Financial Data and Key Metrics - Q4 2023 sales were $125 million, down 12% YoY and 7% sequentially [13] - Full year 2023 sales were $550 million, down 6% from 2022 [100] - Q4 adjusted gross margin was 34.2%, down 215 basis points YoY [5][92] - Full year adjusted gross margin was 34.8%, down 177 basis points from 2022 [5] - Q4 adjusted diluted EPS was $0.47, down $0.09 YoY [83] - Full year adjusted diluted EPS was $2.22, down $0.24 from 2022 [83] - Operating cash flow for 2023 was $89 million, down from $121 million in 2022 [113] Business Line Performance - Transportation sales were $69 million in Q4, down 3% YoY [10] - Full year Transportation sales were $301 million, down 1% from 2022 [10] - Non-transportation sales declined 22% in Q4 and 12% for the full year [7][100] - Medical markets showed steady demand with multiple wins in diagnostic and therapeutic ultrasound [8] - Industrial and distribution markets saw softness, with sales declining due to inventory corrections [7][15] Market Performance - North American light vehicle market expected to be 15.5-16 million units in 2024 [108] - European production forecasted at 17 million units, China at 28 million units [108] - Defense and Medical markets expected to remain solid with continued growth momentum [12][106] - Commercial vehicle products expected to face softer demand in 2024 [10] Strategy and Industry Competition - Focus on profitable growth, diversification through advanced materials, and electrification in mobility markets [6] - Transition to electrification offers significant opportunities, with a potential SAM of over $1 billion [11] - Continued investment in R&D to drive future revenue growth, with higher operating expenses expected in 2024 [26][37] - Strategic acquisitions remain a priority, with a strong balance sheet to support both acquisitions and share buybacks [27][80] Management Commentary on Operating Environment and Future Outlook - 2023 was a challenging year, with a soft revenue environment expected to continue into Q1 2024 [4][5] - Industrial and distribution markets expected to remain soft in H1 2024, with potential recovery in H2 [9][15] - Pricing pressure expected in transportation markets, with a focus on operational and supply chain improvements [94][101] - Long-term growth driven by megatrends of automation, connectivity, efficiency, and minimally invasive medical procedures [88] Other Important Information - Completed consolidation of facilities in Denmark, with production transition from Juarez to Matamoros expected in H1 2024 [7][14] - Returned over $46 million to shareholders through dividends and share buybacks in 2023 [17] - Board approved a new $100 million share repurchase program [17][80] - Cash balance of $164 million as of December 31, 2023, up from $157 million in 2022 [95] Q&A Session Summary Question: Commercial vehicle demand outlook - Soft demand expected in 2024, with competitive pressures and a softer market anticipated [20] Question: Inventory correction in industrial markets - Inventory correction ongoing, with 60-70% of burn-down completed, softness expected in H1 2024 [21] Question: Revenue and operating expense trends - Q1 2024 revenue expected to be similar to Q4 2023, with a pickup in H2 2024 driven by industrial, medical, and defense markets [24][25] - Operating expenses expected to increase by 3% of revenue in Q1 2024 due to higher R&D spend [37] Question: Share buyback program - $100 million buyback authorization reflects strong cash flow and balance sheet, with a focus on strategic acquisitions [49][80] Question: Pricing pressure in transportation markets - Pricing pressure expected across both commercial and light vehicle markets, with a focus on cost management [64][94] Question: Transition from ICE to EV - Slower EV adoption in the short term, but long-term growth opportunities remain, with 95% of content transferable between ICE and EV [35][56] Question: Industrial and distribution market recovery - Industrial and distribution markets expected to rebound in H2 2024, with inventory levels normalizing [69][129] Question: R&D spend target for 2024 - R&D spend expected to be in the range of 5-6% of sales, with an increase in 2024 to support growth programs [76]

Shares of industrial supplier CTS Corporation (CTS 11.29%) jumped as much as 13.3% in trading on Tuesday after the company reported fourth-quarter 2023 financial results. Shares are still up 10.2% as of 2 p.m. ET.Better than expectedCTS isn't blowing the doors off the industry, but it's at least performing better than expected. Revenue was down 12% in the quarter to $125 million and net income was flat at $15 million, or $0.49 per share. Analysts were expecting revenue of $124.5 million and earnings of just ...

