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CTS CORP - Quarter Report: 2023 March (Form 10-Q)

10-Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

For The Quarterly Period Ended March 31, 2023

OR

 

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

For the Transition Period from to

Commission File Number: 1-4639

 

CTS CORPORATION

(Exact name of registrant as specified in its charter)

 

 

IN

 

35-0225010

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification Number)

 

4925 Indiana Avenue

 

 

Lisle IL

 

60532

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code: (630) 577-8800

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

 

Title of Each Class

 

Trading Symbol(s)

 

Name of Each Exchange on Which Registered

Common stock, without par value

 

CTS

 

New York Stock Exchange

 

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

 

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

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

 

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

Smaller reporting company

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of April 21, 2023: 31,540,012.

 

 


 

CTS CORPORATION AND SUBSIDIARIES

TABLE OF CONTENTS

 

 

 

Page

 

 

 

PART I. FINANCIAL INFORMATION

 

 

 

 

 

 

 

 

 

Item 1.

 

Financial Statements

 

3

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Earnings (Unaudited) For the Three Months Ended March 31, 2023 and March 31, 2022

 

3

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Earnings (Unaudited) For the Three Months Ended March 31, 2023 and March 31, 2022

 

4

 

 

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets As of March 31, 2023 (Unaudited) and December 31, 2022

 

5

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows (Unaudited) For the Three Months Ended March 31, 2023 and March 31, 2022

 

6

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Shareholders’ Equity (Unaudited) For the Three Months Ended March 31, 2023 and March 31, 2022

 

7

 

 

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements ‑ (Unaudited)

 

9

 

 

 

 

 

 

 

Item 2.

 

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

 

25

 

 

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

 

29

 

 

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

30

 

 

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

30

 

 

 

 

 

 

 

Item 1A.

 

Risk Factors

 

30

 

 

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

30

 

 

 

 

 

 

 

Item 6.

 

Exhibits

 

32

 

 

 

 

 

 

SIGNATURES

 

33

 

 

2

 


 

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

CTS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS - UNAUDITED

(In thousands, except per share amounts)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

March 31,

 

 

 

2023

 

 

2022

 

Net sales

 

$

145,994

 

 

$

147,695

 

Cost of goods sold

 

 

94,342

 

 

 

93,355

 

Gross margin

 

 

51,652

 

 

 

54,340

 

Selling, general and administrative expenses

 

 

21,979

 

 

 

21,788

 

Research and development expenses

 

 

6,586

 

 

 

6,194

 

Restructuring charges

 

 

912

 

 

 

312

 

Operating earnings

 

 

22,175

 

 

 

26,046

 

Other income (expense):

 

 

 

 

 

 

Interest expense

 

 

(694

)

 

 

(546

)

Interest income

 

 

1,063

 

 

 

180

 

Other income, net

 

 

165

 

 

 

66

 

Total other income (expense), net

 

 

534

 

 

 

(300

)

Earnings before income taxes

 

 

22,709

 

 

 

25,746

 

Income tax expense

 

 

4,365

 

 

 

5,507

 

Net earnings

 

$

18,344

 

 

$

20,239

 

Earnings per share:

 

 

 

 

 

 

Basic

 

$

0.58

 

 

$

0.63

 

Diluted

 

$

0.58

 

 

$

0.63

 

Basic weighted – average common shares outstanding:

 

 

31,634

 

 

 

32,123

 

Effect of dilutive securities

 

 

259

 

 

 

204

 

Diluted weighted – average common shares outstanding:

 

 

31,893

 

 

 

32,327

 

Cash dividends declared per share

 

$

0.04

 

 

$

0.04

 

 

See notes to unaudited condensed consolidated financial statements.

3

 


 

CTS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS UNAUDITED

(In thousands of dollars)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

March 31,

 

 

 

2023

 

 

2022

 

Net earnings

 

$

18,344

 

 

$

20,239

 

Other comprehensive earnings (loss):

 

 

 

 

 

 

Changes in fair market value of derivatives, net of tax

 

 

379

 

 

 

1,235

 

Changes in unrealized pension cost, net of tax

 

 

(34

)

 

 

94

 

Cumulative translation adjustment, net of tax

 

 

1,024

 

 

 

(249

)

Other comprehensive earnings

 

$

1,369

 

 

$

1,080

 

Comprehensive earnings

 

$

19,713

 

 

$

21,319

 

 

See notes to unaudited condensed consolidated financial statements.

4

 


 

CTS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands of dollars)

 

 

(Unaudited)

 

 

 

 

 

 

March 31,

 

 

December 31,

 

 

 

2023

 

 

2022

 

ASSETS

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

Cash and cash equivalents

 

$

143,537

 

 

$

156,910

 

Accounts receivable, net

 

 

97,707

 

 

 

90,935

 

Inventories, net

 

 

63,470

 

 

 

62,260

 

Other current assets

 

 

17,930

 

 

 

15,655

 

Total current assets

 

 

322,644

 

 

 

325,760

 

Property, plant and equipment, net

 

 

96,280

 

 

 

97,300

 

Operating lease assets, net

 

 

21,869

 

 

 

22,702

 

Other Assets

 

 

 

 

 

 

Goodwill

 

 

155,651

 

 

 

152,361

 

Other intangible assets, net

 

 

109,706

 

 

 

108,053

 

Deferred income taxes

 

 

23,246

 

 

 

23,461

 

Other

 

 

17,611

 

 

 

18,850

 

Total other assets

 

 

306,214

 

 

 

302,725

 

Total Assets

 

$

747,007

 

 

$

748,487

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

Accounts payable

 

$

53,410

 

 

$

53,211

 

Operating lease obligations

 

 

4,032

 

 

 

3,936

 

Accrued payroll and benefits

 

 

11,800

 

 

 

20,063

 

Accrued expenses and other liabilities

 

 

36,534

 

 

 

35,322

 

Total current liabilities

 

 

105,776

 

 

 

112,532

 

Long-term debt

 

 

80,261

 

 

 

83,670

 

Long-term operating lease obligations

 

 

20,808

 

 

 

21,754

 

Long-term pension obligations

 

 

5,017

 

 

 

5,048

 

Deferred income taxes

 

 

15,786

 

 

 

16,010

 

Other long-term obligations

 

 

5,223

 

 

 

3,249

 

Total Liabilities

 

 

232,871

 

 

 

242,263

 

Commitments and Contingencies (Note 11)

 

 

 

 

 

 

Shareholders’ Equity

 

 

 

 

 

 

Common stock

 

 

318,785

 

 

 

316,803

 

Additional contributed capital

 

 

42,423

 

 

 

46,144

 

Retained earnings

 

 

563,787

 

 

 

546,703

 

Accumulated other comprehensive income (loss)

 

 

698

 

 

 

(671

)

Total shareholders’ equity before treasury stock

 

 

925,693

 

 

 

908,979

 

Treasury stock

 

 

(411,557

)

 

 

(402,755

)

Total shareholders’ equity

 

 

514,136

 

 

 

506,224

 

Total Liabilities and Shareholders’ Equity

 

$

747,007

 

 

$

748,487

 

 

See notes to unaudited condensed consolidated financial statements.

