UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended June 30, 2022
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
Commission File Number: 1-4639
CTS CORPORATION
(Exact name of registrant as specified in its charter)
IN
35-0225010
(State or other jurisdiction of
incorporation or organization)
(IRS Employer
Identification Number)
4925 Indiana Avenue
Lisle IL
60532
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code: (630) 577-8800
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol(s)
Name of Each Exchange on Which Registered
Common stock, without par value
CTS
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13 (a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of July 21, 2022: 31,865,314.
CTS CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1.
Financial Statements
3
Condensed Consolidated Statements of Earnings (Unaudited) For the Three and Six Months Ended June 30, 2022 and June 30, 2021
Condensed Consolidated Statements of Comprehensive Earnings (Unaudited) For the Three and Six Months Ended June 30, 2022 and June 30, 2021
4
Condensed Consolidated Balance Sheets As of June 30, 2022 (Unaudited) and December 31, 2021
5
Condensed Consolidated Statements of Cash Flows (Unaudited) For the Six Months Ended June 30, 2022 and June 30, 2021
6
Condensed Consolidated Statements of Shareholders’ Equity (Unaudited) For the Three and Six Months Ended June 30, 2022 and June 30, 2021
7
Notes to Condensed Consolidated Financial Statements ‑ (Unaudited)
9
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
26
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
32
Item 4.
Controls and Procedures
33
PART II. OTHER INFORMATION
Legal Proceedings
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
34
Item 6.
Exhibits
35
SIGNATURES
36
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS - UNAUDITED
(In thousands of dollars, except per share amounts)
Three Months Ended
Six Months Ended
June 30,
2022
2021
Net sales
$
144,982
129,585
292,677
258,012
Cost of goods sold
93,134
81,889
186,489
167,725
Gross margin
51,848
47,696
106,188
90,287
Selling, general and administrative expenses
22,238
20,937
44,026
39,262
Research and development expenses
6,294
6,029
12,488
11,716
Restructuring charges
630
151
942
232
Operating earnings
22,686
20,579
48,732
39,077
Other (expense) income:
Interest expense
(602
)
(508
(1,148
(1,063
Interest income
263
257
443
459
Other expense, net
(5,425
(20,929
(5,359
(24,285
Total other expense, net
(5,764
(21,180
(6,064
(24,889
Earnings (loss) before income taxes
16,922
(601
42,668
14,188
Income tax expense (benefit)
4,324
(1,476
9,831
1,323
Net earnings
12,598
875
32,837
12,865
Earnings per share:
Basic
0.39
0.03
1.02
0.40
Diluted
Basic weighted – average common shares outstanding:
32,039
32,397
32,096
32,358
Effect of dilutive securities
204
229
218
259
Diluted weighted – average common shares outstanding:
32,243
32,626
32,314
32,617
Cash dividends declared per share
0.04
0.08
See notes to unaudited condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS ‑ UNAUDITED
(In thousands of dollars)
Other comprehensive earnings (loss):
Changes in fair market value of derivatives, net of tax
705
268
1,940
392
Changes in unrealized pension cost, net of tax
2,082
17,024
2,176
18,446
Cumulative translation adjustment, net of tax
(2,012
1
(2,261
13
Other comprehensive earnings
775
17,293
1,855
18,851
Comprehensive earnings
13,373
18,168
34,692
31,716
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
December 31,
ASSETS
Current Assets
Cash and cash equivalents
98,739
141,465
Accounts receivable, net
98,949
82,191
Inventories, net
64,158
49,506
Other current assets
16,704
15,927
Total current assets
278,550
289,089
Property, plant and equipment, net
99,637
96,876
Operating lease assets, net
22,452
21,594
Other Assets
Prepaid pension asset
33,860
49,382
Goodwill
139,617
109,798
Other intangible assets, net
112,824
69,888
Deferred income taxes
23,401
25,415
Other
19,293
2,420
Total other assets
328,995
256,903
Total Assets
729,634
664,462
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Accounts payable
60,662
55,537
Operating lease obligations
3,612
3,393
Accrued payroll and benefits
14,931
18,418
Accrued expenses and other liabilities
36,171
36,718
Total current liabilities
115,376
114,066
Long-term debt
91,027
50,000
Long-term operating lease obligations
21,851
21,354
Long-term pension obligations
6,361
6,886
6,174
5,894
Other long-term obligations
2,898
2,684
Total Liabilities
243,687
200,884
Commitments and Contingencies (Note 11)
Shareholders’ Equity
Common stock
316,502
314,620
Additional contributed capital
42,585
42,549
Retained earnings
522,506
492,242
Accumulated other comprehensive loss
(2,670
(4,525
Total shareholders’ equity before treasury stock
878,923
844,886
Treasury stock
(392,976
(381,308
Total shareholders’ equity
485,947
463,578
Total Liabilities and Shareholders’ Equity
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS ‑ UNAUDITED
CASH FLOWS FROM OPERATING ACTIVITIES:
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization
13,765
13,512
Non-cash inventory charges
1,113
—
Pension and other post-retirement plan expense
182
23,823
Stock-based compensation
3,566
3,122
1,277
(4,875
Gain on foreign currency hedges, net of cash
(12
(26
Changes in assets and liabilities, net of acquisitions:
Accounts receivable
(12,861
316
Inventories
(7,177
(2,994
Operating lease assets
1,515
131
Other assets
2,513
(1,440
5,087
(3,433
(4,458
1,145
Operating lease liabilities
(1,658
(143
93
(3,028
Pension and other post-retirement plans
(430
(190
Net cash provided by operating activities
35,352
38,785
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures
(6,991
(3,970
Payments for acquisitions, net of cash acquired
(96,528
(255
Net cash used in investing activities
(103,519
(4,225
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long-term debt
(300,000
(430,300
Proceeds from borrowings of long-term debt
341,027
425,700
Purchase of treasury stock
