330 and $1,271, respectively, which have been included in other (expense) income in the Condensed Consolidated Statements of Earnings.

The components of accumulated other comprehensive (loss) income for the three months ended March 31, 2021 are as follows:

 

 

 

 

 

 

 

 

 

 

 

(Gain) Loss

 

 

 

 

 

 

 

As of

 

 

Gain (Loss)

 

 

Reclassified

 

 

As of

 

 

 

December 31,

 

 

Recognized

 

 

from AOCI

 

 

March 31,

 

 

 

2020

 

 

in OCI

 

 

to Earnings

 

 

2021

 

Changes in fair market value of derivatives:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

$

(1,038

)

 

$

206

 

 

$

(45

)

 

$

(877

)

Income tax benefit (expense)

 

 

240

 

 

 

(47

)

 

 

10

 

 

 

203

 

Net

 

 

(798

)

 

 

159

 

 

 

(35

)

 

 

(674

)

Changes in unrealized pension cost:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

 

(128,004

)

 

 

 

 

 

1,847

 

 

 

(126,157

)

Income tax benefit (expense)

 

 

34,917

 

 

 

 

 

 

(425

)

 

 

34,492

 

Net

 

 

(93,087

)

 

 

 

 

 

1,422

 

 

 

(91,665

)

Cumulative translation adjustment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

 

(2,036

)

 

 

12

 

 

 

 

 

 

(2,024

)

Total accumulated other comprehensive (loss) income

 

$

(95,921

)

 

$

171

 

 

$

1,387

 

 

$

(94,363

)

 

The components of accumulated other comprehensive (loss) income for the three months ended March 31, 2020, are as follows:

 

 

 

 

 

 

 

 

 

 

 

(Gain) Loss

 

 

 

 

 

 

 

As of

 

 

(Loss) Gain

 

 

Reclassified

 

 

As of

 

 

 

December 31,

 

 

Recognized

 

 

from AOCI

 

 

March 31,

 

 

 

2019

 

 

in OCI

 

 

to Earnings

 

 

2020

 

Changes in fair market value of derivatives:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

$

659

 

 

$

(5,422

)

 

$

(281

)

 

$

(5,044

)

Income tax (expense) benefit

 

 

(150

)

 

 

1,225

 

 

 

64

 

 

 

1,139

 

Net

 

 

509

 

 

 

(4,197

)

 

 

(217

)

 

 

(3,905

)

Changes in unrealized pension cost:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

 

(124,140

)

 

 

 

 

 

1,660

 

 

 

(122,480

)

Income tax benefit (expense)

 

 

34,018

 

 

 

 

 

 

(375

)

 

 

33,643

 

Net

 

 

(90,122

)

 

 

 

 

 

1,285

 

 

 

(88,837

)

Cumulative translation adjustment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

 

(2,211

)

 

 

(41

)

 

 

 

 

 

(2,252

)

Income tax benefit (expense)

 

 

98

 

 

 

(98

)

 

 

 

 

 

 

Net

 

 

(2,113

)

 

 

(139

)

 

 

 

 

 

(2,252

)

Total accumulated other comprehensive (loss) income

 

$

(91,726

)

 

$

(4,336

)

 

$

1,068

 

 

$

(94,994

)

 

20

 


 

 

NOTE 16 – Shareholders’ Equity

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

 

 

 

As of

 

 

 

March 31,

 

 

December 31,

 

 

 

2021

 

 

2020

 

Preferred Stock

 

 

 

 

 

 

 

 

Par value per share

 

No par value

 

 

No par value

 

Shares authorized

 

 

25,000,000

 

 

 

25,000,000

 

Shares outstanding

 

 

 

 

 

 

Common Stock

 

 

 

 

 

 

 

 

Par value per share

 

No par value

 

 

No par value

 

Shares authorized

 

 

75,000,000

 

 

 

75,000,000

 

Shares issued

 

 

57,147,983

 

 

 

57,076,410

 

Shares outstanding

 

 

32,348,360

 

 

 

32,276,787

 

Treasury stock

 

 

 

 

 

 

 

 

Shares held

 

 

24,799,623

 

 

 

24,799,623

 

 

On February 7, 2019, the Board of Directors authorized a stock repurchase program with a maximum dollar limit of $25,000 in stock repurchases. During the three months ended March 31, 2021, no shares of common stock were repurchased. During the three months ended March 31, 2020, 220,731 shares of common stock were repurchased for $5,304. Approximately $5,740 is available for future purchases.

