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CTS CORP - Quarter Report: 2022 September (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 September 30, 2022

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 October 21, 2022: 31,879,888.

 

 


 

CTS CORPORATION AND SUBSIDIARIES

TABLE OF CONTENTS

 

 

 

Page

 

 

 

PART I. FINANCIAL INFORMATION

 

 

 

 

 

 

 

 

 

Item 1.

 

Financial Statements

 

3

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Earnings (Loss) (Unaudited) For the Three and Nine Months Ended September 30, 2022 and September 30, 2021

 

3

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Earnings (Unaudited) For the Three and Nine Months Ended September 30, 2022 and September 30, 2021

 

4

 

 

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets As of September 30, 2022 (Unaudited) and December 31, 2021

 

5

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows (Unaudited) For the Nine Months Ended September 30, 2022 and September 30, 2021

 

6

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Shareholders’ Equity (Unaudited) For the Three and Nine Months Ended September 30, 2022 and September 30, 2021

 

7

 

 

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements ‑ (Unaudited)

 

9

 

 

 

 

 

 

 

Item 2.

 

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

 

27

 

 

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

 

33

 

 

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

34

 

 

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

34

 

 

 

 

 

 

 

Item 1A.

 

Risk Factors

 

34

 

 

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

35

 

 

 

 

 

 

 

Item 6.

 

Exhibits

 

36

 

 

 

 

 

 

SIGNATURES

 

37

 

 

2

 


 

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

CTS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (LOSS) - UNAUDITED

(In thousands of dollars, except per share amounts)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

September 30,

 

 

September 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Net sales

 

$

151,911

 

 

$

122,382

 

 

$

444,588

 

 

$

380,394

 

Cost of goods sold

 

 

98,565

 

 

 

76,720

 

 

 

285,054

 

 

 

244,446

 

Gross margin

 

 

53,346

 

 

 

45,662

 

 

 

159,534

 

 

 

135,948

 

Selling, general and administrative expenses

 

 

24,003

 

 

 

19,922

 

 

 

68,029

 

 

 

59,184

 

Research and development expenses

 

 

6,207

 

 

 

6,454

 

 

 

18,695

 

 

 

18,170

 

Restructuring charges

 

 

492

 

 

 

319

 

 

 

1,434

 

 

 

551

 

Operating earnings

 

 

22,644

 

 

 

18,967

 

 

 

71,376

 

 

 

58,043

 

Other (expense) income:

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(342

)

 

 

(514

)

 

 

(1,490

)

 

 

(1,577

)

Interest income

 

 

167

 

 

 

230

 

 

 

610

 

 

 

689

 

Other expense, net

 

 

(5,171

)

 

 

(108,502

)

 

 

(10,530

)

 

 

(132,786

)

Total other expense, net

 

 

(5,346

)

 

 

(108,786

)

 

 

(11,410

)

 

 

(133,674

)

Earnings (loss) before income taxes

 

 

17,298

 

 

 

(89,819

)

 

 

59,966

 

 

 

(75,631

)

Income tax expense (benefit)

 

 

5,500

 

 

 

(25,923

)

 

 

15,331

 

 

 

(24,600

)

Net earnings (loss)

 

$

11,798

 

 

$

(63,896

)

 

$

44,635

 

 

$

(51,031

)

Earnings (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.37

 

 

$

(1.97

)

 

$

1.39

 

 

$

(1.58

)

Diluted

 

$

0.37

 

 

$

(1.97

)

 

$

1.38

 

 

$

(1.58

)

Basic weighted – average common shares outstanding:

 

 

31,865

 

 

 

32,379

 

 

 

32,018

 

 

 

32,365

 

Effect of dilutive securities

 

 

225

 

 

 

 

 

 

220

 

 

 

 

Diluted weighted – average common shares outstanding:

 

 

32,090

 

 

 

32,379

 

 

 

32,238

 

 

 

32,365

 

Cash dividends declared per share

 

$

0.04

 

 

$

0.04

 

 

$

0.12

 

 

$

0.12

 

 

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

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

September 30,

 

 

September 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Net earnings (loss)

 

$

11,798

 

 

$

(63,896

)

 

$

44,635

 

 

$

(51,031

)

Other comprehensive earnings (loss):

 

 

 

 

 

 

 

 

 

 

 

 

Changes in fair market value of derivatives, net of tax

 

 

1,727

 

 

 

(292

)

 

 

3,667

 

 

 

100

 

Changes in unrealized pension cost, net of tax

 

 

(1,835

)

 

 

72,530

 

 

 

341

 

 

 

90,976

 

Cumulative translation adjustment, net of tax

 

 

(6,071

)

 

 

(10

)

 

 

(8,332

)

 

 

2

 

Other comprehensive (loss) earnings

 

$

(6,179

)

 

$

72,228

 

 

$

(4,324

)

 

$

91,078

 

Comprehensive earnings

 

$

5,619

 

 

$

8,332

 

 

$

40,311

 

 

$

40,047

 

 

See notes to unaudited condensed consolidated financial statements.

4

 


 

CTS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands of dollars)

 

 

(Unaudited)

 

 

 

 

 

 

September 30,

 

 

December 31,

 

 

 

2022

 

 

2021

 

ASSETS

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

Cash and cash equivalents

 

$

147,908

 

 

$

141,465

 

Accounts receivable, net

 

 

97,004

 

 

 

82,191

 

Inventories, net

 

 

63,465

 

 

 

49,506

 

Other current assets

 

 

18,020

 

 

 

15,927

 

Total current assets

 

 

326,397

 

 

 

289,089

 

Property, plant and equipment, net

 

 

95,906

 

 

 

96,876

 

Operating lease assets, net

 

 

22,630

 

 

 

21,594

 

Other Assets

 

 

 

 

 

 

Prepaid pension asset

 

 

5

 

 

 

49,382

 

Goodwill

 

 

138,945

 

 

 

109,798

 

Other intangible assets, net

 

 

106,207

 

 

 

69,888

 

Deferred income taxes

 

 

22,992

 

 

 

25,415

 

Other

 

 

21,597

 

 

 

2,420

 

Total other assets

 

 

289,746

 

 

 

256,903

 

Total Assets

 

$

734,679

 

 

$

664,462

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

Accounts payable

 

$

65,687

 

 

$

55,537

 

Operating lease obligations

 

 

3,532

 

 

 

3,393

 

Accrued payroll and benefits

 

 

16,979

 

 

 

18,418

 

Accrued expenses and other liabilities

 

 

35,741

 

 

 

36,718

 

Total current liabilities

 

 

121,939

 

 

 

114,066

 

Long-term debt

 

 

85,478

 

 

 

50,000

 

Long-term operating lease obligations

 

 

22,097

 

 

 

21,354

 

Long-term pension obligations

 

 

6,248

 

 

 

6,886

 

Deferred income taxes

 

 

5,515

 

 

 

5,894

 

Other long-term obligations

 

 

2,790

 

 

 

2,684

 

Total Liabilities

 

 

244,067

 

 

 

200,884

 

Commitments and Contingencies (Note 11)

 

 

 

 

 

 

Shareholders’ Equity

 

 

 

 

 

 

Common stock

 

 

316,520

 

 

 

314,620

 

Additional contributed capital

 

 

44,659

 

 

 

42,549

 

Retained earnings

 

 

533,036

 

 

 

492,242

 

Accumulated other comprehensive loss

 

 

(8,849

)

 

 

(4,525

)

Total shareholders’ equity before treasury stock

 

 

885,366

 

 

 

844,886

 

Treasury stock

 

 

(394,754

)

 

 

(381,308

)

Total shareholders’ equity

 

 

490,612

 

 

 

463,578

 

Total Liabilities and Shareholders’ Equity

 

$

734,679

 

 

$

664,462

 

 

See notes to unaudited condensed consolidated financial statements.

5

 


 

CTS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS UNAUDITED

(In thousands of dollars)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2022

 

 

2021

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

Net earnings (loss)

 

$

44,635

 

 

$

(51,031

)

Adjustments to reconcile net earnings (loss) to net cash provided by operating
   activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

21,727

 

 

 

20,231

 

Non-cash inventory charges

 

 

3,342

 

 

 

 

Pension and other post-retirement plan (income) expense

 

 

(1,866

)

 

 

131,290

 

Stock-based compensation

 

 

5,807

 

 

 

4,106

 

Deferred income taxes

 

 

661

 

 

 

(34,147

)

Gain on foreign currency hedges, net of cash

 

 

(123

)

 

 

(27

)

Changes in assets and liabilities, net of acquisitions:

 

 

 

 

 

 

Accounts receivable

 

 

(13,560

)

 

 

2,587

 

Inventories

 

 

(10,386

)

 

 

(5,190

)

Operating lease assets

 

 

1,338

 

 

 

825

 

Other assets

 

 

2,249

 

 

 

(5,334

)

Accounts payable

 

 

11,393

 

 

 

(1,792

)

Accrued payroll and benefits

 

 

(2,029

)

 

 

3,810

 

Operating lease liabilities

 

 

(1,492

)

 

 

(841

)

Accrued expenses and other liabilities

 

 

503

 

 

 

(4,100

)

Pension and other post-retirement plans

 

 

33,540

 

 

 

(270

)

Net cash provided by operating activities

 

 

95,739

 

 

 

60,117

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

Capital expenditures

 

 

(9,260

)

 

 

(8,140

)

Payments for acquisitions, net of cash acquired

 

 

(96,528

)

 

 

(255

)

Net cash used in investing activities

 

 

(105,788

)

 

 

(8,395

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

Payments of long-term debt

 

 

(517,939

)

 

 

(597,200

)

Proceeds from borrowings of long-term debt

 

 

553,417

 

 

 

592,600

 

Purchases of treasury stock

 

 

(13,446

)

 

 

(4,939

)

Dividends paid

 

 

(3,855

)

 

 

(3,882

)

Payments of contingent consideration

 

 

(1,050

)

 

 

(500

)

Taxes paid on behalf of equity award participants

 

 

(1,504

)

 

 