(11,668
Dividends paid
(2,576
(2,585
Payments of contingent consideration
(900
(350
Taxes paid on behalf of equity award participants
(1,491
(1,480
Net cash provided by (used in) financing activities
24,392
(9,015
Effect of exchange rate changes on cash and cash equivalents
1,049
79
Net (decrease) increase in cash and cash equivalents
(42,726
25,624
Cash and cash equivalents at beginning of period
91,773
Cash and cash equivalents at end of period
117,397
Supplemental cash flow information:
Cash paid for interest
969
716
Cash paid for income taxes, net
7,606
7,516
Non-cash financing and investing activities:
Capital expenditures incurred but not paid
1,397
1,288
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - UNAUDITED
(in thousands of dollars)
The following summarizes the changes in total equity for the three and six months ended June 30, 2022:
CommonStock
AdditionalContributed Capital
RetainedEarnings
AccumulatedOther Comprehensive Loss
TreasuryStock
Total
Balances at December 31, 2021
20,239
1,235
94
(249
Cash dividends of $0.04 per share
(1,284
Acquired 116,176 shares of treasury stock
(3,920
Issued shares on vesting of restricted stock units
1,876
(3,289
(1,413
Stock compensation
1,898
Balances at March 31, 2022
316,496
41,158
511,197
(3,445
(385,228
480,178
(1,289
Acquired 216,252 shares of treasury stock
(7,748
(84
(78
1,511
Balances at June 30, 2022
The following summarizes the changes in total equity for the three and six months ended June 30, 2021:
Balances at December 31, 2020
311,190
41,654
539,281
(95,921
(372,522
423,682
11,990
124
1,422
12
(1,294
1,818
(3,218
(1,400
1,180
Balances at March 31, 2021
313,008
39,616
549,977
(94,363
435,716
(1,299
1,333
(80
1,804
Balances at June 30, 2021
314,341
40,007
549,553
(77,070
454,309
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(in thousands except for share and per share data)
June 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 June 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.
Disaggregated Revenue
The following table presents revenues disaggregated by the major markets we serve:
Three months ended
Six months ended
June 30, 2021
Transportation
74,690
71,556
153,824
147,410
Industrial
41,402
32,448
81,409
62,075
Medical
17,030
12,802
32,897
24,078
Aerospace & Defense
11,860
12,779
24,547
24,449
NOTE 3 – Business Acquisitions
TEWA Temperature Sensors SP. Zo.o. Acquisition
On February 28, 2022, we acquired 100% of the outstanding shares of TEWA Temperature Sensors SP. Zo.o. (“TEWA”). TEWA is a designer and manufacturer of high-quality temperature sensors. TEWA has complementary capabilities with our existing temperature sensing platform and the acquisition supports our end market diversification strategy by expanding our presence in Europe.
The purchase price, which includes assumed changes in working capital, of $24,484, net of cash acquired of $2,945, has been allocated to the fair values of assets and liabilities acquired as of February 28, 2022. The allocation of the purchase price continues to be preliminary pending the completion of the valuation of intangible assets and finalization of management's estimates. The final purchase price allocation may result in a materially different allocation than that recorded as of June 30, 2022.
The following table summarizes the consideration paid and the fair values of the assets acquired, and the liabilities assumed as of the date of acquisition:
Fair Values atFebruary 28, 2022
Current assets
6,451
Property, plant and equipment
2,177
28
6,106
Intangible assets
12,503
Fair value of assets acquired
27,265
Less fair value of liabilities acquired
(2,781
Purchase price
24,484
Goodwill represents value the Company expects to be created by combining the operations of the acquired business with the Company's operations, including the expansion of customer relationships, access to new customers, and potential cost savings and synergies. Goodwill related to the acquisition is expected to be deductible for tax purposes.
The Company recorded a $1,113 step-up of inventory to its fair value as of the acquisition date based on the preliminary valuation. The step-up is being amortized as a non-cash charge to cost of goods sold as the acquired inventory was sold with $580 recognized in the first quarter of 2022 and the remaining in the second quarter of 2022.
Intangible assets acquired have been assigned a provisional value of $12,503 and an estimated weighted average amortization period of 12 years. They are included as customer lists/relationships in our Condensed Consolidated Balance Sheets and subsequent notes. Due to the timing of the acquisition, the identification and valuation of all intangible assets remains incomplete; however, management used
10
historical experience and projections to estimate the potential value at June 30, 2022. The amount and assumptions included above remain an estimate that will be adjusted once purchase accounting is complete.
Ferroperm Piezoceramics A/S Acquisition
On June 30, 2022, we acquired 100% of the outstanding shares of Ferroperm Piezoceramics A/S (“Ferroperm”). Ferroperm specializes in the design and manufacture of high performance piezoceramic components for use in complex and demanding medical, industrial, and aerospace applications. Ferroperm has complementary capabilities with our existing medical diagnostics and imaging product lines. The acquisition supports our end market diversification strategy and expanding our presence in European end markets.
The purchase price of $72,044, which includes assumed changes in working capital, net of cash acquired of $5,578, has been allocated to the fair values of assets and liabilities acquired as of June 30, 2022. The allocation of the purchase price continues to be preliminary pending the completion of the valuation of intangible assets and finalization of management's estimates. The final purchase price allocation may result in a materially different allocation than that recorded as of June 30, 2022.