A roll-forward of common shares outstanding is as follows:

 

 

 

Three months ended

 

 

 

March 31,

 

 

March 31,

 

 

 

2021

 

 

2020

 

Balance at the beginning of the year

 

 

32,276,787

 

 

 

32,472,406

 

Repurchases

 

 

 

 

 

(220,731

)

Restricted share issuances

 

 

71,573

 

 

 

94,232

 

Balance at the end of the period

 

 

32,348,360

 

 

 

32,345,907

 

 

Certain potentially dilutive restricted stock units are excluded from diluted earnings per share because they are anti-dilutive. The number of outstanding awards that were anti-dilutive for the three months ended March 31, 2021 and March 31, 2020 were 35,167 and 38,839, respectively.

NOTE 17 - Stock-Based Compensation

At March 31, 2021, we had five active stock-based compensation plans: the Non-Employee Directors’ Stock Retirement Plan (“Directors’ Plan”), the 2004 Omnibus Long-Term Incentive Plan (“2004 Plan”), the 2009 Omnibus Equity and Performance Incentive Plan (“2009 Plan”), the 2014 Performance and Incentive Compensation Plan (“2014 Plan”), and the 2018 Equity and Incentive Compensation Plan ("2018 Plan"). Future grants can only be made under the 2018 Plan.

These plans allow for grants of stock options, stock appreciation rights, restricted stock, restricted stock units ("RSUs"), performance shares, performance units, and other stock awards subject to the terms of the specific plans under which the awards are granted.

21

 


 

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

 

 

 

March 31,

 

 

March 31,

 

 

 

2021

 

 

2020

 

Service-based RSUs

 

$

686

 

 

$

580

 

Performance-based RSUs

 

 

494

 

 

 

(368

)

Cash-settled RSUs

 

 

39

 

 

 

16

 

Total

 

$

1,219

 

 

$

228

 

Income tax benefit

 

 

281

 

 

 

51

 

Net expense

 

$

938

 

 

$

177

 

 

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

 

 

 

March 31, 2021

 

 

Period

 

Service-based RSUs

 

$

3,394

 

 

 

1.54

 

Performance-based RSUs

 

 

3,881

 

 

 

2.24

 

Total

 

$

7,275

 

 

 

1.91

 

 

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 March 31, 2021:

 

 

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

 

Maximum potential RSU and cash settled

   awards outstanding

 

 

656,205

 

 

 

52,500

 

 

 

75,200

 

 

 

35,952

 

 

 

5,522

 

Maximum potential awards outstanding

 

 

656,205

 

 

 

52,500

 

 

 

75,200

 

 

 

35,952

 

 

 

5,522

 

RSUs and cash settled awards vested and released

 

 

96,136

 

 

 

 

 

 

 

 

 

 

 

 

 

Awards available for grant

 

 

1,747,659

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service-Based Restricted Stock Units

The following table summarizes the service-based RSU activity for the three months ended March 31, 2021:

 

 

 

Units

 

 

Weighted

Average

Grant Date

Fair Value

 

Outstanding at December 31, 2020

 

 

367,428

 

 

$

21.28

 

Granted

 

 

65,450

 

 

 

32.77

 

Vested and released

 

 

(61,342

)

 

 

28.48

 

Forfeited

 

 

(3,789

)

 

 

27.20

 

Outstanding at March 31, 2021

 

 

367,747

 

 

$

22.07

 

Releasable at March 31, 2021

 

 

194,974

 

 

$

15.22

 

 

22

 


 

 

Performance and Market-Based Restricted Stock Units

The following table summarizes the performance and market-based RSU activity for the three months ended March 31, 2021:

 

 

 

Units

 

 

Weighted

Average

Grant Date

Fair Value

 

Outstanding at December 31, 2020

 

 

225,559

 

 

$

28.97

 

Granted

 

 

69,872

 

 

 

33.98

 

Attained by performance

 

 

18,107

 

 

 

28.33

 

Released

 

 

(53,137

)

 

 

28.33

 

Forfeited

 

 

(24,622

)

 

 

27.02

 

Outstanding at March 31, 2021

 

 

235,779

 

 

$

30.75

 

Releasable at March 31, 2021

 

 

 

 

$

 

 

The following table summarizes each grant of performance awards outstanding at March 31, 2021:

 

Description

 

Grant Date

 

Vesting

Year

 

Vesting Dependency

 

Target Units

Outstanding

 

 

Maximum

Number

of Units

to be Granted

 

