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, 2023
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
Commission File Number: 1-4639
CTS CORPORATION
(Exact name of registrant as specified in its charter)
IN
35-0225010
(State or other jurisdiction of
incorporation or organization)
(IRS Employer
Identification Number)
4925 Indiana Avenue
Lisle IL
60532
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code: (630) 577-8800
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol(s)
Name of Each Exchange on Which Registered
Common stock, without par value
CTS
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13 (a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of July 20, 2023: 31,355,377.
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, 2023 and June 30, 2022
Condensed Consolidated Statements of Comprehensive Earnings (Unaudited) For the Three and Six Months Ended June 30, 2023 and June 30, 2022
4
Condensed Consolidated Balance Sheets As of June 30, 2023 (Unaudited) and December 31, 2022
5
Condensed Consolidated Statements of Cash Flows (Unaudited) For the Six Months Ended June 30, 2023 and June 30, 2022
6
Condensed Consolidated Statements of Shareholders’ Equity (Unaudited) For the Three and Six Months Ended June 30, 2023 and June 30, 2022
7
Notes to Condensed Consolidated Financial Statements ‑ (Unaudited)
9
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
27
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
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
Item 5.
Other Information
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,
2023
2022
Net sales
$
145,182
144,982
291,176
292,677
Cost of goods sold
94,440
93,134
188,782
186,489
Gross margin
50,742
51,848
102,394
106,188
Selling, general and administrative expenses
23,694
22,238
45,673
44,026
Research and development expenses
6,721
6,294
13,307
12,488
Restructuring charges
1,895
630
2,807
942
Operating earnings
18,432
22,686
40,607
48,732
Other income (expense):
Interest expense
(818
)
(602
(1,512
(1,148
Interest income
1,072
263
2,135
443
Other income, net
(2,606
(5,425
(2,441
(5,359
Total other expense, net
(2,352
(5,764
(1,818
(6,064
Earnings before income taxes
16,080
16,922
38,789
42,668
Income tax expense
3,183
4,324
7,548
9,831
Net earnings
12,897
12,598
31,241
32,837
Earnings per share:
Basic
0.41
0.39
0.99
1.02
Diluted
0.98
Basic weighted – average common shares outstanding:
31,488
32,039
31,560
32,096
Effect of dilutive securities
197
204
224
218
Diluted weighted – average common shares outstanding:
31,685
32,243
31,784
32,314
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
830
705
1,209
1,940
Changes in unrealized pension cost, net of tax
2,082
(30
2,176
Cumulative translation adjustment, net of tax
2,159
(2,012
(2,261
Other comprehensive earnings
2,993
775
4,362
1,855
Comprehensive earnings
15,890
13,373
35,603
34,692
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
December 31,
ASSETS
Current Assets
Cash and cash equivalents
150,878
156,910
Accounts receivable, net
97,519
90,935
Inventories, net
62,556
62,260
Other current assets
18,924
15,655
Total current assets
329,877
325,760
Property, plant and equipment, net
94,956
97,300
Operating lease assets, net
25,768
22,702
Other Assets
Goodwill
155,931
152,361
Other intangible assets, net
108,717
108,053
Deferred income taxes
22,831
23,461
Other
17,826
18,850
Total other assets
305,305
302,725
Total Assets
755,906
748,487
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Accounts payable
53,119
53,211
Operating lease obligations
4,293
3,936
Accrued payroll and benefits
14,389
20,063
Accrued expenses and other liabilities
35,381
35,322
Total current liabilities
107,182
112,532
Long-term debt
77,040
83,670
Long-term operating lease obligations
24,534
21,754
Long-term pension obligations
5,017
5,048
15,780
16,010
Other long-term obligations
4,958
3,249
Total Liabilities
234,511
242,263
Commitments and Contingencies (Note 11)
Shareholders’ Equity
Common stock
319,111
316,803
Additional contributed capital
43,488
46,144
Retained earnings
575,422
546,703
Accumulated other comprehensive income (loss)
3,691
(671
Total shareholders’ equity before treasury stock
941,712
908,979
Treasury stock
(420,317
(402,755
Total shareholders’ equity
521,395
506,224
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
14,175
13,765
Non-cash inventory charges
—
1,113
Pension and other post-retirement plan expense
61
182
Stock-based compensation
3,235
3,566
Asset impairment charges
1,324
(553
1,277
Gain on foreign currency hedges, net of cash
228
(12
Changes in assets and liabilities, net of acquisitions:
Accounts receivable
(6,737
(12,861
Inventories
(349
(7,177
Operating lease assets
(3,066
1,515
Other assets
(599
2,513
1,004
5,087
(6,423
(4,458
Operating lease liabilities
3,136
(1,658
(2,017
93
Pension and other post-retirement plans
(53
(430
Net cash provided by operating activities
34,607
35,352
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures
(8,487
(6,991
Payments for acquisitions, net of cash acquired
(3,359
(96,528
Net cash used in investing activities
(11,846
(103,519
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long-term debt
(249,732
(300,000
Proceeds from borrowings of long-term debt
243,102
341,027
Purchase of treasury stock
(17,562
(11,668
Dividends paid
(2,535
(2,576
Payments of contingent consideration
(900
Taxes paid on behalf of equity award participants
(3,240
(1,491
Net cash (used in) provided by financing activities
(29,967
24,392
Effect of exchange rate changes on cash and cash equivalents
1,174
1,049
Net decrease in cash and cash equivalents
(6,032
(42,726
Cash and cash equivalents at beginning of period
141,465
Cash and cash equivalents at end of period
98,739
Supplemental cash flow information:
Cash paid for interest
1,720
969
Cash paid for income taxes, net
9,732
7,606
Non-cash financing and investing activities:
Capital expenditures incurred but not paid
1,565
1,397
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, 2023:
CommonStock
AdditionalContributed Capital
RetainedEarnings
AccumulatedOther Comprehensive Income (Loss)
TreasuryStock
Total
Balances at December 31, 2022
18,344
379
(34
1,024
Cash dividends of $0.04 per share
(1,260
Acquired 198,271 shares of treasury stock
(8,802
Issued shares on vesting of restricted stock units
1,982
(5,125
(3,143
Stock compensation
1,404
Balances at March 31, 2023
318,785
42,423
563,787
698
(411,557
514,136
(1,262
Acquired 197,716 shares of treasury stock
(8,760
326
(423
(97
1,488
Balances at June 30, 2023
The following summarizes the changes in total equity for the three and six months ended June 30, 2022:
Balances at December 31, 2021
314,620
42,549
492,242
(4,525
(381,308
463,578
20,239
1,235
94
(249
(1,284
Acquired 116,176 shares of treasury stock
(3,920
1,876
(3,289
(1,413
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
316,502
42,585
522,506
(2,670
(392,976
485,947
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(in thousands except for share and per share data)
June 30, 2023
NOTE 1 — Basis of Presentation
The accompanying condensed consolidated financial statements have been prepared by CTS Corporation (“CTS”, "we", "our", "us" or the "Company”), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations. The unaudited condensed consolidated financial statements should be read in conjunction with the financial statements, notes thereto, and other information included in the Company’s Annual Report on Form 10‑K for the year ended December 31, 2022.