(1,490

)

Net cash provided by (used in) financing activities

 

 

15,623

 

 

 

(15,411

)

Effect of exchange rate changes on cash and cash equivalents

 

 

869

 

 

 

443

 

Net increase in cash and cash equivalents

 

 

6,443

 

 

 

36,754

 

Cash and cash equivalents at beginning of period

 

 

141,465

 

 

 

91,773

 

Cash and cash equivalents at end of period

 

$

147,908

 

 

$

128,527

 

Supplemental cash flow information:

 

 

 

 

 

 

Cash paid for interest

 

$

1,519

 

 

$

1,307

 

Cash paid for income taxes, net

 

$

12,607

 

 

$

10,246

 

Non-cash financing and investing activities:

 

 

 

 

 

 

Capital expenditures incurred but not paid

 

$

1,925

 

 

$

1,153

 

 

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 and nine months ended September 30, 2022:

 

 

 

Common
Stock

 

 

Additional
Contributed
Capital

 

 

Retained
Earnings

 

 

Accumulated
Other
Comprehensive
Loss

 

 

Treasury
Stock

 

 

Total

 

Balances at December 31, 2021

 

$

314,620

 

 

$

42,549

 

 

$

492,242

 

 

$

(4,525

)

 

$

(381,308

)

 

$

463,578

 

Net earnings

 

 

 

 

 

 

 

 

20,239

 

 

 

 

 

 

 

 

 

20,239

 

Changes in fair market value of derivatives, net of tax

 

 

 

 

 

 

 

 

 

 

 

1,235

 

 

 

 

 

 

1,235

 

Changes in unrealized pension cost, net of tax

 

 

 

 

 

 

 

 

 

 

 

94

 

 

 

 

 

 

94

 

Cumulative translation adjustment, net of tax

 

 

 

 

 

 

 

 

 

 

 

(249

)

 

 

 

 

 

(249

)

Cash dividends of $0.04 per share

 

 

 

 

 

 

 

 

(1,284

)

 

 

 

 

 

 

 

 

(1,284

)

Acquired 116,176 shares of treasury stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,920

)

 

 

(3,920

)

Issued shares on vesting of restricted stock units

 

 

1,876

 

 

 

(3,289

)

 

 

 

 

 

 

 

 

 

 

 

(1,413

)

Stock compensation

 

 

 

 

 

1,898

 

 

 

 

 

 

 

 

 

 

 

 

1,898

 

Balances at March 31, 2022

 

$

316,496

 

 

$

41,158

 

 

$

511,197

 

 

$

(3,445

)

 

$

(385,228

)

 

$

480,178

 

Net earnings

 

 

 

 

 

 

 

 

12,598

 

 

 

 

 

 

 

 

 

12,598

 

Changes in fair market value of derivatives, net of tax

 

 

 

 

 

 

 

 

 

 

 

705

 

 

 

 

 

 

705

 

Changes in unrealized pension cost, net of tax

 

 

 

 

 

 

 

 

 

 

 

2,082

 

 

 

 

 

 

2,082

 

Cumulative translation adjustment, net of tax

 

 

 

 

 

 

 

 

 

 

 

(2,012

)

 

 

 

 

 

(2,012

)

Cash dividends of $0.04 per share

 

 

 

 

 

 

 

 

(1,289

)

 

 

 

 

 

 

 

 

(1,289

)

Acquired 216,252 shares of treasury stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(7,748

)

 

 

(7,748

)

Issued shares on vesting of restricted stock units

 

 

6

 

 

 

(84

)

 

 

 

 

 

 

 

 

 

 

 

(78

)

Stock compensation

 

 

 

 

 

1,511

 

 

 

 

 

 

 

 

 

 

 

 

1,511

 

Balances at June 30, 2022

 

$

316,502

 

 

$

42,585

 

 

$

522,506

 

 

$

(2,670

)

 

$

(392,976

)

 

$

485,947

 

Net earnings

 

 

 

 

 

 

 

 

11,798

 

 

 

 

 

 

 

 

 

11,798

 

Changes in fair market value of derivatives, net of tax

 

 

 

 

 

 

 

 

 

 

 

1,727

 

 

 

 

 

 

1,727

 

Changes in unrealized pension cost, net of tax

 

 

 

 

 

 

 

 

 

 

 

(1,835

)

 

 

 

 

 

(1,835

)

Cumulative translation adjustment, net of tax

 

 

 

 

 

 

 

 

 

 

 

(6,071

)

 

 

 

 

 

(6,071

)

Cash dividends of $0.04 per share

 

 

 

 

 

 

 

 

(1,268

)

 

 

 

 

 

 

 

 

(1,268

)

Acquired 52,000 shares of treasury stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,778

)

 

 

(1,778

)

Issued shares on vesting of restricted stock units

 

 

18

 

 

 

(30

)

 

 

 

 

 

 

 

 

 

 

 

(12

)

Stock compensation

 

 

 

 

 

2,104

 

 

 

 

 

 

 

 

 

 

 

 

2,104

 

Balances at September 30, 2022

 

$

316,520

 

 

$

44,659

 

 

$

533,036

 

 

$

(8,849

)

 

$

(394,754

)

 

$

490,612

 

 

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 and nine months ended September 30, 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

 

Net earnings

 

 

 

 

 

 

 

 

875

 

 

 

 

 

 

 

 

 

875

 

Changes in fair market value of derivatives, net of tax

 

 

 

 

 

 

 

 

 

 

 

268

 

 

 

 

 

 

268

 

Changes in unrealized pension cost, net of tax

 

 

 

 

 

 

 

 

 

 

 

17,024

 

 

 

 

 

 

17,024

 

Cumulative translation adjustment, net of tax

 

 

 

 

 

 

 

 

 

 

 

1

 

 

 

 

 

 

1

 

Cash dividends of $0.04 per share

 

 

 

 

 

 

 

 

(1,299

)

 

 

 

 

 

 

 

 

(1,299

)

Issued shares on vesting of restricted stock units

 

 

1,333

 

 

 

(1,413

)

 

 

 

 

 

 

 

 

 

 

 

(80

)

Stock compensation

 

 

 

 

 

1,804

 

 

 

 

 

 

 

 

 

 

 

 

1,804

 

Balances at June 30, 2021

 

$

314,341

 

 

$

40,007

 

 

$

549,553

 

 

$

(77,070

)

 

$

(372,522

)

 

$

454,309

 

Net earnings

 

 

 

 

 

 

 

 

(63,896

)

 

 

 

 

 

 

 

 

(63,896

)

Changes in fair market value of derivatives, net of tax

 

 

 

 

 

 

 

 

 

 

 

(292

)

 

 

 

 

 

(292

)

Changes in unrealized pension cost, net of tax

 

 

 

 

 

 

 

 

 

 

 

72,530

 

 

 

 

 

 

72,530

 

Cumulative translation adjustment, net of tax

 

 

 

 

 

 

 

 

 

 

 

(10

)

 

 

 

 

 

(10

)

Cash dividends of $0.04 per share

 

 

 

 

 

 

 

 

(1,289

)

 

 

 

 

 

 

 

 

(1,289

)

Acquired 148,035 shares of treasury stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,939

)

 

 

(4,939

)

Issued shares on vesting of restricted stock units

 

 

10

 

 

 

(20

)

 

 

 

 

 

 

 

 

 

 

 

(10

)

Stock compensation

 

 

 

 

 

971

 

 

 

 

 

 

 

 

 

 

 

 

971

 

Balances at September 30, 2021

 

$

314,351

 

 

$

40,958

 

 

$

484,368

 

 

$

(4,842

)

 

$

(377,461

)

 

$

457,374

 

 

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)

September 30, 2022

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, 2021.

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.

There have been no material changes in the Company’s significant accounting policies as compared to the significant accounting policies described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

NOTE 2 – Revenue Recognition

The core principle of Accounting Standard Codification (“ASC”) Topic 606 Revenue from Contracts with Customers 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 or shipment 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 September 30, 2022 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

 

 

Nine months ended

 

 

 

September 30, 2022

 

 

September 30, 2021

 

 

September 30, 2022

 

 

September 30, 2021

 

Transportation

 

$

78,377

 

 

$

62,342

 

 

$

232,200

 

 

$

209,750

 

Industrial

 

 

43,857

 

 

 

36,356

 

 

 

125,267

 

 

 

98,433

 

Medical

 

 

16,380

 

 

 

12,409

 

 

 

49,277

 

 

 

36,487

 

Aerospace & Defense

 

 

13,297

 

 

 

11,275

 

 

 

37,844

 

 

 

35,724

 

Total

 

$

151,911

 

 

$

122,382

 

 

$

444,588

 

 

$

380,394

 

 

NOTE 3 – Business Acquisitions

TEWA Temperature Sensors SP. Zo.o. Acquisition

On February 28, 2022, we acquired 100% of the outstanding shares of TEWA Temperature Sensors SP. Zo.o. (“TEWA”). TEWA is a designer and manufacturer of high-quality temperature sensors. TEWA has complementary capabilities with our existing temperature sensing platform and the acquisition supports our end market diversification strategy by expanding our presence in Europe.

The purchase price of $24,485, which includes assumed changes in working capital, net of cash acquired of $2,945, has been allocated to the fair values of assets and liabilities acquired as of February 28, 2022. 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. The final purchase price allocation may result in a materially different allocation than that recorded as of September 30, 2022.

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:

 

 

 

Fair Values at
February 28, 2022

 

Current assets

 

$

5,650

 

Property, plant and equipment

 

 

644

 

Other assets

 

 

27

 

Goodwill

 

 

7,669

 

Intangible assets

 

 

12,503

 

Fair value of assets acquired

 

 

26,493

 

Less fair value of liabilities acquired

 

 

(2,008

)

Purchase price

 

$

24,485

 

 

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.

 

The Company recorded a $1,113 step-up of inventory to its fair value as of the acquisition date based on the preliminary valuation. The step-up was amortized as a non-cash charge to cost of goods sold as the acquired inventory was sold with all of it recognized in the nine months ended September 30, 2022.

