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

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

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, 2023


☐	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)

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.

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 20, 2023: 31,158,030.

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 and Nine Months Ended September 30, 2023 and September 30, 2022	3

		Condensed Consolidated Statements of Comprehensive Earnings (Unaudited) For the Three and Nine Months Ended September 30, 2023 and September 30, 2022	4

		Condensed Consolidated Balance Sheets As of September 30, 2023 (Unaudited) and December 31, 2022	5

		Condensed Consolidated Statements of Cash Flows (Unaudited) For the Nine Months Ended September 30, 2023 and September 30, 2022	6

		Condensed Consolidated Statements of Shareholders’ Equity (Unaudited) For the Three and Nine Months Ended September 30, 2023 and September 30, 2022	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, Use of Proceeds, and Issuer Purchases of Equity Securities	34

	Item 5.	Other Information	35

	Item 6.	Exhibits	36

SIGNATURES			37

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

CTS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS - UNAUDITED

(In thousands of dollars, except per share amounts)


	Three Months Ended						Nine Months Ended
	September 30,			September 30,			September 30,			September 30,
	2023			2022			2023			2022
Net sales	$	134,552		$	151,911		$	425,728		$	444,588
Cost of goods sold		88,151			98,565			276,933			285,054
Gross margin		46,401			53,346			148,795			159,534
Selling, general and administrative expenses		18,666			24,003			64,339			68,029
Research and development expenses		6,321			6,207			19,628			18,695
Restructuring charges		3,226			492			6,033			1,434
Operating earnings		18,188			22,644			58,795			71,376
Other income (expense):
Interest expense		(997	)		(342	)		(2,509	)		(1,490	)
Interest income		952			167			3,087			610
Other income (expense), net		594			(5,171	)		(1,847	)		(10,530	)
Total other income (expense), net		549			(5,346	)		(1,269	)		(11,410	)
Earnings before income taxes		18,737			17,298			57,526			59,966
Income tax expense		4,766			5,500			12,314			15,331
Net earnings	$	13,971		$	11,798		$	45,212		$	44,635
Earnings per share:
Basic	$	0.45		$	0.37		$	1.44		$	1.39
Diluted	$	0.44		$	0.37		$	1.43		$	1.38
Basic weighted – average common shares outstanding:		31,302			31,865			31,474			32,018
Effect of dilutive securities		209			225			216			220
Diluted weighted – average common shares outstanding:		31,511			32,090			31,690			32,238
Cash dividends declared per share	$	0.04		$	0.04		$	0.12		$	0.12

See notes to unaudited condensed consolidated financial statements.

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,
	2023			2022			2023			2022
Net earnings	$	13,971		$	11,798		$	45,212		$	44,635
Other comprehensive earnings (loss):
Changes in fair market value of derivatives, net of tax		(392	)		1,727			816			3,667
Changes in unrealized pension cost, net of tax		22			(1,835	)		(7	)		341
Cumulative translation adjustment, net of tax		(3,996	)		(6,071	)		(812	)		(8,332	)
Other comprehensive earnings	$	(4,366	)	$	(6,179	)	$	(3	)	$	(4,324	)
Comprehensive earnings	$	9,605		$	5,619		$	45,209		$	40,311

See notes to unaudited condensed consolidated financial statements.

CTS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands of dollars)


	(Unaudited)
	September 30,			December 31,
	2023			2022
ASSETS
Current Assets
Cash and cash equivalents	$	160,112		$	156,910
Accounts receivable, net		89,556			90,935
Inventories, net		65,384			62,260
Other current assets		19,272			15,655
Total current assets		334,324			325,760
Property, plant and equipment, net		92,880			97,300
Operating lease assets, net		27,545			22,702
Other Assets
Goodwill		154,130			152,361
Other intangible assets, net		103,828			108,053
Deferred income taxes		23,725			23,461
Other		17,530			18,850
Total other assets		299,213			302,725
Total Assets	$	753,962		$	748,487
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Accounts payable	$	49,848		$	53,211
Operating lease obligations		4,444			3,936
Accrued payroll and benefits		13,330			20,063
Accrued expenses and other liabilities		35,804			35,322
Total current liabilities		103,426			112,532
Long-term debt		76,665			83,670
Long-term operating lease obligations		26,016			21,754
Long-term pension obligations		4,963			5,048
Deferred income taxes		15,288			16,010
Other long-term obligations		4,937			3,249
Total Liabilities		231,295			242,263
Commitments and Contingencies (Note 11)
Shareholders’ Equity
Common stock		319,125			316,803
Additional contributed capital		44,718			46,144
Retained earnings		588,144			546,703
Accumulated other comprehensive income (loss)		(675	)		(671	)
Total shareholders’ equity before treasury stock		951,312			908,979
Treasury stock		(428,645	)		(402,755	)
Total shareholders’ equity		522,667			506,224
Total Liabilities and Shareholders’ Equity	$	753,962		$	748,487

See notes to unaudited condensed consolidated financial statements.