The accompanying unaudited condensed consolidated financial statements reflect, in the opinion of management, all adjustments (consisting of normal recurring items) necessary for a fair statement, in all material respects, of the financial position and results of operations for the periods presented. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ materially from those estimates. The results of operations for the interim periods are not necessarily indicative of the results for the entire year.
There have been no material changes in the Company’s significant accounting policies as compared to the significant accounting policies described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.
NOTE 2 – Revenue Recognition
The core principle of Accounting Standard Codification (“ASC”) Topic 606 Revenue from Contracts with Customers is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance provides a five-step process to achieve that core principle:
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, 2023 contained a significant financing component. Differences between the amount of revenue recognized and the amount invoiced, collected from, or paid to our customers are recognized as contract assets or liabilities. Contract assets will be reviewed for impairment when events or circumstances indicate that they may not be recoverable.
To the extent the transaction price includes variable consideration, we estimate the amount of variable consideration that should be included in the transaction price utilizing the most likely amount method based on an analysis of historical experience and current facts and circumstances, which requires significant judgment. Variable consideration is included in the transaction price if, in our judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur.
Disaggregated Revenue
The following table presents revenues disaggregated by the major markets we serve:
Three months ended
Six months ended
June 30, 2022
Transportation
82,142
74,690
156,418
153,824
Industrial
32,711
41,402
73,384
81,409
Medical
17,006
17,030
34,351
32,897
Aerospace & Defense
13,323
11,860
27,023
24,547
NOTE 3 – Business Acquisitions
TEWA Temperature Sensors SP. Zo.o. Acquisition
On February 28, 2022, we acquired 100% of the outstanding shares of TEWA Temperature Sensors SP. Zo.o. (“TEWA”). TEWA is a designer and manufacturer of high-quality temperature sensors. TEWA has complementary capabilities with our existing temperature sensing platform, and the acquisition supports our end market diversification strategy and expands our presence in Europe.
The final purchase price of $23,721, net of cash acquired of $2,979, has been allocated to the fair values of assets and liabilities acquired as of February 28, 2022. The purchase price was reduced by $794 for the final settlement of net working capital during the first quarter of 2023. The following table summarizes the consideration paid, the fair values of the assets acquired, and the liabilities assumed as of the date of acquisition:
Fair Values atFebruary 28, 2022
2,521
Inventory
69
Property, plant and equipment
654
8,473
Intangible assets
13,650
Fair value of assets acquired
28,530
Less fair value of liabilities acquired
(4,809
Purchase price
23,721
Goodwill represents value the Company expects to be created by combining the operations of the acquired business with the Company's operations, including the expansion of customer relationships, access to new customers, and potential cost savings and synergies. Goodwill related to the acquisition is expected to be deductible for tax purposes.
The Company recorded a $1,180 step-up of inventory to its fair value as of the acquisition date. The step-up was amortized as a non-cash charge to cost of goods sold as the acquired inventory was sold with the full $1,180 recognized in the first half of 2022.
The following table summarizes the carrying amounts and weighted average lives of the acquired intangible assets:
CarryingValue
WeightedAverageAmortizationPeriod
Customer lists/relationships
13,000
12.0
Technology and other intangibles
650
3.0
10
Ferroperm Piezoceramics A/S Acquisition
On June 30, 2022, we acquired 100% of the outstanding shares of Ferroperm Piezoceramics A/S (“Ferroperm”). Ferroperm specializes in the design and manufacture of high performance piezoceramic components for use in complex and demanding medical, industrial, and aerospace applications. Ferroperm has complementary capabilities with our existing medical diagnostics and imaging product lines. The acquisition supports our end market diversification strategy and expands our presence in European end markets.
The final purchase price of $72,340, net of cash acquired of $5,578, has been allocated to the fair values of assets and liabilities acquired as of June 30, 2022. The valuation of intangible assets and associated deferred tax liability was finalized in the first quarter of 2023. The following table summarizes the final consideration paid, the fair values of the assets acquired, and the liabilities assumed as of the date of acquisition:
Fair Values atJune 30, 2023
3,073
6,848
1,003
3,953
158
31,985
38,100
85,120
(12,780
72,340
The Company recorded a $3,012 step-up of inventory to its fair value as of the acquisition date based on the preliminary valuation. The step-up was amortized as a non-cash charge to cost of goods sold as the acquired inventory was sold in the third and fourth quarters of 2022.
31,800
16.0
6,300
14.0
Maglab AG Acquisition
On February 6, 2023, we acquired 100% of the outstanding shares of Maglab AG ("Maglab"). Maglab has deep expertise in magnetic system design and current measurement solutions for use in e-mobility, industrial automation, and renewable energy applications. Maglab's domain expertise coupled with CTS’ commercial, technical and operational capabilities position us to advance our status as a recognized innovator in electric motor sensing and controls markets.
The final purchase price of $7,717 has been allocated to the fair values of assets and liabilities acquired as of February 6, 2023. The purchase price was increased by $3 for the final settlement of net working capital in the quarter. The following table summarizes the final consideration paid, the fair values of the assets acquired, and the liabilities assumed as of the date of acquisition:
Consideration Paid
Cash paid, net of cash acquired of $14
4,153
Contingent consideration
3,564
7,717
11
Fair Values atFebruary 6, 2023
348
43
41
4,997
2,860
8,324
(607
2,800
13.0
60
All contingent consideration is payable in cash and is based on success factors related to the integration process as well as upon the achievement of annual revenue and customer order targets through the fiscal year ending December 31, 2025. The Company recorded $3,564 as the acquisition date fair value of the contingent consideration based on the estimate of the probability of achieving the performance targets. This amount is also reflected as an addition to the purchase price.