Intangible assets acquired have been assigned a provisional value of $12,503 with an estimated weighted average amortization period of 12 years. They are included as customer lists/relationships in our Condensed Consolidated Balance Sheets and subsequent notes. Due to the timing of the acquisition, the identification and valuation of all intangible assets remains incomplete; however, management used

10

 


 

historical experience and projections to estimate the potential value at September 30, 2022. The amount and assumptions included above remain an estimate that will be adjusted once purchase accounting is complete.

 

Ferroperm Piezoceramics A/S Acquisition

On June 30, 2022, we acquired 100% of the outstanding shares of Ferroperm Piezoceramics A/S (“Ferroperm”). Ferroperm specializes in the design and manufacture of high performance piezoceramic components for use in complex and demanding medical, industrial, and aerospace applications. Ferroperm has complementary capabilities with our existing medical diagnostics and imaging product lines. The acquisition supports our end market diversification strategy and expands our presence in European end markets.

The purchase price of $72,043, which includes assumed changes in working capital, net of cash acquired of $5,578, has been allocated to the fair values of assets and liabilities acquired as of June 30, 2022. 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. The final purchase price allocation may result in a materially different allocation than that recorded as of September 30, 2022.

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:

 

 

Fair Values at
June 30, 2022

 

Accounts Receivable

 

$

3,073

 

Inventory

 

 

6,848

 

Other current assets

 

 

1,001

 

Property, plant and equipment

 

 

3,953

 

Other assets

 

 

158

 

Goodwill

 

 

24,298

 

Intangible assets

 

 

36,448

 

Fair value of assets acquired

 

 

75,779

 

Less fair value of liabilities acquired

 

 

(3,736

)

Purchase price

 

$

72,043

 

 

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.

 

The Company recorded a $3,012 step-up of inventory to its fair value as of the acquisition date based on the preliminary valuation. The step-up is being amortized as a non-cash charge to cost of goods sold as the acquired inventory is sold with $2,229 recognized in the third quarter of 2022 and the remaining is expected to be recognized in the fourth quarter of 2022.

Intangible assets acquired have been assigned a provisional value of $36,448 with an estimated weighted average amortization period of 12 years. They are included as customer lists/relationships in our Condensed Consolidated Balance Sheets and subsequent notes. Due to the timing of the acquisition, the identification and valuation of all intangible assets remains incomplete; however, management used historical experience and projections to estimate the potential value at September 30, 2022. The amount and assumptions included above remain an estimate that will be adjusted once purchase accounting is complete.

NOTE 4 – Accounts Receivable, net

The components of accounts receivable, net are as follows:

 

 

 

As of

 

 

 

September 30,

 

 

December 31,

 

 

 

2022

 

 

2021

 

Accounts receivable, gross

 

$

98,388

 

 

$

83,848

 

Less: Allowance for credit losses

 

 

(1,384

)

 

 

(1,657

)

Accounts receivable, net

 

$

97,004

 

 

$

82,191

 

 

11

 


 

 

NOTE 5 – Inventories, net

Inventories, net consists of the following:

 

 

 

As of

 

 

 

September 30,

 

 

December 31,

 

 

 

2022

 

 

2021

 

Finished goods

 

$

13,539

 

 

$

11,955

 

Work-in-process

 

 

22,328

 

 

 

18,878

 

Raw materials

 

 

38,460

 

 

 

28,078

 

Less: Inventory reserves

 

 

(10,862

)

 

 

(9,405

)

Inventories, net

 

$

63,465

 

 

$

49,506

 

 

NOTE 6 – Property, Plant and Equipment, net

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

 

 

 

As of

 

 

 

September 30,

 

 

December 31,

 

 

 

2022

 

 

2021

 

Land and land improvements

 

$

1,100

 

 

$

1,095

 

Buildings and improvements

 

 

71,644

 

 

 

69,614

 

Machinery and equipment

 

 

253,659

 

 

 

247,708

 

Less: Accumulated depreciation

 

 

(230,497

)

 

 

(221,541

)

Property, plant and equipment, net

 

$

95,906

 

 

$

96,876

 

 

Depreciation expense for the nine months ended September 30, 2022 and September 30, 2021 was $13,548 and $13,166, respectively.

NOTE 7 – Retirement Plans

Pension Plans

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

 

 

 

Three months ended

 

 

Nine months ended

 

 

 

September 30,

 

 

September 30,

 

 

September 30,

 

 

September 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Net pension (income) expense

 

$

(2,076

)

 

$

107,447

 

 

$

(1,944

)

 

$

131,227

 

 

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

 

 

 

Domestic Pension Plans

 

 

Foreign Pension Plans

 

 

 

Three Months Ended

 

 

Three Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

September 30,

 

 

September 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Service cost

 

$

 

 

$

 

 

$

6

 

 

$

6

 

Interest cost

 

 

5

 

 

 

385

 

 

 

4

 

 

 

4

 

Expected return on plan assets(1)

 

 

(2,139

)

 

 

429

 

 

 

(3

)

 

 

(3

)

Amortization of loss

 

 

8

 

 

 

377

 

 

 

43

 

 

 

43

 

Settlement charges

 

 

 

 

 

106,206

 

 

 

 

 

 

 

Total (income) expense, net

 

$

(2,126

)

 

$

107,397

 

 

$

50

 

 

$

50

 

 

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

 

12

 


 

 

 

Domestic Pension Plans

 

 

Foreign Pension Plans

 

 

 

Nine Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

September 30,

 

 

September 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Service cost

 

$

 

 

$

 

 

$

18

 

 

$

18

 

Interest cost

 

 

15

 

 

 

2,856

 

 

 

12

 

 

 

12

 

Expected return on plan assets(1)

 

 

(2,139

)

 

 

(1,742

)

 

 

(9

)

 

 

(9

)

Amortization of loss

 

 

24

 

 

 

3,694

 

 

 

135

 

 

 

129

 

Settlement charges

 

 

 

 

 

126,269

 

 

 

 

 

 

 

Total (income) expense, net

 

$

(2,100

)

 

$

131,077

 

 

$

156

 

 

$

150

 

 

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

In February 2020, the 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 into 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 allowed us to proceed with the termination process for the Plan. During the second quarter of 2021, the Company offered the option of receiving a lump sum payment to eligible participants with vested qualified Plan benefits in lieu of receiving monthly annuity payments. Approximately 365 participants elected to receive the settlement, and lump sum payments of approximately $35,594 were made from Plan assets to these participants in June 2021.

As required under U.S. GAAP, the Company recognizes a settlement gain or loss when the aggregate amount of lump-sum distributions to participants equals or exceeds the sum of the service and interest cost components of the net periodic pension cost. The amount of settlement gain or loss recognized is the pro rata amount of the existing unrealized gain or loss immediately prior to the settlement. In general, both the projected benefit obligation and fair value of plan assets are required to be remeasured in order to determine the settlement gain or loss.

Upon the partial settlement of the pension liability due to the lump sum offering in the second quarter of 2021, the Company recognized a non-cash and non-operating settlement charge of $20,063 related to pension losses, reclassified from accumulated other comprehensive loss to other income (expense) in the Company's Condensed Consolidated Statements of Earnings.

On July 29, 2021, the Plan purchased a group annuity contract that transferred our benefit obligations for approximately 2,700 CTS participants and beneficiaries in the United States (“Transferred Participants”). As part of the purchase of the group annuity contract, Plan benefit obligations and related annuity administration services for Transferred Participants were irrevocably assumed and guaranteed by the insurance company effective as of August 3, 2021. There will be no change to pension benefits for Transferred Participants. The purchase of the group annuity contract was fully funded directly by Plan assets.

As a result of the final settlement of the pension liability with the purchase of annuities, we reclassified the remaining related unrecognized pension losses of $106,206 that were previously recorded in accumulated other comprehensive loss to the Company’s Consolidated Statements of Earnings as a non-cash and non-operating settlement charge in the third quarter of 2021.

In January 2022, we transferred approximately $17,500 of funds from Plan assets to a qualified replacement plan (“QRP”) managed by the Company. The QRP requires that these assets be used to fund future annual Company contributions to our U.S. 401(k) program. The remaining Plan assets were transferred to the Company in the third quarter of 2022 as part of the final termination process. Approximately $34,016 was transferred to the Company, which resulted in $6,803 of excise tax being recorded during the quarter. The excise tax was recorded as Other Expense in the Company's Condensed Consolidated Statements of Earnings and remained in Accounts Payable in the Company's Condensed Consolidated Balance Sheets as of September 30, 2022.

Other Post-retirement Benefit Plan

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

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

September 30,

 

 

September 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Service cost

 

$

 

 

$

 

 

$

 

 

$

 

Interest cost

 

 

26

 

 

 

20

 

 

 

78

 

 

 

63

 

Amortization of gain

 

 

 

 

 

 

 

 

 

 

 

 

Total expense, net

 

$

26

 

 

$

20

 

 

$

78

 

 

$

63

 

 

13

 


 

Defined Contribution Plans

We sponsor a 401(k) plan that covers substantially all of our U.S. employees as well as offer similar defined contribution plans at certain foreign locations. In the third quarter of 2022, our investment committee, in consultation with the plan’s advisors, determined the 401(k) plan’s position in CTS stock would be liquidated and funds would be reinvested in other investments. CTS stock represented approximately 2% of the 401(k) plan’s investments as of December 31, 2021. The process is expected to begin and to be completed in the fourth quarter of 2022.