CTS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS ‑ UNAUDITED

(In thousands of dollars)


	Nine Months Ended
	September 30,			September 30,
	2023			2022
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings	$	45,212		$	44,635
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization		21,425			21,727
Non-cash inventory charges		—			3,342
Pension and other post-retirement plan expense		102			(1,866	)
Stock-based compensation		4,641			5,807
Asset impairment charges		1,324			—
Deferred income taxes		(1,338	)		661
Loss (gain) on foreign currency hedges, net of cash		326			(123	)
Changes in assets and liabilities, net of acquisitions:
Accounts receivable		197			(13,560	)
Inventories		(3,972	)		(10,386	)
Operating lease assets		(4,843	)		1,338
Other assets		(1,089	)		2,249
Accounts payable		(1,826	)		11,393
Accrued payroll and benefits		(7,342	)		(2,029	)
Operating lease liabilities		4,769			(1,492	)
Accrued expenses and other liabilities		(750	)		503
Pension and other post-retirement plans		(94	)		33,540
Net cash provided by operating activities		56,742			95,739
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures		(11,236	)		(9,260	)
Payments for acquisitions, net of cash acquired		(3,359	)		(96,528	)
Net cash used in investing activities		(14,595	)		(105,788	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long-term debt		(593,307	)		(517,939	)
Proceeds from borrowings of long-term debt		586,301			553,417
Purchase of treasury stock		(25,890	)		(13,446	)
Dividends paid		(3,792	)		(3,855	)
Payments of contingent consideration		—			(1,050	)
Taxes paid on behalf of equity award participants		(3,249	)		(1,504	)
Net cash (used in) provided by financing activities		(39,937	)		15,623
Effect of exchange rate changes on cash and cash equivalents		992			869
Net increase in cash and cash equivalents		3,202			6,443
Cash and cash equivalents at beginning of period		156,910			141,465
Cash and cash equivalents at end of period	$	160,112		$	147,908
Supplemental cash flow information:
Cash paid for interest	$	2,350		$	1,519
Cash paid for income taxes, net	$	15,129		$	12,607
Non-cash financing and investing activities:
Capital expenditures incurred but not paid	$	1,687		$	1,925

See notes to unaudited condensed consolidated financial statements.

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, 2023:


	Common Stock		Additional Contributed Capital			Retained Earnings			Accumulated Other Comprehensive Income (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
Net earnings		—		—			12,897			—			—			12,897
Changes in fair market value of derivatives, net of tax		—		—			—			830			—			830
Changes in unrealized pension cost, net of tax		—		—			—			4			—			4
Cumulative translation adjustment, net of tax		—		—			—			2,159			—			2,159
Cash dividends of $0.04 per share		—		—			(1,262	)		—			—			(1,262	)
Acquired 197,716 shares of treasury stock		—		—			—			—			(8,760	)		(8,760	)
Issued shares on vesting of restricted stock units		326		(423	)		—			—			—			(97	)
Stock compensation		—		1,488			—			—			—			1,488
Balances at June 30, 2023	$	319,111	$	43,488		$	575,422		$	3,691		$	(420,317	)	$	521,395
Net earnings		—		—			13,971			—			—			13,971
Changes in fair market value of derivatives, net of tax		—		—			—			(392	)		—			(392	)
Changes in unrealized pension cost, net of tax		—		—			—			22			—			22
Cumulative translation adjustment, net of tax		—		—			—			(3,996	)		—			(3,996	)
Cash dividends of $0.04 per share		—		—			(1,249	)		—			—			(1,249	)
Acquired 188,658 shares of treasury stock		—		—			—			—			(8,328	)		(8,328	)
Issued shares on vesting of restricted stock units		14		(23	)		—			—			—			(9	)
Stock compensation		—		1,253			—			—			—			1,253
Balances at September 30, 2023	$	319,125	$	44,718		$	588,144		$	(675	)	$	(428,645	)	$	522,667

See notes to unaudited condensed consolidated financial statements.

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 Income (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.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

(in thousands except for share and per share data)

September 30, 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 September 30, 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.

Disaggregated Revenue

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


	Three months ended				Nine months ended
	September 30, 2023		September 30, 2022		September 30, 2023		September 30, 2022
Transportation	$	75,880	$	78,377	$	232,298	$	232,200
Industrial		28,666		43,857		102,050		125,267
Medical		17,757		16,380		52,108		49,277
Aerospace & Defense		12,249		13,297		39,272		37,844
Total	$	134,552	$	151,911	$	425,728	$	444,588

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 during the first quarter of 2023. The purchase accounting was completed in the first quarter of 2023. 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 the full $1,180 recognized in the first half 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, 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 first quarter of 2023. 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

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 with $2,229 recognized in the third quarter of 2022 and the remaining recognized in the fourth 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	$	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 final purchase price of $7,717 has been allocated to the fair values of assets and liabilities acquired as of February 6, 2023. The purchase price was increased by $3 for the final settlement of net working capital during the second quarter of 2023. 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:


	Consideration Paid
Cash paid, net of cash acquired of $14	$	4,153
Contingent consideration		3,564
Purchase price	$	7,717