Fair Values atJune 30, 2022
Accounts Receivable
3,073
Inventory
6,848
1,001
3,953
158
24,285
36,393
75,711
(3,667
72,044
The Company recorded a $3,012 step-up of inventory to its fair value as of the acquisition date based on the preliminary valuation. The step-up will be amortized as a non-cash charge to cost of goods sold as the acquired inventory is sold.
Intangible assets acquired have been assigned a provisional value of $36,393 and an estimated weighted average amortization period of 12 years. They are included as customer lists/relationships in our Condensed Consolidated Balance Sheets and subsequent notes. Due to the timing of the acquisition, the identification and valuation of all intangible assets remains incomplete; however, management used historical experience and projections to estimate the potential value at June 30, 2022. The amount and assumptions included above remain an estimate that will be adjusted once purchase accounting is complete.
NOTE 4 – Accounts Receivable, net
The components of accounts receivable, net are as follows:
As of
Accounts receivable, gross
100,260
83,848
Less: Allowance for credit losses
(1,311
(1,657
11
NOTE 5 – Inventories, net
Inventories, net consists of the following:
Finished goods
15,476
11,955
Work-in-process
21,367
18,878
Raw materials
37,520
28,078
Less: Inventory reserves
(10,205
(9,405
NOTE 6 – Property, Plant and Equipment, net
Property, plant and equipment, net is comprised of the following:
Land and land improvements
1,100
1,095
Buildings and improvements
74,424
69,614
Machinery and equipment
250,718
247,708
Less: Accumulated depreciation
(226,605
(221,541
Depreciation expense for the six months ended June 30, 2022 and June 30, 2021 was $8,847 and $8,795, respectively.
NOTE 7 – Retirement Plans
Pension Plans
Net pension expense for our domestic and foreign plans included in other expense, net in the Condensed Consolidated Statements of Earnings is as follows:
Net pension expense
65
21,823
130
23,780
The components of net pension expense for our domestic and foreign plans include the following:
Domestic Pension Plans
Foreign Pension Plans
Service cost
Interest cost
1,218
Expected return on plan assets(1)
(1,058
(3
Amortization of loss
1,550
45
43
Settlement charges
20,063
Total expense, net
21,773
52
50
2,471
(2,171
(6
16
3,317
90
86
23,680
104
100
In February 2020, the Board of Directors authorized management to explore termination of the U.S.-based pension plan ("Plan"), subject to certain conditions. On June 1, 2020, we entered into the Fifth Amendment to the Plan whereby we set an effective termination date for the Plan of July 31, 2020. In February 2021, we received a determination letter from the Internal Revenue Service that allowed us to proceed with the termination process for the Plan. During the second quarter of 2021, the Company offered the option of receiving a lump sum payment to eligible participants with vested qualified Plan benefits in lieu of receiving monthly annuity payments. Approximately 365 participants elected to receive the settlement, and lump sum payments of approximately $35,594 were made from Plan assets to these participants in June 2021.
As required under U.S. GAAP, the Company recognizes a settlement gain or loss when the aggregate amount of lump-sum distributions to participants equals or exceeds the sum of the service and interest cost components of the net periodic pension cost. The amount of settlement gain or loss recognized is the pro rata amount of the existing unrealized gain or loss immediately prior to the settlement. In general, both the projected benefit obligation and fair value of plan assets are required to be remeasured in order to determine the settlement gain or loss.
Upon the partial settlement of the pension liability due to the lump sum offering in the second quarter of 2021, the Company recognized a non-cash and non-operating settlement charge of $20,063 related to pension losses, reclassified from accumulated other comprehensive loss to other income (expense) in the Company's Condensed Consolidated Statements of Earnings.
On July 29, 2021, the Plan purchased a group annuity contract that transferred our benefit obligations for approximately 2,700 CTS participants and beneficiaries in the United States (“Transferred Participants”). As part of the purchase of the group annuity contract, Plan benefit obligations and related annuity administration services for Transferred Participants were irrevocably assumed and guaranteed by the insurance company effective as of August 3, 2021. There will be no change to pension benefits for Transferred Participants. The purchase of the group annuity contract was fully funded directly by Plan assets.
As a result of the final settlement of the pension liability with the purchase of annuities, we reclassified the remaining related unrecognized pension losses of $106,206 that were previously recorded in accumulated other comprehensive loss to the Consolidated Statements of Earnings as a non-cash and non-operating settlement charge in the third quarter of 2021.
In January 2022, we transferred approximately $17,500 of funds from Plan assets to a qualified replacement plan (“QRP”) managed by the Company. The QRP requires that these assets be used to fund future annual Company contributions to our U.S. 401(k) program. The Plan assets of $33,860 as of June 30, 2022, will remain in the Plan until final administrative tasks are completed. This process is now expected to be completed in the third quarter of 2022, whereby the remaining Plan assets will liquidate and revert to CTS. At that time, the funds will be subject to income and excise taxes.