 

NOTE 8 – Goodwill and Other Intangible Assets

Other Intangible Assets

Other intangible assets, net consist of the following components:

 

 

 

As of

 

 

 

September 30, 2022

 

 

 

Gross
Carrying
Amount

 

 

Accumulated
Amortization

 

 

Net Amount

 

Customer lists/relationships

 

$

141,339

 

 

$

(54,569

)

 

$

86,770

 

Technology and other intangibles

 

 

47,441

 

 

 

(28,004

)

 

 

19,437

 

Other intangible assets, net

 

$

188,780

 

 

$

(82,573

)

 

$

106,207

 

Amortization expense for the three months ended
   September 30, 2022

 

 

 

 

$

3,262

 

 

 

 

Amortization expense for the nine months ended
   September 30, 2022

 

 

 

 

$

8,179

 

 

 

 

 

 

 

As of

 

 

 

December 31, 2021

 

 

 

Gross
Carrying
Amount

 

 

Accumulated
Amortization

 

 

Net Amount

 

Customer lists/relationships

 

$

96,889

 

 

$

(49,213

)

 

$

47,676

 

Technology and other intangibles

 

 

47,441

 

 

 

(25,229

)

 

 

22,212

 

Other intangible assets, net

 

$

144,330

 

 

$

(74,442

)

 

$

69,888

 

Amortization expense for the three months ended
   September 30, 2021

 

 

 

 

$

2,348

 

 

 

 

Amortization expense for the nine months ended
   September 30, 2021

 

 

 

 

$

7,065

 

 

 

 

 

Remaining amortization expense for other intangible assets as of September 30, 2022 is as follows:

 

 

 

Amortization
expense

 

2022

 

$

3,316

 

2023

 

 

10,825

 

2024

 

 

10,663

 

2025

 

 

10,441

 

2026

 

 

10,407

 

Thereafter

 

 

60,555

 

Total amortization expense

 

$

106,207

 

 

Goodwill

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

14

 


 

 

 

Total

 

Goodwill as of December 31, 2021

 

$

109,798

 

     Increase from acquisitions

 

 

31,967

 

     Foreign exchange impact

 

 

(2,820

)

Goodwill as of September 30, 2022

 

$

138,945

 

 

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

 

 

 

September 30, 2022

 

 

September 30, 2021

 

Restructuring charges

 

$

492

 

 

$

319

 

 

 

 

Nine Months Ended

 

 

 

September 30, 2022

 

 

September 30, 2021

 

Restructuring charges

 

$

1,434

 

 

$

551

 

 

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 now estimated to be in the range of $3,500 to $4,500, including workforce reduction charges, building and equipment relocation charges and other contract and asset-related costs. We have incurred $1,793 in program costs to date. We recorded $238 and $396 in workforce reduction costs during the three and nine months ended September 30, 2022, respectively, under the 2020 Plan. Due to the robust market demand and COVID-19 limitations, some projects have been delayed. The total restructuring liability associated with these actions was $396 as of September 30, 2022. There was no liability related to the September 2020 Plan as of December 31, 2021.

Other Restructuring Activities

From time to time we undertake other restructuring activities that are not part of a formal plan. During the three and nine months ended September 30, 2022, we incurred restructuring charges of $252 and $1,034, respectively. During the three and nine months ended September 30, 2021, we incurred restructuring charges of $319 and $582, respectively. The total restructuring liability associated with these actions was $588 at September 30, 2022 and $962 at December 31, 2021.

The following table displays the restructuring liability activity included in accrued expenses and other liabilities for all plans for the nine months ended September 30, 2022:

 

Restructuring liability at January 1, 2022

 

$

962

 

Restructuring charges

 

 

1,434

 

Cost paid

 

 

(1,412

)

Restructuring liability at September 30, 2022

 

$

984

 

 

 

15

 


 

NOTE 10 – Accrued Expenses and Other Liabilities

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

 

 

 

As of

 

 

 

September 30,

 

 

December 31,

 

 

 

2022

 

 

2021

 

Accrued product related costs

 

$

3,068

 

 

$

3,188

 

Accrued income taxes

 

 

9,118

 

 

 

6,761

 

Accrued property and other taxes

 

 

1,916

 

 

 

2,370

 

Accrued professional fees

 

 

2,031

 

 

 

1,629

 

Accrued customer related liabilities

 

 

3,261

 

 

 

3,254

 

Dividends payable

 

 

1,274

 

 

 

1,289

 

Remediation reserves

 

 

10,635

 

 

 

10,979

 

Derivative liabilities

 

 

 

 

 

437

 

Other accrued liabilities

 

 

4,438

 

 

 

6,811

 

Total accrued expenses and other liabilities

 

$

35,741

 

 

$

36,718

 

 

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.

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

 

 

 

September 30,

 

 

December 31,

 

 

 

2022

 

 

2021

 

Balance at beginning of period

 

$

10,979

 

 

$

10,642

 

Remediation expense

 

 

1,710

 

 

 

2,254

 

Net remediation payments

 

 

(2,080

)

 

 

(1,929

)

Other activity(1)

 

 

26

 

 

 

12

 

Balance at end of the period

 

$

10,635

 

 

$

10,979

 

 

(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.

16

 


 

NOTE 12 - Debt

Long-term debt is comprised of the following:

 

 

 

As of

 

 

 

September 30,

 

 

December 31,

 

 

 

2022

 

 

2021

 

Total credit facility

 

$

400,000

 

 

$

400,000

 

Balance outstanding

 

 

85,478

 

 

 

50,000

 

Standby letters of credit

 

 

1,640

 

 

 

1,740

 

Amount available, subject to covenant restrictions

 

$

312,882

 

 

$

348,260

 

Weighted-average interest rate

 

 

2.22

%

 

 

1.16

%

 

On December 15, 2021, we entered into a second amended and restated five-year credit agreement with a group of banks (the “Revolving Credit Facility”) to (i) increase the total credit facility to $400,000, which may be increased by $200,000 at the request of the Company, subject to the administrative agent's approval, (ii) extend the maturity of the Revolving Credit Facility from February 12, 2024 to December 15, 2026, (iii) replace LIBOR with SOFR as the primary reference rate used to calculate interest on the loans under the Revolving Credit Facility, (iv) increase available sublimits for letters of credit, and swingline loans as well as providing for additional alternative currency borrowing capabilities, and (v) modify the financial and non-financial covenants to provide the Company additional flexibility.

 

Borrowings in U.S. dollars under the Revolving Credit Facility bear interest, at a per annum rate equal to the applicable Term SOFR rate (but not less than 0.0%), plus the Term SOFR adjustment, and plus an applicable margin, which ranges from 1.00% to 1.75%, based on our net leverage ratio. Similarly, borrowings of alternative currencies under the Revolving Credit Facility bear interest equal to a defined risk-free reference rate, plus the applicable risk-free rate adjustment and plus an applicable margin, which ranges from 1.00% to 1.75%, based on our net leverage ratio.

The Revolving Credit Facility includes a swing line sublimit of $20,000 and a letter of credit sublimit of $20,000. We also pay a quarterly commitment fee on the unused portion of the Revolving Credit Facility. The commitment fee ranges from 0.175% to 0.25% based on our net leverage ratio. The Revolving Credit Facility requires, in addition to customary representations and warranties, that we comply with a maximum net leverage ratio and a minimum interest coverage ratio. Failure to comply with these covenants could reduce the borrowing availability under the Revolving Credit Facility. We were in compliance with all debt covenants at September 30, 2022. The Revolving Credit Facility requires that we deliver quarterly financial statements, annual financial statements, auditor certifications, and compliance certificates within a specified number of days after the end of a quarter and year. Additionally, the Revolving Credit Facility contains restrictions limiting our ability to: dispose of assets; incur certain additional debt; repay other debt or amend subordinated debt instruments; create liens on assets; make investments, loans or advances; make acquisitions or engage in mergers or consolidations; engage in certain transactions with our subsidiaries and affiliates; and make stock repurchases and dividend payments.

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, which approximates the effective interest method. Amortization expense for the three and nine months ended September 30, 2022 was $48 and $145, respectively. Amortization expense for the three and nine months ended September 30, 2021 was $42 and $126, respectively. These costs are included in interest expense in our Consolidated Statements of Earnings.

Note 13 - 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 as well as interest rate and cross-currency swaps to manage our exposure to these risks.

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

17

 


 

The effective portion of derivative gains and losses are recorded in accumulated other comprehensive loss 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 to other income (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 and nine months ended September 30, 2022.

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 September 30, 2022, we had a net unrealized gain of $616 in accumulated other comprehensive (loss) income, $520 of which is expected to be reclassified to earnings within the next 12 months. The notional amount of foreign currency forward contracts outstanding was $14,701 at September 30, 2022.

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 September 30, 2022, we have agreements to fix interest rates on $50,000 of long-term debt until December 2026. The difference to be paid or received under the terms of the swap agreements will be recognized as an adjustment to interest expense when settled.

These swaps are treated as cash flow hedges and consequently, the changes in fair value are recorded in other comprehensive (loss) income. The estimated net amount of the existing gains that are reported in accumulated other comprehensive (loss) income that are expected to be reclassified into earnings within the next twelve months is approximately $968.

Cross-Currency Swap

The Company has operations and investments in various international locations and is subject to risks associated with changing foreign exchange rates. In order to hedge the Krone-based purchase price of the Ferroperm acquisition, the Company entered into a cross currency interest rate swap agreement on June 27, 2022 that synthetically swapped $25,000 of variable rate debt to Krone denominated variable rate debt. Upon completion of the Ferroperm acquisition on June 30, 2022, the transaction was designated as a net investment hedge for accounting purposes and will mature on June 30, 2027.

Accordingly, any gains or losses on this derivative instrument will be included in the foreign currency translation component of other comprehensive income until the net investment is sold, diluted or liquidated. At September 30, 2022 we had a net unrealized gain of $1,561 in accumulated other comprehensive (loss) income. Interest payments received for the cross currency swap are excluded from the net investment hedge effectiveness assessment and are recorded in interest expense in the Condensed Consolidated Statements of Earnings. The assumptions used in measuring fair value of the cross currency swap are considered level 2 inputs, which are based upon the Krone to United States Dollar exchange rate market.

Prior to designation as a net investment hedge, a gain of $111 was recorded in other expense within the Condensed Consolidated Statements of Earnings during the second quarter of 2022.