NOTE 4 – Accounts Receivable, net
The components of accounts receivable, net are as follows:
As of
Accounts receivable, gross
98,666
92,171
Less: Allowance for credit losses
(1,147
(1,236
NOTE 5 – Inventories, net
Inventories, net consists of the following:
Finished goods
13,103
12,865
Work-in-process
22,076
22,819
Raw materials
38,621
37,362
Less: Inventory reserves
(11,244
(10,786
12
NOTE 6 – Property, Plant and Equipment, net
Property, plant and equipment, net is comprised of the following:
Land and land improvements
536
1,100
Buildings and improvements
72,956
71,938
Machinery and equipment
260,012
258,159
Less: Accumulated depreciation
(238,548
(233,897
Depreciation expense for the three months ended June 30, 2023 and June 30, 2022 was $4,400 and $4,479, respectively. Depreciation expense for the six months ended June 30, 2023 and June 30, 2022 was $8,807 and $8,847, respectively.
We recorded a charge of $1,324 during the second quarter of 2023 due to the impairment of a specific asset group as a result of certain restructuring actions being taken. See Note 9 “Costs Associated with Exit and Restructuring Activities.”
NOTE 7 – Retirement Plans
Pension Plans
Net pension expense for our domestic and foreign plans included in other expense, net in the Condensed Consolidated Statements of Earnings is as follows:
Net pension expense
66
65
133
130
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
Expected return on plan assets(1)
(6
(3
Amortization of loss
45
Total expense, net
15
13
51
52
19
(13
16
86
90
30
26
103
104
Other Post-retirement Benefit Plan
Net post-retirement expense for our other post-retirement plan includes the following components:
48
96
Amortization of gain
(168
Total (income) expense, net
(36
(72
NOTE 8 – Goodwill and Other Intangible Assets
Changes in the net carrying amount of goodwill were as follows:
Goodwill as of December 31, 2022
Changes from acquisition purchase accounting
2,914
Foreign exchange impact
656
Goodwill as of June 30, 2023
Other Intangible Assets
Other intangible assets, net consist of the following components:
GrossCarrying Amount
AccumulatedAmortization
Net Amount
143,844
(59,005
84,839
53,972
(30,094
23,878
197,816
(89,099
December 31, 2022
148,899
(59,603
89,296
45,255
(26,498
18,757
194,154
(86,101
Amortization expense for the three months ended June 30, 2023 and June 30, 2022 was $2,857 and $2,536, respectively. Amortization expense for the six months ended June 30, 2023 and June 30, 2022 was $5,368 and $4,918, respectively.
The changes in the gross carrying amounts of intangible assets are primarily due to business acquisition and purchase accounting activity in the quarter as discussed in Note 3 “Business Acquisitions.”
14
Remaining amortization expense for other intangible assets as of June 30, 2023 is as follows:
Amortizationexpense
5,648
2024
11,146
2025
10,658
2026
10,501
2027
10,443
Thereafter
60,321
Total amortization expense
NOTE 9 – Costs Associated with Exit and Restructuring Activities
Restructuring charges are reported as a separate line within operating earnings in the Condensed Consolidated Statements of Earnings.
Total restructuring charges are as follows:
September 2020 Plan
In September 2020, we initiated a restructuring plan focused on optimizing our manufacturing footprint and improving operational efficiency by better utilizing our systems capabilities (the "September 2020 Plan"). This plan includes transitioning certain administrative functions to a shared service center, realignment of manufacturing locations, and certain other efficiency improvement actions. The restructuring cost of the September 2020 Plan is estimated to be in the range of $3,500 to $4,500, including workforce reduction charges, building and equipment relocation charges and other contract and asset-related costs. We have incurred $3,767 in program costs to date. During the three months ended June 30, 2023, we recorded $1,488 in restructuring costs comprised of $164 and $1,324 in workforce reduction and asset impairment charges, respectively. During the six months ended June 30, 2023, we recorded $1,708 in restructuring costs, comprised of $384 and $1,324 in workforce reduction and asset impairment charges, respectively. The total restructuring liability
associated with these actions was $49 as of June 30, 2023. The total restructuring liability associated with these actions was $634 as of December 31, 2022.
Other Restructuring Activities
From time to time, we undertake other restructuring activities that are not part of a formal plan. During the three and six months ended June 30, 2023, we incurred restructuring charges of $407 and $1,099, respectively. During the three and six months ended June 30, 2022, we incurred restructuring charges of $470 and $782, respectively. The total restructuring liability associated with these actions was $375 at June 30, 2023 and $235 at December 31, 2022.
During the first quarter of 2023, we announced the shutdown of our Juarez manufacturing facility. As a part of this activity, operations from the Juarez plant will be consolidated into our expanded Matamoros facility. We expect the completion of these activities to occur in 2024. The total restructuring cost of the activities associated with the closure and consolidation is estimated to be in the range of $1,500 and $3,000, including workforce reduction charges, building and equipment relocation charges and other contract and asset-related costs. During the three and six months ended June 30, 2023, we incurred costs associated with the planned activities of the Juarez shutdown of $151 and $253, respectively. The restructuring liability associated with the shutdown is $83 as of June 30, 2023. These balances are included in our other restructuring activity amounts referenced in the preceding paragraph.
The following table displays the restructuring liability activity included in accrued expenses and other liabilities for all plans for the six months ended June 30, 2023:
Restructuring liability at January 1, 2023
869
Costs paid
(1,891
Other activity(1)
(1,361
Restructuring liability at June 30, 2023
424
NOTE 10 – Accrued Expenses and Other Liabilities
The components of accrued expenses and other liabilities are as follows:
Accrued product related costs
2,251
2,368
Accrued income taxes
9,630
Accrued property and other taxes
1,938
2,142
Accrued professional fees
1,057
1,472
Accrued customer related liabilities
2,418
2,837
Dividends payable
1,256
1,272
Remediation reserves
12,811
11,048
Derivative liabilities
702
357
Other accrued liabilities
5,400
4,196
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 (”EPA”), state environmental agencies, and in some cases, groups of potentially responsible parties, that we may be potentially liable for environmental contamination at several sites currently and formerly owned or operated by us. Two of those sites, Asheville, North Carolina and Mountain View, California, are designated National Priorities List sites under the EPA’s Superfund program. We accrue a liability for probable remediation activities, claims and proceedings against us
with respect to environmental matters if the amount can be reasonably estimated, and provide disclosures including the nature of a loss whenever it is probable or reasonably possible that a potentially material loss may have occurred but cannot be estimated. We record contingent loss accruals on an undiscounted basis.