Financial Data and Key Metrics Changes - Sales for the third quarter were $135 million, down 11% compared to the same period last year [79] - Adjusted gross margin was 34.5%, down 210 basis points from the third quarter of 2022 [79] - Adjusted diluted earnings per share were $0.54, down $0.08 compared to the third quarter of 2022 [79] - The company updated its full-year sales guidance to a range of $545 million to $555 million, down from the previous range of $565 million to $585 million [87] Business Line Data and Key Metrics Changes - Transportation sales were $76 million in the third quarter, down approximately 3% year-over-year, driven by softness in commercial vehicle products [85] - Non-transportation sales declined 20% in the third quarter compared to the prior-year period, primarily due to decreased demand in industrial and distribution markets [95] - The company added eight new customers in the quarter, with a book-to-bill rate of 0.93 [6][79] Market Data and Key Metrics Changes - The North American light vehicle market is expected to be in the 15 million unit range, with European production forecasted in the 16 million to 17 million unit range [86] - China volumes are expected in the 26 million unit range, with increased competition impacting demand [21][86] Company Strategy and Development Direction - The company is focused on profitable growth through diversification and electrification in mobility markets [67] - Long-term goals include having more than 25% of light vehicle revenue come from electrified platforms by 2025 [73] - The company aims to expand its customer base and range of applications in industrial, medical, and defense end markets [74] Management's Comments on Operating Environment and Future Outlook - Management noted continued softness in industrial and distribution markets due to elevated customer inventory levels [2][82] - The UAW strike had a low impact in the third quarter but is expected to pressure sales further in the fourth quarter [82] - Management expressed confidence in the long-term prospects driven by megatrends of automation, connectivity, and energy efficiency [51] Other Important Information - The company generated $22 million in operating cash flow during the third quarter, with free cash flow of $19 million [76] - The balance sheet remains healthy, with a cash balance of $160 million at the end of September 2023 [12] Q&A Session Summary Question: Can you quantify the margin tailwind from the Mexico site consolidation? - Management indicated that the transition would not significantly change profitability but aims for more stability in production processes [16] Question: Is there a change in competition from China? - Management noted increased competition and pricing pressures in China, particularly affecting demand for EVs [21] Question: What is the impact of the UAW strike on future quarters? - The UAW impact was minimal in Q3 but is expected to be between $2 million to $4 million in Q4, with additional softness in commercial vehicle demand [98] Question: What are the expectations for commercial vehicle demand in 2024? - Management anticipates continued softness in commercial vehicle demand into 2024 [86][101] Question: How are operating costs being managed? - Management has implemented temporary cost reduction measures and expects a slight increase in operating expenses in Q4 compared to Q3 [96]

Forward-Looking Statements | --- | --- | |-----------------------------------------------|---------------------------------------------| | Q3 2023 Financials | Highlights | | $134.6M Revenue -11% YoY | Won first motor position development award | | 34.5% Adjusted Gross Margin 1 (210) bps YoY | 11 new EV platform wins | | $0.54 Adj. Earnings Per Share 1 $(0.08) YoY | 7 new non-Transportation customers | Revenue ($ Millions) $98 $125 $102 Q3 YTD 2021 Q3 YTD 2022 Q3 YTD 2023 ($ Millions) HVAC Tunable Lenses Me ...

UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Quarterly Period Ended September 30, 2023 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from to Commission File Number: 1-4639 CTS CORPORATION (Exact name of registrant as specified in its charter) IN 35-0225010 (State or other jurisdiction of inc ...

CTS Corporation (NYSE:CTS) Q2 2023 Earnings Conference Call July 25, 2023 10:00 AM ET Company Participants Kieran O'Sullivan - President and CEO Ashish Agrawal - CFO Conference Call Participants Justin Long - Stephens John Franzreb - Sidoti Joshua Buchalter - TD Cowen Hendi Susanto - Gabelli Funds Operator Good morning and a warm welcome to the CTS Corporation Second Quarter 2023 Conference Call. My name is Candice and I will be your moderator for today's call. [Operator Instructions] I would now like to tu ...

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 expe ...