2019 - 2021 Performance RSUs

 

February 7, 2019

 

2021

 

35% RTSR, 35% sales growth,

30% operating cash flow

 

 

50,456

 

 

 

100,912

 

2019 Supplemental Performance RSUs

 

February 7, 2019

 

2021

 

Succession Planning Targets

 

 

6,945

 

 

 

13,890

 

2020 - 2022 QTI Performance RSUs

 

September 24, 2019

 

2022

 

50% EBITDA growth,

50% Sales growth

 

 

1,750

 

 

 

3,500

 

2020 - 2022 Performance RSUs

 

February 6, 2020

 

2022

 

25% RTSR, 40% sales growth,

35% operating cash flow

 

 

63,006

 

 

 

126,012

 

2021 - 2023 Performance RSUs

 

February 11, 2021

 

2023

 

25% RTSR, 40% sales growth,

35% operating cash flow

 

 

69,872

 

 

 

139,744

 

Focus 2025 Performance RSUs

 

April 23, 2020

 

2024

 

Cumulative revenues of $750

million over a trailing

four-quarter period

 

 

43,750

 

 

 

43,750

 

Total

 

 

 

 

 

 

 

 

235,779

 

 

 

427,808

 

 

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 March 31, 2021 and December 31, 2020 we had 29,824 and 30,009 cash-settled RSUs outstanding, respectively. At March 31, 2021 and December 31, 2020, liabilities of $177 and $396, respectively, were included in accrued expenses and other liabilities on our Condensed Consolidated Balance Sheets.

NOTE 18 — Fair Value Measurements

The table below summarizes our financial liabilities that were measured at fair value on a recurring basis at March 31, 2021:

 

 

 

 

 

 

 

Quoted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Prices

 

 

 

 

 

 

 

 

 

 

 

Liability

 

 

in Active

 

 

Significant

 

 

 

 

 

 

 

Carrying

 

 

Markets for

 

 

Other

 

 

Significant

 

 

 

Value at

 

 

Identical

 

 

Observable

 

 

Unobservable

 

 

 

March 31,

 

 

Instruments

 

 

Inputs

 

 

Inputs

 

 

 

2021

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

Interest rate swaps

 

$

(1,745

)

 

$

 

 

$

(1,745

)

 

$

 

Foreign currency hedges

 

$

856

 

 

$

 

 

$

856

 

 

$

 

Contingent consideration

 

$

1,850

 

 

$

 

 

$

 

 

$

1,850

 

 

23

 


 

 

The table below summarizes the financial assets that were measured at fair value on a recurring basis as of December 31, 2020:

 

 

 

 

 

 

 

Quoted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Prices

 

 

 

 

 

 

 

 

 

 

 

Asset

 

 

in Active

 

 

Significant

 

 

 

 

 

 

 

Carrying

 

 

Markets for

 

 

Other

 

 

Significant

 

 

 

Value at

 

 

Identical

 

 

Observable

 

 

Unobservable

 

 

 

December 31,

 

 

Instruments

 

 

Inputs

 

 

Inputs

 

 

 

2020

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

Interest rate swaps

 

$

(2,217

)

 

$

 

 

$

(2,217

)

 

$

 

Foreign currency hedges

 

$

1,125

 

 

$

 

 

$

1,125

 

 

$

 

Contingent consideration

 

$

2,000

 

 

$

 

 

$

 

 

$

2,000

 

 

We use interest rate swaps to convert a portion of our revolving credit facility’s outstanding balance from a 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 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.

The fair value of the contingent consideration requires significant judgment. The Company's fair value estimates used in the contingent consideration valuation are considered Level 3 fair value measurements. The fair value estimates were based on assumptions management believes to be reasonable, but that are inherently uncertain, including estimates of future revenues and timing of events and activities that are expected to take place. Refer to Note 3 for further discussion on contingent consideration.

Our long-term debt consists of debt outstanding under 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 19 — Income Taxes

The effective tax rates for the three months ended March 31, 2021 and March 31, 2020 are as follows:

 

 

 

Three months ended

 

 

 

March 31,

 

 

March 31,

 

 

 

2021

 

 

2020

 

Effective tax rate

 

 

18.9

%

 

 

36.4

%

 

Our effective income tax rate was 18.9% and 36.4% in the first quarters of 2021 and 2020, respectively. This decrease is primarily attributed to the change in the mix of earnings by jurisdiction and the establishment of valuation allowance on certain tax credits in the first quarter of 2020. The first quarter 2021 tax rate was lower than the U.S. statutory federal tax rate primarily due to foreign earnings that are taxed at lower rates and tax benefits recorded upon vesting of restricted stock units. The first quarter 2020 tax rate was higher than the U.S. statutory federal tax rate primarily due to the establishment of valuation allowances on certain tax credits and a one-time tax expense resulting from a company restructuring.