Other Post-retirement Benefit Plan
Net post-retirement expense for our other post-retirement plan includes the following components:
20
Amortization of gain
NOTE 8 – Goodwill and Other Intangible Assets
Other Intangible Assets
Other intangible assets, net consist of the following components:
GrossCarrying Amount
AccumulatedAmortization
Net Amount
Customer lists/relationships
144,735
(52,274
92,461
Technology and other intangibles
47,441
(27,078
20,363
192,176
(79,352
Amortization expense for the three months ended June 30, 2022
2,536
Amortization expense for the six months ended June 30, 2022
4,918
December 31, 2021
96,889
(49,213
47,676
(25,229
22,212
144,330
(74,442
Amortization expense for the three months ended June 30, 2021
2,348
Amortization expense for the six months ended June 30, 2021
4,717
Remaining amortization expense for other intangible assets as of June 30, 2022 is as follows:
Amortizationexpense
6,538
2023
11,107
2024
10,945
2025
10,723
2026
10,689
Thereafter
62,822
Total amortization expense
Changes in the net carrying amount of goodwill were as follows:
Goodwill as of December 31, 2021
Increase from acquisitions
30,381
Foreign exchange impact
(562
Goodwill as of June 30, 2022
14
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:
September 2020 Plan
In September 2020, we initiated a restructuring plan focused on optimizing our manufacturing footprint and improving operational efficiency by better utilizing our systems capabilities (the "September 2020 Plan"). This plan includes transitioning certain administrative functions to a shared service center, realignment of manufacturing locations, and certain other efficiency improvement actions. The restructuring cost of the September 2020 Plan is now estimated to be in the range of $3,500 and $4,500, including workforce reduction charges, building and equipment relocation charges and other contract and asset-related costs. We have incurred $1,555 in program costs to date. We recorded $158 in workforce reduction costs during the three and six months ended June 30, 2022 under the 2020 Plan. Due to the robust market demand and COVID-19 limitations, some projects have been delayed. The total restructuring liability associated with these actions was $158 as of June 30, 2022. There was no liability related to the September 2020 Plan as of December 31, 2021.
Other Restructuring Activities
From time to time we undertake other restructuring activities that are not part of a formal plan. During the three and six months ended June 30, 2022, we incurred restructuring charges of $470 and $782, respectively. During the three and six months ended June 30, 2021, we incurred restructuring charges of $161 and $262, respectively. The total restructuring liability associated with these actions was $723 at June 30, 2022 and $962 at December 31, 2021.
The following table displays the restructuring liability activity included in accrued expenses and other liabilities for all plans for the six months ended June 30, 2022:
Restructuring liability at January 1, 2022
962
Cost paid
(1,023
Other activity(1)
Restructuring liability at June 30, 2022
881
15
NOTE 10 – Accrued Expenses and Other Liabilities
The components of accrued expenses and other liabilities are as follows:
Accrued product related costs
2,623
3,188
Accrued income taxes
7,843
6,761
Accrued property and other taxes
2,361
2,370
Accrued professional fees
1,698
1,629
Accrued customer related liabilities
4,767
3,254
Dividends payable
1,287
1,289
Remediation reserves
11,348
10,979
Derivative liabilities
437
Other accrued liabilities
4,244
6,811
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. Two of those sites, Asheville, North Carolina and Mountain View, California, are designated National Priorities List sites under the U.S. Environmental Protection Agency’s Superfund program. We accrue a liability for probable remediation activities, claims and proceedings against us with respect to environmental matters if the amount can be reasonably estimated, and provide disclosures including the nature of a loss whenever it is probable or reasonably possible that a potentially material loss may have occurred but cannot be estimated. We record contingent loss accruals on an undiscounted basis.
A roll-forward of remediation reserves included in accrued expenses and other liabilities on the Condensed Consolidated Balance Sheets is comprised of the following:
Balance at beginning of period
10,642
Remediation expense
1,382
2,254
Net remediation payments
(1,019
(1,929
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.
NOTE 12 - Debt
Long-term debt is comprised of the following:
Total credit facility
400,000
Balance outstanding
Standby letters of credit
1,640
1,740
Amount available, subject to covenant restrictions
307,333
348,260
Weighted-average interest rate
1.57
%
1.16
On December 15, 2021, we entered into a second amended and restated five-year credit agreement with a group of banks (the “Revolving Credit Facility”) to (i) increase the total credit facility to $400,000, which may be increased by $200,000 at the request of the Company, subject to the administrative agent's approval, (ii) extend the maturity of the Revolving Credit Facility from February 12, 2024 to December 15, 2026, (iii) replace LIBOR with SOFR as the primary reference rate used to calculate interest on the loans under the Revolving Credit Facility, (iv) increase available sublimits for letters of credit, and swingline loans as well as providing for additional alternative currency borrowing capabilities, and (v) modify the financial and non-financial covenants to provide the Company additional flexibility.
Borrowings in U.S. dollars under the Revolving Credit Facility bear interest, at a per annum rate equal to the applicable Term SOFR rate (but not less than 0.0%), plus the Term SOFR adjustment, and plus an applicable margin, which ranges from 1.00% to 1.75%, based on our net leverage ratio. Similarly, borrowings of alternative currencies under the Revolving Credit Facility bear interest equal to a defined risk-free reference rate, plus the applicable risk-free rate adjustment and plus an applicable margin, which ranges from 1.00% to 1.75%, based on our net leverage ratio.
The Revolving Credit Facility includes a swing line sublimit of $20,000 and a letter of credit sublimit of $20,000. We also pay a quarterly commitment fee on the unused portion of the Revolving Credit Facility. The commitment fee ranges from 0.175% to 0.25% based on our net leverage ratio. The Revolving Credit Facility requires, in addition to customary representations and warranties, that we comply with a maximum net leverage ratio and a minimum interest coverage ratio. Failure to comply with these covenants could reduce the borrowing availability under the Revolving Credit Facility. We were in compliance with all debt covenants at June 30, 2022. The Revolving Credit Facility requires that we deliver quarterly financial statements, annual financial statements, auditor certifications, and compliance certificates within a specified number of days after the end of a quarter and year. Additionally, the Revolving Credit Facility contains restrictions limiting our ability to: dispose of assets; incur certain additional debt; repay other debt or amend subordinated debt instruments; create liens on assets; make investments, loans or advances; make acquisitions or engage in mergers or consolidations; engage in certain transactions with our subsidiaries and affiliates; and make stock repurchases and dividend payments.