18

 


 

The location and fair values of derivative instruments designated as hedging instruments in the Condensed Consolidated Balance Sheets as of September 30, 2022, are shown in the following table:

 

 

 

As of

 

 

 

September 30,

 

 

December 31,

 

 

 

2022

 

 

2021

 

Interest rate swaps reported in Other current assets

 

$

1,258

 

 

$

 

Interest rate swaps reported in Other assets

 

$

2,072

 

 

$

 

Interest rate swaps reported in Accrued Expenses and other liabilities

 

$

 

 

$

(437

)

Interest rate swaps reported in Other long-term obligations

 

$

 

 

$

(353

)

Foreign currency hedges reported in Other current assets

 

$

789

 

 

$

135

 

Net investment hedge reported in Other assets

 

$

1,675

 

 

$

 

 

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 $789 and foreign currency derivative liabilities of $0 at September 30, 2022.

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

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

September 30,

 

 

September 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Foreign Exchange Contracts:

 

 

 

 

 

 

 

 

 

 

 

 

Amounts reclassified from AOCI to earnings:

 

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

 

216

 

 

 

442

 

 

 

524

 

 

 

992

 

Total gain reclassified from AOCI to earnings

 

 

216

 

 

 

442

 

 

 

524

 

 

 

992

 

Total derivative gain on foreign exchange contracts recognized in earnings

 

$

216

 

 

$

442

 

 

$

524

 

 

$

992

 

Interest Rate Swaps:

 

 

 

 

 

 

 

 

 

 

 

 

Income (expense) recorded in Interest expense

 

$

79

 

 

$

(191

)

 

$

(194

)

 

$

(554

)

Cross-Currency Swap:

 

 

 

 

 

 

 

 

 

 

 

 

Income (expense) recorded in Interest expense

 

$

175

 

 

$

 

 

$

175

 

 

$

 

Total net gains on derivatives

 

$

470

 

 

$

251

 

 

$

505

 

 

$

438

 

Derivative Contracts Not Designated as Hedges

In the second quarter of 2022, the Company used derivative contracts to manage foreign currency exchange risk related to funds to be used for the purchase price of the Ferroperm acquisition. These contracts were not designated as hedges and therefore changes in the fair values of these instruments were recognized directly in earnings. All contracts were settled in conjunction with the closing of the Ferroperm acquisition. As a result of these contracts, the Company recognized a $1,776 loss in other expense in the Condensed Consolidated Statements of Earnings during the second quarter of 2022.

19

 


 

NOTE 14 – Accumulated Other Comprehensive Loss

Shareholders’ equity includes certain items classified as accumulated other comprehensive loss (“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, foreign currency forward contracts used to hedge our exposure to changes in exchange rates affecting certain revenues and costs denominated in foreign currencies, as well as a cross-currency swap that synthetically converts our U.S. Dollar variable rate debt to Krone denominated variable rate debt. 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 13 - Derivative Financial Instruments and Note 17 – 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.

Changes in exchange rates between the functional currency and the currency in which a transaction is denominated are foreign exchange transaction gains or losses. Transaction losses for the three and nine months ended September 30, 2022 were $451 and $3,980, respectively. Transaction losses for the three and nine months ended September 30, 2021 were $1,011 and $1,412, respectively. The impact of these changes have been included in other income (expense) in the Condensed Consolidated Statements of Earnings.

The components of accumulated other comprehensive loss for the three months ended September 30, 2022 are as follows:

 

 

 

 

 

 

 

 

 

(Gain) Loss

 

 

 

 

 

 

As of

 

 

Gain (Loss)

 

 

Reclassified

 

 

As of

 

 

 

June 30,

 

 

Recognized

 

 

from AOCI

 

 

September 30,

 

 

 

2022

 

 

in OCI

 

 

to Earnings

 

 

2022

 

Changes in fair market value of derivatives:

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

$

1,884

 

 

$

2,539

 

 

$

(295

)

 

$

4,128

 

Income tax benefit (expense)

 

 

(431

)

 

 

(585

)

 

 

68

 

 

 

(948

)

Net

 

 

1,453

 

 

 

1,954

 

 

 

(227

)

 

 

3,180

 

Changes in unrealized pension cost:

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

 

(504

)

 

 

161

 

 

 

(1,954

)

 

 

(2,297

)

Income tax benefit (expense)

 

 

674

 

 

 

(492

)

 

 

450

 

 

 

632

 

Net

 

 

170

 

 

 

(331

)

 

 

(1,504

)

 

 

(1,665

)

Cumulative translation adjustment:

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

 

(4,293

)

 

 

(6,071

)

 

 

 

 

 

(10,364

)

Income tax benefit (expense)

 

 

 

 

 

 

 

 

 

 

 

 

Net

 

 

(4,293

)

 

 

(6,071

)

 

 

 

 

 

(10,364

)

Total accumulated other comprehensive (loss) income

 

$

(2,670

)

 

$

(4,448

)

 

$

(1,731

)

 

$

(8,849

)

 

20

 


 

The components of accumulated other comprehensive loss for the three months ended September 30, 2021, are as follows:

 

 

 

 

 

 

 

 

 

(Gain) Loss

 

 

 

 

 

 

As of

 

 

Gain (Loss)

 

 

Reclassified

 

 

As of

 

 

 

June 30,

 

 

Recognized

 

 

from AOCI

 

 

September 30,

 

 

 

2021

 

 

in OCI

 

 

to Earnings

 

 

2021

 

Changes in fair market value of derivatives:

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

$

(529

)

 

$

(128

)

 

$

(251

)

 

$

(908

)

Income tax benefit (expense)

 

 

123

 

 

 

29

 

 

 

58

 

 

 

210

 

Net

 

 

(406

)

 

 

(99

)

 

 

(193

)

 

 

(698

)

Changes in unrealized pension cost:

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

 

(104,052

)

 

 

(5,450

)

 

 

106,622

 

 

 

(2,880

)

Income tax benefit (expense)

 

 

29,411

 

 

 

1,254

 

 

 

(29,896

)

 

 

769

 

Net

 

 

(74,641

)

 

 

(4,196

)

 

 

76,726

 

 

 

(2,111

)

Cumulative translation adjustment:

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

 

(2,023

)

 

 

(10

)

 

 

 

 

 

(2,033

)

Income tax benefit (expense)

 

 

 

 

 

 

 

 

 

 

 

 

Net

 

 

(2,023

)

 

 

(10

)

 

 

 

 

 

(2,033

)

Total accumulated other comprehensive (loss) income

 

$

(77,070

)

 

$

(4,305

)

 

$

76,533

 

 

$

(4,842

)

 

 

The components of accumulated other comprehensive loss for the nine months ended September 30, 2022, are as follows:

 

 

 

 

 

 

 

 

 

(Gain) Loss

 

 

 

 

 

 

As of

 

 

Gain (Loss)

 

 

Reclassified

 

 

As of

 

 

 

December 31,

 

 

Recognized

 

 

from AOCI

 

 

September 30,

 

 

 

2021

 

 

in OCI

 

 

to Earnings

 

 

2022

 

Changes in fair market value of derivatives:

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

$

(635

)

 

$

5,093

 

 

 

(330

)

 

$

4,128

 

Income tax benefit (expense)

 

 

147

 

 

 

(1,171

)

 

 

76

 

 

 

(948

)

Net

 

 

(488

)

 

 

3,922

 

 

 

(254

)

 

 

3,180

 

Changes in unrealized pension cost:

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

 

(2,744

)

 

 

2,139

 

 

 

(1,692

)

 

 

(2,297

)

Income tax benefit (expense)

 

 

738

 

 

 

(492

)

 

 

386

 

 

 

632

 

Net

 

 

(2,006

)

 

 

1,647

 

 

 

(1,306

)

 

 

(1,665

)

Cumulative translation adjustment:

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

 

(2,032

)

 

 

(8,332

)

 

 

 

 

 

(10,364

)

Income tax benefit (expense)

 

 

 

 

 

 

 

 

 

 

 

 

Net

 

 

(2,032

)

 

 

(8,332

)

 

 

 

 

 

(10,364

)

Total accumulated other comprehensive (loss) income

 

$

(4,526

)

 

$

(2,763

)

 

$

(1,560

)

 

$

(8,849

)

 

21

 


 

 

The components of accumulated other comprehensive loss for the nine months ended September 30, 2021, are as follows:

 

 

 

 

 

 

 

 

 

(Gain) Loss

 

 

 

 

 

 

As of

 

 

Gain (Loss)

 

 

Reclassified

 

 

As of

 

 

 

December 31,

 

 

Recognized

 

 

from AOCI

 

 

September 30,

 

 

 

2020

 

 

in OCI

 

 

to Earnings

 

 

2021

 

Changes in fair market value of derivatives:

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

$

(1,038

)

 

$

568

 

 

 

(438

)

 

$

(908

)

Income tax benefit (expense)

 

 

240

 

 

 

(131

)

 

 

101

 

 

 

210

 

Net

 

 

(798

)

 

 

437

 

 

 

(337

)

 

 

(698

)

Changes in unrealized pension cost:

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

 

(128,004

)

 

 

(4,951

)

 

 

130,075

 

 

 

(2,880

)

Income tax benefit (expense)

 

 

34,917

 

 

 

1,139

 

 

 

(35,287

)

 

 

769

 

Net

 

 

(93,087

)

 

 

(3,812

)

 

 

94,788

 

 

 

(2,111

)

Cumulative translation adjustment:

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

 

(2,036

)

 

 

3

 

 

 

 

 

 

(2,033

)

Income tax benefit (expense)

 

 

 

 

 

 

 

 

 

 

 

 

Net

 

 

(2,036

)

 

 

3

 

 

 

 

 

 

(2,033

)

Total accumulated other comprehensive (loss) income

 

$

(95,921

)

 

$

(3,372

)

 

$

94,451

 

 

$

(4,842

)

 

NOTE 15 – Shareholders’ Equity

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

 

 

 

As of

 

 

 

September 30,

 

 

December 31,

 

 

 

2022

 

 

2021

 

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

 

 

57,310,837

 

 

 

57,245,060

 

Shares outstanding

 

 

31,860,064

 

 

 

32,178,715

 

Treasury stock

 

 

 

 

 

 

Shares held

 

 

25,450,773

 

 

 

25,066,345

 

 

On May 13, 2021, the Board of Directors approved a new share repurchase program that authorizes the Company to repurchase up to $50,000 of the Company’s common stock. The repurchase program has no set expiration date and replaces the repurchase program approved by the Board of Directors on February 7, 2019. During the three and nine months ended September 30, 2022, 52,000 and 384,428 shares of common stock were repurchased for $1,778 and $13,446, respectively. During the three and nine months ended September 30, 2021, there were 148,035 shares of common stock that were repurchased for $4,939. As of September 30, 2022, approximately $27,768 remains available for future purchases.