5

 


 

CTS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS UNAUDITED

(In thousands of dollars)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

March 31,

 

 

 

2023

 

 

2022

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

Net earnings

 

$

18,344

 

 

$

20,239

 

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

 

 

 

 

 

 

Depreciation and amortization

 

 

6,918

 

 

 

6,749

 

Pension and other post-retirement plan expense

 

 

31

 

 

 

91

 

Stock-based compensation

 

 

1,586

 

 

 

1,950

 

Deferred income taxes

 

 

(236

)

 

 

1,195

 

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

 

 

192

 

 

 

(15

)

Changes in assets and liabilities, net of acquisitions:

 

 

 

 

 

 

Accounts receivable

 

 

(5,906

)

 

 

(9,969

)

Inventories

 

 

(784

)

 

 

(615

)

Operating lease assets

 

 

833

 

 

 

(224

)

Other assets

 

 

(133

)

 

 

(253

)

Accounts payable

 

 

857

 

 

 

3,936

 

Accrued payroll and benefits

 

 

(8,818

)

 

 

(5,733

)

Operating lease liabilities

 

 

(851

)

 

 

93

 

Accrued expenses and other liabilities

 

 

(797

)

 

 

2,219

 

Pension and other post-retirement plans

 

 

(50

)

 

 

(377

)

Net cash provided by operating activities

 

 

11,186

 

 

 

19,286

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

Capital expenditures

 

 

(4,540

)

 

 

(3,400

)

Payments for acquisitions, net of cash acquired

 

 

(3,356

)

 

 

(24,484

)

Net cash used in investing activities

 

 

(7,896

)

 

 

(27,884

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

Payments of long-term debt

 

 

(204,084

)

 

 

(150,000

)

Proceeds from borrowings of long-term debt

 

 

200,675

 

 

 

150,000

 

Purchases of treasury stock

 

 

(8,802

)

 

 

(3,920

)

Dividends paid

 

 

(1,272

)

 

 

(1,289

)

Payments of contingent consideration

 

 

 

 

 

(150

)

Taxes paid on behalf of equity award participants

 

 

(3,142

)

 

 

(1,413

)

Net cash used in financing activities

 

 

(16,625

)

 

 

(6,772

)

Effect of exchange rate changes on cash and cash equivalents

 

 

(38

)

 

 

23

 

Net decrease in cash and cash equivalents

 

 

(13,373

)

 

 

(15,347

)

Cash and cash equivalents at beginning of period

 

 

156,910

 

 

 

141,465

 

Cash and cash equivalents at end of period

 

$

143,537

 

 

$

126,118

 

Supplemental cash flow information:

 

 

 

 

 

 

Cash paid for interest

 

$

926

 

 

$

480

 

Cash paid for income taxes, net

 

$

4,199

 

 

$

2,548

 

Non-cash financing and investing activities:

 

 

 

 

 

 

Capital expenditures incurred but not paid

 

$

1,400

 

 

$

1,339

 

 

See notes to unaudited condensed consolidated financial statements.

 

6

 


 

CTS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - UNAUDITED

(in thousands of dollars)

 

The following summarizes the changes in total equity for the three months ended March 31, 2023:

 

 

 

Common
Stock

 

 

Additional
Contributed
Capital

 

 

Retained
Earnings

 

 

Accumulated
Other
Comprehensive
Loss

 

 

Treasury
Stock

 

 

Total

 

Balances at December 31, 2022

 

$

316,803

 

 

$

46,144

 

 

$

546,703

 

 

$

(671

)

 

$

(402,755

)

 

$

506,224

 

Net earnings

 

 

 

 

 

 

 

 

18,344

 

 

 

 

 

 

 

 

 

18,344

 

Changes in fair market value of derivatives, net of tax

 

 

 

 

 

 

 

 

 

 

 

379

 

 

 

 

 

 

379

 

Changes in unrealized pension cost, net of tax

 

 

 

 

 

 

 

 

 

 

 

(34

)

 

 

 

 

 

(34

)

Cumulative translation adjustment, net of tax

 

 

 

 

 

 

 

 

 

 

 

1,024

 

 

 

 

 

 

1,024

 

Cash dividends of $0.04 per share

 

 

 

 

 

 

 

 

(1,260

)

 

 

 

 

 

 

 

 

(1,260

)

Acquired 198,271 shares of treasury stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(8,802

)

 

 

(8,802

)

Issued shares on vesting of restricted stock units

 

 

1,982

 

 

 

(5,125

)

 

 

 

 

 

 

 

 

 

 

 

(3,143

)

Stock compensation

 

 

 

 

 

1,404

 

 

 

 

 

 

 

 

 

 

 

 

1,404

 

Balances at March 31, 2023

 

$

318,785

 

 

$

42,423

 

 

$

563,787

 

 

$

698

 

 

$

(411,557

)

 

$

514,136

 

 

See notes to unaudited condensed consolidated financial statements.

7

 


 

CTS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - UNAUDITED

(in thousands of dollars)

 

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

 

 

See notes to unaudited condensed consolidated financial statements.

8

 


 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

(in thousands except for share and per share data)

March 31, 2023

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, 2022.

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.

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, 2022.

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 March 31, 2023 contained a significant financing component. Differences between the amount of revenue recognized and the amount invoiced, collected from, or paid to our customers are recognized as contract assets or liabilities. Contract assets will be reviewed for impairment when events or circumstances indicate that they may not be recoverable.

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

9

 


 

Disaggregated Revenue

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

 

 

 

Three months ended

 

 

 

March 31, 2023

 

 

March 31, 2022

 

Transportation

 

$

74,310

 

 

$

79,134

 

Industrial

 

 

40,673

 

 

 

40,007

 

Medical

 

 

17,311

 

 

 

15,867

 

Aerospace & Defense

 

 

13,700

 

 

 

12,687

 

Total

 

$

145,994

 

 

$

147,695

 

 

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 and expands our presence in Europe.

