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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For The Quarterly Period Ended
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:
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of incorporation or organization) |
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(IRS Employer Identification Number) |
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(Address of principal executive offices) |
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(Zip Code) |
Registrant’s telephone number, including area code: (
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class |
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Trading Symbol(s) |
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Name of Each Exchange on Which Registered |
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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.
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).
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.
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Accelerated filer |
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Non-accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13 (a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of October 21, 2022:
CTS CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
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Item 1. |
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3 |
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3 |
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4 |
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Condensed Consolidated Balance Sheets As of September 30, 2022 (Unaudited) and December 31, 2021 |
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7 |
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Notes to Condensed Consolidated Financial Statements ‑ (Unaudited) |
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Item 2. |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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27 |
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Item 3. |
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33 |
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Item 4. |
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34 |
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Item 1. |
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34 |
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Item 1A. |
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34 |
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Item 2. |
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35 |
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Item 6. |
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36 |
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37 |
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2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CTS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (LOSS) - UNAUDITED
(In thousands of dollars, except per share amounts)
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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September 30, |
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September 30, |
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2022 |
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2021 |
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2022 |
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2021 |
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Net sales |
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$ |
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$ |
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$ |
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$ |
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Cost of goods sold |
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Gross margin |
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Selling, general and administrative expenses |
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Research and development expenses |
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Restructuring charges |
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Operating earnings |
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Other (expense) income: |
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Interest expense |
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Interest income |
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Other expense, net |
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Total other expense, net |
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Earnings (loss) before income taxes |
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Income tax expense (benefit) |
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Net earnings (loss) |
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$ |
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$ |
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$ |
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$ |
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Earnings (loss) per share: |
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Basic |
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$ |
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$ |
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$ |
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$ |
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Diluted |
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$ |
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$ |
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$ |
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Basic weighted – average common shares outstanding: |
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Effect of dilutive securities |
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Diluted weighted – average common shares outstanding: |
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Cash dividends declared per share |
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$ |
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$ |
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$ |
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$ |
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See notes to unaudited condensed consolidated financial statements.
3
CTS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS ‑ UNAUDITED
(In thousands of dollars)
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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September 30, |
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September 30, |
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2022 |
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2021 |
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2022 |
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2021 |
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Net earnings (loss) |
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$ |
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$ |
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$ |
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$ |
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Other comprehensive earnings (loss): |
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Changes in fair market value of derivatives, net of tax |
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Changes in unrealized pension cost, net of tax |
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Cumulative translation adjustment, net of tax |
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Other comprehensive (loss) earnings |
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$ |
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$ |
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$ |
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$ |
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Comprehensive earnings |
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$ |
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$ |
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$ |
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$ |
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See notes to unaudited condensed consolidated financial statements.
4
CTS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
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(Unaudited) |
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September 30, |
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December 31, |
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2022 |
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2021 |
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ASSETS |
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Current Assets |
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Cash and cash equivalents |
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$ |
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$ |
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Accounts receivable, net |
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Inventories, net |
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Other current assets |
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Total current assets |
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Property, plant and equipment, net |
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Operating lease assets, net |
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Other Assets |
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Prepaid pension asset |
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Goodwill |
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Other intangible assets, net |
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Deferred income taxes |
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Other |
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Total other assets |
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Total Assets |
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$ |
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$ |
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LIABILITIES AND SHAREHOLDERS’ EQUITY |
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Current Liabilities |
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Accounts payable |
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$ |
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$ |
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Operating lease obligations |
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Accrued payroll and benefits |
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Accrued expenses and other liabilities |
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Total current liabilities |
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Long-term debt |
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Long-term operating lease obligations |
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Long-term pension obligations |
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Deferred income taxes |
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Other long-term obligations |
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Total Liabilities |
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Shareholders’ Equity |
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Common stock |
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Additional contributed capital |
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Retained earnings |
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Accumulated other comprehensive loss |
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Total shareholders’ equity before treasury stock |
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Treasury stock |
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Total shareholders’ equity |
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Total Liabilities and Shareholders’ Equity |
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$ |
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$ |
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See notes to unaudited condensed consolidated financial statements.
5
CTS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS ‑ UNAUDITED
(In thousands of dollars)
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Nine Months Ended |
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September 30, |
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September 30, |
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2022 |
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2021 |
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CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net earnings (loss) |
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$ |
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$ |
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Adjustments to reconcile net earnings (loss) to net cash provided by operating |
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Depreciation and amortization |
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Non-cash inventory charges |
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Pension and other post-retirement plan (income) expense |
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Stock-based compensation |
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Deferred income taxes |
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Gain on foreign currency hedges, net of cash |
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Changes in assets and liabilities, net of acquisitions: |
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Accounts receivable |
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Inventories |
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Operating lease assets |
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Other assets |
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( |
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Accounts payable |
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Accrued payroll and benefits |
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Operating lease liabilities |
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( |
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Accrued expenses and other liabilities |
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( |
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Pension and other post-retirement plans |
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Net cash provided by operating activities |
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Capital expenditures |
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Payments for acquisitions, net of cash acquired |
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Net cash used in investing activities |
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CASH FLOWS FROM FINANCING ACTIVITIES: |
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Payments of long-term debt |
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Proceeds from borrowings of long-term debt |
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Purchases of treasury stock |
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Dividends paid |
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( |
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Payments of contingent consideration |
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Taxes paid on behalf of equity award participants |
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( |
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Net cash provided by (used in) financing activities |
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Effect of exchange rate changes on cash and cash equivalents |
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Net increase in cash and cash equivalents |
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Cash and cash equivalents at beginning of period |
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Cash and cash equivalents at end of period |
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$ |
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$ |
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Supplemental cash flow information: |
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Cash paid for interest |
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$ |
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$ |
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Cash paid for income taxes, net |
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$ |
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$ |
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Non-cash financing and investing activities: |
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Capital expenditures incurred but not paid |
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$ |
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$ |
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See notes to unaudited condensed consolidated financial statements.
6
CTS CORPORATION AND SUBSIDIARIES
(in thousands of dollars)
The following summarizes the changes in total equity for the three and nine months ended September 30, 2022:
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Common |
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Additional |
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Retained |
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Accumulated |
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Treasury |
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Total |
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Balances at December 31, 2021 |
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$ |
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$ |
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$ |
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$ |
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$ |
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$ |
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Net earnings |
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— |
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— |
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— |
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— |
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Changes in fair market value of derivatives, net of tax |
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— |
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— |
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— |
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— |
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Changes in unrealized pension cost, net of tax |
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— |
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— |
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— |
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— |
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Cumulative translation adjustment, net of tax |
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— |
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— |
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— |
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( |
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— |
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( |
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Cash dividends of $ |
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— |
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— |
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( |
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— |
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— |
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( |
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Acquired |
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— |
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— |
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— |
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— |
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( |
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( |
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Issued shares on vesting of restricted stock units |
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( |
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— |
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— |
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— |
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( |
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Stock compensation |
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— |
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— |
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— |
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— |
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Balances at March 31, 2022 |
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$ |
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$ |
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$ |
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$ |
( |
) |
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$ |
( |
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$ |
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Net earnings |
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— |
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— |
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— |
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— |
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Changes in fair market value of derivatives, net of tax |
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— |
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— |
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— |
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— |
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Changes in unrealized pension cost, net of tax |
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— |
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— |
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— |
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— |
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Cumulative translation adjustment, net of tax |
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— |
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— |
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— |
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( |
) |
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— |
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( |
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Cash dividends of $ |
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— |
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— |
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( |
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— |
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— |
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( |
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Acquired |
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— |
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— |
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— |
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— |
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( |
) |
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( |
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Issued shares on vesting of restricted stock units |
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( |
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— |
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— |
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— |
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( |
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Stock compensation |
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— |
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— |
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— |
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— |
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Balances at June 30, 2022 |
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$ |
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$ |
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$ |
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$ |
( |
) |
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$ |
( |
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$ |
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Net earnings |
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— |
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— |
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— |
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— |
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Changes in fair market value of derivatives, net of tax |
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— |
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|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Changes in unrealized pension cost, net of tax |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Cumulative translation adjustment, net of tax |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Cash dividends of $ |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
Acquired |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Issued shares on vesting of restricted stock units |
|
|
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
Stock compensation |
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Balances at September 30, 2022 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
||||
See notes to unaudited condensed consolidated financial statements.
