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

10-Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

For The Quarterly Period Ended September 30, 2023

OR

 

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

For the Transition Period from to

Commission File Number: 1-4639

 

CTS CORPORATION

(Exact name of registrant as specified in its charter)

 

 

IN

 

35-0225010

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification Number)

 

4925 Indiana Avenue

 

 

Lisle IL

 

60532

(Address of principal executive offices)

 

(Zip Code)

 

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

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

 

Title of Each Class

 

Trading Symbol(s)

 

Name of Each Exchange on Which Registered

Common stock, without par value

 

CTS

 

New York Stock Exchange

 

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

 

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

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

 

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

Smaller reporting company

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of 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

 

 

2

 


 

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.

3

 


 

CTS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS UNAUDITED

(In thousands of dollars)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

September 30,

 

 

September 30,

 

 

 

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.

4

 


 

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.

5

 


 

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.

 

6

 


 

CTS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - UNAUDITED

(in thousands of dollars)

 

The following summarizes the changes in total equity for the three and nine months ended September 30, 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.

7

 


 

CTS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - UNAUDITED

(in thousands of dollars)

 

The following summarizes the changes in total equity for the three and nine months ended September 30, 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.

8

 


 

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.

9

 


 

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

 

 

 

 

 

 

 

10

 


 

 

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

 

 

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

 

The Company recorded a $3,012 step-up of inventory to its fair value as of the acquisition date based on the preliminary valuation. The step-up was amortized as a non-cash charge to cost of goods sold as the acquired inventory was sold 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:

11

 


 

 

 

 

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

 

 

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 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

 

 

12

 


 

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.

 

13

 


 

 

 

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

 

 

14

 


 

 

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.

15

 


 

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.

16

 


 

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

%

 

On December 15, 2021, we entered into a second amended and restated five-year credit agreement with a group of banks (the “Revolving Credit Facility”) to (i) increase the total credit facility to $400,000, which may be increased by $200,000 at the request of the Company,

17

 


 

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.

18

 


 

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.

19

 


 

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.

20

 


 

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

)

 

 

21

 


 

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

 

 

22

 


 

 

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

 

 

23

 


 

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

 

 

 

 

$

 

 

24

 


 

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:

25

 


 

 

 

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.

 

26

 


 

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

(in thousands of dollars, except percentages and per share amounts)

The following discussion should be read in conjunction with our unaudited Condensed Consolidated Financial Statements and notes included under Item 1, as well as our Consolidated Financial Statements and notes and related Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 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.

27

 


 

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

)

 

28

 


 

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

29

 


 

“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.

30

 


 

 

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.

31

 


 

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.

 

ForwardLooking Statements

This document contains statements that are, or may be deemed to be, forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, any financial or other guidance, statements that reflect our current expectations concerning future results and events, and any other statements that are not based solely on historical fact. Forward-looking statements are based on management’s expectations, certain assumptions, and currently available information. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof and are based on various assumptions as to future events, the occurrence of which necessarily are subject to uncertainties. These forward-looking statements are made subject to certain risks, uncertainties, and other factors, which could cause CTS’ actual results, performance, or achievements to differ materially from those presented in the forward-looking statements. Examples of factors that may affect future operating results and financial condition include, but are not limited to: supply chain disruptions; changes in the economy generally, including inflationary and/or recessionary conditions, and in respect to the business in which CTS operates; unanticipated issues in integrating acquisitions; 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

32

 


 

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.

33

 


 

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

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

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting for the quarter ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II - OTHER INFORMATION

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

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

Item 1A. Risk Factors

There have been no significant changes to our risk factors from those contained in our Annual Report on Form 10-K for the year ended December 31, 2022.

Item 2. Unregistered Sales of Equity, 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.

 

34

 


 

 

 

 

 

 

 

 

 

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).

35

 


 

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

 

 

 

 

 

 

 

36

 


 

SIGNATURES

 

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

 

CTS Corporation

 

CTS Corporation

 

 

 

/s/ Thomas M. White

 

/s/ Ashish Agrawal

Thomas M. White

 

Ashish Agrawal

Corporate Controller

(Principal Accounting Officer)

 

Vice President and Chief Financial Officer

(Principal Financial Officer)

 

 

 

 

 

 

Dated: October 26, 2023

 

Dated: October 26, 2023

 

37