The final purchase price of $23,721, net of cash acquired of $2,979, has been allocated to the fair values of assets and liabilities acquired as of February 28, 2022. The purchase price was reduced by $794 for the final settlement of net working capital in the quarter. The following table summarizes the consideration paid, the fair values of the assets acquired and the liabilities assumed as of the date of acquisition:

 

 

 

Fair Values at
February 28, 2022

 

Accounts Receivable

 

$

2,521

 

Inventory

 

 

3,136

 

Other current assets

 

 

69

 

Property, plant and equipment

 

 

654

 

Other assets

 

 

27

 

Goodwill

 

 

8,473

 

Intangible assets

 

 

13,650

 

Fair value of assets acquired

 

 

28,530

 

Less fair value of liabilities acquired

 

 

(4,809

)

Purchase price

 

$

23,721

 

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 $1,180 step-up of inventory to its fair value as of the acquisition date. The step-up was amortized as a non-cash charge to cost of goods sold as the acquired inventory was sold with $580 recognized in the first quarter of 2022.

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

 

 

Carrying
Value

 

 

Weighted
Average
Amortization
Period

 

Customer lists/relationships

 

$

13,000

 

 

 

12.0

 

Technology and other intangibles

 

 

650

 

 

 

3.0

 

Total

 

$

13,650

 

 

 

 

 

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,

10

 


 

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 final purchase price of $72,340, 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 valuation of intangible assets and associated deferred tax liability was finalized in the quarter. The following table summarizes the final consideration paid, 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

 

 

1,003

 

Property, plant and equipment

 

 

3,953

 

Other assets

 

 

158

 

Goodwill

 

 

31,985

 

Intangible assets

 

 

38,100

 

Fair value of assets acquired

 

 

85,120

 

Less fair value of liabilities acquired

 

 

(12,780

)

Purchase price

 

$

72,340

 

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 was amortized as a non-cash charge to cost of goods sold as the acquired inventory was sold in the third and fourth quarters of 2022.

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

 

 

 

Carrying
Value

 

 

Weighted
Average
Amortization
Period

 

Customer lists/relationships

 

$

31,800

 

 

 

16.0

 

Technology and other intangibles

 

 

6,300

 

 

 

14.0

 

Total

 

$

38,100

 

 

 

 

 

Maglab AG Acquisition

On February 6, 2023, we acquired 100% of the outstanding shares of Maglab AG (”Maglab”). Maglab has deep expertise in magnetic system design and current measurement solutions for use in e-mobility, industrial automation, and renewable energy applications. Maglab’s domain expertise coupled with CTS’ commercial, technical and operational capabilities position us to advance our status as a recognized innovator in electric motor sensing and controls markets.

The purchase price, which includes estimated changes in working capital, of $7,714 has been allocated to the fair values of assets and liabilities acquired as of February 6, 2023. 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 information included below represents our current estimate of the purchase price allocation.

The following tables summarize the purchase price, the fair values of the assets acquired and the liabilities assumed as of the date of acquisition of Maglab:

 

 

Consideration Paid

 

Cash paid, net of cash acquired of $14

 

$

4,150

 

Contingent consideration

 

 

3,564

 

Purchase price

 

$

7,714

 

 

11

 


 

 

 

 

Fair Values at
February 6, 2023

 

Accounts Receivable

 

$

348

 

Inventory

 

 

43

 

Other Current Assets

 

 

41

 

Property, plant and equipment

 

 

35

 

Goodwill

 

 

5,527

 

Intangible assets

 

 

1,955

 

Fair value of assets acquired

 

 

7,949

 

Less fair value of liabilities acquired

 

 

(235

)

Purchase price

 

$

7,714

 

 

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.

Intangible assets acquired have been assigned a provisional value of $1,955 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 March 31, 2023. The amount and assumptions included above remain an estimate that will be adjusted once purchase accounting is complete.

All contingent consideration is payable in cash and is based on success factors related to the integration process as well as upon the achievement of annual revenue and customer order targets through the fiscal year ending December 31, 2025. The Company recorded $3,564 as the acquisition date fair value of the contingent consideration based on the estimate of the probability of achieving the performance targets. This amount is also reflected as an addition to the purchase price.

 

NOTE 4 – Accounts Receivable, net

The components of accounts receivable, net are as follows:

 

 

 

As of

 

 

 

March 31,

 

 

December 31,

 

 

 

2023

 

 

2022

 

Accounts receivable, gross

 

$

98,797

 

 

$

92,171

 

Less: Allowance for credit losses

 

 

(1,090

)

 

 

(1,236

)

Accounts receivable, net

 

$

97,707

 

 

$

90,935

 

 

NOTE 5 – Inventories, net

Inventories, net consists of the following:

 

 

 

As of

 

 

 

March 31,

 

 

December 31,

 

 

 

2023

 

 

2022

 

Finished goods

 

$

13,428

 

 

$

12,865

 

Work-in-process

 

 

21,892

 

 

 

22,819

 

Raw materials

 

 

39,504

 

 

 

37,362

 

Less: Inventory reserves

 

 

(11,354

)

 

 

(10,786

)

Inventories, net

 

$

63,470

 

 

$

62,260

 

 

12

 


 

NOTE 6 – Property, Plant and Equipment, net

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

 

 

 

As of

 

 

 

March 31,

 

 

December 31,

 

 

 

2023

 

 

2022

 

Land and land improvements

 

$

1,100

 

 

$

1,100

 

Buildings and improvements

 

 

73,383

 

 

 

71,938

 

Machinery and equipment

 

 

258,610

 

 

 

258,159

 

Less: Accumulated depreciation

 

 

(236,813

)

 

 

(233,897

)

Property, plant and equipment, net

 

$

96,280

 

 

$

97,300

 

 

Depreciation expense for the three months ended March 31, 2023 and March 31, 2022 was $4,407 and $4,368, respectively.

NOTE 7 – Retirement Plans

Pension Plans

Net pension 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

 

 

 

March 31,

 

 

March 31,

 

 

 

2023

 

 

2022

 

Net pension expense

 

$

67

 

 

$

65

 

 

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

 

 

 

Domestic Pension Plans

 

 

Foreign Pension Plans

 

 

 

Three Months Ended

 

 

Three Months Ended

 

 

 

March 31,

 

 

March 31,

 

 

March 31,

 

 

March 31,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Service cost

 

$

 

 

$

 

 

$

6

 

 

$

6

 

Interest cost

 

 

10

 

 

 

5

 

 

 

10

 

 

 

4

 

Expected return on plan assets(1)

 

 

 

 

 

 

 

 

(7

)

 

 

(3

)

Amortization of loss

 

 

5

 

 

 

8

 

 

 

43

 

 

 

45

 

Total expense, net

 

$

15

 

 

$

13

 

 

$

52

 

 

$

52

 

 

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

Other Post-retirement Benefit Plan

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

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

March 31,

 

 