24

 


 

NOTE 20 — Recent Accounting Pronouncements

Accounting Pronouncements Recently Adopted

ASU No. 2019-12 "Simplifying the Accounting for Income Taxes"

In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2019-12, Simplifying the Accounting for Income Taxes, as part of its simplification initiative to reduce the cost and complexity in accounting for income taxes. ASU 2019-12 removes certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences. ASU 2019-12 also amends other aspects of the guidance to help simplify and promote consistent application of U.S. GAAP. The guidance is effective for interim and annual periods beginning after December 15, 2020, with early adoption permitted. We adopted this ASU on January 1, 2021 and it did not have a material impact on our financial statements.

Recently Issued Accounting Pronouncements

ASU No. 2020-04 "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting"

In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting”, which provides temporary optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting as it relates to our LIBOR indexed instruments. ASU 2020-04 provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. ASU 2020-04 is effective for all entities as of March 12, 2020 through December 31, 2022, and an entity may elect to apply ASU 2020-04 for contract modifications by Topic or Industry Subtopic as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. We are currently evaluating the impact of the transition from LIBOR to an alternative reference interest rate in our financial instruments including the potential election of certain practical expedients. Our LIBOR based revolving credit facility includes a provision for the determination of a successor LIBOR rate, and we are still evaluating the impact to potential future hedging activities.

 

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, 2020.

Overview

CTS Corporation ("CTS", "we", "our" or "us") is a leading designer and manufacturer of products that Sense, Connect and Move. Our vision is to be a leading provider of sensing and motion devices as well as connectivity components, enabling an intelligent and seamless world. These devices are categorized by their ability to Sense, Connect or Move. Sense products provide vital inputs to electronic systems. Connect products allow systems to function in synchronization with other systems. Move products ensure required movements are effectively and accurately executed. We are committed to achieving our vision by continuing to invest in the development of products and technologies, and talent within these categories.

We manufacture sensors, actuators, and connectivity components in North America, Europe, and Asia. CTS provides engineered products to OEMs and tier one suppliers in the aerospace and defense, industrial, information technology, medical, telecommunications, and transportation markets.

There is an increasing proliferation of sensing and motion applications within various markets we serve. In addition, the increasing connectivity of various devices to the internet results in greater demand for communication bandwidth and data storage, increasing the need for our connectivity products. Our success is dependent on the ability to execute our strategy to support these trends. We are subject to challenges including periodic market softness, competition from other suppliers, changes in technology, and the ability to add new customers, launch new products or penetrate new markets.

25

 


 

Impact of COVID-19

The COVID-19 pandemic has resulted in a significant disruption to the global economy that has and is likely to have continued adverse impact on our business. The extent of the impact of the COVID-19 pandemic on our business, financial results and liquidity will depend largely on future developments, including the duration of the spread of the COVID-19 outbreak within the U.S. and globally, the impact on capital and financial markets and the related impact on our suppliers and customers, especially in the transportation end-market. These future developments are outside of our control, are highly uncertain and cannot be predicted. These and other potential impacts of the COVID-19 pandemic, along with the recent increases in consumer demand are resulting in critical raw material and semiconductor chip shortages as well as associated cost increases, that may adversely impact our results for the remainder of 2021, and that impact could be material. We continue to actively monitor the ongoing potential impacts of COVID-19 and the supply chain issues and will seek to mitigate and minimize their impact on our business. We remain cautious about the financial impact of COVID-19 on our business for the remainder of 2021.