[PART I. FINANCIAL INFORMATION](index=3&type=section&id=PART%20I.%20FINANCIAL%20INFORMATION) This section presents the unaudited condensed consolidated financial statements for CTS Corporation, detailing earnings, balance sheets, cash flows, and shareholders' equity with accompanying notes [Item 1. Financial Statements](index=3&type=section&id=Item%201.%20Financial%20Statements) This section presents CTS Corporation's unaudited condensed consolidated financial statements, detailing earnings, balance sheets, cash flows, and shareholders' equity with accompanying notes [Condensed Consolidated Statements of Earnings](index=3&type=section&id=Condensed%20Consolidated%20Statements%20of%20Earnings) This statement details CTS Corporation's net sales, gross margin, operating earnings, net earnings, and EPS for the three and six months ended June 30, 2023 and 2022 | Metric | Three Months Ended June 30, 2023 ($ thousands) | Three Months Ended June 30, 2022 ($ thousands) | Six Months Ended June 30, 2023 ($ thousands) | Six Months Ended June 30, 2022 ($ thousands) | | :---------------------- | :--------------------------------------------- | :--------------------------------------------- | :------------------------------------------- | :------------------------------------------- | | Net sales | 145,182 | 144,982 | 291,176 | 292,677 | | Gross margin | 50,742 | 51,848 | 102,394 | 106,188 | | Operating earnings | 18,432 | 22,686 | 40,607 | 48,732 | | Net earnings | 12,897 | 12,598 | 31,241 | 32,837 | | Diluted EPS | 0.41 | 0.39 | 0.98 | 1.02 | | Cash dividends per share| 0.04 | 0.04 | 0.08 | 0.08 | - **Net sales** for Q2 **2023** increased by **$200** (**0.1%**) year-over-year, while **net sales** for the six months ended June **30, 2023**, decreased by **$1,501** (**0.5%**) year-over-year[7](index=7&type=chunk)[11](index=11&type=chunk)[27](index=27&type=chunk) - **Operating earnings** decreased by **18.8%** in Q2 **2023** and **16.7%** for the six months ended June **30, 2023**, primarily due to lower **gross margin** and increased operating expenses, including **restructuring charges**[27](index=27&type=chunk)[181](index=181&type=chunk)[185](index=185&type=chunk) [Condensed Consolidated Statements of Comprehensive Earnings](index=4&type=section&id=Condensed%20Consolidated%20Statements%20of%20Comprehensive%20Earnings) This statement presents CTS Corporation's net earnings and other comprehensive earnings for the three and six months ended June 30, 2023 and 2022 | Metric | Three Months Ended June 30, 2023 ($ thousands) | Three Months Ended June 30, 2022 ($ thousands) | Six Months Ended June 30, 2023 ($ thousands) | Six Months Ended June 30, 2022 ($ thousands) | | :----------------------- | :--------------------------------------------- | :--------------------------------------------- | :------------------------------------------- | :------------------------------------------- | | Net earnings | 12,897 | 12,598 | 31,241 | 32,837 | | Other comprehensive earnings | 2,993 | 775 | 4,362 | 1,855 | | Comprehensive earnings | 15,890 | 13,373 | 35,603 | 34,692 | - **Other comprehensive earnings** significantly increased in both the three and six months ended June **30, 2023**, driven by positive changes in **fair market value of derivatives** and **cumulative translation adjustments**[49](index=49&type=chunk)[163](index=163&type=chunk)[165](index=165&type=chunk) [Condensed Consolidated Balance Sheets](index=5&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) This statement outlines CTS Corporation's assets, liabilities, and shareholders' equity as of June 30, 2023, and December 31, 2022 | Metric | June 30, 2023 ($ thousands) | December 31, 2022 ($ thousands) | | :------------------------- | :-------------------------- | :------------------------------ | | Cash and cash equivalents | 150,878 | 156,910 | | Total current assets | 329,877 | 325,760 | | Total Assets | 755,906 | 748,487 | | Total current liabilities | 107,182 | 112,532 | | Long-term debt | 77,040 | 83,670 | | Total Liabilities | 234,511 | 242,263 | | Total Shareholders' Equity | 521,395 | 506,224 | - **Total assets** increased slightly to **$755,906 thousand** at June **30, 2023**, from **$748,487 thousand** at December **31, 2022**, while **total liabilities** decreased, leading to an increase in **total shareholders' equity**[30](index=30&type=chunk) [Condensed Consolidated Statements of Cash Flows](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) This statement details CTS Corporation's cash flows from operating, investing, and financing activities for the six months ended June 30, 2023 and 2022 | Cash Flow Activity | Six Months Ended June 30, 2023 ($ thousands) | Six Months Ended June 30, 2022 ($ thousands) | | :----------------------------- | :------------------------------------------- | :------------------------------------------- | | Net cash from operating activities | 34,607 | 35,352 | | Net cash used in investing activities | (11,846) | (103,519) | | Net cash (used in) provided by financing activities | (29,967) | 24,392 | | Net decrease in cash and cash equivalents | (6,032) | (42,726) | | Cash and cash equivalents at end of period | 150,878 | 98,739 | - **Net cash used in investing activities** significantly decreased from **$(103,519) thousand** in **2022** to **$(11,846) thousand** in **2023**, primarily due to lower payments for acquisitions[31](index=31&type=chunk)[190](index=190&type=chunk) - **Net cash used in financing activities** was **$(29,967) thousand** for the six months ended June **30, 2023**, a shift from net cash provided of **$24,392 thousand** in the prior year, driven by **treasury stock purchases** and **debt paydown**[31](index=31&type=chunk)[191](index=191&type=chunk) [Condensed Consolidated Statements of Shareholders' Equity](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Shareholders'%20Equity) This statement tracks changes in CTS Corporation's shareholders' equity from December 31, 2022, to June 30, 2023 | Equity Component | Balance at December 31, 2022 ($ thousands) | Balance at June 30, 2023 ($ thousands) | | :------------------------------- | :----------------------------------------- | :------------------------------------- | | Common Stock | 316,803 | 319,111 | | Additional Contributed Capital | 46,144 | 43,488 | | Retained Earnings | 546,703 | 575,422 | | Accumulated Other Comprehensive Income (Loss) | (671) | 3,691 | | Treasury Stock | (402,755) | (420,317) | | Total Shareholders' Equity | 506,224 | 521,395 | - **Total shareholders' equity** increased by **$15,171 thousand** from December **31, 2022**, to June **30, 2023**, primarily due to **net earnings** and positive changes in **accumulated other comprehensive income**, partially offset by **treasury stock** repurchases[53](index=53&type=chunk) [Notes to Condensed Consolidated Financial Statements](index=9&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) This section provides detailed explanations and disclosures supporting the condensed consolidated financial statements [NOTE 1 — Basis of Presentation](index=9&type=section&id=NOTE%201%20%E2%80%94%20Basis%20of%20Presentation) These unaudited financial statements are prepared in accordance with SEC rules and GAAP, requiring management estimates and assumptions - The **financial statements** are unaudited and prepared in conformity with **GAAP**, requiring management estimates and assumptions[76](index=76&type=chunk) - No material changes in significant accounting policies have occurred compared to the Annual Report on Form **10-K** for the year ended December **31, 2022**[76](index=76&type=chunk) [NOTE 2 – Revenue Recognition](index=9&type=section&id=NOTE%202%20%E2%80%93%20Revenue%20Recognition) Revenue is recognized upon satisfaction of performance obligations, typically at delivery or shipment, with variable consideration estimated using the most likely amount method - **Revenue** is recognized when **performance obligations** are satisfied, usually at the date of delivery or shipment[77](index=77&type=chunk) - **Variable consideration** is estimated using the most likely amount method, based on historical experience and current facts[58](index=58&type=chunk) - No contracts as of June **30, 2023**, contained a significant **financing component**[77](index=77&type=chunk) [NOTE 3 – Business Acquisitions](index=10&type=section&id=NOTE%203%20%E2%80%93%20Business%20Acquisitions) Details the acquisition of Maglab AG in February 2023 and final purchase prices for prior acquisitions of TEWA and Ferroperm - On February **6, 2023**, **CTS** acquired **100%** of **Maglab AG** for **$4,167 thousand** in cash, with a final purchase price of **$7,717 thousand** including **$3,564 thousand** in **contingent consideration**[18](index=18&type=chunk)[64](index=64&type=chunk)[85](index=85&type=chunk) - **Maglab AG** specializes in **magnetic system design** and **current measurement solutions** for **e-mobility**, **industrial automation**, and **renewable energy** applications[84](index=84&type=chunk)[154](index=154&type=chunk) - The final purchase price for **TEWA Temperature Sensors** (acquired Feb **2022**) was **$23,721 thousand**, and for **Ferroperm Piezoceramics** (acquired June **2022**) was **$72,340 thousand**[79](index=79&type=chunk)[82](index=82&type=chunk) [NOTE 4 – Accounts Receivable, net](index=12&type=section&id=NOTE%204%20%E2%80%93%20Accounts%20Receivable,%20net) Provides a breakdown of accounts receivable, net, and the allowance for credit losses at June 30, 2023, and December 31, 2022 | Metric | June 30, 2023 ($ thousands) | December 31, 2022 ($ thousands) | | :-------------------------- | :-------------------------- | :------------------------------ | | Accounts receivable, gross | 98,666 | 92,171 | | Less: Allowance for credit losses | (1,147) | (1,236) | | Accounts receivable, net | 97,519 | 90,935 | [NOTE 5 – Inventories, net](index=12&type=section&id=NOTE%205%20%E2%80%93%20Inventories,%20net) Details the composition of inventories, net, including finished goods, work-in-process, and raw materials, at June 30, 2023, and December 31, 2022 | Inventory Component | June 30, 2023 ($ thousands) | December 31, 2022 ($ thousands) | | :------------------ | :-------------------------- | :------------------------------ | | 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) | | Inventories, net | 62,556 | 62,260 | [NOTE 6 – Property, Plant and Equipment, net](index=13&type=section&id=NOTE%206%20%E2%80%93%20Property,%20Plant%20and%20Equipment,%20net) Outlines the components of property, plant and equipment, net, and includes an asset impairment charge recorded in Q2 2023 | PP&E Component | June 30, 2023 ($ thousands) | December 31, 2022 ($ thousands) | | :----------------------------- | :-------------------------- | :------------------------------ | | 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) | | Property, plant and equipment, net | 94,956 | 97,300 | - A charge of **$1,324 thousand** was recorded in Q2 **2023** for **asset impairment charge** due to **restructuring actions**[68](index=68&type=chunk)[95](index=95&type=chunk) [NOTE 7 – Retirement Plans](index=13&type=section&id=NOTE%207%20%E2%80%93%20Retirement%20Plans) Reports net pension expense and other post-retirement plan income/expense for the six months ended June 30, 2023 and 2022 | Metric | Six Months Ended June 30, 2023 ($ thousands) | Six Months Ended June 30, 2022 ($ thousands) | | :---------------------- | :------------------------------------------- | :------------------------------------------- | | Net pension expense | 133 | 130 | | Other post-retirement plan (income) expense, net | (72) | 52 | [NOTE 9 – Costs Associated with Exit and Restructuring Activities](index=15&type=section&id=NOTE%209%20%E2%80%93%20Costs%20Associated%20with%20Exit%20and%20Restructuring%20Activities) Details restructuring charges, including costs from the September 2020 Plan and