	Fair Values at February 6, 2023
Accounts receivable	$	348
Inventory		43
Other current assets		41
Property, plant and equipment		35
Goodwill		4,997
Intangible assets		2,860
Fair value of assets acquired		8,324
Less fair value of liabilities acquired		(607	)
Purchase price	$	7,717

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	$	2,800		13.0
Technology and other intangibles		60		3.0
Total	$	2,860

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
	September 30,			December 31,
	2023			2022
Accounts receivable, gross	$	90,581		$	92,171
Less: Allowance for credit losses		(1,025	)		(1,236	)
Accounts receivable, net	$	89,556		$	90,935

NOTE 5 – Inventories, net

Inventories, net consists of the following:


	As of
	September 30,			December 31,
	2023			2022
Finished goods	$	17,815		$	12,865
Work-in-process		22,459			22,819
Raw materials		36,734			37,362
Less: Inventory reserves		(11,624	)		(10,786	)
Inventories, net	$	65,384		$	62,260

NOTE 6 – Property, Plant and Equipment, net

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


	As of
	September 30,			December 31,
	2023			2022
Land and land improvements	$	536		$	1,100
Buildings and improvements		73,172			71,938
Machinery and equipment		258,321			258,159
Less: Accumulated depreciation		(239,149	)		(233,897	)
Property, plant and equipment, net	$	92,880		$	97,300

Depreciation expense for the three months ended September 30, 2023 and September 30, 2022 was $4,422 and $4,700, respectively. Depreciation expense for the nine months ended September 30, 2023 and September 30, 2022 was $13,229 and $13,548, respectively.

We recorded a charge of $1,324 during the second quarter of 2023 due to the impairment of a specific asset group as a result of certain restructuring actions being taken. See Note 9 “Costs Associated with Exit and Restructuring Activities.”

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					Nine months ended
	September 30,		September 30,			September 30,		September 30,
	2023		2022			2023		2022
Net pension expense	$	79	$	(2,076	)	$	212	$	(1,944	)

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
	September 30,		September 30,			September 30,			September 30,
	2023		2022			2023			2022
Service cost	$	—	$	—		$	6		$	6
Interest cost		10		5			10			4
Expected return on plan assets(1)		12		(2,139	)		(7	)		(3	)
Amortization of loss		5		8			43			43
Total expense (income), net	$	27	$	(2,126	)	$	52		$	50

(1)

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


	Domestic Pension Plans					Foreign Pension Plans
	Nine Months Ended					Nine Months Ended
	September 30,		September 30,			September 30,			September 30,
	2023		2022			2023			2022
Service cost	$	—	$	—		$	17		$	18
Interest cost		29		15			29			12
Expected return on plan assets(1)		12		(2,139	)		(20	)		(9	)
Amortization of loss		16		24			129			135
Total expense (income), net	$	57	$	(2,100	)	$	155		$	156

(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					Nine Months Ended
	September 30,			September 30,		September 30,			September 30,
	2023			2022		2023			2022
Service cost	$	—		$	—	$	—		$	—
Interest cost		48			26		144			78
Amortization of gain		(85	)		—		(253	)		—
Total (income) expense, net	$	(37	)	$	26	$	(109	)	$	78

NOTE 8 – Goodwill and Other Intangible Assets

Goodwill

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


	Total
Goodwill as of December 31, 2022	$	152,361
Changes from acquisition purchase accounting		2,914
Foreign exchange impact		(1,145	)
Goodwill as of September 30, 2023	$	154,130

Other Intangible Assets

Other intangible assets, net consist of the following components:


	As of
	September 30, 2023
	Gross Carrying Amount		Accumulated Amortization			Net Amount
Customer lists/relationships	$	141,837	$	(60,806	)	$	81,031
Technology and other intangibles		53,723		(30,926	)		22,797
Other intangible assets, net	$	195,560	$	(91,732	)	$	103,828


	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 September 30, 2023 and September 30, 2022 was $2,828 and $3,262, respectively. Amortization expense for the nine months ended September 30, 2023 and September 30, 2022 was $8,196 and $8,179, respectively.

The changes in the gross carrying amounts of intangible assets are primarily due to business acquisition and purchase accounting activity as discussed in Note 3 “Business Acquisitions” as well as foreign exchange impacts.

Remaining amortization expense for other intangible assets as of September 30, 2023 is as follows:


	Amortization expense
2023	$	2,896
2024		10,963
2025		10,491
2026		10,339
2027		10,281
Thereafter		58,858
Total amortization expense	$	103,828

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
	September 30, 2023		September 30, 2022
Restructuring charges	$	3,226	$	492


	Nine Months Ended
	September 30, 2023		September 30, 2022
Restructuring charges	$	6,033	$	1,434

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 $3,900 to $4,500, including workforce reduction charges, building and equipment relocation charges and other contract and asset-related costs. We have incurred $3,852 in program costs to date. During the three months ended September 30, 2023, we recorded $85 in restructuring costs related to workforce reduction charges. During the nine months ended September 30, 2023, we recorded $1,793 in restructuring costs, comprised of $469 and $1,324 in workforce reduction and asset impairment charges, respectively. The total restructuring liability associated with these actions was $83 as of September 30, 2023. The total restructuring liability associated with these actions was $634 as of December 31, 2022.