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

 

 

 

Nine months ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2022

 

 

2021

 

Balance at the beginning of the year

 

 

32,178,715

 

 

 

32,276,787

 

Repurchases

 

 

(384,428

)

 

 

(148,035

)

Restricted share issuances

 

 

65,777

 

 

 

159,397

 

Balance at the end of the period

 

 

31,860,064

 

 

 

32,288,149

 

 

22

 


 

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 and nine months ended September 30, 2022 were 393 and 950, respectively. The number of outstanding awards that were anti-dilutive for the three and nine months ended September 30, 2021 were 462 and 1,029, respectively.

NOTE 16- Stock-Based Compensation

At September 30, 2022, 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.

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

 

 

Nine months ended

 

 

 

September 30,

 

 

September 30,

 

 

September 30,

 

 

September 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Service-based RSUs

 

$

766

 

 

$

588

 

 

$

2,134

 

 

$

2,013

 

Performance and Market-based RSUs

 

 

1,338

 

 

 

383

 

 

 

3,379

 

 

 

1,942

 

Cash-settled RSUs

 

 

137

 

 

 

16

 

 

 

294

 

 

 

151

 

Total

 

$

2,241

 

 

$

987

 

 

$

5,807

 

 

$

4,106

 

Income tax benefit

 

 

515

 

 

 

227

 

 

 

1,336

 

 

 

945

 

Net expense

 

$

1,726

 

 

$

760

 

 

$

4,471

 

 

$

3,161

 

 

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

 

 

 

September 30, 2022

 

 

Period (years)

 

Service-based RSUs

 

$

2,013

 

 

 

1.41

 

Performance and Market-based RSUs

 

 

5,282

 

 

 

1.82

 

Total

 

$

7,295

 

 

 

1.70

 

 

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 September 30, 2022:

 

 

 

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 awards outstanding

 

 

718,268

 

 

 

35,100

 

 

 

30,000

 

 

 

14,545

 

 

 

4,722

 

RSUs and cash-settled awards vested and released

 

 

249,742

 

 

 

 

 

 

 

 

 

 

 

 

 

Awards available for grant

 

 

1,531,990

 

 

 

 

 

 

 

 

 

 

 

 

 

 

23

 


 

Service-Based Restricted Stock Units

The following table summarizes the service-based RSU activity for the nine months ended September 30, 2022:

 

 

 

Units

 

 

Weighted
Average
Grant Date
Fair Value

 

Outstanding at December 31, 2021

 

 

283,216

 

 

$

24.91

 

Granted

 

 

70,124

 

 

 

33.71

 

Vested and released

 

 

(77,945

)

 

 

26.71

 

Forfeited

 

 

(7,838

)

 

 

30.35

 

Outstanding at September 30, 2022

 

 

267,557

 

 

$

26.54

 

Releasable at September 30, 2022

 

 

117,467

 

 

$

18.29

 

 

Performance and Market-Based Restricted Stock Units

The following table summarizes the performance and market-based RSU activity for the nine months ended September 30, 2022:

 

 

 

Units

 

 

Weighted
Average
Grant Date
Fair Value

 

Outstanding at December 31, 2021

 

 

237,767

 

 

$

31.35

 

Granted

 

 

83,602

 

 

 

37.08

 

Attained by performance

 

 

5,136

 

 

 

29.50

 

Released

 

 

(51,848

)

 

 

30.64

 

Forfeited

 

 

(15,601

)

 

 

31.83

 

Outstanding at September 30, 2022

 

 

259,056

 

 

$

33.26

 

Releasable at September 30, 2022

 

 

 

 

$

 

 

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 September 30, 2022 and December 31, 2021, we had 48,508 and 32,085 cash-settled RSUs outstanding, respectively. At September 30, 2022 and December 31, 2021, liabilities of $437 and $400, respectively, were included in accrued expenses and other liabilities on our Condensed Consolidated Balance Sheets.

NOTE 17 — Fair Value Measurements

The table below summarizes our financial assets and liabilities that were measured at fair value on a recurring basis at September 30, 2022:

 

 

 

Asset (Liability) Carrying
Value at
September 30,
2022

 

 

Quoted Prices
in Active
Markets for
Identical
(Level 1)

 

 

Significant
Other
Observable
Inputs
(Level 2)

 

 

Significant
Unobservable
Inputs
(Level 3)

 

Interest rate swaps

 

$

3,330

 

 

$

 

 

$

3,330

 

 

$

 

Foreign currency hedges

 

$

789

 

 

$

 

 

$

789

 

 

$

 

Cross-currency swap

 

$

1,675

 

 

$

 

 

$

1,675

 

 

$

 

Qualified replacement plan assets

 

$

15,635

 

 

$

15,635

 

 

$

 

 

$

 

Contingent consideration

 

$

(300

)

 

$

 

 

$

 

 

$

(300

)

 

24

 


 

The table below summarizes the financial assets and liabilities that were measured at fair value on a recurring basis as of December 31, 2021:

 

 

 

(Liability) Asset Carrying
Value at
December 31,
2021

 

 

Quoted Prices
in Active
Markets for
Identical
(Level 1)

 

 

Significant
Other
Observable
Inputs
(Level 2)

 

 

Significant
Unobservable
Inputs
(Level 3)

 

Interest rate swaps

 

$

(790

)

 

$

 

 

$

(790

)

 

$

 

Foreign currency hedges

 

$

135

 

 

$

 

 

$

135

 

 

$

 

Contingent consideration

 

$

(1,200

)

 

$

 

 

$

 

 

$

(1,200

)

 

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. The Company entered into a cross currency swap agreement in order to manage its exposure to changes in interest rates related to foreign debt. 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.

A roll-forward of the contingent consideration is as follows:

 

 

 

 

 

 

 

 

 

 

Contingent
Consideration

 

Balance at December 31, 2021

 

$

1,200

 

    Settled in cash

 

 

(900

)

Balance at September 30, 2022 in accrued expenses and other liabilities

 

$

300

 

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

The QRP assets consist of investment funds maintained for future contributions to the Company’s U.S. 401(k) program. See Note 7 for further information on the QRP. The investments are Level 1 marketable securities and are recorded in Other Assets on our Condensed Consolidated Balance Sheets.

NOTE 18 — Income Taxes

The effective tax rates for the three and nine months ended September 30, 2022 and 2021 are as follows:

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

September 30,

 

 

September 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Effective tax rate

 

 

31.8

%

 

 

28.9

%

 

 

25.6

%

 

 

32.5

%

 

Our effective income tax rate was 31.8% and 28.9% in the third quarters of 2022 and 2021, respectively. The increase in effective income tax is primarily attributed to a nondeductible cost associated with the termination of the U.S. pension plan incurred in the third quarter of 2022. The third quarter 2022 effective income tax rate was higher than the U.S. statutory federal tax rate primarily due to the

25

 


 

impact of a nondeductible cost associated with the termination of the U.S. pension plan. The third quarter 2021 effective tax rate was higher, primarily due to the non-cash settlement expense related to the final annuity purchase made for the U.S. pension plan termination.

 

Our effective income tax rate was 25.6% and 32.5% in the nine months ending September 30, 2022 and 2021, respectively. The decrease is primarily attributed to a non-cash settlement expense related to the termination of the U.S. pension plan made in the second and third quarters of 2021. The tax rate in the first nine months of 2022 was higher than the U.S. statutory federal tax rate primarily due to the impact of a nondeductible cost associated with the termination of the U.S. pension plan. The tax rate in the first nine months of 2021 was higher than the U.S. statutory federal tax rate primarily due to settlement expenses related to the termination of the U.S. pension plan made in the second and third quarters of 2021.

 

26

 


 

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

(in thousands of dollars, 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, 2021.

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, technologies and talent within these categories.

We manufacture sensors, actuators, and connectivity components in North America, Europe, and Asia. CTS provides engineered products to original equipment manufacturers (“OEMs”) and tier one suppliers in the aerospace and defense, industrial, medical, and transportation markets.

There is an increasing proliferation of sensing, connectivity, and motion applications within various markets we serve. Our success is dependent on the ability to execute our strategy to support these trends. We are subject to challenges including, without limitation, periodic market softness, competition from other suppliers, changes in technology, and the ability to add new customers, launch new products or penetrate new markets.

On February 28, 2022, we acquired 100% of the outstanding shares of TEWA Temperature Sensors SP. Zo.o. (“TEWA”) for $24,485. TEWA is a designer and manufacturer of high-quality temperature sensors. TEWA has complementary capabilities with our existing temperature sensing platform and the acquisition supports our end market diversification strategy by expanding our presence in Europe.

On June 30, 2022, we acquired 100% of the outstanding shares of Ferroperm Piezoceramics A/S (“Ferroperm”) for $72,043. Ferroperm specializes in the design and manufacture of high performance piezoceramic components for use in complex and demanding medical, industrial, and aerospace applications. Ferroperm has complementary capabilities with our existing medical diagnostics and imaging product lines and the acquisition also supports our end market diversification strategy by expanding our presence in European end markets.