Results of Operations: First Quarter 2021 versus First Quarter 2020

The following table highlights changes in significant components of the Unaudited Condensed Consolidated Statements of Earnings for the quarters ended March 31, 2021, and March 31, 2020:

 

 

 

Three Months Ended

 

 

 

 

 

 

Percent of

 

 

Percent of

 

 

 

March 31,

 

 

March 31,

 

 

Percent

 

 

Net Sales –

 

 

Net Sales –

 

 

 

2021

 

 

2020

 

 

Change

 

 

2021

 

 

2020

 

Net sales

 

$

128,427

 

 

$

103,075

 

 

 

24.6

%

 

 

100.0

%

 

 

100.0

%

Cost of goods sold

 

 

85,836

 

 

 

70,176

 

 

 

22.3

 

 

 

66.8

 

 

 

68.1

 

Gross margin

 

 

42,591

 

 

 

32,899

 

 

 

29.5

 

 

 

33.2

 

 

 

31.9

 

Selling, general and administrative expenses

 

 

18,325

 

 

 

16,759

 

 

 

9.3

 

 

 

14.3

 

 

 

16.3

 

Research and development expenses

 

 

5,687

 

 

 

7,408

 

 

 

(23.2

)

 

 

4.4

 

 

 

7.2

 

Restructuring charges

 

 

81

 

 

 

240

 

 

 

(66.3

)

 

 

0.1

 

 

 

0.2

 

Total operating expenses

 

 

24,093

 

 

 

24,407

 

 

 

(1.3

)

 

 

18.8

 

 

 

23.7

 

Operating earnings

 

 

18,498

 

 

 

8,492

 

 

 

117.8

 

 

 

14.4

 

 

 

8.2

 

Total other expense, net

 

 

(3,709

)

 

 

(2,502

)

 

 

48.2

 

 

 

(2.9

)

 

 

(2.4

)

Earnings before income taxes

 

 

14,789

 

 

 

5,990

 

 

 

146.9

 

 

 

11.5

 

 

 

5.8

 

Income tax expense

 

 

2,799

 

 

 

2,182

 

 

 

28.3

 

 

 

2.2

 

 

 

2.1

 

Net earnings

 

$

11,990

 

 

$

3,808

 

 

 

214.9

%

 

 

9.3

%

 

 

3.7

%

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted net earnings per share

 

$

0.37

 

 

$

0.12

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales were $128,427 in the first quarter of 2021, an increase of $25,352 or 24.6% from the first quarter of 2020. Net sales momentum continued in the first quarter of 2021 as a result of overall improvement in the economy; however, we also experienced significant material inflationary pressures and interruptions in the supply chain particularly due to the global semiconductor chip shortage impacting the operations of our business. The impact of the pandemic and supply chain impacts are ongoing and are expected to continue to have an effect on our operations. We are currently unable to quantify these future impacts.

Net sales to transportation markets increased $14,320 or 23.3%. Net sales to other markets increased $11,032 or 26.6%. The Sensor Scientific, Inc. (“SSI”) acquisition, which was completed in December 2020, added $1,847 in net sales for the quarter. Changes in foreign exchange rates increased net sales by $2,496 year-over-year due to the U.S. Dollar depreciating compared to the Chinese Renminbi and Euro.

Gross margin as a percent of net sales was 33.2% in the first quarter of 2021 compared to 31.9% in the first quarter of 2020. The increase in gross margin was driven primarily by sales volume with raw material price increases adversely impacting the results.

Selling, general and administrative ("SG&A") expenses were $18,325 or 14.3% of net sales in the first quarter of 2021 versus $16,759 or 16.3% of net sales in the first quarter of 2020. Increased net sales drove the overall decrease in SG&A expenses as a percentage of net sales.

26

 


 

Research and development (“R&D”) expenses were $5,687 or 4.4% of net sales in the first quarter of 2021 compared to $7,408 or 7.2% of net sales in the comparable quarter of 2020. The reduction in overall R&D expenses is primarily due to changes in timing and mix of certain projects.

Restructuring charges were $81 or 0.1% of net sales in the first quarter of 2021 compared to $240 or 0.2% of net sales in the first quarter of 2020.

Operating earnings were $18,498 or 14.4% of net sales in the first quarter of 2021 compared to operating earnings of $8,492 or 8.2% of net sales in the first quarter of 2020. The change in operating earnings were driven by the items discussed above.

Other expense and income items are summarized in the following table:

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

March 31,

 

 

 

2021

 

 

2020

 

Interest expense

 

$

(555

)

 

$

(851

)

Interest income

 

 

202

 

 

 

331

 

Other expense, net

 

 

(3,356

)

 

 

(1,982

)

Total other expense, net

 

$

(3,709

)

 

$

(2,502

)

 

Other expense in the first quarter of 2021 was principally driven by increased pension expense as well as unfavorable foreign exchange impact primarily from the U.S. Dollar depreciating compared to the Chinese Renminbi and Euro.