7
CTS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - UNAUDITED
(in thousands of dollars)
The following summarizes the changes in total equity for the three and nine months ended September 30, 2021:
|
|
Common |
|
|
Additional |
|
|
Retained |
|
|
Accumulated |
|
|
Treasury |
|
|
Total |
|
||||||
Balances at December 31, 2020 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
||||
Net earnings |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Changes in fair market value of derivatives, net of tax |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Changes in unrealized pension cost, net of tax |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Cumulative translation adjustment, net of tax |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Cash dividends of $ |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
Issued shares on vesting of restricted stock units |
|
|
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
Stock compensation |
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Balances at March 31, 2021 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
||||
Net earnings |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Changes in fair market value of derivatives, net of tax |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Changes in unrealized pension cost, net of tax |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Cumulative translation adjustment, net of tax |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Cash dividends of $ |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
Issued shares on vesting of restricted stock units |
|
|
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
Stock compensation |
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Balances at June 30, 2021 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
||||
Net earnings |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
Changes in fair market value of derivatives, net of tax |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Changes in unrealized pension cost, net of tax |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Cumulative translation adjustment, net of tax |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Cash dividends of $ |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
Acquired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
||||
Issued shares on vesting of restricted stock units |
|
|
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
Stock compensation |
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Balances at September 30, 2021 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
||||
See notes to unaudited condensed consolidated financial statements.
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(in thousands except for share and per share data)
September 30, 2022
NOTE 1 — Basis of Presentation
The accompanying condensed consolidated financial statements have been prepared by CTS Corporation (“CTS”, "we", "our", "us" or the "Company”), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations. The unaudited condensed consolidated financial statements should be read in conjunction with the financial statements, notes thereto, and other information included in the Company’s Annual Report on Form 10‑K for the year ended December 31, 2021.
The accompanying unaudited condensed consolidated financial statements reflect, in the opinion of management, all adjustments (consisting of normal recurring items) necessary for a fair statement, in all material respects, of the financial position and results of operations for the periods presented. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ materially from those estimates. The results of operations for the interim periods are not necessarily indicative of the results for the entire year. Certain reclassifications have been made to prior year amounts to conform to the current year presentation. The reclassifications had no impact on previously reported net earnings.
There have been no material changes in the Company’s significant accounting policies as compared to the significant accounting policies described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
NOTE 2 – Revenue Recognition
The core principle of Accounting Standard Codification (“ASC”) Topic 606 Revenue from Contracts with Customers is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance provides a five-step process to achieve that core principle:
We recognize revenue when the performance obligations specified in our contracts have been satisfied, after considering the impact of variable consideration and other factors that may affect the transaction price. Our contracts normally contain a single performance obligation that is fulfilled on the date of delivery or shipment based on shipping terms stipulated in the contract. We usually expect payment within 30 to 90 days from the shipping date, depending on our terms with the customer. None of our contracts as of September 30, 2022 contained a significant financing component. Differences between the amount of revenue recognized and the amount invoiced, collected from, or paid to our customers are recognized as contract assets or liabilities. Contract assets will be reviewed for impairment when events or circumstances indicate that they may not be recoverable.
To the extent the transaction price includes variable consideration, we estimate the amount of variable consideration that should be included in the transaction price utilizing the most likely amount method based on an analysis of historical experience and current facts and circumstances, which requires significant judgment. Variable consideration is included in the transaction price if, in our judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur.
9
Disaggregated Revenue
The following table presents revenues disaggregated by the major markets we serve:
|
|
Three months ended |
|
|
Nine months ended |
|
||||||||||
|
|
September 30, 2022 |
|
|
September 30, 2021 |
|
|
September 30, 2022 |
|
|
September 30, 2021 |
|
||||
Transportation |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Industrial |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Medical |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Aerospace & Defense |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
NOTE 3 – Business Acquisitions
TEWA Temperature Sensors SP. Zo.o. Acquisition
On February 28, 2022, we acquired
The purchase price of $
The following table summarizes the consideration paid and the fair values of the assets acquired, and the liabilities assumed as of the date of acquisition:
|
|
Fair Values at |
|
|
Current assets |
|
$ |
|
|
Property, plant and equipment |
|
|
|
|
Other assets |
|
|
|
|
Goodwill |
|
|
|
|
Intangible assets |
|
|
|
|
Fair value of assets acquired |
|
|
|
|
Less fair value of liabilities acquired |
|
|
( |
) |
Purchase price |
|
$ |
|
|
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 $
Intangible assets acquired have been assigned a provisional value of $
10
historical experience and projections to estimate the potential value at September 30, 2022. The amount and assumptions included above remain an estimate that will be adjusted once purchase accounting is complete.
Ferroperm Piezoceramics A/S Acquisition
On June 30, 2022, we acquired
The purchase price of $
The following table summarizes the consideration paid and the fair values of the assets acquired, and the liabilities assumed as of the date of acquisition:
|
|
Fair Values at |
|
|
Accounts Receivable |
|
$ |
|
|
Inventory |
|
|
|
|
Other current assets |
|
|
|
|
Property, plant and equipment |
|
|
|
|
Other assets |
|
|
|
|
Goodwill |
|
|
|
|
Intangible assets |
|
|
|
|
Fair value of assets acquired |
|
|
|
|
Less fair value of liabilities acquired |
|
|
( |
) |
Purchase price |
|
$ |
|
|
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 $
Intangible assets acquired have been assigned a provisional value of $
NOTE 4 – Accounts Receivable, net
The components of accounts receivable, net are as follows:
|
|
As of |
|
|||||
|
|
September 30, |
|
|
December 31, |
|
||
|
|
2022 |
|
|
2021 |
|
||
Accounts receivable, gross |
|
$ |
|
|
$ |
|
||
Less: Allowance for credit losses |
|
|
( |
) |
|
|
( |
) |
Accounts receivable, net |
|
$ |
|
|
$ |
|
||
11
NOTE 5 – Inventories, net
Inventories, net consists of the following:
|
|
As of |
|
|||||
|
|
September 30, |
|
|
December 31, |
|
||
|
|
2022 |
|
|
2021 |
|
||
Finished goods |
|
$ |
|
|
$ |
|
||
Work-in-process |
|
|
|
|
|
|
||
Raw materials |
|
|
|
|
|
|
||
Less: Inventory reserves |
|
|
( |
) |
|
|
( |
) |
Inventories, net |
|
$ |
|
|
$ |
|
||
NOTE 6 – Property, Plant and Equipment, net
Property, plant and equipment, net is comprised of the following:
|
|
As of |
|
|||||
|
|
September 30, |
|
|
December 31, |
|
||
|
|
2022 |
|
|
2021 |
|
||
Land and land improvements |
|
$ |
|
|
$ |
|
||
Buildings and improvements |
|
|
|
|
|
|
||
Machinery and equipment |
|
|
|
|
|
|
||
Less: Accumulated depreciation |
|
|
( |
) |
|
|
( |
) |
Property, plant and equipment, net |
|
$ |
|
|
$ |
|
||
Depreciation expense for the nine months ended September 30, 2022 and September 30, 2021 was $
NOTE 7 – Retirement Plans
Pension Plans
Net pension (income) expense for our domestic and foreign plans included in other expense, net in the Condensed Consolidated Statements of Earnings is as follows:
|
|
Three months ended |
|
|
Nine months ended |
|
||||||||||
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Net pension (income) expense |
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||
The components of net pension (income) expense for our domestic and foreign plans include the following:
|
|
Domestic Pension Plans |
|
|
Foreign Pension Plans |
|
||||||||||
|
|
Three Months Ended |
|
|
Three Months Ended |
|
||||||||||
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Service cost |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Interest cost |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Expected return on plan assets(1) |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
Amortization of loss |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Settlement charges |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total (income) expense, net |
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|
$ |
|
|||
12
|
|
Domestic Pension Plans |
|
|
Foreign Pension Plans |
|
||||||||||
|
|
Nine Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Service cost |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Interest cost |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Expected return on plan assets(1) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Amortization of loss |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Settlement charges |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total (income) expense, net |
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|
$ |
|
|||
In February 2020, the Board of Directors authorized management to explore termination of the U.S.-based pension plan ("Plan"), subject to certain conditions. On June 1, 2020, we entered into the Fifth Amendment to the Plan whereby we set an effective termination date for the Plan of July 31, 2020.
As required under U.S. GAAP, the Company recognizes a settlement gain or loss when the aggregate amount of lump-sum distributions to participants equals or exceeds the sum of the service and interest cost components of the net periodic pension cost. The amount of settlement gain or loss recognized is the pro rata amount of the existing unrealized gain or loss immediately prior to the settlement. In general, both the projected benefit obligation and fair value of plan assets are required to be remeasured in order to determine the settlement gain or loss.