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, 2023, we incurred restructuring charges of $3,141 and $4,238, respectively. During the three and nine months ended September 30, 2022, we incurred restructuring charges of $252 and $1,034, respectively. The total restructuring liability associated with these actions was $2,741 at September 30, 2023 and $235 at December 31, 2022.

Closure and Consolidation of Juarez Manufacturing Facility and Operations

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 now estimated to be in the range of $3,000 and $4,500, including workforce reduction charges, building and equipment relocation charges and other contract and asset-related costs. In addition to these charges, we expect an additional $1,500 to $2,500 of other costs to be incurred related to initiatives that would not qualify as restructuring charges. During the three and nine months ended September 30, 2023, we incurred costs associated with the planned activities of $2,618 and $2,871, respectively. The restructuring liability associated with the shutdown is $2,474 as of September 30, 2023. These balances are included in our other restructuring activity amounts referenced in the preceding paragraph.

The following table displays the total restructuring liability activity included in accrued expenses and other liabilities for all plans for the nine months ended September 30, 2023:


Restructuring liability at January 1, 2023	$	869
Restructuring charges		6,033
Costs paid		(2,713	)
Other activity(1)		(1,365	)
Restructuring liability at September 30, 2023	$	2,824

(1)

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

NOTE 10 – Accrued Expenses and Other Liabilities

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


	As of
	September 30,		December 31,
	2023		2022
Accrued product related costs	$	2,331	$	2,368
Accrued income taxes		6,840		9,630
Accrued property and other taxes		2,373		2,142
Accrued professional fees		1,261		1,472
Accrued customer related liabilities		1,676		2,837
Dividends payable		1,248		1,272
Remediation reserves		12,006		11,048
Derivative liabilities		17		357
Other accrued liabilities		8,052		4,196
Total accrued expenses and other liabilities	$	35,804	$	35,322

The increase in Other accrued liabilities is primarily due to additional accruals related to 2023 exit and disposal activities as well as a contingent liability accrual associated with the 2023 Maglab acquisition. Refer to Note 9 “Costs Associated with Exit and Restructuring Activities” and Note 3 “Business Acquisitions”, respectively, for further discussion on these items.

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
	September 30,			December 31,
	2023			2022
Balance at beginning of period	$	11,048		$	10,979
Remediation expense		3,140			2,750
Net remediation payments		(2,179	)		(2,661	)
Other activity(1)		(3	)		(20	)
Balance at end of the period	$	12,006		$	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 (“Asheville 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 expects its potential exposure to be between $1,900 and $9,955. We have determined that no point within this range is more likely than another and therefore we have recorded a loss estimate of $1,900 as of September 30, 2023 in the Consolidated Balance Sheets.

Unrelated to the environmental claims described above, from time to time, the Company has been threatened with, or named as a defendant in, various legal or regulatory actions in the ordinary course of business. The Company records a loss contingency liability when a loss is considered probable and the amount can be reasonably estimated. Although the potential liability with respect to certain of such legal or regulatory actions cannot be reasonably estimated, none of such matters is expected to have a material adverse effect on the Company’s financial condition, results of operations or cash flows. The Company’s legal costs associated with defending itself are recorded to expense as incurred.

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

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

NOTE 12 - Debt

Long-term debt is comprised of the following:


	As of
	September 30,			December 31,
	2023			2022
Total credit facility	$	400,000		$	400,000
Balance outstanding		76,665			83,670
Standby letters of credit		1,640			1,640
Amount available, subject to covenant restrictions	$	321,695		$	314,690
Weighted-average interest rate		5.93	%		2.96	%

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 sub-limits 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 sub-limit of $20,000 and a letter of credit sub-limit 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, 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 and nine months ended September 30, 2023 was $48 and $145, respectively. Amortization expense for the three and nine months ended September 30, 2022 was $48 and $145, 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.

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 income (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, 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 September 30, 2023, we had a net unrealized gain of $1,692 in accumulated other comprehensive (loss) income, $1,724 of which is expected to be reclassified to earnings within the next 12 months. The notional amount of foreign currency forward contracts outstanding was $26,046 at September 30, 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 September 30, 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 $1,532.

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 income until the net investment is sold, diluted or liquidated. At September 30, 2023, we had a net unrealized loss of $316 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.

The location and fair values of derivative instruments designated as hedging instruments in the Condensed Consolidated Balance Sheets as of September 30, 2023 are shown in the following table:


	As of
	September 30,			December 31,
	2023			2022
Interest rate swaps reported in Other current assets	$	1,532		$	1,561
Interest rate swaps reported in Other assets	$	1,744		$	1,434
Cross-currency swap reported in Accrued expenses and other liabilities	$	(17	)	$	(357	)
Foreign currency hedges reported in Other current assets	$	1,295		$	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 $1,454 and foreign currency derivative liabilities of $159 at September 30, 2023.