other activities like the Juarez manufacturing facility shutdown | Metric | Six Months Ended June 30, 2023 ($ thousands) | Six Months Ended June 30, 2022 ($ thousands) | | :---------------------- | :------------------------------------------- | :------------------------------------------- | | Restructuring charges | 2,807 | 942 | - The **September 2020 Plan** incurred **$1,708 thousand** in **restructuring costs** for the six months ended June **30, 2023**, including **$1,324 thousand** in **asset impairment charges**[95](index=95&type=chunk) - Other **restructuring activities**, including the shutdown of the **Juarez manufacturing facility**, incurred **$1,099 thousand** in charges for the six months ended June **30, 2023**[122](index=122&type=chunk) [NOTE 10 – Accrued Expenses and Other Liabilities](index=16&type=section&id=NOTE%2010%20%E2%80%93%20Accrued%20Expenses%20and%20Other%20Liabilities) Provides a breakdown of accrued expenses and other liabilities, including remediation reserves and derivative liabilities, at June 30, 2023, and December 31, 2022 | Liability Component | June 30, 2023 ($ thousands) | December 31, 2022 ($ thousands) | | :----------------------------------- | :-------------------------- | :------------------------------ | | Accrued product related costs | 2,251 | 2,368 | | Accrued income taxes | 7,548 | 9,630 | | Remediation reserves | 12,811 | 11,048 | | Derivative liabilities | 702 | 357 | | Other accrued liabilities | 5,400 | 4,196 | | Total accrued expenses and other liabilities | 35,381 | 35,322 | [NOTE 11 – Commitments and Contingencies](index=16&type=section&id=NOTE%2011%20%E2%80%93%20Commitments%20and%20Contingencies) Discusses environmental liabilities, including remediation reserves and an EPA reimbursement request, and other legal actions - **Remediation reserves** increased to **$12,811 thousand** at June **30, 2023**, from **$11,048 thousand** at December **31, 2022**[99](index=99&type=chunk) - The Company received an **EPA letter** seeking **$9,955 thousand** reimbursement for the Asheville Site and recorded a loss estimate of **$1,900 thousand** as of June **30, 2023**[99](index=99&type=chunk) - Management believes adequate accruals are established for **legal** and **environmental matters**, with no **material adverse effect** expected on **financial condition**[126](index=126&type=chunk)[127](index=127&type=chunk) [NOTE 12 - Debt](index=18&type=section&id=NOTE%2012%20-%20Debt) Details the Company's long-term debt, Revolving Credit Facility, available credit, and weighted-average interest rate, confirming covenant compliance | Metric | June 30, 2023 ($ thousands) | December 31, 2022 ($ thousands) | | :------------------------------------------- | :-------------------------- | :------------------------------ | | Total credit facility | 400,000 | 400,000 | | Balance outstanding | 77,040 | 83,670 | | Amount available, subject to covenant restrictions | 321,320 | 314,690 | | Weighted-average interest rate | 5.74% | 2.96% | - The **Revolving Credit Facility's** maturity was extended to December **15, 2026**, and **LIBOR** was replaced with **SOFR** as the primary reference rate[102](index=102&type=chunk)[215](index=215&type=chunk) - The Company was in compliance with all **debt covenants** at June **30, 2023**[103](index=103&type=chunk)[215](index=215&type=chunk) [NOTE 13 - Derivative Financial Instruments](index=18&type=section&id=NOTE%2013%20-%20Derivative%20Financial%20Instruments) Explains the Company's use of interest rate swaps, foreign currency forward contracts, and a cross-currency swap to manage market risks - The Company uses **interest rate swaps** to convert **$50,000 thousand** of variable rate debt to a fixed rate until December **2026**[107](index=107&type=chunk) - **Foreign currency forward contracts**, designated as **cash flow hedges**, had a notional amount of **$16,538 thousand** at June **30, 2023**, with a net unrealized gain of **$2,387 thousand** in **AOCI** expected to reclassify to earnings within **12 months**[106](index=106&type=chunk)[134](index=134&type=chunk)[158](index=158&type=chunk) - A **cross-currency swap**, designated as a **net investment hedge** for the **Ferroperm acquisition**, resulted in a net unrealized loss of **$1,003 thousand** in **AOCI** at June **30, 2023**[108](index=108&type=chunk) | Derivative Type | Six Months Ended June 30, 2023 ($ thousands) | Six Months Ended June 30, 2022 ($ thousands) | | :------------------------ | :------------------------------------------- | :------------------------------------------- | | Total derivative gain on foreign exchange contracts recognized in earnings | 747 | 308 | | Income (expense) from Interest Rate Swaps in Interest expense | 817 | (273) | | Income from Cross-Currency Swap in Interest expense | 295 | — | | Total net gains on derivatives | 1,859 | 35 | [NOTE 14 – Accumulated Other Comprehensive Income (Loss)](index=20&type=section&id=NOTE%2014%20%E2%80%93%20Accumulated%20Other%20Comprehensive%20Income%20(Loss)) Analyzes the changes in accumulated other comprehensive income (loss), driven by derivatives, pension costs, and translation adjustments | Component | As of December 31, 2022 ($ thousands) | As of June 30, 2023 ($ thousands) | | :-------------------------------------- | :------------------------------------ | :-------------------------------- | | Changes in fair market value of derivatives, net | 3,012 | 4,221 | | Changes in unrealized pension cost, net | (803) | (833) | | Cumulative translation adjustment, net | (2,880) | 303 | | Total accumulated other