A roll-forward of remediation reserves included in accrued expenses and other liabilities on the Condensed Consolidated Balance Sheets is comprised of the following:
Balance at beginning of period
10,979
Remediation expense
2,756
2,750
Net remediation payments
(990
(2,661
(20
Balance at end of the period
The Company operates under and in accordance with a federal consent decree, dated March 7, 2017, with the EPA for the CTS of Asheville, Inc. Superfund Site (“Asheville Site”). On February 8, 2023, the Company received a letter from the EPA (the “EPA Letter”) seeking reimbursement of its past response costs and interest thereon relating to any release or threatened release of hazardous substances at the Asheville Site in the aggregate amount of $9,955 from the three potentially responsible parties associated with the Asheville Site, including the Company. The Company expects its potential exposure to be between $1,900 and $9,955. We have determined that no point within this range is more likely than another and therefore we have recorded a loss estimate of $1,900 as of June 30, 2023 in the Consolidated Statements of Earnings.
Unrelated to the environmental claims described above, from time to time, the Company has been threatened with, or named as a defendant in, various legal or regulatory actions in the ordinary course of business. The Company records a loss contingency liability when a loss is considered probable and the amount can be reasonably estimated. Although the potential liability with respect to certain of such legal or regulatory actions cannot be reasonably estimated, none of such matters is expected to have a material adverse effect on the Company’s financial condition, results of operations or cash flows. The Company’s legal costs associated with defending itself are recorded to expense as incurred.
We provide product warranties when we sell our products and accrue for estimated liabilities at the time of sale. Warranty estimates are forecasts based on the best available information and historical claims experience. We accrue for specific warranty claims if we believe that the facts of a specific claim make it probable that a liability in excess of our historical experience has been or will be incurred, and provide disclosures for specific claims whenever it is reasonably possible that a material loss may be incurred which cannot be estimated.
We cannot provide assurance that the ultimate disposition of environmental, legal, and product warranty claims will not materially exceed the amount of our accrued losses and adversely impact our consolidated financial position, results of operations, or cash flows. Our accrued liabilities and disclosures will be adjusted accordingly if additional information becomes available in the future.
17
NOTE 12 - Debt
Long-term debt is comprised of the following:
Total credit facility
400,000
Balance outstanding
Standby letters of credit
1,640
Amount available, subject to covenant restrictions
321,320
314,690
Weighted-average interest rate
5.74
%
2.96
On December 15, 2021, we entered into a second amended and restated five-year credit agreement with a group of banks (the “Revolving Credit Facility”) to (i) increase the total credit facility to $400,000, which may be increased by $200,000 at the request of the Company, subject to the administrative agent's approval, (ii) extend the maturity of the Revolving Credit Facility from February 12, 2024 to December 15, 2026, (iii) replace LIBOR with SOFR as the primary reference rate used to calculate interest on the loans under the Revolving Credit Facility, (iv) increase available sublimits for letters of credit, and swingline loans as well as providing for additional alternative currency borrowing capabilities, and (v) modify the financial and non-financial covenants to provide the Company additional flexibility.
Borrowings in U.S. dollars under the Revolving Credit Facility bear interest, at a per annum rate equal to the applicable Term SOFR rate (but not less than 0.0%), plus the Term SOFR adjustment, and plus an applicable margin, which ranges from 1.00% to 1.75%, based on our net leverage ratio. Similarly, borrowings of alternative currencies under the Revolving Credit Facility bear interest equal to a defined risk-free reference rate, plus the applicable risk-free rate adjustment and plus an applicable margin, which ranges from 1.00% to 1.75%, based on our net leverage ratio.
The Revolving Credit Facility includes a swing line sublimit of $20,000 and a letter of credit sublimit of $20,000. We also pay a quarterly commitment fee on the unused portion of the Revolving Credit Facility. The commitment fee ranges from 0.175% to 0.25% based on our net leverage ratio. The Revolving Credit Facility requires, in addition to customary representations and warranties, that we comply with a maximum net leverage ratio and a minimum interest coverage ratio. Failure to comply with these covenants could reduce the borrowing availability under the Revolving Credit Facility. We were in compliance with all debt covenants at June 30, 2023. The Revolving Credit Facility requires that we deliver quarterly financial statements, annual financial statements, auditor certifications, and compliance certificates within a specified number of days after the end of a quarter and year. Additionally, the Revolving Credit Facility contains restrictions limiting our ability to: dispose of assets; incur certain additional debt; repay other debt or amend subordinated debt instruments; create liens on assets; make investments, loans or advances; make acquisitions or engage in mergers or consolidations; engage in certain transactions with our subsidiaries and affiliates; and make stock repurchases and dividend payments.
We have debt issuance costs related to our long-term debt that are being amortized using the straight-line method over the life of the debt, which approximates the effective interest method. Amortization expense for the three and six months ended June 30, 2023 was $48 and $97, respectively. Amortization expense for the three and six months ended June 30, 2022 was $48 and $97, 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.
18
The effective portion of derivative gains and losses are recorded in accumulated other comprehensive loss until the hedged transaction affects earnings upon settlement, at which time they are reclassified to cost of goods sold or net sales. If it is probable that an anticipated hedged transaction will not occur by the end of the originally specified time period, we reclassify the gains or losses related to that hedge from accumulated other comprehensive income (loss) to other income (expense), net.
We assess hedge effectiveness qualitatively by verifying that the critical terms of the hedging instrument and the forecasted transaction continue to match, and that there have been no adverse developments that have increased the risk that the counterparty will default. No recognition of ineffectiveness was recorded in our Condensed Consolidated Statements of Earnings for the three and six months ended June 30, 2023.
Foreign Currency Hedges
We use forward contracts to mitigate currency risk related to a portion of our forecasted foreign currency revenues and costs. The currency forward contracts are designed as cash flow hedges and are recorded in the Condensed Consolidated Balance Sheets at fair value.
We continue to monitor the Company’s overall currency exposure and may elect to add cash flow hedges in the future. At June 30, 2023, we had a net unrealized gain of $2,387 in accumulated other comprehensive (loss) income, $2,387 of which is expected to be reclassified to earnings within the next 12 months. The notional amount of foreign currency forward contracts outstanding was $16,538 at June 30, 2023.
Interest Rate Swaps
We use interest rate swaps to convert a portion of our Revolving Credit Facility’s outstanding balance from a variable rate of interest to a fixed rate. As of June 30, 2023, we have agreements to fix interest rates on $50,000 of long-term debt until December 2026. The difference to be paid or received under the terms of the swap agreements will be recognized as an adjustment to interest expense when settled.