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,
	2023			2022		2023			2022
Foreign Exchange Contracts:
Amounts reclassified from AOCI to earnings:
Net sales	$	(37	)	$	—	$	(134	)	$	—
Cost of goods sold		949			216		1,793			524
Total gain reclassified from AOCI to earnings		912			216		1,659			524
Total derivative gain on foreign exchange contracts recognized in earnings	$	912		$	216	$	1,659		$	524
Interest Rate Swaps:
Income (expense) recorded in Interest expense	$	481		$	79	$	1,298		$	(194	)
Cross-Currency Swap:
Income recorded in Interest expense	$	119		$	175	$	414		$	175
Total net gains on derivatives	$	1,512		$	470	$	3,371		$	505

NOTE 14 – Accumulated Other Comprehensive Income (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 gains (losses) for the three and nine months ended September 30, 2023 were $365 and ($2,317), respectively. Transaction losses for the three and nine months ended September 30, 2022 were $451 and $3,980, 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 income (loss) for the three months ended September 30, 2023 are as follows:


							(Gain) Loss
	As of			Gain (Loss)			Reclassified			As of
	June 30,			Recognized			from AOCI			September 30,
	2023			in OCI			to Earnings			2023
Changes in fair market value of derivatives:
Gross	$	5,482		$	882		$	(1,392	)	$	4,972
Income tax benefit (expense)		(1,261	)		(203	)		321			(1,143	)
Net		4,221			679			(1,071	)		3,829
Changes in unrealized pension cost:
Gross		(1,219	)		—			25			(1,194	)
Income tax benefit (expense)		386			—			(3	)		383
Net		(833	)		—			22			(811	)
Cumulative translation adjustment:
Gross		303			(3,996	)		—			(3,693	)
Income tax benefit (expense)		—			—			—			—
Net		303			(3,996	)		—			(3,693	)
Total accumulated other comprehensive (loss) income	$	3,691		$	(3,317	)	$	(1,049	)	$	(675	)

The components of accumulated other comprehensive income (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	)

The components of accumulated other comprehensive income (loss) for the nine months ended September 30, 2023 are as follows:


							(Gain) Loss
	As of			Gain (Loss)			Reclassified			As of
	December 31,			Recognized			from AOCI			September 30,
	2022			in OCI			to Earnings			2023
Changes in fair market value of derivatives:
Gross	$	3,911		$	4,017			(2,956	)	$	4,972
Income tax benefit (expense)		(899	)		(924	)		680			(1,143	)
Net		3,012			3,093			(2,276	)		3,829
Changes in unrealized pension cost:
Gross		(1,179	)		—			(15	)		(1,194	)
Income tax benefit (expense)		376			—			7			383
Net		(803	)		—			(8	)		(811	)
Cumulative translation adjustment:
Gross		(2,880	)		(813	)		—			(3,693	)
Income tax benefit (expense)		—			—			—			—
Net		(2,880	)		(813	)		—			(3,693	)
Total accumulated other comprehensive (loss) income	$	(671	)	$	2,280		$	(2,284	)	$	(675	)

The components of accumulated other comprehensive income (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	)

NOTE 15 – Shareholders’ Equity

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


	As of
	September 30,		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		57,440,235		57,330,761
Shares outstanding		31,206,185		31,680,890
Treasury stock
Shares held		26,234,516		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 and nine months ended September 30, 2023, 188,658 and 584,645 shares of common stock were repurchased for $8,328 and $25,890, respectively. 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. As of September 30, 2023, approximately $28,403 remains available for future purchases.

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


	Nine months ended
	September 30,			September 30,
	2023			2022
Balance at the beginning of the year		31,680,890			32,178,715
Repurchases		(584,645	)		(384,428	)
Restricted share issuances		109,940			65,777
Balance at the end of the period		31,206,185			31,860,064

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 nine months ended September 30, 2023 was 911. The number of outstanding awards that were anti-dilutive for the three and nine months ended September 30, 2022 were 393 and 950, respectively. There were no anti-dilutive shares for the three months ended September 30, 2023.

NOTE 16- Stock-Based Compensation

At September 30, 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 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,
	2023		2022		2023		2022
Service-based RSUs	$	728	$	766	$	2,263	$	2,134
Performance-based RSUs		525		1,338		1,883		3,379
Cash-settled RSUs		152		137		495		294
Total	$	1,405	$	2,241	$	4,641	$	5,807
Income tax benefit		379		515		1,067		1,336
Net expense	$	1,026	$	1,726	$	3,574	$	4,471

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, 2023		Period (years)
Service-based RSUs	$	2,339		1.45
Performance-based RSUs		4,026		1.76
Total	$	6,365		1.65

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, 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		785,582		35,100		30,000		14,545		4,722
RSUs and cash-settled awards vested and released		443,106		—		—		—		—
Awards available for grant		1,271,312		—		—		—		—

Service-Based Restricted Stock Units

The following table summarizes the service-based RSU activity for the nine months ended September 30, 2023:


	Units			Weighted Average Grant Date Fair Value
Outstanding at December 31, 2022		282,124		$	27.44
Granted		66,396			43.71
Vested and released		(69,515	)		32.32
Forfeited		(8,181	)		37.02
Outstanding at September 30, 2023		270,824		$	29.89
Releasable at September 30, 2023		131,867		$	20.30

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, 2023:


	Units			Weighted Average Grant Date Fair Value
Outstanding at December 31, 2022		260,306		$	33.20
Granted		71,832			43.80
Attained by performance		53,035			32.11
Released		(113,385	)		32.11
Forfeited		(12,679	)		34.96
Outstanding at September 30, 2023		259,109		$	36.30
Releasable at September 30, 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 September 30, 2023 and December 31, 2022, we had 48,499 and 46,641 Cash-Settled RSUs outstanding, respectively. At September 30, 2023 and December 31, 2022, liabilities of $673 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 September 30, 2023:


	Asset (Liability) Carrying Value at September 30, 2023			Quoted Prices in Active Markets for Identical (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Interest rate swaps	$	3,276		$	—	$	3,276		$	—
Foreign currency hedges	$	1,295		$	—	$	1,295		$	—
Cross-currency swap	$	(17	)	$	—	$	(17	)	$	—
Qualified replacement plan assets	$	13,775		$	13,775	$	—		$	—
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 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 “Business Acquisitions” 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 September 30, 2023	$	3,564

As of September 30, 2023, approximately $1,424 of contingent consideration 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 income tax rates for the three and nine months ended September 30, 2023 and 2022 are as follows:


	Three Months Ended						Nine Months Ended
	September 30,			September 30,			September 30,			September 30,
	2023			2022			2023			2022
Effective tax rate		25.4	%		31.8	%		21.4	%		25.6	%

Our effective income tax rate was 25.4% and 31.8% in the third quarters of 2023 and 2022, respectively. The decrease in the quarterly 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. The third quarter 2023 effective income tax rate was higher than the U.S. statutory federal tax rate primarily due to the mix of foreign earnings that are taxed at higher rates. The third quarter 2022 effective income tax rate was higher than the U.S. statutory federal income tax rate primarily due to the impact of a nondeductible cost associated with the termination of the U.S. pension plan.

Our effective income tax rate was 21.4% and 25.6% in the nine months ended September 30, 2023 and 2022, respectively. The decrease is primarily attributed to 2023 tax benefits recorded upon vesting of restricted stock and tax benefits from amended U.S. federal income tax returns, as well as U.S. tax credits and deductions. The effective income tax rate in the nine months of 2023 was higher than the U.S. statutory federal income tax rate primarily due the mix of foreign earnings that are taxed at higher rates partially offset by tax benefits recorded upon vesting of restricted stock and tax benefits from amended U.S. federal income tax returns. The effective income 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.

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 $4,167 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.

Results of Operations: Third Quarter 2023 versus Third Quarter 2022

The following table highlights changes in significant components of the Unaudited Condensed Consolidated Statements of Earnings for the quarters ended September 30, 2023 and September 30, 2022:


	Three Months Ended
	September 30, 2023		September 30, 2022			Percent Change			Percentage of Net Sales – 2023			Percentage of Net Sales – 2022
Net sales	$	134,552	$	151,911			(11.4	)%		100.0	%		100.0	%
Cost of goods sold		88,151		98,565			(10.6	)		65.5			64.9
Gross margin		46,401		53,346			(13.0	)		34.5			35.1
Selling, general and administrative expenses		18,666		24,003			(22.2	)		13.9			15.9
Research and development expenses		6,321		6,207			1.8			4.7			4.1
Restructuring charges		3,226		492			555.7			2.4			0.3
Total operating expenses		28,213		30,702			(8.1	)		21.0			20.2
Operating earnings		18,188		22,644			(19.7	)		13.5			14.9
Total other income (expense), net		549		(5,346	)		(110.3	)		0.4			(3.5	)
Earnings before income taxes		18,737		17,298			8.3			13.9			11.4
Income tax expense		4,766		5,500			(13.3	)		3.5			3.6
Net earnings	$	13,971	$	11,798			18.4			10.4	%		7.8	%
Earnings per share:
Diluted net earnings per share	$	0.44	$	0.37

Net sales were $134,552 in the third quarter of 2023, a decrease of $17,359 or 11.4% from the third quarter of 2022. Net sales to the transportation market decreased $2,498 or 3.2% while net sales to non-transportation markets decreased $14,861 or 20.2%, primarily due to inventory reduction related softness among distributor customers as they continued to reduce inventory.

Gross margin was $46,401 in the third quarter of 2023, a decrease of $6,945 or 13.0% from the third quarter of 2022. The year over year decrease was primarily driven by lower sales volumes and unfavorable impacts from foreign exchange rates of $1,810 year-over-year.

Selling, general and administrative ("SG&A") expenses were $18,666 or 13.9% of net sales in the third quarter of 2023 versus $24,003 or 15.9% of net sales in the third quarter of 2022. The decrease in SG&A expenses was primarily caused by adjustments to incentive compensation accruals as well as some cost reduction measures implemented due to the softening sales environment.