 

2023

 

 

2022

 

Service cost

 

$

 

 

$

 

Interest cost

 

 

48

 

 

 

26

 

Amortization of gain

 

 

(84

)

 

 

 

Total (income) expense, net

 

$

(36

)

 

$

26

 

 

NOTE 8 – Goodwill and Other Intangible Assets

Goodwill

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

 

13

 


 

 

 

Total

 

Goodwill as of December 31, 2022

 

$

152,361

 

     Changes from acquisition purchase accounting

 

 

3,444

 

     Foreign exchange impact

 

 

(154

)

Goodwill as of March 31, 2023

 

$

155,651

 

 

Other Intangible Assets

Other intangible assets, net consist of the following components:

 

 

 

As of

 

 

 

March 31, 2023

 

 

 

Gross
Carrying
Amount

 

 

Accumulated
Amortization

 

 

Net Amount

 

Customer lists/relationships

 

$

141,952

 

 

$

(56,891

)

 

$

85,061

 

Technology and other intangibles

 

 

53,971

 

 

 

(29,326

)

 

 

24,645

 

Other intangible assets, net

 

$

195,923

 

 

$

(86,217

)

 

$

109,706

 

Amortization expense for the three months ended March 31, 2023

 

 

 

 

$

2,511

 

 

 

 

The changes in the gross carrying amounts of intangible assets are primarily due to business acquisition and purchase accounting activity in the quarter as discussed in Note 3.

 

 

 

As of

 

 

 

December 31, 2022

 

 

 

Gross
Carrying
Amount

 

 

Accumulated
Amortization

 

 

Net Amount

 

Customer lists/relationships

 

$

148,899

 

 

$

(59,603

)

 

$

89,296

 

Technology and other intangibles

 

 

45,255

 

 

 

(26,498

)

 

 

18,757

 

Other intangible assets, net

 

$

194,154

 

 

$

(86,101

)

 

$

108,053

 

Amortization expense for the three months ended March 31, 2022

 

 

 

 

$

2,381

 

 

 

 

 

Remaining amortization expense for other intangible assets as of March 31, 2023 is as follows:

 

 

 

Amortization
expense

 

2023

 

$

8,449

 

2024

 

 

10,959

 

2025

 

 

10,482

 

2026

 

 

10,328

 

2027

 

 

10,270

 

Thereafter

 

 

59,218

 

Total amortization expense

 

$

109,706

 

 

 

NOTE 9 – Costs Associated with Exit and Restructuring Activities

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

Total restructuring charges are as follows:

 

 

 

Three Months Ended

 

 

 

March 31, 2023

 

 

March 31, 2022

 

Restructuring charges

 

$

912

 

 

$

312

 

 

14

 


 

 

September 2020 Plan

In September 2020, we initiated a restructuring plan focused on optimizing our manufacturing footprint and improving operational efficiency by better utilizing our systems capabilities (the "September 2020 Plan"). This plan includes transitioning certain administrative functions to a shared service center, realignment of manufacturing locations, and certain other efficiency improvement actions. The restructuring cost of the September 2020 Plan is estimated to be in the range of $3,500 to $4,500, including workforce reduction charges, building and equipment relocation charges and other contract and asset-related costs. We have incurred $2,279 in program costs to date. We recorded $220 in workforce reduction costs during the three months ended March 31, 2023, under the 2020 Plan. The total restructuring liability associated with these actions was $485 as of March 31, 2023. The total restructuring liability associated with these actions was $634 as of December 31, 2022.

Other Restructuring Activities

From time to time, we may incur charges that are not considered part of a formal plan. During the three months ended March 31, 2023, we incurred restructuring charges of $692. The total restructuring liability associated with other restructuring activity was $615 at March 31, 2023 and $235 at December 31, 2022.

During the first quarter of 2023 we announced the shutdown of our Juarez manufacturing facility. As a part of this activity, operations from the Juarez plant will be consolidated into our expanded Matamoros facility. We expect the completion of these activities to occur in 2024. The total restructuring cost of the activities associated with the closure and consolidation is estimated to be in the range of $1,500 to $3,000, including workforce reduction charges, building and equipment relocation charges and other contract and asset-related costs. During the three months ended March 31, 2023, we incurred costs of $102 that are associated with the planned Juarez shutdown activities. The restructuring liability associated with the shutdown is $56 as of March 31, 2023. These balances were included in our other restructuring activity amounts referenced in the preceding paragraph.

The following table displays the restructuring liability activity included in accrued expenses and other liabilities for all plans for the three months ended March 31, 2023:

 

Restructuring liability at January 1, 2023

 

$

869

 

Restructuring charges

 

 

912

 

Costs paid

 

 

(681

)

Restructuring liability at March 31, 2023

 

$

1,100

 

 

 

NOTE 10 – Accrued Expenses and Other Liabilities

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

 

 

 

As of

 

 

 

March 31,

 

 

December 31,

 

 

 

2023

 

 

2022

 

Accrued product related costs

 

$

2,092

 

 

$

2,368

 

Accrued income taxes

 

 

9,210

 

 

 

9,630

 

Accrued property and other taxes

 

 

2,279

 

 

 

2,142

 

Accrued professional fees

 

 

1,587

 

 

 

1,472

 

Accrued customer related liabilities

 

 

2,648

 

 

 

2,837

 

Dividends payable

 

 

1,263

 

 

 

1,272

 

Remediation reserves

 

 

11,058

 

 

 

11,048

 

Derivative liabilities

 

 

649

 

 

 

357

 

Other accrued liabilities

 

 

5,748

 

 

 

4,196

 

Total accrued expenses and other liabilities

 

$

36,534

 

 

$

35,322

 

 

15

 


 

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 (”EPA”), 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 EPA’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

 

 

 

March 31,

 

 

December 31,

 

 

 

2023

 

 

2022

 

Balance at beginning of period

 

$

11,048

 

 

$

10,979

 

Remediation expense

 

 

562

 

 

 

2,750

 

Net remediation payments

 

 

(555

)

 

 

(2,661

)

Other activity(1)

 

 

3

 

 

 

(20

)

Balance at end of the period

 

$

11,058

 

 

$

11,048

 

 

(1)
Other activity includes currency translation adjustments not recorded through remediation expense.

The Company operates under and in accordance with a federal consent decree, dated March 7, 2017, with the EPA for the CTS of Asheville, Inc. Superfund Site (“Ashveville Site”). On February 8, 2023, the Company received a letter from the EPA (the “EPA Letter”) seeking reimbursement of its past response costs and interest thereon relating to any release or threatened release of hazardous substances at the Asheville Site in the aggregate amount of $9,955 from the three potentially responsible parties associated with the Asheville Site, including the Company. The Company is analyzing its potential exposure for the costs sought in the EPA Letter and will respond thereto in due course; however, at this time, we are unable to reasonably estimate the liability from the EPA Letter, and therefore, we did not record an accrual for the EPA Letter as of March 31, 2023.