 

 

 

Three months ended

 

 

 

March 31,

 

 

March 31,

 

 

 

2021

 

 

2020

 

Effective tax rate

 

 

18.9

%

 

 

36.4

%

 

Our effective income tax rate was 18.9% and 36.4% in the first quarters of 2021 and 2020, respectively. This decrease is primarily attributed to the change in the mix of earnings by jurisdiction and the establishment of valuation allowance on certain tax credits in the first quarter of 2020.

 

Liquidity and Capital Resources

 

Cash and cash equivalents were $103,392 at March 31, 2021, and $91,773 at December 31, 2020, of which $101,883 and $90,051, respectively, were held outside the United States. The increase in cash and cash equivalents of $11,619 was primarily driven by cash generated from operating activities of $20,110, which was partially offset by net payments on long-term debt of $4,600, capital expenditures of $1,638, dividends paid of $1,291, and taxes paid on behalf of equity award participants of $1,402. Total long-term debt was $50,000 as of March 31, 2021 and $54,600 as of December 31, 2020. Total debt as a percentage of total capitalization, defined as long-term debt as a percentage of total debt and shareholders' equity, was 10.3% at March 31, 2021, compared to 11.4% at December 31, 2020.

 

Working capital increased by $11,627 during the three months ended March 31, 2021, primarily due to the increase in cash and cash equivalents from strong operating cash flows.

 

Cash Flows from Operating Activities

 

Net cash provided by operating activities was $20,110 during the three months ended March 31, 2021. Components of net cash provided by operating activities included net earnings of $11,990, depreciation and amortization expense of $6,800, other net non-cash items of $3,220, and a net cash outflow from changes in assets and liabilities of $1,900.

 

Cash Flows from Investing Activities

 

Net cash used in investing activities for the three months ended March 31, 2021 was $1,638, driven entirely by capital expenditures.

 

Cash Flows from Financing Activities

 

27

 


 

 

Net cash used in financing activities for the three months ended March 31, 2021 was $7,293. The net cash outflow was the result of a decrease in borrowings of long-term debt of $4,600, dividends paid of $1,291 and taxes paid on behalf of equity award participants in the amount of $1,402.

Capital Resources

Long‑term debt is comprised of the following:

 

 

 

As of

 

 

 

March 31,

 

 

December 31,

 

 

 

2021

 

 

2020

 

Total credit facility

 

$

300,000

 

 

$

300,000

 

Balance outstanding

 

 

50,000

 

 

 

54,600

 

Standby letters of credit

 

 

1,740

 

 

 

1,740

 

Amount available, subject to covenant restrictions

 

$

248,260

 

 

$

243,660

 

Weighted-average interest rate

 

 

1.30

%

 

 

1.92

%

Commitment fee percentage per annum

 

 

0.20

%

 

 

0.23

%

 

Our Credit Agreement provides for a revolving credit facility of $300,000, which may be increased by $150,000 at the request of the Company, subject to the administrative agent's approval.

We have entered into interest rate swap agreements to fix interest rates on $50,000 of long-term debt through February 2024. The difference to be paid or received under the terms of the swap agreements is recognized as an adjustment to interest expense when settled.

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, debt service and dividend requirements for at least the next twelve months. However, we may choose to pursue additional equity and debt financing to provide additional liquidity or to fund acquisitions.

Critical Accounting Policies and Estimates

Management prepared the condensed consolidated financial statements 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

Product revenue is recognized when the transfer of promised goods to a customer occurs in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods. We follow the five step model to determine when this transfer has occurred: 1) identify the contract(s) with the customer; 2) identify the performance obligations in the contract; 3) determine the transaction price; 4) allocate the transaction price to the performance obligations in the contract; 5) recognize revenue when (or as) the entity satisfies a performance obligation.

Product Warranties

Provisions for estimated warranty expenses primarily 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. Over the last three years, product warranty reserves have ranged from 0.5%

28

 


 

to 2.7% of total sales. We believe our reserve level is appropriate considering all facts and circumstances surrounding any outstanding quality claims and our historical experience selling our products to our customers.

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, specific customer collection issues, current conditions and reasonable and supportable forecasts that affect the collectability of the remaining cash flows over the contractual terms of our receivables and other financial assets. Over the last three years, accounts receivable reserves have been approximately 0.1% to 1.1% 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 of the reserves established, we cannot guarantee that our credit loss experience will continue to be consistent with historical experience or our current forecasts.

Inventories

We value our inventories at the lower of the actual cost to purchase or manufacture using the first-in, first-out ("FIFO") method, or net realizable value. We review inventory quantities on hand and record a provision for excess and obsolete inventory based on historical usage, forecasts of product demand and related production requirements.