Upon the partial settlement of the pension liability due to the lump sum offering in the second quarter of 2021, the Company recognized a non-cash and non-operating settlement charge of $
On July 29, 2021, the Plan purchased a group annuity contract that transferred our benefit obligations for approximately
As a result of the final settlement of the pension liability with the purchase of annuities, we reclassified the remaining related unrecognized pension losses of $
In January 2022, we transferred approximately $
Other Post-retirement Benefit Plan
Net post-retirement expense for our other post-retirement plan includes the following components:
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Service cost |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Interest cost |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Amortization of gain |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total expense, net |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
13
Defined Contribution Plans
We sponsor a 401(k) plan that covers substantially all of our U.S. employees as well as offer similar defined contribution plans at certain foreign locations. In the third quarter of 2022, our investment committee, in consultation with the plan’s advisors, determined the 401(k) plan’s position in CTS stock would be liquidated and funds would be reinvested in other investments. CTS stock represented approximately
NOTE 8 – Goodwill and Other Intangible Assets
Other Intangible Assets
Other intangible assets, net consist of the following components:
|
|
As of |
|
|||||||||
|
|
September 30, 2022 |
|
|||||||||
|
|
Gross |
|
|
Accumulated |
|
|
Net Amount |
|
|||
Customer lists/relationships |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||
Technology and other intangibles |
|
|
|
|
|
( |
) |
|
|
|
||
Other intangible assets, net |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||
Amortization expense for the three months ended |
|
|
|
|
$ |
|
|
|
|
|||
Amortization expense for the nine months ended |
|
|
|
|
$ |
|
|
|
|
|||
|
|
As of |
|
|||||||||
|
|
December 31, 2021 |
|
|||||||||
|
|
Gross |
|
|
Accumulated |
|
|
Net Amount |
|
|||
Customer lists/relationships |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||
Technology and other intangibles |
|
|
|
|
|
( |
) |
|
|
|
||
Other intangible assets, net |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||
Amortization expense for the three months ended |
|
|
|
|
$ |
|
|
|
|
|||
Amortization expense for the nine months ended |
|
|
|
|
$ |
|
|
|
|
|||
Remaining amortization expense for other intangible assets as of September 30, 2022 is as follows:
|
|
Amortization |
|
|
2022 |
|
$ |
|
|
2023 |
|
|
|
|
2024 |
|
|
|
|
2025 |
|
|
|
|
2026 |
|
|
|
|
Thereafter |
|
|
|
|
Total amortization expense |
|
$ |
|
|
Goodwill
Changes in the net carrying amount of goodwill were as follows:
14
|
|
Total |
|
|
Goodwill as of December 31, 2021 |
|
$ |
|
|
Increase from acquisitions |
|
|
|
|
Foreign exchange impact |
|
|
( |
) |
Goodwill as of September 30, 2022 |
|
$ |
|
|
NOTE 9 – Costs Associated with Exit and Restructuring Activities
Restructuring charges are reported as a separate line within operating earnings in the Condensed Consolidated Statement of Earnings.
Total restructuring charges are as follows:
|
|
Three Months Ended |
|
|||||
|
|
September 30, 2022 |
|
|
September 30, 2021 |
|
||
Restructuring charges |
|
$ |
|
|
$ |
|
||
|
|
Nine Months Ended |
|
|||||
|
|
September 30, 2022 |
|
|
September 30, 2021 |
|
||
Restructuring charges |
|
$ |
|
|
$ |
|
||
September 2020 Plan
In September 2020, we initiated a restructuring plan focused on optimizing our manufacturing footprint and improving operational efficiency by better utilizing our systems capabilities (the "September 2020 Plan"). This plan includes transitioning certain administrative functions to a shared service center, realignment of manufacturing locations, and certain other efficiency improvement actions. The restructuring cost of the September 2020 Plan is now estimated to be in the range of $
Other Restructuring Activities
From time to time we undertake other restructuring activities that are not part of a formal plan. During the three and nine months ended September 30, 2022, we incurred restructuring charges of $
The following table displays the restructuring liability activity included in accrued expenses and other liabilities for all plans for the nine months ended September 30, 2022:
Restructuring liability at January 1, 2022 |
|
$ |
|
|
Restructuring charges |
|
|
|
|
Cost paid |
|
|
( |
) |
Restructuring liability at September 30, 2022 |
|
$ |
|
15
NOTE 10 – Accrued Expenses and Other Liabilities
The components of accrued expenses and other liabilities are as follows:
|
|
As of |
|
|||||
|
|
September 30, |
|
|
December 31, |
|
||
|
|
2022 |
|
|
2021 |
|
||
Accrued product related costs |
|
$ |
|
|
$ |
|
||
Accrued income taxes |
|
|
|
|
|
|
||
Accrued property and other taxes |
|
|
|
|
|
|
||
Accrued professional fees |
|
|
|
|
|
|
||
Accrued customer related liabilities |
|
|
|
|
|
|
||
Dividends payable |
|
|
|
|
|
|
||
Remediation reserves |
|
|
|
|
|
|
||
Derivative liabilities |
|
|
|
|
|
|
||
Other accrued liabilities |
|
|
|
|
|
|
||
Total accrued expenses and other liabilities |
|
$ |
|
|
$ |
|
||
NOTE 11 – Commitments and Contingencies
Certain processes in the manufacture of our current and past products create by-products classified as hazardous waste. We have been notified by the U.S. Environmental Protection Agency, state environmental agencies, and in some cases, groups of potentially responsible parties, that we may be potentially liable for environmental contamination at several sites currently and formerly owned or operated by us.
A roll-forward of remediation reserves included in accrued expenses and other liabilities on the Condensed Consolidated Balance Sheets is comprised of the following:
|
|
As of |
|
|||||
|
|
September 30, |
|
|
December 31, |
|
||
|
|
2022 |
|
|
2021 |
|
||
Balance at beginning of period |
|
$ |
|
|
$ |
|
||
Remediation expense |
|
|
|
|
|
|
||
Net remediation payments |
|
|
( |
) |
|
|
( |
) |
Other activity(1) |
|
|
|
|
|
|
||
Balance at end of the period |
|
$ |
|
|
$ |
|
||
Unrelated to the environmental claims described above, certain other legal claims are pending against us with respect to matters arising out of the ordinary conduct of our business.
We provide product warranties when we sell our products and accrue for estimated liabilities at the time of sale. Warranty estimates are forecasts based on the best available information and historical claims experience. We accrue for specific warranty claims if we believe that the facts of a specific claim make it probable that a liability in excess of our historical experience has been or will be incurred, and provide disclosures for specific claims whenever it is reasonably possible that a material loss may be incurred which cannot be estimated.
We cannot provide assurance that the ultimate disposition of environmental, legal, and product warranty claims will not materially exceed the amount of our accrued losses and adversely impact our consolidated financial position, results of operations, or cash flows. Our accrued liabilities and disclosures will be adjusted accordingly if additional information becomes available in the future.
16
NOTE 12 - Debt
Long-term debt is comprised of the following:
|
|
As of |
|
|||||
|
|
September 30, |
|
|
December 31, |
|
||
|
|
2022 |
|
|
2021 |
|
||
Total credit facility |
|
$ |
|
|
$ |
|
||
Balance outstanding |
|
|
|
|
|
|
||
Standby letters of credit |
|
|
|
|
|
|
||
Amount available, subject to covenant restrictions |
|
$ |
|
|
$ |
|
||
Weighted-average interest rate |
|
|
% |
|
|
% |
||
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 $
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
The Revolving Credit Facility includes a swing line sublimit of $
We have debt issuance costs related to our long-term debt that are being amortized using the straight-line method over the life of the debt, which approximates the effective interest method. Amortization expense for the three and nine months ended September 30, 2022 was $
Note 13 - Derivative Financial Instruments
Our earnings and cash flows are subject to fluctuations due to changes in foreign currency exchange rates and interest rates. We selectively use derivative financial instruments including foreign currency forward contracts as well as interest rate and cross-currency swaps to manage our exposure to these risks.
The use of derivative financial instruments exposes the Company to credit risk, which relates to the risk of nonperformance by a counterparty to the derivative contracts. We manage our credit risk by entering into derivative contracts with only highly rated financial institutions and by using netting agreements.
17
The effective portion of derivative gains and losses are recorded in accumulated other comprehensive loss until the hedged transaction affects earnings upon settlement, at which time they are reclassified to cost of goods sold or net sales. If it is probable that an anticipated hedged transaction will not occur by the end of the originally specified time period, we reclassify the gains or losses related to that hedge from accumulated other comprehensive loss to other income (expense), net.