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

 

 

 

March 31,

 

 

December 31,

 

 

 

2023

 

 

2022

 

Total credit facility

 

$

400,000

 

 

$

400,000

 

Balance outstanding

 

 

80,261

 

 

 

83,670

 

Standby letters of credit

 

 

1,640

 

 

 

1,640

 

Amount available, subject to covenant restrictions

 

$

318,099

 

 

$

314,690

 

Weighted-average interest rate

 

 

5.47

%

 

 

2.96

%

 

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 March 31, 2023. 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 months ended March 31, 2023 and 2022 were $48 and $48, 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 months ended March 31, 2023.

Foreign Currency Hedges

We use forward contracts to mitigate currency risk related to a portion of our forecasted foreign currency revenues and costs. The currency forward contracts are designed as cash flow hedges and are recorded in the Condensed Consolidated Balance Sheets at fair value.

We continue to monitor the Company’s overall currency exposure and may elect to add cash flow hedges in the future. At March 31, 2023, we had a net unrealized gain of $2,123 in accumulated other comprehensive (loss) income, $2,078 of which is expected to be reclassified to earnings within the next 12 months. The notional amount of foreign currency forward contracts outstanding was $24,165 at March 31, 2023.

Interest Rate Swaps

We use interest rate swaps to convert a portion of our Revolving Credit Facility’s outstanding balance from a variable rate of interest to a fixed rate. As of March 31, 2023, 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 $1,451.

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 are included in the foreign currency translation component of other comprehensive (loss) income until the net investment is sold, diluted or liquidated. At March 31, 2023 we had a net unrealized loss of $860 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 U.S. Dollar exchange rate market.

18

 


 

The location and fair values of derivative instruments designated as hedging instruments in the Condensed Consolidated Balance Sheets as of March 31, 2023, are shown in the following table:

 

 

 

As of

 

 

 

March 31,

 

 

December 31,

 

 

 

2023

 

 

2022

 

Interest rate swaps reported in Other current assets

 

$

1,451

 

 

$

1,561

 

Interest rate swaps reported in Other assets

 

$

827

 

 

$

1,434

 

Cross-currency swap reported in Accrued expenses and other liabilities

 

$

(649

)

 

$

(357

)

Foreign currency hedges reported in Other current assets

 

$

1,952

 

 

$

945

 

 

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 $2,143 and foreign currency derivative liabilities of $191 at March 31, 2023.

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

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

March 31,

 

 

 

2023

 

 

2022

 

Foreign Exchange Contracts:

 

 

 

 

 

 

Amounts reclassified from AOCI to earnings:

 

 

 

 

 

 

Net sales

 

$

(34

)

 

$

 

Cost of goods sold

 

 

255

 

 

 

146

 

Total net gain reclassified from AOCI to earnings

 

 

221

 

 

 

146

 

Total derivative gain on foreign exchange contracts recognized in earnings

 

$

221

 

 

$

146

 

Interest Rate Swaps:

 

 

 

 

 

 

Income recorded in Interest expense

 

$

377

 

 

$

171

 

Cross-Currency Swap:

 

 

 

 

 

 

Income recorded in Interest expense

 

$

158

 

 

$

 

Total net gains on derivatives

 

$

756

 

 

$

317

 

 

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

19

 


 

dollars using a combination of historical, period-end, and average foreign exchange rates. This combination of rates creates the foreign currency translation adjustment component of other comprehensive (loss) income.

Changes in exchange rates between the functional currency and the currency in which a transaction is denominated are foreign exchange transaction gains or losses. Transaction losses for the three months ended March 31, 2023 and March 31, 2022 were $68 and $288, 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 March 31, 2023, are as follows:

 

 

 

 

 

 

 

 

 

(Gain) Loss

 

 

 

 

 

 

As of

 

 

Gain (Loss)

 

 

Reclassified

 

 

As of

 

 

 

December 31,

 

 

Recognized

 

 

from AOCI

 

 

March 31,

 

 

 

2022

 

 

in OCI

 

 

to Earnings

 

 

2023

 

Changes in fair market value of derivatives:

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

$

3,911

 

 

$

1,090

 

 

$

(598

)

 

$

4,403

 

Income tax benefit (expense)

 

 

(899

)

 

 

(251

)

 

 

138

 

 

 

(1,012

)

Net

 

 

3,012

 

 

 

839

 

 

 

(460

)

 

 

3,391

 

Changes in unrealized pension cost:

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

 

(1,179

)

 

 

 

 

 

(47

)

 

 

(1,226

)

Income tax benefit

 

 

376

 

 

 

 

 

 

13

 

 

 

389

 

Net

 

 

(803

)

 

 

 

 

 

(34

)

 

 

(837

)

Cumulative translation adjustment:

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

 

(2,880

)

 

 

1,024

 

 

 

 

 

 

(1,856

)

Income tax benefit (expense)

 

 

 

 

 

 

 

 

 

 

 

 

Net

 

 

(2,880

)

 

 

1,024

 

 

 

 

 

 

(1,856

)

Total accumulated other comprehensive (loss) income

 

$

(671

)

 

$

1,863

 

 

$

(494

)

 

$

698

 

 

The components of accumulated other comprehensive loss for the three months ended March 31, 2022, are as follows:

 

 

 

 

 

 

 

 

 

(Gain) Loss

 

 

 

 

 

 

As of

 

 

Gain (Loss)

 

 

Reclassified

 

 

As of

 

 

 

December 31,

 

 

Recognized

 

 

from AOCI

 

 

March 31,

 

 

 

2021

 

 

in OCI

 

 

to Earnings

 

 

2022

 

Changes in fair market value of derivatives:

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

$

(634

)

 

$

1,577

 

 

$

26

 

 

$

969

 

Income tax benefit (expense)

 

 

147

 

 

 

(363

)

 

 

(5

)

 

 

(221

)

Net

 

 

(487

)

 

 

1,214

 

 

 

21

 

 

 

748

 

Changes in unrealized pension cost:

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

 

(2,744

)

 

 

 

 

 

120

 

 

 

(2,624

)

Income tax benefit (expense)

 

 

738

 

 

 

 

 

 

(26

)

 

 

712

 

Net

 

 

(2,006

)

 

 

 

 

 

94

 

 

 

(1,912

)

Cumulative translation adjustment:

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

 

(2,032

)

 

 

(249

)

 

 

 

 

 

(2,281

)