Research and development (“R&D”) expenses were $6,321 or 4.7% of net sales in the third quarter of 2023 compared to $6,207 or 4.1% of net sales in the comparable quarter of 2022, in line with our commitment to continue investing in research and product development to drive organic growth.

Restructuring charges were $3,226 or 2.4% of net sales in the third quarter of 2023 compared to $492 or 0.3% of net sales in the third quarter of 2022. The charges in the third quarter of 2023 were primarily related to costs associated with our plant closure and consolidation activities. See Note 9 “Costs Associated with Exit and Restructuring Activities” in the Notes to the Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q for further information.

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


	Three Months Ended
	September 30,			September 30,
	2023			2022
Interest expense	$	(997	)	$	(342	)
Interest income		952			167
Other income (expense), net		594			(5,171	)
Total other income (expense), net	$	549		$	(5,346	)

Interest income increased due to investments of available cash into short term, cash equivalent, high yield deposit accounts.

Other income (expense), net for the three months ended September 30, 2023 is primarily driven by income from the qualified replacement plan assets as well as foreign currency gains primarily related to the Danish Krone.

Other expense, net for the third quarter of 2022 was 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 its final termination.


	Three Months Ended
	September 30,			September 30,
	2023			2022
Effective tax rate		25.4	%		31.8	%

Our effective income tax rate was 25.4% and 31.8% in the third quarters of 2023 and 2022, respectively. The decrease in the 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, 2023 versus Nine Months Ended September 30, 2022

The following table highlights changes in significant components of the Unaudited Condensed Consolidated Statements of Earnings for the nine months ended September 30, 2023, and September 30, 2022:


	Nine Months Ended
	September 30, 2023			September 30, 2022			Percent Change			Percentage of Net Sales – 2023			Percentage of Net Sales – 2022
Net sales	$	425,728		$	444,588			(4.2	)%		100.0	%		100.0	%
Cost of goods sold		276,933			285,054			(2.8	)		65.0			64.1
Gross margin		148,795			159,534			(6.7	)		35.0			35.9
Selling, general and administrative expenses		64,339			68,029			(5.4	)		15.1			15.3
Research and development expenses		19,628			18,695			5.0			4.6			4.2
Restructuring charges		6,033			1,434			320.7			1.4			0.3
Total operating expenses		90,000			88,158			2.1			21.1			19.8
Operating earnings		58,795			71,376			(17.6	)		13.8			16.1
Total other expense, net		(1,269	)		(11,410	)		(88.9	)		(0.3	)		(2.6	)
Earnings before income taxes		57,526			59,966			(4.1	)		13.5			13.5
Income tax expense		12,314			15,331			(19.7	)		2.9			3.4
Net earnings	$	45,212		$	44,635			1.3	%		10.6	%		10.0	%
Earnings per share:
Diluted net earnings per share	$	1.43		$	1.38

Net sales were $425,728 in the nine months ended September 30, 2023, a decrease of $18,860 or 4.2% from the nine months ended September 30, 2022. Net sales to the transportation market remained flat while net sales to non-transportation markets decreased $18,958 or 8.9%, primarily due to inventory reduction related softness among distributor customers as they continued to reduce inventory. Changes in foreign exchange rates decreased net sales by $3,367 year-over-year.

Gross margin was $148,795 for the nine months ended September 30, 2023, a decrease of $10,739 or 6.7% from the nine months ended September 30, 2022. The year over year decrease in gross margin was primarily driven by lower sales volumes and unfavorable impacts from foreign exchange rates of $5,307 year-over-year.

SG&A expenses were $64,339 or 15.1% of net sales for the nine months ended September 30, 2023 versus $68,029 or 15.3% of net sales for the nine months ended September 30, 2022. The decrease in SG&A expenses was primarily caused by adjustments to incentive compensation accruals partially offset by higher environmental costs and expenses related to acquisition activity. See Note 11

“Commitments and Contingencies” in the Notes to the Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q for further information on the environmental costs.

R&D expenses were $19,628 or 4.6% of net sales for the nine months ended September 30, 2023 compared to $18,695 or 4.2% of net sales for the nine months ended September 30, 2022, in line with our commitment to continue investing in research and product development to drive organic growth.

Restructuring charges were $6,033 or 1.4% of net sales for the nine months ended September 30, 2023 compared to $1,434 or 0.3% of net sales for the nine months ended September 30, 2022. The restructuring charges in the nine months ended September 30, 2023 were primarily related to costs associated with our plant closure and consolidation activities. See Note 9 “Costs Associated with Exit and Restructuring Activities” in the Notes to the Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q for further information.

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


	Nine Months Ended
	September 30,			September 30,
	2023			2022
Interest expense	$	(2,509	)	$	(1,490	)
Interest income		3,087			610
Other expense, net		(1,847	)		(10,530	)
Total other expense, net	$	(1,269	)	$	(11,410	)

Interest income increased due to investments of available cash into short term, cash equivalent, high yield deposit accounts.