These swaps are treated as cash flow hedges and consequently, the changes in fair value are recorded in other comprehensive (loss) income. The estimated net amount of the existing gains that are reported in accumulated other comprehensive (loss) income that are expected to be reclassified into earnings within the next twelve months is approximately $1,629.
Cross-Currency Swap
The Company has operations and investments in various international locations and is subject to risks associated with changing foreign exchange rates. In order to hedge the Krone-based purchase price of the Ferroperm acquisition, the Company entered into a cross-currency interest rate swap agreement on June 27, 2022 that synthetically swapped $25,000 of variable rate debt to Krone denominated variable rate debt. Upon completion of the Ferroperm acquisition on June 30, 2022, the transaction was designated as a net investment hedge for accounting purposes and will mature on June 30, 2027.
Accordingly, any gains or losses on this derivative instrument are included in the foreign currency translation component of other comprehensive income until the net investment is sold, diluted or liquidated. At June 30, 2023, we had a net unrealized loss of $1,003 in accumulated other comprehensive (loss) income. Interest payments received for the cross-currency swap are excluded from the net investment hedge effectiveness assessment and are recorded in interest expense in the Condensed Consolidated Statements of Earnings. The assumptions used in measuring fair value of the cross-currency swap are considered level 2 inputs, which are based upon the Krone to United States Dollar exchange rate market.
The location and fair values of derivative instruments designated as hedging instruments in the Condensed Consolidated Balance Sheets as of June 30, 2023 are shown in the following table:
Interest rate swaps reported in Other current assets
1,629
1,561
Interest rate swaps reported in Other assets
1,463
1,434
Cross-currency swap reported in Accrued expenses and other liabilities
(701
(357
Foreign currency hedges reported in Other current assets
2,095
945
The Company has elected to net its foreign currency derivative assets and liabilities in the balance sheet in accordance with ASC 210-20 (Balance Sheet, Offsetting). On a gross basis, there were foreign currency derivative assets of $2,233 and foreign currency derivative liabilities of $138 at June 30, 2023.
The effect of derivative instruments on the Condensed Consolidated Statements of Earnings is as follows:
Foreign Exchange Contracts:
Amounts reclassified from AOCI to earnings:
(63
589
162
844
308
Total gain reclassified from AOCI to earnings
526
747
Total derivative gain on foreign exchange contracts recognized in earnings
Interest Rate Swaps:
Income (expense) recorded in Interest expense
441
(101
817
(273
Cross-Currency Swap:
Income recorded in Interest expense
136
295
Total net gains on derivatives
1,103
1,859
NOTE 14 – Accumulated Other Comprehensive Income (Loss)
Shareholders’ equity includes certain items classified as accumulated other comprehensive loss (“AOCI”) in the Condensed Consolidated Balance Sheets, including:
20
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, 2023 were $2,750 and $2,683, respectively. Transaction losses for the three and six months ended June 30, 2022 were $3,817 and $3,529, respectively. The impact of these changes have been included in other income (expense) in the Condensed Consolidated Statements of Earnings.
The components of accumulated other comprehensive income (loss) for the three months ended June 30, 2023 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
4,403
2,046
(967
5,482
Income tax benefit (expense)
(1,012
(471
222
(1,261
Net
3,391
1,575
(745
4,221
Changes in unrealized pension cost:
(1,226
(1,219
389
386
(837
(833
Cumulative translation adjustment:
(1,856
303
Total accumulated other comprehensive (loss) income
3,734
(741
The components of accumulated other comprehensive income (loss) for the three months ended June 30, 2022 are as follows:
976
(61
1,884
(221
(224
(431
748
752
(47
1,453
(2,624
1,977
143
(504
712
(38
674
(1,912
105
170
(2,281
(4,293
717
58
21
The components of accumulated other comprehensive income (loss) for the six months ended June 30, 2023 are as follows:
3,911
3,135
(1,564
(899
(721
359
3,012
2,414
(1,205
(1,179
(40
376
(803
(2,880
5,597
(1,235
The components of accumulated other comprehensive income (loss) for the six months ended June 30, 2022 are as follows:
2021
(635
2,554
(35
147
(587
(488
1,967
(26
(2,744
738
(64
(2,006
199
(2,032
(4,526
1,683
173
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
57,440,235
57,330,761
31,394,377
31,680,890
Shares held
26,045,858
25,649,871
22
On February 9, 2023, the Board of Directors approved a new share repurchase program that authorizes the Company to repurchase up to $50,000 of the Company’s common stock. The repurchase program has no set expiration date and replaces the repurchase program approved by the Board of Directors on May 13, 2021. During the three and six months ended June 30, 2023, 197,716 and 395,987 shares of common stock were repurchased for $8,760 and $17,562, respectively. 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. As of June 30, 2023, approximately $36,633 remains available for future purchases.
A roll-forward of common shares outstanding is as follows:
Balance at the beginning of the year
32,178,715
Repurchases
(395,987
(332,428
Restricted share issuances
109,474
65,114
Balance at the end of the period
31,911,401
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 six months ended June 30, 2023 was 5,000. The number of outstanding awards that were anti-dilutive for the three and six months ended June 30, 2022 were 2,500 and 2,500, respectively. There were no anti-dilutive shares for the three months ended June 30, 2023.
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
765
691
1,535
1,368
Performance-based RSUs
723
820
1,357
2,041
Cash-settled RSUs
161
343
157
1,649
1,616
Income tax benefit
372
744
Net expense
1,270
1,244
2,491
2,746
23
The following table summarizes the unrecognized compensation expense related to non-vested RSUs by type and the weighted-average period in which the expense is to be recognized:
Unrecognized
Compensation
Weighted-
Expense at
Average
Period (years)
1.47
5,252
1.88
8,245
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, 2023:
2018 Plan
2014 Plan
2009 Plan
2004 Plan
Directors'Plan
Awards originally available
2,500,000
1,500,000
3,400,000
6,500,000
N/A
Maximum potential awards outstanding
787,638
35,100
30,000
14,545
4,722
RSUs and cash-settled awards vested and released
441,812
Awards available for grant
1,270,550
Service-Based Restricted Stock Units
The following table summarizes the service-based RSU activity for the six months ended June 30, 2023:
Units
WeightedAverage Grant Date Fair Value
Outstanding at December 31, 2022
282,124
27.44
Granted
64,046
43.77
Vested and released
(68,848
32.30
Forfeited
(7,540
36.97
Outstanding at June 30, 2023
269,782
29.81
Releasable at June 30, 2023
131,867
20.30
Performance and Market-Based Restricted Stock Units
The following table summarizes the performance and market-based RSU activity for the six months ended June 30, 2023:
260,306
33.20
71,832
43.80
Attained by performance
53,035
32.11
Released
(113,385
(10,429
37.59
261,359
36.19
24
Cash-Settled Restricted Stock Units
Cash-Settled RSUs entitle the holder to receive the cash equivalent of one share of common stock for each unit when the unit vests. These RSUs are issued to key employees residing in foreign locations as direct compensation. Generally, these RSUs vest over a three-year period. Cash-Settled RSUs are classified as liabilities and are remeasured at each reporting date until settled. At June 30, 2023 and December 31, 2022, we had 49,347 and 46,641 Cash-Settled RSUs outstanding, respectively. At June 30, 2023 and December 31, 2022, liabilities of $547 and $566, respectively, were included in accrued expenses and other liabilities on our Condensed Consolidated Balance Sheets.