Income tax benefit (expense)

 

 

 

 

 

 

 

 

 

 

 

 

Net

 

 

(2,032

)

 

 

(249

)

 

 

 

 

 

(2,281

)

Total accumulated other comprehensive (loss) income

 

$

(4,525

)

 

$

965

 

 

$

115

 

 

$

(3,445

)

 

20

 


 

NOTE 15 – Shareholders’ Equity

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

 

 

 

As of

 

 

 

March 31,

 

 

December 31,

 

 

 

2023

 

 

2022

 

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

 

 

57,429,297

 

 

 

57,330,761

 

Shares outstanding

 

 

31,581,155

 

 

 

31,680,890

 

Treasury stock

 

 

 

 

 

 

Shares held

 

 

25,848,142

 

 

 

25,649,871

 

 

On February 9, 2023, 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 May 13, 2021. During the three months ended March 31, 2023, 198,271 shares of common stock were repurchased for $8,802 across both share repurchase programs. During the three months ended March 31, 2022, 116,176 shares of common stock were repurchased for $3,920. As of March 31, 2023, approximately $45,399 remains available for future purchases.

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

 

 

 

Three months ended

 

 

 

March 31,

 

 

March 31,

 

 

 

2023

 

 

2022

 

Balance at the beginning of the year

 

 

31,680,890

 

 

 

32,178,715

 

Repurchases

 

 

(198,271

)

 

 

(116,176

)

Restricted share issuances

 

 

98,536

 

 

 

60,683

 

Balance at the end of the period

 

 

31,581,155

 

 

 

32,123,222

 

 

Certain potentially dilutive restricted stock units are excluded from diluted earnings per share because they are anti-dilutive. The number of outstanding awards that were anti-dilutive for the three months ended March 31, 2023 and March 31, 2022 were 37,676 and 38,384, respectively.

NOTE 16- Stock-Based Compensation

At March 31, 2023, 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 or allowed (as applicable) for grants of stock options, stock appreciation rights, restricted stock, restricted stock units ("RSUs"), performance shares, performance units, and other stock awards subject to the terms of the specific plans under which the awards are granted.

21

 


 

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

 

 

 

Three months ended

 

 

 

 

March 31,

 

 

March 31,

 

 

 

 

2023

 

 

2022

 

 

Service-based RSUs

 

$

770

 

 

$

676

 

 

Performance-based RSUs

 

 

634

 

 

 

1,222

 

 

Cash-settled RSUs

 

 

182

 

 

 

52

 

 

Total

 

$

1,586

 

 

$

1,950

 

 

Income tax benefit

 

 

365

 

 

 

449

 

 

Net expense

 

$

1,221

 

 

$

1,501

 

 

 

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

 

 

 

Unrecognized

 

 

 

 

 

 

Compensation

 

 

Weighted-

 

 

 

Expense at

 

 

Average

 

 

 

March 31, 2023

 

 

Period (years)

 

Service-based RSUs

 

$

4,003

 

 

 

1.59

 

Performance-based RSUs

 

 

6,366

 

 

 

2.06

 

Total

 

$

10,369

 

 

 

1.88

 

 

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

The following table summarizes the status of these plans as of March 31, 2023:

 

 

 

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

 

 

825,641

 

 

 

35,100

 

 

 

30,000

 

 

 

14,545

 

 

 

4,722

 

RSUs and cash-settled awards vested and released

 

 

427,202

 

 

 

 

 

 

 

 

 

 

 

 

 

Awards available for grant

 

 

1,247,157

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service-Based Restricted Stock Units

The following table summarizes the service-based RSU activity for the three months ended March 31, 2023:

 

 

 

Units

 

 

Weighted
Average
Grant Date
Fair Value

 

Outstanding at December 31, 2022

 

 

282,124

 

 

$

27.44

 

Granted

 

 

64,046

 

 

 

43.77

 

Vested and released

 

 

(55,738

)

 

 

32.29

 

Forfeited

 

 

(1,005

)

 

 

33.06

 

Outstanding at March 31, 2023

 

 

289,427

 

 

$

30.10

 

Releasable at March 31, 2023

 

 

135,467

 

 

$

20.73

 

 

22

 


 

Performance-Based Restricted Stock Units

The following table summarizes the performance-based RSU activity for the three months ended March 31, 2023:

 

 

 

Units

 

 

Weighted
Average
Grant Date
Fair Value

 

Outstanding at December 31, 2022

 

 

260,306

 

 

$

33.30

 

Granted

 

 

71,832

 

 

 

43.80

 

Attained by performance

 

 

53,035

 

 

 

32.11

 

Released

 

 

(113,385

)

 

 

32.11

 

Forfeited

 

 

(875

)

 

 

32.26

 

Outstanding at March 31, 2023

 

 

270,913

 

 

$

36.25

 

Releasable at March 31, 2023

 

 

 

 

$

 

 

Cash-Settled Restricted Stock Units

Cash-Settled RSUs entitle the holder to receive the cash equivalent of one share of common stock for each unit when the unit vests. These RSUs are issued to key employees residing in foreign locations as direct compensation. Generally, these RSUs vest over a three-year period. Cash-Settled RSUs are classified as liabilities and are remeasured at each reporting date until settled. At March 31, 2023 and December 31, 2022, we had 50,847 and 46,641 Cash-Settled RSUs outstanding, respectively. At March 31, 2023 and December 31, 2022, liabilities of $451 and $566, 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 March 31, 2023:

 

 

 

Asset (Liability) Carrying
Value at
March 31,
2023

 

 

Quoted Prices
in Active
Markets for
Identical
(Level 1)

 

 

Significant
Other
Observable
Inputs
(Level 2)

 

 

Significant
Unobservable
Inputs
(Level 3)

 

Interest rate swaps

 

$

2,278

 

 

$

 

 

$

2,278

 

 

$

 

Foreign currency hedges

 

$

1,952

 

 

$

 

 

$

1,952

 

 

$

 

Cross-currency swap

 

$

(649

)

 

$

 

 

$

(649

)

 

$

 

Qualified replacement plan assets

 

$

14,562

 

 

$

14,562

 

 

$

 

 

$

 

Contingent consideration

 

$

(3,564

)

 

$

 

 

$

 

 

$

(3,564

)

 

The table below summarizes the financial assets and liabilities that were measured at fair value on a recurring basis as of December 31, 2022:

 

 

 

Asset (Liability) Carrying
Value at
December 31,
2022

 

 

Quoted Prices
in Active
Markets for
Identical
(Level 1)

 

 

Significant
Other
Observable
Inputs
(Level 2)

 

 

Significant
Unobservable
Inputs
(Level 3)

 

Interest rate swaps

 

$

2,995

 

 

$

 

 

$

2,995

 

 

$

 

Foreign currency hedges

 

$

945

 

 

$

 

 

$

945

 

 

$

 

Cross-currency swap

 

$

(357

)

 

$

 

 

$

(357

)

 

$

 

Qualified replacement plan assets

 

$

15,249

 

 

$

15,249

 

 

$

 

 

$

 

 

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

23

 


 

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. Refer to Note 3 for further discussion on contingent consideration.