We assess hedge effectiveness qualitatively by verifying that the critical terms of the hedging instrument and the forecasted transaction continue to match, and that there have been no adverse developments that have increased the risk that the counterparty will default.
Foreign Currency Hedges
We use forward contracts to mitigate currency risk related to a portion of our forecasted foreign currency revenues and costs. The currency forward contracts are designed as cash flow hedges and are recorded in the Condensed Consolidated Balance Sheets at fair value.
We continue to monitor the Company’s overall currency exposure and may elect to add cash flow hedges in the future. At September 30, 2022, we had a net unrealized gain of $
Interest Rate Swaps
We use interest rate swaps to convert a portion of our Revolving Credit Facility’s outstanding balance from a variable rate of interest to a fixed rate. As of September 30, 2022, we have agreements to fix interest rates on $
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 $
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 $
Accordingly, any gains or losses on this derivative instrument will be included in the foreign currency translation component of other comprehensive income until the net investment is sold, diluted or liquidated. At September 30, 2022 we had a net unrealized gain of $
Prior to designation as a net investment hedge, a gain of $
18
The location and fair values of derivative instruments designated as hedging instruments in the Condensed Consolidated Balance Sheets as of September 30, 2022, are shown in the following table:
|
|
As of |
|
|||||
|
|
September 30, |
|
|
December 31, |
|
||
|
|
2022 |
|
|
2021 |
|
||
Interest rate swaps reported in Other current assets |
|
$ |
|
|
$ |
|
||
Interest rate swaps reported in Other assets |
|
$ |
|
|
$ |
|
||
Interest rate swaps reported in Accrued Expenses and other liabilities |
|
$ |
|
|
$ |
( |
) |
|
Interest rate swaps reported in Other long-term obligations |
|
$ |
|
|
$ |
( |
) |
|
|
$ |
|
|
$ |
|
|||
|
$ |
|
|
$ |
|
|||
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 $
The effect of derivative instruments on the Condensed Consolidated Statements of Earnings is as follows:
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Foreign Exchange Contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Amounts reclassified from AOCI to earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Total gain reclassified from AOCI to earnings |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total derivative gain on foreign exchange contracts recognized in earnings |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Interest Rate Swaps: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
||
Cross-Currency Swap: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
$ |
|
|
$ |
— |
|
|
$ |
|
|
$ |
— |
|
|||
Total net gains on derivatives |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Derivative Contracts Not Designated as Hedges
In the second quarter of 2022, the Company used derivative contracts to manage foreign currency exchange risk related to funds to be used for the purchase price of the Ferroperm acquisition. These contracts were not designated as hedges and therefore changes in the fair values of these instruments were recognized directly in earnings. All contracts were settled in conjunction with the closing of the Ferroperm acquisition. As a result of these contracts, the Company recognized a $
19
NOTE 14 – Accumulated Other Comprehensive Loss
Shareholders’ equity includes certain items classified as accumulated other comprehensive loss (“AOCI”) in the Condensed Consolidated Balance Sheets, including:
Changes in exchange rates between the functional currency and the currency in which a transaction is denominated are foreign exchange transaction gains or losses. Transaction losses for the three and nine months ended September 30, 2022 were $
The components of accumulated other comprehensive loss for the three months ended September 30, 2022 are as follows:
|
|
|
|
|
|
|
|
(Gain) Loss |
|
|
|
|
||||
|
|
As of |
|
|
Gain (Loss) |
|
|
Reclassified |
|
|
As of |
|
||||
|
|
June 30, |
|
|
Recognized |
|
|
from AOCI |
|
|
September 30, |
|
||||
|
|
2022 |
|
|
in OCI |
|
|
to Earnings |
|
|
2022 |
|
||||
Changes in fair market value of derivatives: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Gross |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||
Income tax benefit (expense) |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
Net |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Changes in unrealized pension cost: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Gross |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
Income tax benefit (expense) |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|||
Net |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Cumulative translation adjustment: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Gross |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
Income tax benefit (expense) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
Total accumulated other comprehensive (loss) income |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
20
The components of accumulated other comprehensive loss for the three months ended September 30, 2021, are as follows:
|
|
|
|
|
|
|
|
(Gain) Loss |
|
|
|
|
||||
|
|
As of |
|
|
Gain (Loss) |
|
|
Reclassified |
|
|
As of |
|
||||
|
|
June 30, |
|
|
Recognized |
|
|
from AOCI |
|
|
September 30, |
|
||||
|
|
2021 |
|
|
in OCI |
|
|
to Earnings |
|
|
2021 |
|
||||
Changes in fair market value of derivatives: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Gross |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Income tax benefit (expense) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Changes in unrealized pension cost: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Gross |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
Income tax benefit (expense) |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Net |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
Cumulative translation adjustment: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Gross |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
Income tax benefit (expense) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
Total accumulated other comprehensive (loss) income |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
The components of accumulated other comprehensive loss for the nine months ended September 30, 2022, are as follows:
|
|
|
|
|
|
|
|
(Gain) Loss |
|
|
|
|
||||
|
|
As of |
|
|
Gain (Loss) |
|
|
Reclassified |
|
|
As of |
|
||||
|
|
December 31, |
|
|
Recognized |
|
|
from AOCI |
|
|
September 30, |
|
||||
|
|
2021 |
|
|
in OCI |
|
|
to Earnings |
|
|
2022 |
|
||||
Changes in fair market value of derivatives: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Gross |
|
$ |
( |
) |
|
$ |
|
|
|
( |
) |
|
$ |
|
||
Income tax benefit (expense) |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
||
Net |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
||
Changes in unrealized pension cost: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Gross |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
Income tax benefit (expense) |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|||
Net |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
Cumulative translation adjustment: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Gross |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
Income tax benefit (expense) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
Total accumulated other comprehensive (loss) income |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
21
The components of accumulated other comprehensive loss for the nine months ended September 30, 2021, are as follows:
|
|
|
|
|
|
|
|
(Gain) Loss |
|
|
|
|
||||
|
|
As of |
|
|
Gain (Loss) |
|
|
Reclassified |
|
|
As of |
|
||||
|
|
December 31, |
|
|
Recognized |
|
|
from AOCI |
|
|
September 30, |
|
||||
|
|
2020 |
|
|
in OCI |
|
|
to Earnings |
|
|
2021 |
|
||||
Changes in fair market value of derivatives: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Gross |
|
$ |
( |
) |
|
$ |
|
|
|
( |
) |
|
$ |
( |
) |
|
Income tax benefit (expense) |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|||
Net |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
Changes in unrealized pension cost: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Gross |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
Income tax benefit (expense) |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Net |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
Cumulative translation adjustment: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Gross |
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
||
Income tax benefit (expense) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net |
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
||
Total accumulated other comprehensive (loss) income |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
NOTE 15 – Shareholders’ Equity
Share count and par value data related to shareholders’ equity are as follows:
|
|
As of |
|
|||||
|
|
September 30, |
|
|
December 31, |
|
||
|
|
2022 |
|
|
2021 |
|
||
Preferred Stock |
|
|
|
|
|
|
||
Par value per share |
|
par value |
|
|
par value |
|
||
Shares authorized |
|
|
|
|
|
|
||
Shares outstanding |
|
|
|
|
|
|
||
Common Stock |
|
|
|
|
|
|
||
Par value per share |
|
par value |
|
|
par value |
|
||
Shares authorized |
|
|
|
|
|
|
||
Shares issued |
|
|
|
|
|
|
||
Shares outstanding |
|
|
|
|
|
|
||
Treasury stock |
|
|
|
|
|
|
||
Shares held |
|
|
|
|
|
|
||
On May 13, 2021, the Board of Directors approved a new share repurchase program that authorizes the Company to repurchase up to $
A roll-forward of common shares outstanding is as follows:
|
|
Nine months ended |
|
|||||
|
|
September 30, |
|
|
September 30, |
|
||
|
|
2022 |
|
|
2021 |
|
||
Balance at the beginning of the year |
|
|
|
|
|
|
||
Repurchases |
|
|
( |
) |
|
|
( |
) |
Restricted share issuances |
|
|
|
|
|
|
||
Balance at the end of the period |
|
|
|
|
|
|
||
22
Certain potentially dilutive restricted stock units are excluded from diluted earnings per share because they are anti-dilutive. The number of outstanding awards that were anti-dilutive for the three and nine months ended September 30, 2022 were
NOTE 16- Stock-Based Compensation
At September 30, 2022, we had
These plans allow for grants of stock options, stock appreciation rights, restricted stock, restricted stock units ("RSUs"), performance shares, performance units, and other stock awards subject to the terms of the specific plans under which the awards are granted.