We have debt issuance costs related to our long-term debt that are being amortized using the straight-line method over the life of the debt, which approximates the effective interest method. Amortization expense for the three and six months ended June 30, 2022 was $48 and $97, respectively. Amortization expense for the three and six months ended June 30, 2021 was $42 and $84, respectively. These costs are included in interest expense in our Consolidated Statements of Earnings.
Note 13 - Derivative Financial Instruments
Our earnings and cash flows are subject to fluctuations due to changes in foreign currency exchange rates and interest rates. We selectively use derivative financial instruments including foreign currency forward contracts as well as interest rate and cross-currency swaps to manage our exposure to these risks.
The use of derivative financial instruments exposes the Company to credit risk, which relates to the risk of nonperformance by a counterparty to the derivative contracts. We manage our credit risk by entering into derivative contracts with only highly rated financial institutions and by using netting agreements.
17
The effective portion of derivative gains and losses are recorded in accumulated other comprehensive loss until the hedged transaction affects earnings upon settlement, at which time they are reclassified to cost of goods sold or net sales. If it is probable that an anticipated hedged transaction will not occur by the end of the originally specified time period, we reclassify the gains or losses related to that hedge from accumulated other comprehensive loss to other income (expense), net.
We assess hedge effectiveness qualitatively by verifying that the critical terms of the hedging instrument and the forecasted transaction continue to match, and that there have been no adverse developments that have increased the risk that the counterparty will default. No recognition of ineffectiveness was recorded in our Condensed Consolidated Statements of Earnings for the three and six months ended June 30, 2022.
Foreign Currency Hedges
We use forward contracts to mitigate currency risk related to a portion of our forecasted foreign currency revenues and costs. The currency forward contracts are designed as cash flow hedges and are recorded in the Condensed Consolidated Balance Sheets at fair value.
We continue to monitor the Company’s overall currency exposure and may elect to add cash flow hedges in the future. At June 30, 2022, we had a net unrealized gain of $401 in accumulated other comprehensive (loss) income, all of which is expected to be reclassified to earnings within the next 12 months. The notional amount of foreign currency forward contracts outstanding was $9,379 at June 30, 2022.
Interest Rate Swaps
We use interest rate swaps to convert a portion of our Revolving Credit Facility’s outstanding balance from a variable rate of interest to a fixed rate. As of June 30, 2022, we have agreements to fix interest rates on $50,000 of long-term debt until December 2026. The difference to be paid or received under the terms of the swap agreements will be recognized as an adjustment to interest expense when settled.
These swaps are treated as cash flow hedges and consequently, the changes in fair value are recorded in other comprehensive (loss) income. The estimated net amount of the existing gains that are reported in accumulated other comprehensive (loss) income that are expected to be reclassified into earnings within the next twelve months is approximately $523.
Cross-Currency Swap
The Company has operations and investments in various international locations and is subject to risks associated with changing foreign exchange rates. On June 27, 2022, the Company entered into a cross currency interest rate swap agreement that synthetically swapped $25,000 of variable rate debt to Krone denominated variable rate debt. Upon completion of the Ferroperm acquisition on June 30, 2022, the transaction was designated as a net investment hedge for accounting purposes and will mature on June 30, 2027.
Accordingly, any gains or losses on this derivative instrument will be included in the foreign currency translation component of other comprehensive income until the net investment is sold, diluted or liquidated. Interest payments received for the cross currency swap are excluded from the net investment hedge effectiveness assessment and are recorded in interest expense in the Condensed Consolidated Statements of Earnings. The assumptions used in measuring fair value of the cross currency swap are considered level 2 inputs, which are based upon the Krone to United States Dollar exchange rate market.
Prior to designation as a net investment hedge, a gain of $111 was recorded in other expense within the Condensed Consolidated Statements of Earnings for three and six months ended June 30, 2022.
18
The location and fair values of derivative instruments designated as hedging instruments in the Condensed Consolidated Balance Sheets as of June 30, 2022, are shown in the following table:
Interest rate swaps reported in Other current assets
679
Interest rate swaps reported in Other assets
684
Interest rate swaps reported in Accrued Expenses and other liabilities
(437
Interest rate swaps reported in Other long-term obligations
(353
Foreign currency hedges reported in Other current assets
514
135
Net investment hedge reported in Other assets
111
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 $514 and foreign currency derivative liabilities of $0 at June 30, 2022.
The effect of derivative instruments on the Condensed Consolidated Statements of Earnings is as follows:
Foreign Exchange Contracts:
Amounts reclassified from AOCI to earnings:
162
329
308
550
Total gain reclassified from AOCI to earnings
Total derivative gain on foreign exchange contracts recognized in earnings
Interest Rate Swaps:
Income (expense) recorded in Interest expense
(101
(187
(273
(363
Total net gains on derivatives
61
142
187
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 acquisition. As a result of these contracts, the Company recognized a $1,776 loss in other expense in the Condensed Consolidated Statements of Earnings.
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:
19
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 six months ended June 30, 2022 were $3,817 and $3,529, respectively. Transaction losses and (gains) for the three and six months ended June 30, 2021 were $928 and $(401), respectively. The impact of these changes have been included in other income (expense) in the Condensed Consolidated Statements of Earnings.