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

 

 

 

 

 

 

 

 

 

 

Contingent
Consideration

 

Balance at December 31, 2022

 

$

 

   Acquisition date fair value of contingent consideration

 

 

3,564

 

Balance at March 31, 2023

 

$

3,564

 

As of March 31, 2023, approximately $1,424 was recorded in accrued expenses and other liabilities with the remainder in other long-term obligations.

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 its 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 qualified replacement plan assets consist of investment funds maintained for future contributions to the Company’s U.S. 401(k) program. 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 months ended March 31, 2023 and March 31, 2022 are as follows:

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

March 31,

 

 

 

2023

 

 

2022

 

Effective tax rate

 

 

19.2

%

 

 

21.4

%

 

The decrease in effective income tax is primarily attributed to tax benefits recorded upon vesting of restricted stock units. The first quarter 2023 effective income tax rate was lower than the U.S. statutory federal tax rate for the same reason as noted above. The first quarter 2022 effective tax rate was higher than the U.S. statutory federal tax rate primarily due to foreign withholding taxes and state taxes.

24

 


 

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, 2022.

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 OEMs and tier one suppliers in the aerospace and defense, industrial, medical, and transportation markets.

There is an increasing proliferation of sensing and motion applications within various markets we serve. In addition, the increasing connectivity of various devices to the internet results in greater demand for communication bandwidth and data storage, increasing the need for our connectivity products. Our success is dependent on the ability to execute our strategy to support these trends. We are subject to a number of 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. Many of these, and other risks and uncertainties relating to the Company and our business, are discussed in further detail in Item 1A. of our Annual Report on Form 10-K and other filings made with the SEC.

On February 6, 2023, we acquired 100% of the outstanding shares of Maglab AG ("Maglab") for $4,164 in cash subject to additional earnout payments based on future performance. Maglab has deep expertise in magnetic system design and current measurement solutions for use in e-mobility, industrial automation, and renewable energy applications. Maglab's domain expertise coupled with CTS’ commercial, technical and operational capabilities position us to advance our status as a recognized innovator in electric motor sensing and controls markets.

Supply Chain Uncertainties

The COVID-19 pandemic and subsequent supply chain uncertainties have had a significant negative impact on the global economy in 2022 and 2021. These events disrupted the financial markets, negatively impacted the global supply chain and increased the cost of materials and operations, particularly within the global automotive industry. While supply chain conditions have eased, material shortages could still impact our or our customers’ production schedules. 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 uncertain, and cannot be predicted. We continue to actively monitor the ongoing impacts of the supply chain uncertainties and will seek to mitigate and minimize their impact on our business, when possible.

25

 


 

Results of Operations: First Quarter 2023 versus First Quarter 2022

The following table highlights changes in significant components of the Unaudited Condensed Consolidated Statements of Earnings for the quarters ended March 31, 2023 and March 31, 2022:

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2023

 

 

March 31, 2022

 

 

Percent
Change

 

 

Percentage of Net Sales –
2023

 

 

Percentage of Net Sales –
2022

 

Net sales

 

$

145,994

 

 

$

147,695

 

 

 

(1.2

)%

 

 

100.0

%

 

 

100.0

%

Cost of goods sold

 

 

94,342

 

 

 

93,355

 

 

 

1.1

 

 

 

64.6

 

 

 

63.2

 

Gross margin

 

 

51,652

 

 

 

54,340

 

 

 

(4.9

)

 

 

35.4

 

 

 

36.8

 

Selling, general and administrative expenses

 

 

21,979

 

 

 

21,788

 

 

 

0.9

 

 

 

15.1

 

 

 

14.8

 

Research and development expenses

 

 

6,586

 

 

 

6,194

 

 

 

6.3

 

 

 

4.5

 

 

 

4.2

 

Restructuring charges

 

 

912

 

 

 

312

 

 

 

192.3

 

 

 

0.6

 

 

 

0.2

 

Total operating expenses

 

 

29,477

 

 

 

28,294

 

 

 

4.2

 

 

 

20.2

 

 

 

19.2

 

Operating earnings

 

 

22,175

 

 

 

26,046

 

 

 

(14.9

)

 

 

15.2

 

 

 

17.6

 

Total other expense, net

 

 

534

 

 

 

(300

)

 

 

(278.0

)

 

 

0.4

 

 

 

(0.2

)

Earnings before income taxes

 

 

22,709

 

 

 

25,746

 

 

 

(11.8

)

 

 

15.6

 

 

 

17.4

 

Income tax expense

 

 

4,365

 

 

 

5,507

 

 

 

(20.7

)

 

 

3.0

 

 

 

3.7

 

Net earnings

 

$

18,344

 

 

$

20,239

 

 

 

(9.4

)

 

 

12.6

%

 

 

13.7

%

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted net earnings per share

 

$

0.58

 

 

$

0.63

 

 

 

 

 

 

 

 

 

 

 

Net sales were $145,994 in the first quarter of 2023, a decrease of $(1,701) or (1.2)% from the first quarter of 2022. Net sales to non-transportation markets increased $3,123 or 4.6% while net sales to transportation markets decreased $(4,824) or (6.1)%. Changes in foreign exchange rates decreased net sales by $2,321 year-over-year primarily due to the U.S. Dollar appreciating compared to the Renminbi and Euro.

Gross margin was $51,652 in the first quarter of 2023, a decrease of $(2,688), or (4.9)% from the first quarter of 2022. The year over year decrease in gross margin was driven by increased material and freight costs and unfavorable impacts from foreign exchange rates of $1,778 year-over-year. We continue to experience inflation in material costs as well as interruptions in some areas of the supply chain.

Selling, general and administrative ("SG&A") expenses of $21,979 or 15.1% of net sales in the first quarter of 2023 were consistent with SG&A expenses of $21,788 or 14.8% of net sales in the first quarter of 2022.

Research and development (“R&D”) expenses were $6,586 or 4.5% of net sales in the first quarter of 2023 compared to $6,194 or 4.2% of net sales in the first quarter of 2022, in line with our commitment to continue investing in research and product development to drive organic growth.

Restructuring charges were $912 or 0.6% of net sales in the first quarter of 2023 compared to $312 or 0.2% of net sales in the first quarter of 2022. We continue to implement certain restructuring actions to improve our cost structure.