comprehensive (loss) income | (671) | 3,691 | - The increase in **AOCI** was significantly influenced by a **$2,414 thousand** gain recognized in **OCI** from changes in **fair market value of derivatives** and a **$3,183 thousand** gain from **cumulative translation adjustments** during the six months ended June **30, 2023**[165](index=165&type=chunk) [NOTE 15 – Shareholders' Equity](index=22&type=section&id=NOTE%2015%20%E2%80%93%20Shareholders'%20Equity) Details changes in shareholders' equity, including common shares outstanding, treasury stock, and the new share repurchase program | Metric | June 30, 2023 | December 31, 2022 | | :---------------------- | :------------ | :---------------- | | Shares issued | 57,440,235 | 57,330,761 | | Shares outstanding | 31,394,377 | 31,680,890 | | Treasury stock shares held | 26,045,858 | 25,649,871 | - A new **share repurchase program** for up to **$50,000 thousand** was approved on February **9, 2023**, replacing the prior program. As of June **30, 2023**, approximately **$36,633 thousand** remains available[168](index=168&type=chunk)[196](index=196&type=chunk) - During the six months ended June **30, 2023**, **395,987 shares** of **common stock** were repurchased for **$17,562 thousand**[168](index=168&type=chunk)[169](index=169&type=chunk) [NOTE 16- Stock-Based Compensation](index=24&type=section&id=NOTE%2016-%20Stock-Based%20Compensation) Reports stock-based compensation expense, unrecognized compensation for RSUs, and outstanding cash-settled RSUs | Expense Type | Six Months Ended June 30, 2023 ($ thousands) | Six Months Ended June 30, 2022 ($ thousands) | | :----------------------- | :------------------------------------------- | :------------------------------------------- | | Service-based RSUs | 1,535 | 1,368 | | Performance-based RSUs | 1,357 | 2,041 | | Cash-settled RSUs | 343 | 157 | | Total compensation expense | 3,235 | 3,566 | | RSU Type | Unrecognized Compensation Expense at June 30, 2023 ($ thousands) | Weighted Average Period (years) | | :----------------------- | :--------------------------------------------------------------- | :------------------------------ | | Service-based RSUs | 2,993 | 1.47 | | Performance-based RSUs | 5,252 | 1.88 | | Total | 8,245 | 1.73 | - At June **30, 2023**, there were **49,347 Cash-Settled RSUs** outstanding, classified as liabilities, for key employees in foreign locations[150](index=150&type=chunk) [NOTE 17 — Fair Value Measurements](index=26&type=section&id=NOTE%2017%20%E2%80%94%20Fair%20Value%20Measurements) Describes the fair value measurement of financial instruments, including interest rate swaps, foreign currency hedges, and contingent consideration | Financial Instrument | June 30, 2023 Carrying Value ($ thousands) | Level 1 ($ thousands) | Level 2 ($ thousands) | Level 3 ($ thousands) | | :------------------------------ | :----------------------------------------- | :-------------------- | :-------------------- | :-------------------- | | Interest rate swaps | 3,092 | — | 3,092 | — | | Foreign currency hedges | 2,095 | — | 2,095 | — | | Cross-currency swap | (701) | — | (701) | — | | Qualified replacement plan assets | 14,218 | 14,218 | — | — | | Contingent consideration | (3,564) | — | — | (3,564) | - **Contingent consideration**, valued at **$3,564 thousand**, is a **Level 3 fair value measurement**, relying on management's assumptions about future revenues and timing of events[151](index=151&type=chunk) - **Interest rate swaps** and **foreign currency hedges** are classified within **Level 2** of the fair value hierarchy, using standard valuation models with **market-based observable inputs**[1](index=1&type=chunk) [NOTE 18 — Income Taxes](index=27&type=section&id=NOTE%2018%20%E2%80%94%20Income%20Taxes) Discusses the effective income tax rate and the factors contributing to its decrease for the six months ended June 30, 2023 | Period | Effective Tax Rate | | :---------------------- | :----------------- | | Three Months Ended June 30, 2023 | 19.8% | | Three Months Ended June 30, 2022 | 25.6% | | Six Months Ended June 30, 2023 | 19.5% | | Six Months Ended June 30, 2022 | 23.0% | - The decrease in the **effective income tax rate** is primarily attributed to **tax benefits** recorded upon **vesting of restricted stock** and **tax benefits** from amended U.S. federal income tax returns[4](index=4&type=chunk)[213](index=213&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=28&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses financial performance for Q2 and six months ended June 30, 2023, noting Q2 sales growth, overall earnings decline, and strong liquidity [Overview](index=28&type=section&id=Overview) CTS Corporation designs and manufactures products for aerospace & defense, industrial, medical, and transportation markets, enhancing capabilities through the Maglab AG acquisition - **CTS Corporation** designs and manufactures products that Sense, Connect, and Move for **OEMs** and tier one suppliers in **aerospace and defense**, **industrial**, **medical**, and **transportation markets**[154](index=154&type=chunk) - The Company acquired **Maglab AG** in February **2023**, gaining expertise in **magnetic system design** and **current measurement solutions** for **e-mobility**, **industrial automation**, and **renewable energy**[154](index=154&type=chunk) [Supply Chain Uncertainties](index=28&type=section&id=Supply%20Chain%20Uncertainties) Despite easing global conditions, material shortages persist, posing risks to production schedules and potentially leading to excess inventory due to