The components of accumulated other comprehensive loss for the three months ended June 30, 2022 are as follows:
(Gain) Loss
Gain (Loss)
Reclassified
March 31,
Recognized
from AOCI
in OCI
to Earnings
Changes in fair market value of derivatives:
Gross
976
(61
1,884
Income tax benefit (expense)
(221
(224
(431
Net
748
752
(47
1,453
Changes in unrealized pension cost:
(2,624
1,977
143
(504
712
(38
674
(1,912
105
170
Cumulative translation adjustment:
(2,281
(4,293
Total accumulated other comprehensive (loss) income
717
58
The components of accumulated other comprehensive loss for the three months ended June 30, 2021, are as follows:
(877
490
(142
(529
Income tax (expense) benefit
203
(113
123
(674
377
(109
(406
(126,157
499
21,606
(104,052
34,492
(115
(4,966
29,411
(91,665
384
16,640
(74,641
(2,024
(2,023
762
16,531
The components of accumulated other comprehensive loss for the six months ended June 30, 2022, are as follows:
(635
2,554
(35
147
(587
(488
1,967
(2,744
738
(64
(2,006
199
(2,032
(4,526
1,683
173
The components of accumulated other comprehensive loss for the six months ended June 30, 2021, are as follows:
Gain
2020
(1,038
696
240
(160
(798
536
(144
(128,004
23,453
34,917
(5,391
(93,087
18,062
(2,036
933
17,918
NOTE 15 – Shareholders’ Equity
Share count and par value data related to shareholders’ equity are as follows:
Preferred Stock
Par value per share
No par value
Shares authorized
25,000,000
Shares outstanding
Common Stock
75,000,000
Shares issued
57,310,174
57,245,060
31,911,401
32,178,715
Shares held
25,398,773
25,066,345
21
On May 13, 2021, the Board of Directors approved a new share repurchase program that authorizes the Company to repurchase up to $50,000 of the Company’s common stock. The repurchase program has no set expiration date and replaces the repurchase program approved by the Board of Directors on February 7, 2019. During the three and six months ended June 30, 2022, 216,252 and 332,428 shares of common stock were repurchased for $7,748 and $11,668, respectively. During the three and six months ended June 30, 2021, there were no shares of common stock that were repurchased. As of June 30, 2022, approximately $29,546 remains available for future purchases.
A roll-forward of common shares outstanding is as follows:
Balance at the beginning of the year
32,276,787
Repurchases
(332,428
Restricted share issuances
65,114
158,969
Balance at the end of the period
32,435,756
Certain potentially dilutive restricted stock units are excluded from diluted earnings per share because they are anti-dilutive. The number of outstanding awards that were anti-dilutive for the three months ended June 30, 2022 and 2021 were 2,500 and 93, respectively. The number of outstanding awards that were anti-dilutive for the six months ended June 30, 2022 and 2021 were 2,500 and 46,810, respectively
NOTE 16- Stock-Based Compensation
At June 30, 2022, we had five active stock-based compensation plans: the Non-Employee Directors’ Stock Retirement Plan (“Directors’ Plan”), the 2004 Omnibus Long-Term Incentive Plan (“2004 Plan”), the 2009 Omnibus Equity and Performance Incentive Plan (“2009 Plan”), the 2014 Performance and Incentive Compensation Plan (“2014 Plan”), and the 2018 Equity and Incentive Compensation Plan ("2018 Plan"). Future grants can only be made under the 2018 Plan.
These plans allow for grants of stock options, stock appreciation rights, restricted stock, restricted stock units ("RSUs"), performance shares, performance units, and other stock awards subject to the terms of the specific plans under which the awards are granted.
The following table summarizes the compensation expense included in selling, general and administrative expenses in the Condensed Consolidated Statements of Earnings related to stock-based compensation plans:
Service-based RSUs
691
1,368
1,425
Performance-based RSUs
820
1,066
2,041
1,559
Cash-settled RSUs
99
157
138
1,616
1,903
Income tax benefit
372
438
718
Net expense
1,244
1,465
2,746
2,404
22
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
Period (years)
2,711
1.44
5,117
1.89
7,828
1.73
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 June 30, 2022:
2018 Plan
2014 Plan
2009 Plan
2004 Plan
Directors'Plan
Awards originally available
2,500,000
1,500,000
3,400,000
6,500,000
N/A
Maximum potential awards outstanding
716,826
35,100
45,200
14,545
4,722
RSUs and cash settled awards vested and released
117,828
Awards available for grant
1,665,346
Service-Based Restricted Stock Units
The following table summarizes the service-based RSU activity for the three months ended June 30, 2022:
Units
WeightedAverage Grant Date Fair Value
Outstanding at December 31, 2021
283,216
24.91
Granted
68,124
33.70
Vested and released
(58,144
29.96
Forfeited
(7,838
30.35
Outstanding at June 30, 2022
285,358
25.83
Releasable at June 30, 2022
132,834
17.55
Performance and Market-Based Restricted Stock Units
The following table summarizes the performance and market-based RSU activity for the three months ended June 30, 2022:
237,767
31.35
81,702
37.15
Attained by performance
5,136
29.50
Released
(51,848
30.64
(14,351
32.62
258,406
33.20
23
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 June 30, 2022 and December 31, 2021, we had 46,524 and 32,085 cash-settled RSUs outstanding, respectively. At June 30, 2022 and December 31, 2021, liabilities of $299 and $400, respectively, were included in accrued expenses and other liabilities on our Condensed Consolidated Balance Sheets.