NOTE 17 — Fair Value Measurements
The table below summarizes our financial assets and liabilities that were measured at fair value on a recurring basis at June 30, 2023:
Asset (Liability) CarryingValue atJune 30,2023
Quoted Pricesin ActiveMarkets forIdentical(Level 1)
SignificantOtherObservableInputs(Level 2)
SignificantUnobservableInputs(Level 3)
Interest rate swaps
3,092
Foreign currency hedges
Cross-currency swap
Qualified replacement plan assets
14,218
(3,564
The table below summarizes the financial assets and liabilities that were measured at fair value on a recurring basis as of December 31, 2022:
Asset (Liability) CarryingValue atDecember 31,2022
2,995
15,249
We use interest rate swaps to convert a portion of our Revolving Credit Facility’s outstanding balance from a variable rate of interest into a fixed rate and foreign currency forward contracts to hedge the effect of foreign currency changes on certain revenues and costs denominated in foreign currencies. The Company entered into a cross-currency swap agreement in order to manage its exposure to changes in interest rates related to foreign debt. These derivative financial instruments are measured at fair value on a recurring basis. The fair value of our interest rate swaps and foreign currency hedges were measured using standard valuation models using market-based observable inputs over the contractual terms, including forward yield curves, among others. There is a readily determinable market for these derivative instruments, but that market is not active and therefore they are classified within Level 2 of the fair value hierarchy.
The fair value of the contingent consideration requires significant judgment. The Company's fair value estimates used in the contingent consideration valuation are considered Level 3 fair value measurements. The fair value estimates were based on assumptions management believes to be reasonable, but that are inherently uncertain, including estimates of future revenues and timing of events and activities that are expected to take place. Refer to Note 3 “Business Acquisitions” for further discussion on contingent consideration.
A roll-forward of the contingent consideration is as follows:
25
ContingentConsideration
Balance at December 31, 2022
Acquisition date fair value of contingent consideration
Balance at June 30, 2023
As of June 30, 2023, approximately $1,424 was recorded in accrued expenses and other liabilities with the remainder in other long-term obligations.
Our long-term debt consists of the Revolving Credit Facility, which is recorded at its carrying value. There is a readily determinable market for our long-term debt and it is classified within Level 2 of the fair value hierarchy as the market is not deemed to be active. The fair value of long-term debt approximates its carrying value and was determined by valuing a similar hypothetical coupon bond and attributing that value to our long-term debt under the Revolving Credit Facility.
The qualified replacement plan assets consist of investment funds maintained for future contributions to the Company’s U.S. 401(k) program. The investments are Level 1 marketable securities and are recorded in Other Assets on our Condensed Consolidated Balance Sheets.
NOTE 18 — Income Taxes
The effective income tax rates for the three and six months ended June 30, 2023 and 2022 are as follows:
Effective tax rate
19.8
25.6
19.5
23.0
Our effective income tax rate was 19.8% and 25.6% in the second quarters of 2023 and 2022, respectively. The decrease in the effective income tax rate is primarily attributed to tax benefits from amended U.S. federal income tax returns. The second quarter 2023 effective income tax rate was lower than the U.S. statutory federal tax rate primarily due to the same reason as noted above. 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.
Our effective income tax rate was 19.5% and 23.0% in the six months ended June 30, 2023 and 2022, respectively. The decrease is primarily attributed to tax benefits recorded upon vesting of restricted stock and tax benefits from amended U.S. federal income tax returns. The tax rate in the first six months of 2023 was lower than the U.S. statutory federal tax rate primarily for the same reason as noted above. The tax rate in the first six months of 2022 was higher than the U.S. statutory federal tax rate primarily due to the impact of foreign withholding taxes and state taxes.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”)
(in thousands of dollars, except percentages and per share amounts)
The following discussion should be read in conjunction with our unaudited Condensed Consolidated Financial Statements and notes included under Item 1, as well as our Consolidated Financial Statements and notes and related Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2022.
Overview
CTS Corporation ("CTS", "we", "our" or "us") is a leading designer and manufacturer of products that Sense, Connect and Move. Our vision is to be a leading provider of sensing and motion devices as well as connectivity components, enabling an intelligent and seamless world. These devices are categorized by their ability to Sense, Connect or Move. Sense products provide vital inputs to electronic systems. Connect products allow systems to function in synchronization with other systems. Move products ensure required movements are effectively and accurately executed. We are committed to achieving our vision by continuing to invest in the development of products, technologies and talent within these categories.
We manufacture sensors, actuators, and connectivity components in North America, Europe, and Asia. CTS provides engineered products to OEMs and tier one suppliers in the aerospace and defense, industrial, medical, and transportation markets.
There is an increasing proliferation of sensing and motion applications within various markets we serve. In addition, the increasing connectivity of various devices to the internet results in greater demand for communication bandwidth and data storage, increasing the need for our connectivity products. Our success is dependent on the ability to execute our strategy to support these trends. We are subject to a number of challenges including, without limitation, periodic market softness, competition from other suppliers, changes in technology, and the ability to add new customers, launch new products or penetrate new markets. Many of these, and other risks and uncertainties relating to the Company and our business, are discussed in further detail in Item 1A. of our Annual Report on Form 10-K and other filings made with the SEC.
On February 6, 2023, we acquired 100% of the outstanding shares of Maglab AG ("Maglab") for $4,167 in cash subject to additional earnout payments based on future performance. Maglab has deep expertise in magnetic system design and current measurement solutions for use in e-mobility, industrial automation, and renewable energy applications. Maglab's domain expertise coupled with CTS’ commercial, technical and operational capabilities position us to advance our status as a recognized innovator in electric motor sensing and controls markets.