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

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

March 31,

 

 

 

2023

 

 

2022

 

Interest expense

 

$

(694

)

 

$

(546

)

Interest income

 

 

1,063

 

 

 

180

 

Other expense, net

 

 

165

 

 

 

66

 

Total other expense, net

 

$

534

 

 

$

(300

)

 

26

 


 

 

The reduction in total other expense, net was primarily driven by higher interest income from our short-term investments classified as cash equivalents in line with market rate increases seen recently.

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

March 31,

 

 

 

2023

 

 

2022

 

Effective tax rate

 

 

19.2

%

 

 

21.4

%

 

Our effective income tax rate was 19.2% and 21.4% in the first quarters of 2023 and 2022, respectively. The decrease in effective income tax rate is primarily due to tax benefits recorded upon vesting of restricted stock units.

 

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, 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 $143,537 at March 31, 2023, and $156,910 at December 31, 2022, of which $98,249 and $90,244, respectively, were held outside the United States. Total long-term debt was $80,261 as of March 31, 2023 and $83,670 as of December 31, 2022.

 

Cash Flow Overview

Cash Flows from Operating Activities

Net cash provided by operating activities was $11,186 during the three months ended March 31, 2023. Components of net cash provided by operating activities included net earnings of $18,344, depreciation and amortization expense of $6,918, other net non-cash items of $7,821, and a net cash outflow from changes in assets and liabilities of $15,649 primarily driven by 2022’s annual bonus payout and an increase in accounts receivables.

 

Cash Flows from Investing Activities

Net cash used in investing activities for the three months ended March 31, 2023 was $7,896, driven by the acquisition payments for the Maglab acquisition and finalization of the TEWA Temperature Sensors SP. Zo.o. (“TEWA”) net working capital adjustment of $3,356 and capital expenditures of $4,540. See Note 3 "Business Acquisitions" in the Notes to the Condensed Consolidated Financial Statements.

 

Cash Flows from Financing Activities

Net cash used in financing activities for the three months ended March 31, 2023 was $(16,625). The net cash outflow was the result of treasury stock purchases of $8,802, dividends paid of $1,272, taxes paid on behalf of equity award participants of $3,142, and net cash used in the paydown of long-term debt of $3,409.

27

 


 

Capital Resources

Revolving Credit Facility

Long‑term debt is comprised of the following:

 

 

 

As of

 

 

 

March 31,

 

 

December 31,

 

 

 

2023

 

 

2022

 

Total credit facility

 

$

400,000

 

 

$

400,000

 

Balance outstanding

 

 

80,261

 

 

 

83,670

 

Standby letters of credit

 

 

1,640

 

 

 

1,640

 

Amount available, subject to covenant restrictions

 

$

318,099

 

 

$

314,690

 

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 on 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 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 March 31, 2023.

 

Acquisitions

On February 6, 2023, we acquired 100% of the outstanding shares of Maglab for $4,164 in cash subject to additional earnout payments based on future performance. The acquisition was funded from cash on hand.

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, 2022. During and as of the three months ended March 31, 2023, there were no significant changes in the application of critical accounting policies or estimates.

28

 


 

Significant Customers

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

 

 

 

Three months ended

 

 

 

 

March 31, 2023

 

 

March 31, 2022

 

 

Cummins Inc.

 

 

14.1

%

 

 

15.7

%

 

Toyota Motor Corporation

 

 

10.7

%

 

 

11.5

%

 

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: supply chain disruptions; changes in the economy generally, including inflationary and/or recessionary conditions, and in respect to the business in which CTS operates; unanticipated issues in integrating acquisitions, including our acquisitions of TEWA Temperature Sensors, Ferroperm Piezoceramics and maglab, A.G.; 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 (including the ultimate impact of the COVID-19 pandemic on CTS’ business, results of operations or financial condition), 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 U.S./China relations and 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’ most recent 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, 2022. During the three months ended March 31, 2023, there have been no material changes in our exposure to market risk.

29

 


 

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

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

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting for the quarter ended March 31, 2023, 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, 2022.

Item 2. Unregistered Sales of Equity

On February 9, 2023, the Board approved a new share repurchase program that authorizes the Company to repurchase up to $50 million of its common stock. The repurchase program has no set expiration date and supersedes and replaces the repurchase program approved by the Board in May 2021.

30

 


 

 

 

 

 

 

 

 

 

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

 

January 1, 2023 through January 31, 2023

 

 

72,401

 

 

$

43.57

 

 

 

72,401

 

 

$

16,612

 

February 1, 2023 through February 28, 2023

 

 

57,000

 

 

$

45.21

 

 

 

57,000

 

 

$

48,513

 

March 1, 2023 through March 31, 2023

 

 

68,870

 

 

$

45.22

 

 

 

68,870

 

 

$

45,399

 

Total

 

 

198,271

 

 

 

 

 

 

198,271

 

 

 

 

 

31

 


 

Item 6. Exhibits

 

 

 

10(a)

Form Restricted Stock Unit Agreement (service-based) under the CTS Corporation 2018 Equity and Incentive Compensation Plan, covering grants made in 2021, 2022 and 2023.

 

 

10(b)

Form Restricted Stock Unit Agreement (performance-based) under the CTS Corporation 2018 Equity and Incentive Compensation Plan, covering certain grants made in 2020.

 

 

10(c)

Form Restricted Stock Unit Agreement (performance-based) under the CTS Corporation 2018 Equity and Incentive Compensation Plan, covering grants made in 2021.

 

 

10(d)

Form Restricted Stock Unit Agreement (performance-based) under the CTS Corporation 2018 Equity and Incentive Compensation Plan, covering grants made in 2022.

 

 

10(e)

Form Restricted Stock Unit Agreement (performance-based) under the CTS Corporation 2018 Equity and Incentive Compensation Plan, covering grants made in 2023.

 

 

(31)(a)

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

 

 

(31)(b)

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

 

 

(32)(a)

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

 

 

(32)(b)

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

 

 

101.1

The following information from CTS Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2023 formatted in Inline XBRL: (i) Condensed Consolidated Statements of Earnings; (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

 

 

 

 

 

 

 

32

 


 

SIGNATURES

 

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

 

CTS Corporation

 

CTS Corporation

 

 

 

/s/ Thomas M. White

 

/s/ Ashish Agrawal

Thomas M. White

 

Ashish Agrawal

Corporate Controller

(Principal Accounting Officer)

 

Vice President and Chief Financial Officer

(Principal Financial Officer)

 

 

 

 

 

 

Dated: April 27, 2023

 

  Dated: April 27, 2023

 

33