The following table summarizes the compensation expense included in selling, general and administrative expenses in the Condensed Consolidated Statements of Earnings related to stock-based compensation plans:
|
|
Three months ended |
|
|
Nine months ended |
|
||||||||||
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Service-based RSUs |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Performance and Market-based RSUs |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Cash-settled RSUs |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Income tax benefit |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net expense |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
The following table summarizes the unrecognized compensation expense related to non-vested RSUs by type and the weighted-average period in which the expense is to be recognized:
|
|
Unrecognized |
|
|
|
|
||
|
|
Compensation |
|
|
Weighted- |
|
||
|
|
Expense at |
|
|
Average |
|
||
|
|
September 30, 2022 |
|
|
Period (years) |
|
||
Service-based RSUs |
|
$ |
|
|
|
|
||
Performance and Market-based RSUs |
|
|
|
|
|
|
||
Total |
|
$ |
|
|
|
|
||
We recognize expense on a straight-line basis over the requisite service period for each separately vesting portion of the award as if the award was, in substance, multiple awards.
The following table summarizes the status of these plans as of September 30, 2022:
|
|
2018 Plan |
|
|
2014 Plan |
|
|
2009 Plan |
|
|
2004 Plan |
|
|
Directors' |
|
|||||
Awards originally available |
|
|
|
|
|
|
|
|
|
|
|
|
|
N/A |
|
|||||
Maximum potential awards outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
RSUs and cash-settled awards vested and released |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Awards available for grant |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
23
Service-Based Restricted Stock Units
The following table summarizes the service-based RSU activity for the nine months ended September 30, 2022:
|
|
Units |
|
|
Weighted |
|
||
Outstanding at December 31, 2021 |
|
|
|
|
$ |
|
||
Granted |
|
|
|
|
|
|
||
Vested and released |
|
|
( |
) |
|
|
|
|
Forfeited |
|
|
( |
) |
|
|
|
|
Outstanding at September 30, 2022 |
|
|
|
|
$ |
|
||
Releasable at September 30, 2022 |
|
|
|
|
$ |
|
||
Performance and Market-Based Restricted Stock Units
The following table summarizes the performance and market-based RSU activity for the nine months ended September 30, 2022:
|
|
Units |
|
|
Weighted |
|
||
Outstanding at December 31, 2021 |
|
|
|
|
$ |
|
||
Granted |
|
|
|
|
|
|
||
Attained by performance |
|
|
|
|
|
|
||
Released |
|
|
( |
) |
|
|
|
|
Forfeited |
|
|
( |
) |
|
|
|
|
Outstanding at September 30, 2022 |
|
|
|
|
$ |
|
||
Releasable at September 30, 2022 |
|
|
|
|
$ |
|
||
Cash-Settled Restricted Stock Units
Cash-Settled RSUs entitle the holder to receive the cash equivalent of one share of common stock for each unit when the unit vests. These RSUs are issued to key employees residing in foreign locations as direct compensation. Generally, these RSUs vest over a three-year period. Cash-Settled RSUs are classified as liabilities and are remeasured at each reporting date until settled. At September 30, 2022 and December 31, 2021, we had
NOTE 17 — Fair Value Measurements
The table below summarizes our financial assets and liabilities that were measured at fair value on a recurring basis at September 30, 2022:
|
|
Asset (Liability) Carrying |
|
|
Quoted Prices |
|
|
Significant |
|
|
Significant |
|
||||
Interest rate swaps |
|
$ |
|
|
$ |
— |
|
|
$ |
|
|
$ |
— |
|
||
Foreign currency hedges |
|
$ |
|
|
$ |
— |
|
|
$ |
|
|
$ |
— |
|
||
Cross-currency swap |
|
$ |
|
|
$ |
— |
|
|
$ |
|
|
$ |
— |
|
||
Qualified replacement plan assets |
|
$ |
|
|
$ |
|
|
$ |
— |
|
|
$ |
— |
|
||
Contingent consideration |
|
$ |
( |
) |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
( |
) |
24
The table below summarizes the financial assets and liabilities that were measured at fair value on a recurring basis as of December 31, 2021:
|
|
(Liability) Asset Carrying |
|
|
Quoted Prices |
|
|
Significant |
|
|
Significant |
|
||||
Interest rate swaps |
|
$ |
( |
) |
|
$ |
— |
|
|
$ |
( |
) |
|
$ |
— |
|
Foreign currency hedges |
|
$ |
|
|
$ |
— |
|
|
$ |
|
|
$ |
— |
|
||
Contingent consideration |
|
$ |
( |
) |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
( |
) |
We use interest rate swaps to convert a portion of our Revolving Credit Facility’s outstanding balance from a variable rate of interest into a fixed rate and foreign currency forward contracts to hedge the effect of foreign currency changes on certain revenues and costs denominated in foreign currencies. The Company entered into a cross currency swap agreement in order to manage its exposure to changes in interest rates related to foreign debt. These derivative financial instruments are measured at fair value on a recurring basis. The fair value of our interest rate swaps and foreign currency hedges were measured using standard valuation models using market-based observable inputs over the contractual terms, including forward yield curves, among others. There is a readily determinable market for these derivative instruments, but that market is not active and therefore they are classified within Level 2 of the fair value hierarchy.
The fair value of the contingent consideration requires significant judgment. The Company's fair value estimates used in the contingent consideration valuation are considered Level 3 fair value measurements. The fair value estimates were based on assumptions management believes to be reasonable, but that are inherently uncertain, including estimates of future revenues and timing of events and activities that are expected to take place.
A roll-forward of the contingent consideration is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Contingent |
|
|
Balance at December 31, 2021 |
|
$ |
|
|
Settled in cash |
|
|
( |
) |
Balance at September 30, 2022 in accrued expenses and other liabilities |
|
$ |
|
|
Our long-term debt consists of the Revolving Credit Facility, which is recorded at its carrying value. There is a readily determinable market for our long-term debt and it is classified within Level 2 of the fair value hierarchy as the market is not deemed to be active. The fair value of long-term debt approximates carrying value and was determined by valuing a similar hypothetical coupon bond and attributing that value to our long-term debt under the Revolving Credit Facility.
The QRP assets consist of investment funds maintained for future contributions to the Company’s U.S. 401(k) program. See Note 7 for further information on the QRP. The investments are Level 1 marketable securities and are recorded in Other Assets on our Condensed Consolidated Balance Sheets.
NOTE 18 — Income Taxes
The effective tax rates for the three and nine months ended September 30, 2022 and 2021 are as follows:
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Effective tax rate |
|
|
% |
|
|
% |
|
|
% |
|
|
% |
||||
Our effective income tax rate was
25
impact of a nondeductible cost associated with the termination of the U.S. pension plan. The third quarter 2021 effective tax rate was higher, primarily due to the non-cash settlement expense related to the final annuity purchase made for the U.S. pension plan termination.
Our effective income tax rate was
26
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”)
(in thousands of dollars, except percentages and per share amounts)
The following discussion should be read in conjunction with our unaudited Condensed Consolidated Financial Statements and notes included under Item 1, as well as our Consolidated Financial Statements and notes and related Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2021.
Overview
CTS Corporation ("CTS", "we", "our" or "us") is a leading designer and manufacturer of products that Sense, Connect and Move. Our vision is to be a leading provider of sensing and motion devices as well as connectivity components, enabling an intelligent and seamless world. These devices are categorized by their ability to Sense, Connect or Move. Sense products provide vital inputs to electronic systems. Connect products allow systems to function in synchronization with other systems. Move products ensure required movements are effectively and accurately executed. We are committed to achieving our vision by continuing to invest in the development of products, technologies and talent within these categories.
We manufacture sensors, actuators, and connectivity components in North America, Europe, and Asia. CTS provides engineered products to original equipment manufacturers (“OEMs”) and tier one suppliers in the aerospace and defense, industrial, medical, and transportation markets.
There is an increasing proliferation of sensing, connectivity, and motion applications within various markets we serve. Our success is dependent on the ability to execute our strategy to support these trends. We are subject to challenges including, without limitation, periodic market softness, competition from other suppliers, changes in technology, and the ability to add new customers, launch new products or penetrate new markets.
On February 28, 2022, we acquired 100% of the outstanding shares of TEWA Temperature Sensors SP. Zo.o. (“TEWA”) for $24,485. TEWA is a designer and manufacturer of high-quality temperature sensors. TEWA has complementary capabilities with our existing temperature sensing platform and the acquisition supports our end market diversification strategy by expanding our presence in Europe.