Supply Chain Uncertainties
The COVID-19 pandemic and subsequent supply chain uncertainties had a significant negative impact on the global economy in 2022 and 2021. These events disrupted the financial markets, negatively impacted the global supply chain and increased the cost of materials and operations, particularly within the global automotive industry. While supply chain conditions have eased, material shortages could still impact our or our customers’ production schedules. With customers changing orders on short notice, we run the risk of carrying excess inventory in these situations. These developments are outside of our control, remain uncertain, and cannot be predicted. We continue to actively monitor the ongoing impacts of the supply chain uncertainties and will seek to mitigate and minimize their impact on our business, when possible.
Results of Operations: Second Quarter 2023 versus Second Quarter 2022
The following table highlights changes in significant components of the Unaudited Condensed Consolidated Statements of Earnings for the quarters ended June 30, 2023 and June 30, 2022:
PercentChange
Percentage of Net Sales –2023
Percentage of Net Sales –2022
0.1
100.0
1.4
65.0
64.2
(2.1
35.0
35.8
6.5
16.3
15.3
6.8
4.6
4.3
200.8
1.3
0.4
Total operating expenses
32,310
29,162
10.8
22.3
20.1
(18.8
12.7
15.6
(59.2
(1.6
(4.0
(5.0
11.1
11.7
(26.4
2.2
2.4
8.9
8.7
Diluted net earnings per share
Net sales were $145,182 in the second quarter of 2023, an increase of $200 or 0.1% from the second quarter of 2022. Net sales to the transportation market increased $7,452 or 10.0% while net sales to non-transportation markets decreased $7,252 or 10.3%, primarily due to inventory reduction related softness in distribution and the industrial end market. Changes in foreign exchange rates decreased net sales by $1,092 year-over-year.
Gross margin was $50,742 in the second quarter of 2023, a decrease of $1,106 or 2.1% from the second quarter of 2022. The year over year decrease was driven by end market sales mix, increased material and freight costs and unfavorable impacts from foreign exchange rates of $1,720 year-over-year.
Selling, general and administrative ("SG&A") expenses were $23,694 or 16.3% of net sales in the second quarter of 2023 versus $22,238 or 15.3% of net sales in the second quarter of 2022. The increase in SG&A expenses was primarily caused by higher environmental costs in the second quarter of 2023. See Note 11 “Commitments and Contingencies” in the Notes to the Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q for further information on the environmental liability.
Research and development (“R&D”) expenses were $6,721 or 4.6% of net sales in the second quarter of 2023 compared to $6,294 or 4.3% of net sales in the comparable quarter of 2022, in line with our commitment to continue investing in research and product development to drive organic growth.
Restructuring charges were $1,895 or 1.3% of net sales in the second quarter of 2023 compared to $630 or 0.4% of net sales in the second quarter of 2022. We continue to implement certain restructuring actions to improve our cost structure.
Other income and expense items are summarized in the following table:
Other expense, net
28
The reduction in total other expense, net was primarily driven by higher interest income from our short-term investments classified as cash equivalents in line with market rate increases seen recently. Other expense, net for 2022 also includes $1,776 in derivative losses associated with the acquisition of Ferroperm Piezoceramics A/S (“Ferroperm”).
Our effective income tax rate was 19.8% and 25.6% in the second quarters of 2023 and 2022, respectively. The decrease in the effective income tax rate is primarily attributed to tax benefits from amended U.S. federal income tax returns.
Results of Operations: Six Months ended June 30, 2023 versus Six Months Ended June 30, 2022
The following table highlights changes in significant components of the Unaudited Condensed Consolidated Statements of Earnings for the six months ended June 30, 2023, and June 30, 2022:
(0.5
)%
1.2
64.8
63.7
(3.6
35.2
36.3
3.7
15.7
15.0
6.6
198.0
1.0
0.3
61,787
57,456
7.5
21.2
19.6
(16.7
13.9
16.7
(70.0
(0.6
(9.1
13.3
14.6
(23.2
2.6
3.4
(4.9
10.7
11.2
Net sales were $291,176 in the six months ended June 30, 2023, a decrease of $1,501 or 0.5% from the six months ended June 30, 2022. Net sales to the transportation market increased $2,594 or 1.7% while net sales to non-transportation markets decreased $4,095 or 2.9%. Changes in foreign exchange rates decreased net sales by $3,413 year-over-year.
Gross margin was $102,394 for the six months ended June 30, 2023, a decrease of $3,794 or 3.6% from the six months ended June 30, 2022. The year over year decrease in gross margin was driven by end market sales mix, increased material and freight costs and unfavorable impacts from foreign exchange rates of $3,497 year-over-year.
SG&A expenses were $45,673 or 15.7% of net sales for the six months ended June 30, 2023 versus $44,026 or 15.0% of net sales for the six months ended June 30, 2022. The increase in SG&A expenses was caused by higher environmental costs in the second quarter of 2023 as well as expenses related to acquisition activity. See Note 11 “Commitments and Contingencies” in the Notes to the Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q for further information on the environmental costs.
R&D expenses were $13,307 or 4.6% of net sales for the six months ended June 30, 2023 compared to $12,488 or 4.3% of net sales for the six months ended June 30, 2022, in line with our commitment to continue investing in research and product development to drive organic growth.
29
Restructuring charges were $2,807 or 1.0% of net sales for the six months ended June 30, 2023 compared to $942 or 0.3% of net sales for the six months ended June 30, 2022. We continue to implement certain restructuring actions to improve our cost structure.
The reduction in total other expense, net was primarily driven by higher interest income from our short-term investments classified as cash equivalents in line with market rate increases seen recently. Other expense, net for 2022 also includes $1,776 in derivative losses associated with the acquisition of Ferroperm.
Our effective income tax rate was 19.5% and 23.0% for the six months ended June 30, 2023 and 2022, respectively. The decrease is primarily attributed to tax benefits recorded upon vesting of restricted stock and tax benefits from amended U.S. federal income tax returns.
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 $150,878 at June 30, 2023, and $156,910 at December 31, 2022, of which $102,830 and $90,244, respectively, were held outside the United States. Total long-term debt was $77,040 as of June 30, 2023 and $83,670 as of December 31, 2022.