NOTE 17 — Fair Value Measurements
The table below summarizes our financial assets and liabilities that were measured at fair value on a recurring basis at June 30, 2022:
Asset (Liability) CarryingValue atJune 30,2022
Quoted Pricesin ActiveMarkets forIdentical(Level 1)
SignificantOtherObservableInputs(Level 2)
SignificantUnobservableInputs(Level 3)
Interest rate swaps
1,363
Foreign currency hedges
Cross-currency swap
Qualified replacement plan assets
16,149
Contingent consideration
(300
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 CarryingValue atDecember 31,2021
(790
(1,200
We use interest rate swaps to convert a portion of our Revolving Credit Facility’s outstanding balance from a variable rate of interest into a fixed rate and foreign currency forward contracts to hedge the effect of foreign currency changes on certain revenues and costs denominated in foreign currencies. The Company entered into a cross currency swap agreement in order to manage its exposure to changes in interest rates related to foreign debt. These derivative financial instruments are measured at fair value on a recurring basis. The fair value of our interest rate swaps and foreign currency hedges were measured using standard valuation models using market-based observable inputs over the contractual terms, including forward yield curves, among others. There is a readily determinable market for these derivative instruments, but that market is not active and therefore they are classified within Level 2 of the fair value hierarchy.
The fair value of the contingent consideration requires significant judgment. The Company's fair value estimates used in the contingent consideration valuation are considered Level 3 fair value measurements. The fair value estimates were based on assumptions management believes to be reasonable, but that are inherently uncertain, including estimates of future revenues and timing of events and activities that are expected to take place.
A roll-forward of the contingent consideration is as follows:
24
ContingentConsideration
Balance at December 31, 2021
1,200
Settled in cash
Balance at June 30, 2022 in accrued expenses and other liabilities
300
Our long-term debt consists of the Revolving Credit Facility, which is recorded at its carrying value. There is a readily determinable market for our long-term debt and it is classified within Level 2 of the fair value hierarchy as the market is not deemed to be active. The fair value of long-term debt approximates carrying value and was determined by valuing a similar hypothetical coupon bond and attributing that value to our long-term debt under the Revolving Credit Facility.
The QRP assets consist of investment funds maintained for future contributions to the Company’s U.S. 401(k) program. See Note 7 for further information on the QRP. The investments are Level 1 marketable securities and are recorded in Other assets on our Condensed Consolidated Balance Sheets.
NOTE 18 — Income Taxes
The effective tax rates for the three and six months ended June 30, 2022 and 2021 are as follows:
Effective tax rate
25.6
245.6
23.0
9.3
Our effective income tax rate was 25.6% and 245.6% in the second quarters of 2022 and 2021, respectively. The decrease in effective income tax is primarily attributed to a one-time non-cash settlement expense related to lump sum payments for the CTS Corporation U.S. pension plan that occurred in the second quarter of 2021. The second quarter 2022 effective income tax rate was higher than the U.S. statutory federal tax rate primarily due to the impact of foreign withholding taxes and state taxes. The second quarter 2021 effective tax rate was higher, primarily due to the one-time non-cash settlement expense in the U.S. pension plan outlined above.
Our effective income tax rate was 23.0% and 9.3% in the first half of 2022 and 2021, respectively. The increase is primarily attributed to a one-time non-cash settlement expense related to lump sum payments made for the CTS Corporation U.S. pension plan that occurred in Q2 2021. The tax rate in the first half of 2022 was higher than the U.S. statutory federal tax rate primarily due to the impact of foreign withholding taxes and state taxes. The tax rate in the first half of 2021 was lower than the U.S. statutory federal tax rate, primarily due to the one-time non-cash settlement expense in the U.S. pension plan outlined above.
25
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 $24,484. 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 $72,044. 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 Europe 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.
Results of Operations: Second Quarter 2022 versus Second Quarter 2021
The following table highlights changes in significant components of the Unaudited Condensed Consolidated Statements of Earnings for the quarters ended June 30, 2022, and June 30, 2021:
Percent of
Percent
Net Sales –
Change
11.9
100.0
13.7
64.2
63.2
8.7
35.8
36.8
6.2
15.3
16.2
4.4
4.3
4.7
317.2
0.4
0.1
Total operating expenses
29,162
27,117
7.5
20.1
20.9
10.2
15.6
15.9
(72.8
(4.0
(16.3
n/a
11.7
(0.5
3.0
(1.1
0.7
Diluted net earnings per share
Net sales were $144,982 in the second quarter of 2022, an increase of $15,397 or 11.9% from the second quarter of 2021. Net sales to non-transportation markets increased $12,263 or 21.1% while net sales to transportation markets increased $3,134 or 4.4%. The TEWA acquisition, which was completed in February 2022, added $4,065 in net sales for the quarter. Changes in foreign exchange rates decreased net sales by $2,186 year-over-year primarily due to the U.S. Dollar appreciating compared to the Euro.
Gross margin as a percent of net sales was 35.8% in the second quarter of 2022 compared to 36.8% in the second quarter of 2021. The decrease in gross margin was driven primarily by increased material and freight costs. 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 $22,238 or 15.3% of net sales in the second quarter of 2022 versus $20,937 or 16.2% of net sales in the second 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 $6,294 or 4.3% of net sales in the second quarter of 2022 compared to $6,029 or 4.7% of net sales in the comparable quarter of 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 $630 or 0.4% of net sales in the second quarter of 2022 compared to $151 or 0.1% of net sales in the second quarter of 2021. We continue to implement certain restructuring actions to improve our cost structure to remain competitive.
Operating earnings were $22,686 or 15.6% of net sales in the second quarter of 2022 compared to operating earnings of $20,579 or 15.9% of net sales in the second quarter of 2021. The change in operating earnings were primarily driven by the items discussed above.
27
Other income and expense items are summarized in the following table:
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 2022 is primarily driven by $1,776 in derivative losses associated with the acquisition of Ferroperm as well as foreign currency losses primarily related to the Chinese Renminbi.