COVID-19 Impact and Supply Chain Uncertainties

The COVID-19 pandemic and subsequent supply chain uncertainties have had a significant negative impact on the global economy in 2020, 2021, and into 2022. These events have disrupted the financial markets, negatively impacted the global supply chain and increased the cost of materials and operations, particularly within the global automotive industry. Key semiconductor chip and other critical part shortages continue to force OEMs to shut down production, often on short notice. With customers changing orders on short notice, we run the risk of carrying excess inventory in these situations. These developments are outside of our control, remain highly uncertain, and cannot be predicted. In addition, the supply chain shortages continue to put pressure on our manufacturing costs and our gross margins. We continue to actively monitor the ongoing impacts of the COVID-19 pandemic and supply chain issues and will seek to mitigate and minimize their impact on our business, when possible. We anticipate these challenges to continue to impact our results for the remainder of 2022 and we remain cautious about the financial impact of these potential disruptions on our business into 2023.

27

 


 

Results of Operations: Third Quarter 2022 versus Third Quarter 2021

The following table highlights changes in significant components of the Unaudited Condensed Consolidated Statements of Earnings for the quarters ended September 30, 2022, and September 30, 2021:

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2022

 

 

September 30, 2021

 

 

Percent
Change

 

 

Percentage of Net Sales –
2022

 

 

Percentage of Net Sales –
2021

 

Net sales

 

$

151,911

 

 

$

122,382

 

 

 

24.1

%

 

 

100.0

%

 

 

100.0

%

Cost of goods sold

 

 

98,565

 

 

 

76,720

 

 

 

28.5

 

 

 

64.9

 

 

 

62.7

 

Gross margin

 

 

53,346

 

 

 

45,662

 

 

 

16.8

 

 

 

35.1

 

 

 

37.3

 

Selling, general and administrative expenses

 

 

24,003

 

 

 

19,922

 

 

 

20.5

 

 

 

15.8

 

 

 

16.3

 

Research and development expenses

 

 

6,207

 

 

 

6,454

 

 

 

(3.8

)

 

 

4.1

 

 

 

5.3

 

Restructuring charges

 

 

492

 

 

 

319

 

 

 

54.2

 

 

 

0.3

 

 

 

0.3

 

Total operating expenses

 

 

30,702

 

 

 

26,695

 

 

 

15.0

 

 

 

20.2

 

 

 

21.9

 

Operating earnings

 

 

22,644

 

 

 

18,967

 

 

 

19.4

 

 

 

14.9

 

 

 

15.5

 

Total other expense, net

 

 

(5,346

)

 

 

(108,786

)

 

 

(95.1

)

 

 

(3.5

)

 

 

(88.9

)

Earnings (loss) before income taxes

 

 

17,298

 

 

 

(89,819

)

 

n/a

 

 

 

11.4

 

 

 

(73.4

)

Income tax expense (benefit)

 

 

5,500

 

 

 

(25,923

)

 

n/a

 

 

 

3.6

 

 

 

(21.2

)

Net earnings (loss)

 

$

11,798

 

 

$

(63,896

)

 

n/a

 

 

 

7.8

%

 

 

(52.2

)%

Earnings (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted net earnings (loss) per share

 

$

0.37

 

 

$

(1.97

)

 

 

 

 

 

 

 

 

 

 

Net sales were $151,911 in the third quarter of 2022, an increase of $29,529 or 24.1% from the third quarter of 2021. Net sales to non-transportation markets increased $13,492 or 22.5% while net sales to transportation markets increased $16,035 or 25.7%. The TEWA and Ferroperm acquisitions added $8,588 in net sales for the quarter. Changes in foreign exchange rates decreased net sales by $4,137 year-over-year primarily due to the U.S. Dollar appreciating compared to the Euro.

Gross margin was $53,346 in the third quarter of 2022, an increase of $7,684 or 16.8% from the third quarter of 2021. The year over year increase in gross margin was driven by sales volume and mix partially offset by increased material and freight costs, changes in foreign exchange rates of $1,041 year-over-year, and $2,229 in inventory step-up amortization charges taken relating to the Ferroperm acquisition. We continue to experience significant inflation in material and freight costs as well as interruptions in the supply chain particularly due to the global semiconductor chip shortages impacting the operations of our business. The impact of the supply chain shortages and OEM shutdowns are expected to continue to have an adverse effect on our operations that we are continuing to attempt to mitigate.

Selling, general and administrative ("SG&A") expenses were $24,003 or 15.8% of net sales in the third quarter of 2022 versus $19,922 or 16.3% of net sales in the third quarter of 2021. The increase in SG&A expenses was primarily caused by expenses related to acquisition activity.

Research and development (“R&D”) expenses were $6,207 or 4.1% of net sales in the third quarter of 2022 compared to $6,454 or 5.3% of net sales in the comparable quarter of 2021. We continue investing in research and product development to drive organic growth, and the slight reduction was due to timing of spend and customer reimbursements.

Restructuring charges were $492 or 0.3% of net sales in the third quarter of 2022 compared to $319 or 0.3% of net sales in the third quarter of 2021. We continue to implement certain restructuring actions to improve our cost structure to remain competitive.

Operating earnings were $22,644 or 14.9% of net sales in the third quarter of 2022 compared to operating earnings of $18,967 or 15.5% of net sales in the third quarter of 2021. The change in operating earnings were primarily driven by the items discussed above.

28

 


 

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

 

 

 

Three Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2022

 

 

2021

 

Interest expense

 

$

(342

)

 

$

(514

)

Interest income

 

 

167

 

 

 

230

 

Other expense, net

 

 

(5,171

)

 

 

(108,502

)

Total other expense, net

 

$

(5,346

)

 

$

(108,786

)

 

The reduction in other expense, net was primarily driven by decreased pension expense due to the U.S. pension plan termination, effective in 2021. Other expense, net for the third quarter of 2022 is primarily driven by $6,803 in excise taxes incurred as part of the U.S. pension plan termination as well as foreign currency losses primarily related to the Chinese Renminbi offset partially by income from the U.S. pension plan investments realized prior to the final termination.

 

 

 

Three Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2022

 

 

2021

 

Effective tax rate

 

 

31.8

%

 

 

28.9

%

 

Our effective income tax rate was 31.8% and 28.9% in the third quarters of 2022 and 2021, respectively. The increase in effective income tax rate is primarily attributed to a nondeductible cost associated with the termination of the U.S. pension plan incurred in the third quarter of 2022.

 

Results of Operations: Nine Months ended September 30, 2022 versus Nine Months Ended September 30, 2021

The following table highlights changes in significant components of the Unaudited Condensed Consolidated Statements of Earnings for the nine months ended September 30, 2022, and September 30, 2021:

 

 

 

Nine Months Ended

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2022

 

 

September 30, 2021

 

 

Percent
Change

 

 

Percentage of Net Sales –
2022

 

 

Percentage of Net Sales –
2021

 

Net sales

 

$

444,588

 

 

$

380,394

 

 

 

16.9

%

 

 

100.0

%

 

 

100.0

%

Cost of goods sold

 

 

285,054

 

 

 

244,446

 

 

 

16.6

 

 

 

64.1

 

 

 

64.3

 

Gross margin

 

 

159,534

 

 

 

135,948

 

 

 

17.3

 

 

 

35.9

 

 

 

35.7

 

Selling, general and administrative expenses

 

 

68,029

 

 

 

59,184

 

 

 

14.9

 

 

 

15.3

 

 

 

15.6

 

Research and development expenses

 

 

18,695

 

 

 

18,170

 

 

 

2.9

 

 

 

4.2

 

 

 

4.8

 

Restructuring charges

 

 

1,434

 

 

 

551

 

 

 

160.3

 

 

 

0.3

 

 

 

0.1

 

Total operating expenses

 

 

88,158

 

 

 

77,905

 

 

 

13.2

 

 

 

19.8

 

 

 

20.5

 

Operating earnings

 

 

71,376

 

 

 

58,043

 

 

 

23.0

 

 

 

16.1

 

 

 

15.3

 

Total other (expense), net

 

 

(11,410

)

 

 

(133,674

)

 

 

(91.5

)

 

 

(2.6

)

 

 

(35.1

)

Earnings (loss) before income taxes

 

 

59,966

 

 

 

(75,631

)

 

 

(179.3

)

 

 

13.5

 

 

 

(19.8

)

Income tax expense (benefit)

 

 

15,331

 

 

 

(24,600

)

 

 

(162.3

)

 

 

3.4

 

 

 

(6.5

)

Net earnings (loss)

 

$

44,635

 

 

$

(51,031

)

 

 

(187.5

)%

 

 

10.0

%

 

 

(13.4

)%

Earnings (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted net earnings (loss) per share

 

$

1.38

 

 

$

(1.58

)

 

 

 

 

 

 

 

 

 

 

Net sales were $444,588 in the nine months ended September 30, 2022, an increase of $64,194 or 16.9% from the nine months ended September 30, 2021. Net sales to non-transportation markets increased $41,743 or 24.5% while net sales to transportation markets increased $22,449 or 10.7%. The TEWA and Ferroperm acquisitions added $14,092 in net sales for the year to date period. Changes in foreign exchange rates decreased net sales by $6,650 year-over-year primarily due to the U.S. Dollar appreciating compared to the Euro.

Gross margin was $159,534 for the nine months ended September 30, 2022, an increase of $23,586 or 17.3% from the nine months ended September 30, 2021. The increase in gross margin was driven primarily by sales volume and mix partially offset by increased

29

 


 

material and freight costs, changes in foreign exchange rates of $1,909 year-over-year, and $3,342 in inventory step-up amortization charges taken relating to the TEWA and Ferroperm acquisitions. We continue to experience significant inflation in material and freight costs as well as interruptions in the supply chain particularly due to the global semiconductor chip shortages impacting the operations of our business. The impact of the supply chain shortages and OEM shutdowns are expected to continue to have an adverse effect on our operations that we are continuing to attempt to mitigate.

SG&A expenses were $68,029 or 15.3% of net sales for the nine months ended September 30, 2022 versus $59,184 or 15.6% of net sales for the nine months ended September 30, 2021. The increase in SG&A expenses was caused by expenses related to acquisition activity.

R&D expenses were $18,695 or 4.2% of net sales for the nine months ended September 30, 2022 compared to $18,170 or 4.8% of net sales for the nine months ended September 30, 2021. The increase in overall R&D expenses is in line with our commitment to continue investing in research and product development to drive organic growth.