Cash Flow Overview
Cash Flows from Operating Activities
Net cash provided by operating activities was $34,607 during the six months ended June 30, 2023. Components of net cash provided by operating activities included net earnings of $31,241, depreciation and amortization expense of $14,175, other net non-cash items of $4,295, and a net cash outflow from changes in assets and liabilities of $15,104 primarily driven by the annual bonus payout for 2022 and an increase in accounts receivable.
Cash Flows from Investing Activities
Net cash used in investing activities for the six months ended June 30, 2023 was $(11,846), driven by payments for the Maglab acquisition and finalization of the TEWA Temperature Sensors SP. Zo.o. (“TEWA”) net working capital adjustment of $3,359 and capital expenditures of $8,487. See Note 3 "Business Acquisitions" in the Notes to the Condensed Consolidated Financial Statements.
Cash Flows from Financing Activities
Net cash used in financing activities for the six months ended June 30, 2023 was $(29,967). The net cash outflow was the result of treasury stock purchases of $17,562, net cash used in the paydown of long-term debt of $6,630, taxes paid on behalf of equity award participants of $3,240, and dividends paid of $2,535.
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, 2023.
Acquisitions
On February 6, 2023, we acquired 100% of the outstanding shares of Maglab for $4,167 in cash subject to additional earnout payments based on future performance. The acquisition was funded from cash on hand.
Critical Accounting Policies and Estimates
The Company’s Condensed Consolidated Financial Statements are prepared in accordance with U.S. GAAP. In connection with the preparation of the condensed consolidated financial statements, the Company uses estimates and makes judgments and assumptions about future events that affect the reported amounts of assets, liabilities, revenue, expenses, and the related disclosures. The assumptions, estimates, and judgments are based on historical experience, current trends, and other factors the Company believes are relevant at the time it prepares the Condensed Consolidated Financial Statements.
The critical accounting policies and estimates are consistent with those discussed in Note 1, Summary of Significant Accounting Policies, to the Consolidated Financial Statements and the MD&A section of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. During and as of the three and six months ended June 30, 2023, there were no significant changes in the application of critical accounting policies or estimates.
31
Significant Customers
Our net sales to customers representing at least 10% of total net sales is as follows:
Cummins Inc.
18.6
15.9
16.4
Toyota Motor Corporation
12.6
11.3
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: supply chain disruptions; changes in the economy generally, including inflationary and/or recessionary conditions, and in respect to the business in which CTS operates; unanticipated issues in integrating acquisitions; the results of actions to reposition CTS’ business; rapid technological change; general market conditions in the transportation, as well as conditions in the industrial, aerospace and defense, and medical markets; reliance on key customers; unanticipated public health crises (including the ultimate impact of the COVID-19 pandemic on CTS’ business, results of operations or financial condition), natural disasters or other events; environmental compliance and remediation expenses; the ability to protect CTS’ intellectual property; pricing pressures and demand for CTS’ products; and risks associated with CTS’ international operations, including trade and tariff barriers, exchange rates and political and geopolitical risks (including, without limitation, the potential impact U.S./China relations and the conflict between Russia and Ukraine may have on our business, results of operations and financial condition). Many of these, and other risks and uncertainties, are discussed in further detail in Item 1A. of CTS’ most recent Annual Report on Form 10-K and other filings made with the SEC. CTS undertakes no obligation to publicly update CTS’ forward-looking statements to reflect new information or events or circumstances that arise after the date hereof, including market or industry changes.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
See Item 7A, Quantitative and Qualitative Disclosures about Market Risk, of our Annual Report on Form 10-K for the year ended December 31, 2022. During the three months ended June 30, 2023, there have been no material changes in our exposure to market risk.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q were effective in providing reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within CTS have been detected.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting for the quarter ended June 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
From time to time we are involved in litigation with respect to matters arising from the ordinary conduct of our business, and currently certain claims are pending against us. In the opinion of management, we believe we have established adequate accruals pursuant to U.S. generally accepted accounting principles for our expected future liability with respect to pending lawsuits, claims and proceedings, where the nature and extent of any such liability can be reasonably estimated based on presently available information. However, there can be no assurance that the final resolution of any existing or future lawsuits, claims or proceedings will not have a material adverse effect on our business, results of operations, financial condition, or cash flows.
See Note 11 "Commitments and Contingencies" in the Notes to the Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q.
Item 1A. Risk Factors
There have been no significant changes to our risk factors from those contained in our Annual Report on Form 10-K for the year ended December 31, 2022.
Item 2. Unregistered Sales of Equity
On February 9, 2023, the Board approved a new share repurchase program that authorizes the Company to repurchase up to $50 million of its common stock. The repurchase program has no set expiration date and supersedes and replaces the repurchase program approved by the Board in May 2021.
Total Number
Maximum Dollar
of Shares
Value of Shares
Purchased as
That May Yet Be
Part of Publicly
Purchased Under
Average Price
Announced
Publicly Announced
Purchased
Paid per Share
Programs
Plans or Programs
April 1, 2023 through April 30, 2023
56,716
45.80
42,801,450
May 1, 2023 through May 31, 2023
78,000
42.50
39,486,452
June 1, 2023 through June 30, 2023
63,000
45.29
36,633,072
197,716
Item 5. Other Information
From time to time, our directors and officers may purchase or sell shares of our common stock in the market, including pursuant to plans intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) under the Securities Exchange Act of 1934, as amended (“Rule 10b5-1 Plans”).
Kieran O’Sullivan, President, Chief Executive Officer and Chairman of the Board, entered into a Rule 10b5-1 Plan on May 23, 2023 for the sale of up to 65,000 shares of our common stock, which plan is scheduled to terminate no later than May 23, 2025.
Ashish Agrawal, Vice President and Chief Financial Officer, entered into a Rule 10b5-1 Plan on June 2, 2023 for the sale of up to 25,000 shares of our common stock, which plan is scheduled to terminate no later than August 30, 2024.
Item 6. Exhibits
3(1)
Amended and Restated Bylaws of CTS Corporation.
(31)(a)
Certification pursuant to Section 302 of the Sarbanes‑Oxley Act of 2002.
(31)(b)
(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, 2023 formatted in Inline XBRL: (i) Condensed Consolidated Statements of Earnings; (ii) Condensed Consolidated Statements of Comprehensive Earnings; (iii) Condensed Consolidated Balance Sheets; (iv) Condensed Consolidated Statements of Cash Flows; (v) Condensed Consolidated Statements of Shareholders’ Equity; (vi) Notes to Condensed Consolidated Financial Statements, tagged as blocks of text and including detailed tags.
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 25, 2023