Other expense, net for the nine months ended September 30, 2023 is primarily driven by foreign currency losses primarily related to the Chinese Renminbi offset partially by income from the qualified replacement plan assets.

Other expense, net for the nine months ended September 30, 2022 was 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 its final termination.


	Nine Months Ended
	September 30,			September 30,
	2023			2022
Effective tax rate		21.4	%		25.6	%

Our effective income tax rate was 21.4% and 25.6% for the nine months ended September 30, 2023 and 2022, respectively. The decrease is primarily attributed to 2023 tax benefits recorded upon vesting of restricted stock and tax benefits from amended U.S. federal income tax returns, as well as U.S. tax credits and deductions.

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 $160,112 at September 30, 2023, and $156,910 at December 31, 2022, of which $111,750 and $90,244, respectively, were held outside the United States. Total long-term debt was $76,665 as of September 30, 2023 and $83,670 as of December 31, 2022.

Cash Flow Overview

Cash Flows from Operating Activities

Net cash provided by operating activities was $56,742 during the nine months ended September 30, 2023. Components of net cash provided by operating activities included net earnings of $45,212, depreciation and amortization expense of $21,425, other net non-cash items of $5,055, and a net cash outflow from changes in assets and liabilities of $14,950 primarily driven by the annual bonus payout for 2022 and an increase in inventory primarily from pre-determined inventory builds associated with plant closure and consolidation activities. See Note 9 “Costs Associated with Exit and Restructuring Activities” in the Notes to the Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q for further information.

Cash Flows from Investing Activities

Net cash used in investing activities for the nine months ended September 30, 2023 was $(14,595), driven by payments for the Maglab acquisition and finalization of the TEWA Temperature Sensors SP. Zo.o. (“TEWA”) net working capital adjustment of $3,359 and capital expenditures of $11,236. 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 nine months ended September 30, 2023 was $(39,937). The net cash outflow was the result of treasury stock purchases of $25,890, net cash used in the paydown of long-term debt of $7,006, taxes paid on behalf of equity award participants of $3,249, and dividends paid of $3,792.

Capital Resources

Revolving Credit Facility

Long‑term debt is comprised of the following:


	As of
	September 30,		December 31,
	2023		2022
Total credit facility	$	400,000	$	400,000
Balance outstanding		76,665		83,670
Standby letters of credit		1,640		1,640
Amount available, subject to covenant restrictions	$	321,695	$	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 sub-limits 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 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 sub-limit 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, 2023.

Acquisitions

On February 6, 2023, we acquired 100% of the outstanding shares of Maglab for $4,167 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 and nine months ended September 30, 2023, 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, 2023			September 30, 2022			September 30, 2023			September 30, 2022
Cummins Inc.		16.9	%		15.6	%		16.5	%		16.1	%
Toyota Motor Corporation		12.2	%		11.6	%		11.8	%		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.

Forward‑Looking Statements

This document contains statements that are, or may be deemed to be, forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, any financial or other guidance, statements that reflect our current expectations concerning future results and events, and any other statements that are not based solely on historical fact. Forward-looking statements are based on management’s expectations, certain assumptions, and currently available information. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof and are based on various assumptions as to future events, the occurrence of which necessarily are subject to uncertainties. These forward-looking statements are made subject to certain risks, uncertainties, and other factors, which could cause 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; 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 effects 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 September 30, 2023, there have been no material changes in our exposure to market risk.

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, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

From time to time we are involved in litigation with respect to matters arising from the ordinary conduct of our business, and currently certain claims are pending against us. In the opinion of management, 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, Use of Proceeds, and Issuer Purchases 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.


					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, 2023 through July 31, 2023		60,000	$	42.85		60,000	$	34,061,996
August 1, 2023 through August 31, 2023		68,731	$	45.05		68,731	$	30,965,666
September 1, 2023 through September 30, 2023		59,927	$	42.77		59,927	$	28,402,510
Total		188,658				188,658

Item 5. Other Information

On October 20, 2023, Mr. Michael E. Murray tendered his resignation, effective November 3, 2023, as Senior Vice President of CTS Corporation, to pursue other business opportunities.

During the quarter ended September 30, 2023, no director or officer (as defined in Rule 16a-1(f) under the Exchange Act) of the Company adopted, modified or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement” (as each term is defined in Item 408 of Regulation S-K).

On October 26, 2023, the Board of Directors of the Company approved an amendment to Article XI, Section 1 of the Company’s Amended and Restated Bylaws changing the provision requiring the Board to set the record date for a meeting of shareholders or for purposes of other corporate actions on a date not exceeding fifty (50) days in advance of the meeting of shareholders or other applicable corporate action to seventy (70) days in advance of the meeting of shareholders or other corporate action. A copy of the Amended and Restated Bylaws of the Company, dated October 26, 2023, as amended to date, is attached hereto as Exhibit 3(1).

Item 6. Exhibits


3(1)	Amended and Restated Bylaws of CTS Corporation.

(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, 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

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, 2023		Dated: October 26, 2023