On June 30, 2022, we acquired 100% of the outstanding shares of Ferroperm Piezoceramics A/S (“Ferroperm”) for $72,043. Ferroperm specializes in the design and manufacture of high performance piezoceramic components for use in complex and demanding medical, industrial, and aerospace applications. Ferroperm has complementary capabilities with our existing medical diagnostics and imaging product lines and the acquisition also supports our end market diversification strategy by expanding our presence in European end markets.
COVID-19 Impact and Supply Chain Uncertainties
The COVID-19 pandemic and subsequent supply chain uncertainties have had a significant negative impact on the global economy in 2020, 2021, and into 2022. These events have disrupted the financial markets, negatively impacted the global supply chain and increased the cost of materials and operations, particularly within the global automotive industry. Key semiconductor chip and other critical part shortages continue to force OEMs to shut down production, often on short notice. With customers changing orders on short notice, we run the risk of carrying excess inventory in these situations. These developments are outside of our control, remain highly uncertain, and cannot be predicted. In addition, the supply chain shortages continue to put pressure on our manufacturing costs and our gross margins. We continue to actively monitor the ongoing impacts of the COVID-19 pandemic and supply chain issues and will seek to mitigate and minimize their impact on our business, when possible. We anticipate these challenges to continue to impact our results for the remainder of 2022 and we remain cautious about the financial impact of these potential disruptions on our business into 2023.
27
Results of Operations: Third Quarter 2022 versus Third Quarter 2021
The following table highlights changes in significant components of the Unaudited Condensed Consolidated Statements of Earnings for the quarters ended September 30, 2022, and September 30, 2021:
|
|
Three Months Ended |
|
|
|
|
|
|
|
|
|
|
||||||||
|
|
September 30, 2022 |
|
|
September 30, 2021 |
|
|
Percent |
|
|
Percentage of Net Sales – |
|
|
Percentage of Net Sales – |
|
|||||
Net sales |
|
$ |
151,911 |
|
|
$ |
122,382 |
|
|
|
24.1 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of goods sold |
|
|
98,565 |
|
|
|
76,720 |
|
|
|
28.5 |
|
|
|
64.9 |
|
|
|
62.7 |
|
Gross margin |
|
|
53,346 |
|
|
|
45,662 |
|
|
|
16.8 |
|
|
|
35.1 |
|
|
|
37.3 |
|
Selling, general and administrative expenses |
|
|
24,003 |
|
|
|
19,922 |
|
|
|
20.5 |
|
|
|
15.8 |
|
|
|
16.3 |
|
Research and development expenses |
|
|
6,207 |
|
|
|
6,454 |
|
|
|
(3.8 |
) |
|
|
4.1 |
|
|
|
5.3 |
|
Restructuring charges |
|
|
492 |
|
|
|
319 |
|
|
|
54.2 |
|
|
|
0.3 |
|
|
|
0.3 |
|
Total operating expenses |
|
|
30,702 |
|
|
|
26,695 |
|
|
|
15.0 |
|
|
|
20.2 |
|
|
|
21.9 |
|
Operating earnings |
|
|
22,644 |
|
|
|
18,967 |
|
|
|
19.4 |
|
|
|
14.9 |
|
|
|
15.5 |
|
Total other expense, net |
|
|
(5,346 |
) |
|
|
(108,786 |
) |
|
|
(95.1 |
) |
|
|
(3.5 |
) |
|
|
(88.9 |
) |
Earnings (loss) before income taxes |
|
|
17,298 |
|
|
|
(89,819 |
) |
|
n/a |
|
|
|
11.4 |
|
|
|
(73.4 |
) |
|
Income tax expense (benefit) |
|
|
5,500 |
|
|
|
(25,923 |
) |
|
n/a |
|
|
|
3.6 |
|
|
|
(21.2 |
) |
|
Net earnings (loss) |
|
$ |
11,798 |
|
|
$ |
(63,896 |
) |
|
n/a |
|
|
|
7.8 |
% |
|
|
(52.2 |
)% |
|
Earnings (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Diluted net earnings (loss) per share |
|
$ |
0.37 |
|
|
$ |
(1.97 |
) |
|
|
|
|
|
|
|
|
|
|||
Net sales were $151,911 in the third quarter of 2022, an increase of $29,529 or 24.1% from the third quarter of 2021. Net sales to non-transportation markets increased $13,492 or 22.5% while net sales to transportation markets increased $16,035 or 25.7%. The TEWA and Ferroperm acquisitions added $8,588 in net sales for the quarter. Changes in foreign exchange rates decreased net sales by $4,137 year-over-year primarily due to the U.S. Dollar appreciating compared to the Euro.
Gross margin was $53,346 in the third quarter of 2022, an increase of $7,684 or 16.8% from the third quarter of 2021. The year over year increase in gross margin was driven by sales volume and mix partially offset by increased material and freight costs, changes in foreign exchange rates of $1,041 year-over-year, and $2,229 in inventory step-up amortization charges taken relating to the Ferroperm acquisition. We continue to experience significant inflation in material and freight costs as well as interruptions in the supply chain particularly due to the global semiconductor chip shortages impacting the operations of our business. The impact of the supply chain shortages and OEM shutdowns are expected to continue to have an adverse effect on our operations that we are continuing to attempt to mitigate.
Selling, general and administrative ("SG&A") expenses were $24,003 or 15.8% of net sales in the third quarter of 2022 versus $19,922 or 16.3% of net sales in the third quarter of 2021. The increase in SG&A expenses was primarily caused by expenses related to acquisition activity.
Research and development (“R&D”) expenses were $6,207 or 4.1% of net sales in the third quarter of 2022 compared to $6,454 or 5.3% of net sales in the comparable quarter of 2021. We continue investing in research and product development to drive organic growth, and the slight reduction was due to timing of spend and customer reimbursements.
Restructuring charges were $492 or 0.3% of net sales in the third quarter of 2022 compared to $319 or 0.3% of net sales in the third quarter of 2021. We continue to implement certain restructuring actions to improve our cost structure to remain competitive.
Operating earnings were $22,644 or 14.9% of net sales in the third quarter of 2022 compared to operating earnings of $18,967 or 15.5% of net sales in the third quarter of 2021. The change in operating earnings were primarily driven by the items discussed above.
28
Other income and expense items are summarized in the following table:
|
|
Three Months Ended |
|
|||||
|
|
September 30, |
|
|
September 30, |
|
||
|
|
2022 |
|
|
2021 |
|
||
Interest expense |
|
$ |
(342 |
) |
|
$ |
(514 |
) |
Interest income |
|
|
167 |
|
|
|
230 |
|
Other expense, net |
|
|
(5,171 |
) |
|
|
(108,502 |
) |
Total other expense, net |
|
$ |
(5,346 |
) |
|
$ |
(108,786 |
) |
The reduction in other expense, net was primarily driven by decreased pension expense due to the U.S. pension plan termination, effective in 2021. Other expense, net for the third quarter of 2022 is primarily driven by $6,803 in excise taxes incurred as part of the U.S. pension plan termination as well as foreign currency losses primarily related to the Chinese Renminbi offset partially by income from the U.S. pension plan investments realized prior to the final termination.
|
|
Three Months Ended |
|
|||||
|
|
September 30, |
|
|
September 30, |
|
||
|
|
2022 |
|
|
2021 |
|
||
Effective tax rate |
|
|
31.8 |
% |
|
|
28.9 |
% |
Our effective income tax rate was 31.8% and 28.9% in the third quarters of 2022 and 2021, respectively. The increase in effective income tax rate is primarily attributed to a nondeductible cost associated with the termination of the U.S. pension plan incurred in the third quarter of 2022.