Restructuring charges were $1,434 or 0.3% of net sales for the nine months ended September 30, 2022 compared to $551 or 0.1% of net sales for the nine months ended September 30, 2021. We continue to implement certain restructuring actions to improve our cost structure to remain competitive.

Operating earnings were $71,376 or 16.1% of net sales for the nine months ended September 30, 2022 compared to operating earnings of $58,043 or 15.3% of net sales for the nine months ended September 30, 2021. The change in operating earnings were primarily driven by the items discussed above.

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

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2022

 

 

2021

 

Interest expense

 

$

(1,490

)

 

$

(1,577

)

Interest income

 

 

610

 

 

 

689

 

Other expense, net

 

 

(10,530

)

 

 

(132,786

)

Total other expense, net

 

$

(11,410

)

 

$

(133,674

)

 

The reduction in other expense, net was primarily driven by decreased pension expense due to the U.S. pension plan termination, effective in 2021. Other expense, net for the nine months ended September 30, 2022 is primarily driven by $6,803 in excise taxes incurred as part of the U.S. pension plan termination and $1,776 in derivative losses associated with the acquisition of Ferroperm, as well as foreign currency losses primarily related to the Chinese Renminbi offset partially by income from the U.S. pension plan investments realized prior to the final termination.

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2022

 

 

2021

 

Effective tax rate

 

 

25.6

%

 

 

32.5

%

 

Our effective income tax rate was 25.6% and 32.5% for the nine months ended September 30, 2022 and 2021, respectively. The decrease in our effective income tax rate is primarily attributed to a one-time non-cash settlement expense related to the termination of the U.S. pension plan made in the second and third quarters of 2021.

 

 

Liquidity and Capital Resources

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 (as defined below). 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,

30

 


 

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

Cash and cash equivalents were $147,908 at September 30, 2022, and $141,465 at December 31, 2021, of which $96,180 and $124,635, respectively, were held outside the United States. Total long-term debt was $85,478 as of September 30, 2022 and $50,000 as of December 31, 2021. Total debt as a percentage of total capitalization, defined as long-term debt as a percentage of total debt and shareholders' equity, was 14.8% at September 30, 2022, compared to 9.7% at December 31, 2021.

 

Cash Flow Overview

 

Cash Flows from Operating Activities

Net cash provided by operating activities was $95,739 during the nine months ended September 30, 2022. Components of net cash provided by operating activities included net earnings of $44,635, depreciation and amortization expense of $21,727, other net non-cash items of $7,821, and a net cash inflow from changes in assets and liabilities of $21,556 primarily driven by $34,016 received from the U.S. pension plan termination.

 

Cash Flows from Investing Activities

Net cash used in investing activities for the nine months ended September 30, 2022 was $105,788, driven by the acquisition payments for the TEWA and Ferroperm acquisitions of $96,528 and capital expenditures of $9,260. See Note 3 "Business Acquisitions" in the Notes to the Condensed Consolidated Financial Statements.

 

Cash Flows from Financing Activities

Net cash provided by financing activities for the nine months ended September 30, 2022 was $15,623. The net cash inflow was the result of net cash from debt of $35,478 associated with recently completed acquisitions, partially offset by treasury stock purchases of $13,446, dividends paid of $3,855, taxes paid on behalf of equity award participants of $1,504, and contingent consideration payments of $1,050.

Capital Resources

Revolving Credit Facility

Long‑term debt is comprised of the following:

 

 

 

As of

 

 

 

September 30,

 

 

December 31,

 

 

 

2022

 

 

2021

 

Total credit facility

 

$

400,000

 

 

$

400,000

 

Balance outstanding

 

 

85,478

 

 

 

50,000

 

Standby letters of credit

 

 

1,640

 

 

 

1,740

 

Amount available, subject to covenant restrictions

 

$

312,882

 

 

$

348,260

 

 

On December 15, 2021, we entered into a second amended and restated five-year credit agreement with a group of banks (the “Revolving Credit Facility”) to (i) increase the total credit facility availability to $400,000, which may be increased by $200,000 at the request of the Company, subject to the administrative agent's approval, (ii) extend the maturity of the Revolving Credit Facility from February 12, 2024 to December 15, 2026, (iii) replace LIBOR with SOFR as the primary reference rate used to calculate interest on the loans under the Revolving Credit Facility, (iv) increase available sublimits for letters of credit, and swingline loans as well as providing for additional alternative currency borrowing capabilities, and (v) modify the financial and non-financial covenants to provide the Company additional flexibility. This new unsecured credit facility replaced the prior $300,000 unsecured credit facility, which would have expired February 12, 2024.

Borrowings in U.S. Dollars under the Revolving Credit Facility bear interest, at a per annum rate equal to the applicable Term SOFR rate (but not less than 0.0%), plus the Term SOFR adjustment, and plus an applicable margin, which ranges from 1.00% to 1.75%, based on our net leverage ratio. Similarly, borrowings of alternative currencies under the Revolving Credit Facility bear interest equal to a

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defined risk-free reference rate, plus the applicable risk-free rate adjustment and plus an applicable margin, which ranges from 1.00% to 1.75%, based on our net leverage ratio.

The Revolving Credit Facility includes a swing-line sublimit of $20,000 and a letter of credit sublimit of $20,000. We also pay a quarterly commitment fee on the unused portion of the Revolving Credit Facility. The commitment fee ranges from 0.175% to 0.25% based on our net leverage ratio. We were in compliance with all debt covenants at September 30, 2022.

 

Acquisitions

On February 28, 2022, we acquired TEWA, a designer and manufacturer of high-quality temperature sensors. The net cash payment of $24,485 for this acquisition was funded by the Company's cash on hand.

On June 30, 2022, we acquired Ferroperm, a designer and manufacturer of high performance piezoceramic components for use in complex and demanding medical, industrial, and aerospace applications. The net cash payment of $72,043 for this acquisition was funded by a combination of cash on hand and borrowings under our Revolving Credit Facility.

Critical Accounting Policies and Estimates

The Company’s Condensed Consolidated Financial Statements are prepared in accordance with U.S. GAAP. In connection with the preparation of the condensed consolidated financial statements, the Company uses estimates and makes judgments and assumptions about future events that affect the reported amounts of assets, liabilities, revenue, expenses, and the related disclosures. The assumptions, estimates, and judgments are based on historical experience, current trends, and other factors the Company believes are relevant at the time it prepares the Condensed Consolidated Financial Statements.

The critical accounting policies and estimates are consistent with those discussed in Note 1, Summary of Significant Accounting Policies, to the Consolidated Financial Statements and the MD&A section of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. During and as of the three and nine months ended September 30, 2022, there were no significant changes in the application of critical accounting policies or estimates.

Significant Customers

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

 

 

 

Three months ended

 

 

Nine months ended

 

 

 

September 30, 2022

 

 

September 30, 2021

 

 

September 30, 2022

 

 

September 30, 2021

 

Cummins Inc.

 

 

15.6

%

 

 

14.3

%

 

 

16.1

%

 

 

14.8

%

Toyota Motor Corporation

 

 

11.6

%

 

 

10.0

%

 

 

11.5

%

 

 

12.3

%

No other customer accounted for 10% or more of total net sales during these periods. We continue to focus on broadening our customer base to diversify our non-transportation end market exposure.

 

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 CTS’ 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

32

 


 

pandemic on CTS’ business, results of operations or financial condition; changes in the economy generally, including recessionary conditions, and in respect to the business in which CTS operates; unanticipated issues in integrating acquisitions; the results of actions to reposition CTS’ business; rapid technological change; general market conditions in the transportation, 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 CTS’ intellectual property; pricing pressures and demand for CTS’ products; and risks associated with CTS’ international operations, including trade and tariff barriers, exchange rates and political and geopolitical risks (including, without limitation, the potential impact the conflict between Russia and Ukraine may have on our business, results of operations and financial condition). Many of these, and other risks and uncertainties, are discussed in further detail in Item 1A. of CTS’ Annual Report on Form 10-K and other filings made with the SEC. CTS undertakes no obligation to publicly update CTS’ 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

See Item 7A, Quantitative and Qualitative Disclosures about Market Risk, of our Annual Report on Form 10-K for the year ended December 31, 2021. During the three months ended September 30, 2022, there have been no material changes in our exposure to market risk.

33

 


 

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 September 30, 2022 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, 2021.

34

 


 

Item 2. Unregistered Sales of Equity

On May 13, 2021, the Board of Directors authorized a stock repurchase program with a maximum dollar limit of $50 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.

 

 

 

 

 

 

 

 

Total Number

 

 

Maximum Dollar

 

 

 

 

 

 

 

 

 

of Shares

 

 

Value of Shares

 

 

 

 

 

 

 

 

 

Purchased as

 

 

That May Yet Be

 

 

 

Total Number

 

 

 

 

 

Part of Publicly

 

 

Purchased Under

 

 

 

of Shares

 

 

Average Price

 

 

Announced

 

 

Publicly Announced

 

 

 

Purchased

 

 

Paid per Share

 

 

Programs

 

 

Plans or Programs

 

July 1, 2022 through July 31, 2022

 

 

46,400

 

 

$

33.58

 

 

 

46,400

 

 

$

27,988

 

August 1, 2022 through August 31, 2022

 

 

5,600

 

 

$

39.22

 

 

 

5,600

 

 

$

27,768

 

September 1, 2022 through September 30, 2022

 

 

 

 

$

 

 

 

 

 

$

27,768

 

Total

 

 

52,000

 

 

 

 

 

 

52,000

 

 

 

 

 

35

 


 

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 September 30, 2022 formatted in Inline XBRL: (i) Condensed Consolidated Statements of Earnings (Loss); (ii) Condensed Consolidated Statements of Comprehensive Earnings; (iii) Condensed Consolidated Balance Sheets; (iv) Condensed Consolidated Statements of Cash Flows; (v) Condensed Consolidated Statements of Shareholders’ Equity; (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

 

 

 

 

 

 

 

36

 


 

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: October 26, 2022

 

  Dated: October 26, 2022

 

37