Over the last three years, our reserves for excess and obsolete inventories have ranged from 10.2% to 14.0% of gross inventory. We believe our reserve level is appropriate considering the quantities and quality of the inventories.

Retirement Plans

Actuarial assumptions are used in determining pension income and expense and our defined benefit obligations. We utilize actuaries from consulting companies in each applicable country to develop our discount rates, matching 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.

In February 2020, the CTS Board of Directors authorized management to explore termination of our Plan at management's discretion, subject to certain conditions. On June 1, 2020, we amended the Plan whereby we set an effective termination date of July 31, 2020. In February 2021, we received a determination letter from the Internal Revenue Service that allows us to proceed with the termination process. In connection with the termination, the Plan has offered a window extending from March 29, 2021 through May 7, 2021 to certain eligible participants to elect to receive a lump sum payment. The distribution date is June 1, 2021.

The completion of the Plan termination process, including the final purchases of annuities, is expected to occur in the second half of 2021. As of March 31, 2021, we had gross unrecognized losses related to the Plan of $123,238 in accumulated other comprehensive loss that are expected to be recognized in the income statement in 2021. Since the amount of the settlement depends on a number of

29

 


 

factors determined as of the liquidation date, including lump sum payout estimates, the annuity pricing interest rate environment and asset experience, we are currently unable to determine the ultimate cost of the settlement. However, we expect non-cash settlement charges of approximately $10,000 to $20,000 will be recognized in the second quarter of 2021 with the remaining amount of the gross accumulated other comprehensive loss balance to be recognized upon final settlement. We do not expect any cash contributions from the Company to the Plan as a result of this termination because Plan assets significantly exceed estimated liabilities.

Impairment 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 regulatory factors or in the business climate,

 

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. We have the option to perform a qualitative assessment (commonly referred to as "step zero" test) to determine whether further quantitative analysis for impairment of goodwill and indefinite-lived intangible assets is necessary. The qualitative assessment includes a review of macroeconomic conditions, industry and market considerations, internal cost factors, and our own overall financial and share price performance, among other factors. If, after assessing the totality of events or circumstances we determine that it is not more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, we do not need to perform a quantitative analysis.

If a quantitative assessment is required, we estimate the fair value of each reporting unit using a combination of discounted cash flow analysis and market-based valuation methodologies. Determining fair value using a quantitative approach requires significant judgment, including judgments about projected revenues, cash flows over a multi-year period, discount rates and estimated valuation multiples. The discount rate applied to our forecasts of future cash flows is based on our estimated weighted average cost of capital. In assessing the reasonableness of our determined fair values, we evaluate our results against our market capitalization. Changes in these estimates and assumptions could materially affect the determination of fair value and impact the goodwill impairment assessment.

Our latest assessment was performed using a quantitative approach as of October 1, 2020, and we determined that it was likely that the fair values of our reporting units were more than their carrying amounts, and therefore no impairment charges were recorded. We will monitor future results and will perform a test if indicators trigger an impairment review.  

Impairment 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 under performance 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, and

 

Significant negative industry or economic trends.

30

 


 

 

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. We recorded a charge of $1,016 during the first quarter of 2020 due to the impairment of a specific asset group. No indicators of impairment were identified during the quarter ended March 31, 2021.

Environmental and Legal Contingencies

U.S. GAAP requires a liability to be recorded for contingencies when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated. Significant judgment is required to determine the existence and amounts of our environmental, legal and other contingent liabilities. We regularly consult with attorneys and consultants to determine the relevant facts and circumstances before we record a liability. Changes in laws, regulatory orders, cost estimates, participation of other parties, timing of payments, input of attorneys and consultants, or other circumstances may have a material impact on the recorded liability.

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 consolidated income tax expense.

Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, which will result in taxable or deductible amounts in the future. In evaluating our ability to recover our deferred tax assets in the jurisdiction from which they arise, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax-planning strategies, and results of recent operations. The assumptions about future taxable income require the use of significant judgment and are consistent with the plans and estimates we are using to manage our underlying businesses.

The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in a multitude of jurisdictions across our global operations. Accounting Standards Codification (“ASC”) No. 740 states that a tax benefit from an uncertain tax position may be recognized when it is more-likely-than-not that the position will be sustained upon examination, including resolution of any related appeals or litigation processes, on the basis of its technical merits. We record unrecognized tax benefits as liabilities in accordance with ASC 740 and adjust these liabilities when our judgment changes as a result of the evaluation of new information not previously available. Because of the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the unrecognized tax benefit liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which new information is available.