Results of Operations: Nine Months ended September 30, 2022 versus Nine Months Ended September 30, 2021
The following table highlights changes in significant components of the Unaudited Condensed Consolidated Statements of Earnings for the nine months ended September 30, 2022, and September 30, 2021:
|
|
Nine Months Ended |
|
|
|
|
|
|
|
|
|
|
||||||||
|
|
September 30, 2022 |
|
|
September 30, 2021 |
|
|
Percent |
|
|
Percentage of Net Sales – |
|
|
Percentage of Net Sales – |
|
|||||
Net sales |
|
$ |
444,588 |
|
|
$ |
380,394 |
|
|
|
16.9 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of goods sold |
|
|
285,054 |
|
|
|
244,446 |
|
|
|
16.6 |
|
|
|
64.1 |
|
|
|
64.3 |
|
Gross margin |
|
|
159,534 |
|
|
|
135,948 |
|
|
|
17.3 |
|
|
|
35.9 |
|
|
|
35.7 |
|
Selling, general and administrative expenses |
|
|
68,029 |
|
|
|
59,184 |
|
|
|
14.9 |
|
|
|
15.3 |
|
|
|
15.6 |
|
Research and development expenses |
|
|
18,695 |
|
|
|
18,170 |
|
|
|
2.9 |
|
|
|
4.2 |
|
|
|
4.8 |
|
Restructuring charges |
|
|
1,434 |
|
|
|
551 |
|
|
|
160.3 |
|
|
|
0.3 |
|
|
|
0.1 |
|
Total operating expenses |
|
|
88,158 |
|
|
|
77,905 |
|
|
|
13.2 |
|
|
|
19.8 |
|
|
|
20.5 |
|
Operating earnings |
|
|
71,376 |
|
|
|
58,043 |
|
|
|
23.0 |
|
|
|
16.1 |
|
|
|
15.3 |
|
Total other (expense), net |
|
|
(11,410 |
) |
|
|
(133,674 |
) |
|
|
(91.5 |
) |
|
|
(2.6 |
) |
|
|
(35.1 |
) |
Earnings (loss) before income taxes |
|
|
59,966 |
|
|
|
(75,631 |
) |
|
|
(179.3 |
) |
|
|
13.5 |
|
|
|
(19.8 |
) |
Income tax expense (benefit) |
|
|
15,331 |
|
|
|
(24,600 |
) |
|
|
(162.3 |
) |
|
|
3.4 |
|
|
|
(6.5 |
) |
Net earnings (loss) |
|
$ |
44,635 |
|
|
$ |
(51,031 |
) |
|
|
(187.5 |
)% |
|
|
10.0 |
% |
|
|
(13.4 |
)% |
Earnings (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Diluted net earnings (loss) per share |
|
$ |
1.38 |
|
|
$ |
(1.58 |
) |
|
|
|
|
|
|
|
|
|
|||
Net sales were $444,588 in the nine months ended September 30, 2022, an increase of $64,194 or 16.9% from the nine months ended September 30, 2021. Net sales to non-transportation markets increased $41,743 or 24.5% while net sales to transportation markets increased $22,449 or 10.7%. The TEWA and Ferroperm acquisitions added $14,092 in net sales for the year to date period. Changes in foreign exchange rates decreased net sales by $6,650 year-over-year primarily due to the U.S. Dollar appreciating compared to the Euro.
Gross margin was $159,534 for the nine months ended September 30, 2022, an increase of $23,586 or 17.3% from the nine months ended September 30, 2021. The increase in gross margin was driven primarily by sales volume and mix partially offset by increased
29
material and freight costs, changes in foreign exchange rates of $1,909 year-over-year, and $3,342 in inventory step-up amortization charges taken relating to the TEWA and Ferroperm acquisitions. We continue to experience significant inflation in material and freight costs as well as interruptions in the supply chain particularly due to the global semiconductor chip shortages impacting the operations of our business. The impact of the supply chain shortages and OEM shutdowns are expected to continue to have an adverse effect on our operations that we are continuing to attempt to mitigate.
SG&A expenses were $68,029 or 15.3% of net sales for the nine months ended September 30, 2022 versus $59,184 or 15.6% of net sales for the nine months ended September 30, 2021. The increase in SG&A expenses was caused by expenses related to acquisition activity.
R&D expenses were $18,695 or 4.2% of net sales for the nine months ended September 30, 2022 compared to $18,170 or 4.8% of net sales for the nine months ended September 30, 2021. The increase in overall R&D expenses is in line with our commitment to continue investing in research and product development to drive organic growth.
Restructuring charges were $1,434 or 0.3% of net sales for the nine months ended September 30, 2022 compared to $551 or 0.1% of net sales for the nine months ended September 30, 2021. We continue to implement certain restructuring actions to improve our cost structure to remain competitive.
Operating earnings were $71,376 or 16.1% of net sales for the nine months ended September 30, 2022 compared to operating earnings of $58,043 or 15.3% of net sales for the nine months ended September 30, 2021. The change in operating earnings were primarily driven by the items discussed above.
Other income and expense items are summarized in the following table:
|
|
Nine Months Ended |
|
|||||
|
|
September 30, |
|
|
September 30, |
|
||
|
|
2022 |
|
|
2021 |
|
||
Interest expense |
|
$ |
(1,490 |
) |
|
$ |
(1,577 |
) |
Interest income |
|
|
610 |
|
|
|
689 |
|
Other expense, net |
|
|
(10,530 |
) |
|
|
(132,786 |
) |
Total other expense, net |
|
$ |
(11,410 |
) |
|
$ |
(133,674 |
) |
The reduction in other expense, net was primarily driven by decreased pension expense due to the U.S. pension plan termination, effective in 2021. Other expense, net for the nine months ended September 30, 2022 is primarily driven by $6,803 in excise taxes incurred as part of the U.S. pension plan termination and $1,776 in derivative losses associated with the acquisition of Ferroperm, as well as foreign currency losses primarily related to the Chinese Renminbi offset partially by income from the U.S. pension plan investments realized prior to the final termination.
|
|
Nine Months Ended |
|
|||||
|
|
September 30, |
|
|
September 30, |
|
||
|
|
2022 |
|
|
2021 |
|
||
Effective tax rate |
|
|
25.6 |
% |
|
|
32.5 |
% |
Our effective income tax rate was 25.6% and 32.5% for the nine months ended September 30, 2022 and 2021, respectively. The decrease in our effective income tax rate is primarily attributed to a one-time non-cash settlement expense related to the termination of the U.S. pension plan made in the second and third quarters of 2021.
Liquidity and Capital Resources
We have historically funded our capital and operating needs primarily through cash flows from operating activities, supported by available credit under our Revolving Credit Facility (as defined below). We believe that cash flows from operating activities and available borrowings under our Revolving Credit Facility will be adequate to fund our working capital needs, capital expenditures,
30
investments, and debt service requirements for at least the next twelve months and for the foreseeable future thereafter. However, we may choose to pursue additional equity and debt financing to provide additional liquidity or to fund acquisitions.
Cash and cash equivalents were $147,908 at September 30, 2022, and $141,465 at December 31, 2021, of which $96,180 and $124,635, respectively, were held outside the United States. Total long-term debt was $85,478 as of September 30, 2022 and $50,000 as of December 31, 2021. Total debt as a percentage of total capitalization, defined as long-term debt as a percentage of total debt and shareholders' equity, was 14.8% at September 30, 2022, compared to 9.7% at December 31, 2021.
Cash Flow Overview
Cash Flows from Operating Activities
Net cash provided by operating activities was $95,739 during the nine months ended September 30, 2022. Components of net cash provided by operating activities included net earnings of $44,635, depreciation and amortization expense of $21,727, other net non-cash items of $7,821, and a net cash inflow from changes in assets and liabilities of $21,556 primarily driven by $34,016 received from the U.S. pension plan termination.
Cash Flows from Investing Activities
Net cash used in investing activities for the nine months ended September 30, 2022 was $105,788, driven by the acquisition payments for the TEWA and Ferroperm acquisitions of $96,528 and capital expenditures of $9,260. See Note 3 "Business Acquisitions" in the Notes to the Condensed Consolidated Financial Statements.
Cash Flows from Financing Activities
Net cash provided by financing activities for the nine months ended September 30, 2022 was $15,623. The net cash inflow was the result of net cash from debt of $35,478 associated with recently completed acquisitions, partially offset by treasury stock purchases of $13,446, dividends paid of $3,855, taxes paid on behalf of equity award participants of $1,504, and contingent consideration payments of $1,050.
Capital Resources
Revolving Credit Facility
Long‑term debt is comprised of the following:
|
|
As of |
|
|||||
|
|
September 30, |
|
|
December 31, |
|
||
|
|
2022 |
|
|
2021 |
|
||
Total credit facility |
|
$ |
400,000 |
|
|
$ |
400,000 |
|
Balance outstanding |
|
|
85,478 |
|
|
|
50,000 |
|
Standby letters of credit |
|
|
1,640 |
|
|
|
1,740 |
|
Amount available, subject to covenant restrictions |
|
$ |
312,882 |
|
|
$ |
348,260 |
|
On December 15, 2021, we entered into a second amended and restated five-year credit agreement with a group of banks (the “Revolving Credit Facility”) to (i) increase the total credit facility availability to $400,000, which may be increased by $200,000 at the request of the Company, subject to the administrative agent's approval, (ii) extend the maturity of the Revolving Credit Facility from February 12, 2024 to December 15, 2026, (iii) replace LIBOR with SOFR as the primary reference rate used to calculate interest on the loans under the Revolving Credit Facility, (iv) increase available sublimits for letters of credit, and swingline loans as well as providing for additional alternative currency borrowing capabilities, and (v) modify the financial and non-financial covenants to provide the Company additional flexibility. This new unsecured credit facility replaced the prior $300,000 unsecured credit facility, which would have expired February 12, 2024.