fluctuating customer orders - **Supply chain conditions** have eased, but **material shortages** could still impact **production schedules** for **CTS** or its customers[180](index=180&type=chunk) - The Company faces the risk of carrying **excess inventory** due to customers changing orders on short notice[180](index=180&type=chunk) [Results of Operations: Second Quarter 2023 versus Second Quarter 2022](index=29&type=section&id=Results%20of%20Operations%3A%20Second%20Quarter%202023%20versus%20Second%20Quarter%202022) Q2 2023 net sales marginally increased by 0.1%, driven by transportation, while gross margin and operating earnings declined due to sales mix, costs, and restructuring charges | Metric | Q2 2023 ($ thousands) | Q2 2022 ($ thousands) | % Change | | :---------------------- | :-------------------- | :-------------------- | :------- | | Net sales | 145,182 | 144,982 | 0.1% | | Gross margin | 50,742 | 51,848 | (2.1%) | | Operating earnings | 18,432 | 22,686 | (18.8%) | | Net earnings | 12,897 | 12,598 | 2.4% | | R&D expenses (% of net sales) | 6,721 (4.6%) | 6,294 (4.3%) | 6.8% | | Restructuring charges | 1,895 | 630 | 200.8% | | Effective income tax rate | 19.8% | 25.6% | (5.8 pp) | - **Net sales** to the **transportation market** increased by **10.0%**, while **non-transportation markets** decreased by **10.3%** in Q2 **2023**, with **foreign exchange rates** decreasing **net sales** by **$1,092 thousand**[7](index=7&type=chunk) - **Gross margin** decrease was driven by **end market sales mix**, increased **material and freight costs**, and unfavorable **foreign exchange rates** of **$1,720 thousand**[156](index=156&type=chunk) [Results of Operations: Six Months ended June 30, 2023 versus Six Months Ended June 30, 2022](index=30&type=section&id=Results%20of%20Operations%3A%20Six%20Months%20ended%20June%2030%2C%202023%20versus%20Six%20Months%20Ended%20June%2030%2C%202022) Six-month net sales decreased by 0.5%, with transportation growth offset by non-transportation declines, leading to lower gross margin and operating earnings due to increased expenses | Metric | 6M 2023 ($ thousands) | 6M 2022 ($ thousands) | % Change | | :---------------------- | :-------------------- | :-------------------- | :------- | | Net sales | 291,176 | 292,677 | (0.5%) | | Gross margin | 102,394 | 106,188 | (3.6%) | | Operating earnings | 40,607 | 48,732 | (16.7%) | | Net earnings | 31,241 | 32,837 | (4.9%) | | R&D expenses (% of net sales) | 13,307 (4.6%) | 12,488 (4.3%) | 6.6% | | Restructuring charges | 2,807 | 942 | 198.0% | | Effective income tax rate | 19.5% | 23.0% | (3.5 pp) | - **Net sales** to the **transportation market** increased by **1.7%**, while **non-transportation markets** decreased by **2.9%** for the six-month period, with **foreign exchange rates** decreasing **net sales** by **$3,413 thousand**[11](index=11&type=chunk) - **SG&A expenses** increased by **3.7%** due to higher **environmental costs** and **acquisition activity**[186](index=186&type=chunk) [Liquidity and Capital Resources](index=31&type=section&id=Liquidity%20and%20Capital%20Resources) Liquidity is strong, supported by operating cash flows and a $400,000 thousand Revolving Credit Facility, despite increased cash usage in financing activities - **Net cash provided by operating activities** was **$34,607 thousand** for the six months ended June **30, 2023**[15](index=15&type=chunk)[190](index=190&type=chunk) - **Net cash used in investing activities** was **$(11,846) thousand**, driven by the **Maglab acquisition** and **capital expenditures**[190](index=190&type=chunk) - **Net cash used in financing activities** was **$(29,967) thousand** for the six months ended June **30, 2023**, primarily due to **$17,562 thousand** in **treasury stock purchases** and **$6,630 thousand** net cash used in **long-term debt paydown**[191](index=191&type=chunk) - The **Revolving Credit Facility** provides **$400,000 thousand** in total credit, with **$321,320 thousand** available at June **30, 2023**, and a **weighted-average interest rate** of **5.74%**[17](index=17&type=chunk)[128](index=128&type=chunk)[215](index=215&type=chunk) [Critical Accounting Policies and Estimates](index=32&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) The Company's critical accounting policies and estimates remain consistent with the prior Annual Report on Form 10-K, with no significant changes in application - **Critical accounting policies and estimates** are consistent with those discussed in the Company's **Annual Report on Form 10-K** for the year ended December **31, 2022**[192](index=192&type=chunk) - There were no significant changes in the application of **critical accounting policies** or estimates during the three and six months ended June **30, 2023**[192](index=192&type=chunk) [Significant Customers](index=33&type=section&id=Significant%20Customers) Cummins Inc. and Toyota Motor Corporation were significant customers, accounting for 16.4% and 11.7% of net sales, respectively, for the six months ended June 30, 2023 | Customer | Six Months Ended June 30, 2023 (% of Net Sales) | Six Months Ended June 30, 2022 (% of Net Sales) | | :---------------------- | :---------------------------------------------- | :---------------------------------------------- | | Cummins Inc. | 16.4% | 15.9% | | Toyota Motor Corporation | 11.7% | 11.4% | - The Company continues to focus on broadening its **customer base** to diversify **non-transportation end market exposure**[217](index=217&type=chunk) [Forward‑Looking Statements](index=33&type=section&id=Forward%E2%80%91Looking%20Statements) This