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

Following the enactment of the 2017 Tax Cut and Jobs Act and the associated one-time transition tax, in general, repatriation of foreign earnings to the U.S. can be completed with no incremental U.S. tax. However, there are limited other taxes that continue to apply such as foreign withholding and certain state taxes. The Company records a deferred liability for the estimated foreign earnings and state tax cost associated with the undistributed foreign earnings that are not permanently reinvested.

Significant Customers

Our net sales to customers representing at least 10% of total net sales is as follows:

 

 

 

Three months ended

 

 

 

March 31,

 

 

March 31,

 

 

 

2021

 

 

2020

 

Cummins Inc.

 

 

15.7

%

 

 

16.5

%

Toyota Motor Corporation

 

 

13.4

%

 

 

11.9

%

31

 


 

 

ForwardLooking 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: the ultimate impact of the COVID-19 pandemic on our business, results of operations or financial condition, 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 transportation, telecommunications, and information technology industries, as well as conditions in the industrial, aerospace and defense, and medical markets; reliance on key customers; unanticipated public health crises, natural disasters or other events; environmental compliance and remediation expenses; the ability to protect our intellectual property; pricing pressures and demand for our products; 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 our Annual Report on Form 10-K. We undertake no obligation to publicly update our forward-looking statements to reflect new information or events or circumstances that arise after the date hereof, including market or industry changes.

Item 3.   Quantitative and Qualitative Disclosures About Market Risk

For a discussion of current market conditions resulting from the COVID-19 pandemic, refer to Part I, Item 2, "Management's Discussion and Analysis of Financial Condition” hereof.

There have been no other material changes in our market risk from the disclosure contained in our Annual Report on Form 10-K for the year ended December 31, 2020.

32

 


 

Item 4.   Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q were effective in providing reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within CTS have been detected.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting for the quarter ended March 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II - OTHER INFORMATION

From time to time we are involved in litigation with respect to matters arising from the ordinary conduct of our business, and currently certain claims are pending against us. In the opinion of management, we believe we have established adequate accruals pursuant to U.S. generally accepted accounting principles for our expected future liability with respect to pending lawsuits, claims and proceedings, where the nature and extent of any such liability can be reasonably estimated based on presently available information. However, there can be no assurance that the final resolution of any existing or future lawsuits, claims or proceedings will not have a material adverse effect on our business, results of operations, financial condition, or cash flows.

See Note 11 "Commitments and Contingencies" in the Notes to the Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q.

Item 1A.  Risk Factors

There have been no significant changes to our risk factors from those contained in our Annual Report on Form 10-K for the year ended December 31, 2020.

Item 2.  Unregistered Sales of Equity

Securities and Use of Proceeds

On February 7, 2019, the Board of Directors authorized a stock repurchase program with a maximum dollar limit of $25 million. This program authorizes us to make repurchases of our common stock from time to time on the open market, but does not obligate us to make repurchases, and it has no expiration date. There were no repurchases of the Company's equity securities during the three months ended March 31, 2021. As of March 31, 2021, approximately $5.7 million remained available under the repurchase program. 

33

 


 

Item 6. Exhibits

 

 

 

(31)(a)

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

 

 

(31)(b)

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

 

 

(32)(a)

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

 

 

(32)(b)

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

 

 

101.1

The following information from CTS Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2021 formatted in Inline XBRL: (i) Condensed Consolidated Statements of Earnings for the three months ended March 31, 2021 and 2020; (ii) Condensed Consolidated Statements of Comprehensive Earnings for the three months ended March 31, 2021 and 2020; (iii) Condensed Consolidated Balance Sheets at March 31, 2021 and December 31, 2020; (iv) Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2020 and 2020; (v) Condensed Consolidated Statements of Shareholders’ Equity for the three months ended March 31, 2021 and 2020; (vi) Notes to Condensed Consolidated Financial Statements, tagged as blocks of text and including detailed tags.

 

 

104

The cover page from this Current Report on Form 10-Q formatted as inline XBRL

 

 

 

 

 

 

 

34

 


 

 

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/ Thomas M. White

 

/s/ Ashish Agrawal

Thomas M. White

 

Ashish Agrawal

Corporate Controller

(Principal Accounting Officer)

 

Vice President and Chief Financial Officer

(Principal Financial Officer)

 

 

 

 

 

 

Dated: April 29, 2021

 

  Dated: April 29, 2021

 

35