Borrowings in U.S. Dollars under the Revolving Credit Facility bear interest, at a per annum rate equal to the applicable Term SOFR rate (but not less than 0.0%), plus the Term SOFR adjustment, and plus an applicable margin, which ranges from 1.00% to 1.75%, based on our net leverage ratio. Similarly, borrowings of alternative currencies under the Revolving Credit Facility bear interest equal to a
31
defined risk-free reference rate, plus the applicable risk-free rate adjustment and plus an applicable margin, which ranges from 1.00% to 1.75%, based on our net leverage ratio.
The Revolving Credit Facility includes a swing-line sublimit of $20,000 and a letter of credit sublimit of $20,000. We also pay a quarterly commitment fee on the unused portion of the Revolving Credit Facility. The commitment fee ranges from 0.175% to 0.25% based on our net leverage ratio. We were in compliance with all debt covenants at September 30, 2022.
Acquisitions
On February 28, 2022, we acquired TEWA, a designer and manufacturer of high-quality temperature sensors. The net cash payment of $24,485 for this acquisition was funded by the Company's cash on hand.
On June 30, 2022, we acquired Ferroperm, a designer and manufacturer of high performance piezoceramic components for use in complex and demanding medical, industrial, and aerospace applications. The net cash payment of $72,043 for this acquisition was funded by a combination of cash on hand and borrowings under our Revolving Credit Facility.
Critical Accounting Policies and Estimates
The Company’s Condensed Consolidated Financial Statements are prepared in accordance with U.S. GAAP. In connection with the preparation of the condensed consolidated financial statements, the Company uses estimates and makes judgments and assumptions about future events that affect the reported amounts of assets, liabilities, revenue, expenses, and the related disclosures. The assumptions, estimates, and judgments are based on historical experience, current trends, and other factors the Company believes are relevant at the time it prepares the Condensed Consolidated Financial Statements.
The critical accounting policies and estimates are consistent with those discussed in Note 1, Summary of Significant Accounting Policies, to the Consolidated Financial Statements and the MD&A section of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. During and as of the three and nine months ended September 30, 2022, there were no significant changes in the application of critical accounting policies or estimates.
Significant Customers
Our net sales to customers representing at least 10% of total net sales is as follows:
|
|
Three months ended |
|
|
Nine months ended |
|
||||||||||
|
|
September 30, 2022 |
|
|
September 30, 2021 |
|
|
September 30, 2022 |
|
|
September 30, 2021 |
|
||||
Cummins Inc. |
|
|
15.6 |
% |
|
|
14.3 |
% |
|
|
16.1 |
% |
|
|
14.8 |
% |
Toyota Motor Corporation |
|
|
11.6 |
% |
|
|
10.0 |
% |
|
|
11.5 |
% |
|
|
12.3 |
% |
No other customer accounted for 10% or more of total net sales during these periods. We continue to focus on broadening our customer base to diversify our non-transportation end market exposure.
Forward‑Looking Statements
This document contains statements that are, or may be deemed to be, forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, any financial or other guidance, statements that reflect our current expectations concerning future results and events, and any other statements that are not based solely on historical fact. Forward-looking statements are based on management’s expectations, certain assumptions and currently available information. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof and are based on various assumptions as to future events, the occurrence of which necessarily are subject to uncertainties. These forward-looking statements are made subject to certain risks, uncertainties and other factors, which could cause CTS’ actual results, performance or achievements to differ materially from those presented in the forward-looking statements. Examples of factors that may affect future operating results and financial condition include, but are not limited to: the ultimate impact of the COVID-19
32
pandemic on CTS’ business, results of operations or financial condition; changes in the economy generally, including recessionary conditions, and in respect to the business in which CTS operates; unanticipated issues in integrating acquisitions; the results of actions to reposition CTS’ business; rapid technological change; general market conditions in the transportation, as well as conditions in the industrial, aerospace and defense, and medical markets; reliance on key customers; unanticipated public health crises, natural disasters or other events; environmental compliance and remediation expenses; the ability to protect CTS’ intellectual property; pricing pressures and demand for CTS’ products; and risks associated with CTS’ international operations, including trade and tariff barriers, exchange rates and political and geopolitical risks (including, without limitation, the potential impact the conflict between Russia and Ukraine may have on our business, results of operations and financial condition). Many of these, and other risks and uncertainties, are discussed in further detail in Item 1A. of CTS’ Annual Report on Form 10-K and other filings made with the SEC. CTS undertakes no obligation to publicly update CTS’ forward-looking statements to reflect new information or events or circumstances that arise after the date hereof, including market or industry changes.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
See Item 7A, Quantitative and Qualitative Disclosures about Market Risk, of our Annual Report on Form 10-K for the year ended December 31, 2021. During the three months ended September 30, 2022, there have been no material changes in our exposure to market risk.
33
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q were effective in providing reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within CTS have been detected.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting for the quarter ended September 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
From time to time we are involved in litigation with respect to matters arising from the ordinary conduct of our business, and currently certain claims are pending against us. In the opinion of management, we believe we have established adequate accruals pursuant to U.S. generally accepted accounting principles for our expected future liability with respect to pending lawsuits, claims and proceedings, where the nature and extent of any such liability can be reasonably estimated based on presently available information. However, there can be no assurance that the final resolution of any existing or future lawsuits, claims or proceedings will not have a material adverse effect on our business, results of operations, financial condition, or cash flows.
See Note 11 "Commitments and Contingencies" in the Notes to the Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q.
Item 1A. Risk Factors
There have been no significant changes to our risk factors from those contained in our Annual Report on Form 10-K for the year ended December 31, 2021.
34
Item 2. Unregistered Sales of Equity
On May 13, 2021, the Board of Directors authorized a stock repurchase program with a maximum dollar limit of $50 million. This program authorizes us to make repurchases of our common stock from time to time on the open market, but does not obligate us to make repurchases, and it has no expiration date.
|
|
|
|
|
|
|
|
Total Number |
|
|
Maximum Dollar |
|
||||
|
|
|
|
|
|
|
|
of Shares |
|
|
Value of Shares |
|
||||
|
|
|
|
|
|
|
|
Purchased as |
|
|
That May Yet Be |
|
||||
|
|
Total Number |
|
|
|
|
|
Part of Publicly |
|
|
Purchased Under |
|
||||
|
|
of Shares |
|
|
Average Price |
|
|
Announced |
|
|
Publicly Announced |
|
||||
|
|
Purchased |
|
|
Paid per Share |
|
|
Programs |
|
|
Plans or Programs |
|
||||
July 1, 2022 through July 31, 2022 |
|
|
46,400 |
|
|
$ |
33.58 |
|
|
|
46,400 |
|
|
$ |
27,988 |
|
August 1, 2022 through August 31, 2022 |
|
|
5,600 |
|
|
$ |
39.22 |
|
|
|
5,600 |
|
|
$ |
27,768 |
|
September 1, 2022 through September 30, 2022 |
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
27,768 |
|
Total |
|
|
52,000 |
|
|
|
|
|
|
52,000 |
|
|
|
|
||
35
Item 6. Exhibits
|
|
(31)(a) |
Certification pursuant to Section 302 of the Sarbanes‑Oxley Act of 2002. |
|
|
(31)(b) |
Certification pursuant to Section 302 of the Sarbanes‑Oxley Act of 2002. |
|
|
(32)(a) |
|
|
|
(32)(b) |
|
|
|
101.1 |
The following information from CTS Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2022 formatted in Inline XBRL: (i) Condensed Consolidated Statements of Earnings (Loss); (ii) Condensed Consolidated Statements of Comprehensive Earnings; (iii) Condensed Consolidated Balance Sheets; (iv) Condensed Consolidated Statements of Cash Flows; (v) Condensed Consolidated Statements of Shareholders’ Equity; (vi) Notes to Condensed Consolidated Financial Statements, tagged as blocks of text and including detailed tags. |
|
|
104 |
The cover page from this Current Report on Form 10-Q formatted as inline XBRL |
|
|
|
|
|
|
36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CTS Corporation |
|
CTS Corporation |
|
|
|
/s/ Thomas M. White |
|
/s/ Ashish Agrawal |
Thomas M. White |
|
Ashish Agrawal |
Corporate Controller (Principal Accounting Officer) |
|
Vice President and Chief Financial Officer (Principal Financial Officer) |
|
|
|
|
|
|
Dated: October 26, 2022 |
|
Dated: October 26, 2022 |
37