Our effective income tax rate was 25.6% and 245.6% in the second quarters of 2022 and 2021, respectively. The decrease in effective income tax is primarily attributed to a one-time non-cash settlement expense related to lump sum payments for the CTS Corporation U.S. pension plan that occurred in the second quarter of 2021.
Results of Operations: Six Months ended June 30, 2022 versus Six Months Ended June 30, 2021
The following table highlights changes in significant components of the Unaudited Condensed Consolidated Statements of Earnings for the six months ended June 30, 2022, and June 30, 2021:
13.4
11.2
63.7
65.0
17.6
36.3
35.0
12.1
15.0
15.2
6.6
4.5
306.0
0.3
57,456
51,210
12.2
19.6
19.8
24.7
16.7
15.1
Total other (expense), net
(75.6
(2.1
(9.6
Earnings before income taxes
200.7
14.6
5.5
Income tax expense
643.1
3.4
0.5
155.2
5.0
Net sales were $292,677 in the six months ended June 30, 2022, an increase of $34,665 or 13.4% from the six months ended June 30, 2021. Net sales to non-transportation markets increased $28,251 or 25.5% while net sales to transportation markets increased $6,414 or 4.4%. The TEWA acquisition, which was completed in February 2022, added $5,504 in net sales for the year to date period. Changes in foreign exchange rates decreased net sales by $2,515 year-over-year primarily due to the U.S. Dollar appreciating compared to the Euro.
Gross margin as a percent of net sales was 36.3% for the six months ended June 30, 2022 compared to 35.0% for the six months ended June 30, 2021. The increase in gross margin was driven primarily by sales volume and mix offset by increased material and freight costs. 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 $44,026 or 15.0% of net sales for the six months ended June 30, 2022 versus $39,262 or 15.2% of net sales for the six months ended June 30, 2021. The increase in SG&A expenses was caused by expenses related to acquisition activity.
R&D expenses were $12,488 or 4.3% of net sales for the six months ended June 30, 2022 compared to $11,716 or 4.5% of net sales for the six months ended June 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 $942 or 0.3% of net sales for the six months ended June 30, 2022 compared to $232 or 0.1% of net sales for the six months ended June 30, 2021. We continue to implement certain restructuring actions to improve our cost structure to remain competitive.
Operating earnings were $48,732 or 16.7% of net sales for the six months ended June 30, 2022 compared to operating earnings of $39,077 or 15.1% of net sales for the six months ended June 30, 2021. The change in operating earnings were primarily driven by the items discussed above.
Our effective income tax rate was 23.0% and 9.3% for the six months ended June 30, 2022 and 2021, respectively. The increase is primarily attributed to a one-time non-cash settlement expense related to lump sum payments made for the CTS Corporation U.S. pension plan that occurred in Q2 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, 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 $98,739 at June 30, 2022, and $141,465 at December 31, 2021, of which $86,968 and $124,635, respectively, were held outside the United States. Total long-term debt was $91,027 as of June 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 15.8% at June 30, 2022, compared to 9.7% at December 31, 2021.
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Cash Flow Overview
Cash Flows from Operating Activities
Net cash provided by operating activities was $35,352 during the six months ended June 30, 2022. Components of net cash provided by operating activities included net earnings of $32,837, depreciation and amortization expense of $13,765, other net non-cash items of $6,126, and a net cash outflow from changes in assets and liabilities of $17,376.
Cash Flows from Investing Activities
Net cash used in investing activities for the six months ended June 30, 2022 was $(103,519), driven by the acquisition payments for the TEWA and Ferroperm acquisitions of $96,528 and capital expenditures of $6,991. 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 six months ended June 30, 2022 was $24,392. The net cash inflow was the result of treasury stock purchases of $11,668, dividends paid of $2,576, taxes paid on behalf of equity award participants of $1,491, and contingent consideration payments of $900.
Capital Resources
Revolving Credit Facility
Long‑term debt is comprised of the following:
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 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 June 30, 2022.
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Acquisitions
On February 28, 2022, we acquired TEWA, a designer and manufacturer of high-quality temperature sensors. The net cash payment of $24,484 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 $72,044 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 six months ended June 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:
Cummins Inc.
14.3
Toyota Motor Corporation
11.3
13.3
11.4
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 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
31
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 June 30, 2022, there have been no material changes in our exposure to market risk.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q were effective in providing reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within CTS have been detected.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting for the quarter ended June 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.
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
Part of Publicly
Purchased Under
Average Price
Announced
Publicly Announced
Purchased
Paid per Share
Programs
Plans or Programs
April 1, 2022 through April 30, 2022
50,796
34.38
35,548
May 1, 2022 through May 31, 2022
75,425
37.02
32,756
June 1, 2022 through June 30, 2022
90,031
35.65
29,546
216,252
Item 6. Exhibits
(31)(a)
Certification pursuant to Section 302 of the Sarbanes‑Oxley Act of 2002.
(31)(b)
(32)(a)
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes‑Oxley Act of 2002.
(32)(b)
101.1
The following information from CTS Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2022 formatted in Inline XBRL: (i) Condensed Consolidated Statements of Earnings; (ii) Condensed Consolidated Statements of Comprehensive Earnings; (iii) Condensed Consolidated Balance Sheets; (iv) Condensed Consolidated Statements of Cash Flows; (v) Condensed Consolidated Statements of Shareholders’ Equity; (vi) Notes to Condensed Consolidated Financial Statements, tagged as blocks of text and including detailed tags.
The cover page from this Current Report on Form 10-Q formatted as inline XBRL
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
/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: July 26, 2022