section contains forward-looking statements subject to various risks, including supply chain disruptions and economic changes, with no obligation for updates - **Forward-looking statements** are based on management's expectations, assumptions, and currently available information, subject to **uncertainties and risks**[20](index=20&type=chunk) - Factors that may affect future operating results include **supply chain disruptions**, **economic changes** (**inflation/recession**), **technological change**, **market conditions**, reliance on **key customers**, and **international operational risks**[20](index=20&type=chunk) - The Company undertakes no obligation to publicly update its **forward-looking statements**[20](index=20&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=33&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The Company's exposure to market risk, including foreign currency and interest rate fluctuations, has not materially changed from its prior Annual Report on Form 10-K - There have been no **material changes** in the Company's exposure to **market risk** during the three months ended June **30, 2023**[194](index=194&type=chunk) [Item 4. Controls and Procedures](index=34&type=section&id=Item%204.%20Controls%20and%20Procedures) Disclosure controls and procedures were effective as of June 30, 2023, with no material changes in internal control over financial reporting during the quarter - The **CEO** and **CFO** concluded that **disclosure controls and procedures** were effective as of June **30, 2023**, providing reasonable assurance for timely and accurate information disclosure[22](index=22&type=chunk) - No changes in **internal control over financial reporting** materially affected, or are reasonably likely to materially affect, the Company's **internal control over financial reporting** for the quarter ended June **30, 2023**[22](index=22&type=chunk) [PART II. OTHER INFORMATION](index=34&type=section&id=PART%20II.%20OTHER%20INFORMATION) This section provides additional information, including legal proceedings, risk factors, equity security sales, other disclosures, and exhibits [Item 1. Legal Proceedings](index=34&type=section&id=Item%201.%20Legal%20Proceedings) The Company is involved in various legal proceedings, with adequate accruals established and no material adverse effect expected on financial condition - The Company is involved in **litigation** arising from the ordinary conduct of its business[195](index=195&type=chunk) - Management believes adequate accruals have been established for expected future liabilities, and no **material adverse effect** on business, **results of operations**, **financial condition**, or **cash flows** is expected[195](index=195&type=chunk) [Item 1A. Risk Factors](index=34&type=page&id=Item%201A.%20Risk%20Factors) No significant changes to the Company's risk factors have occurred since the Annual Report on Form 10-K for the year ended December 31, 2022 - No significant changes to **risk factors** from those contained in the **Annual Report on Form 10-K** for the year ended December **31, 2022**[227](index=227&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=34&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) A new $50,000 thousand share repurchase program was approved in February 2023, with $36,633 thousand remaining available after repurchases - A new **share repurchase program** for up to **$50,000 thousand** was approved on February **9, 2023**, replacing the prior program[168](index=168&type=chunk)[196](index=196&type=chunk) - During the six months ended June **30, 2023**, **395,987 shares** of **common stock** were repurchased for **$17,562 thousand**[168](index=168&type=chunk)[169](index=169&type=chunk) - As of June **30, 2023**, approximately **$36,633 thousand** remains available for future purchases under the program[168](index=168&type=chunk)[222](index=222&type=chunk) [Item 5. Other Information](index=35&type=section&id=Item%205.%20Other%20Information) Directors and officers may engage in stock transactions, including through Rule 10b5-1 Plans, with specific plans for the CEO and CFO detailed - Directors and officers may purchase or sell **common stock**, including through **Rule 10b5-1 Plans**[229](index=229&type=chunk) - The **CEO**, Kieran O'Sullivan, entered a **Rule 10b5-1 Plan** on May **23, 2023**, for the sale of up to **65,000 shares**, terminating by May **23, 2025**[223](index=223&type=chunk) - The **CFO**, Ashish Agrawal, entered a **Rule 10b5-1 Plan** on June **2, 2023**, for the sale of up to **25,000 shares**, terminating by August **30, 2024**[198](index=198&type=chunk) [Item 6. Exhibits](index=36&type=section&id=Item%206.%20Exhibits) This section lists exhibits filed with the Quarterly Report on Form 10-Q, including certifications pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002, and the Inline XBRL formatted financial information - **Exhibits** include **certifications** pursuant to **Section 302** and **Section 906** of the **Sarbanes-Oxley Act of 2002**[199](index=199&type=chunk)[225](index=225&type=chunk)[231](index=231&type=chunk) - The Quarterly Report on Form **10-Q** includes **financial statements** formatted in **Inline XBRL**[200](index=200&type=chunk)[225](index=225&type=chunk) [SIGNATURES](index=37&type=section&id=SIGNATURES) The report is duly signed by the Corporate Controller and the Vice President and Chief Financial Officer as of July 25, 2023 - The report is signed by Thomas M. White, **Corporate Controller** (**Principal Accounting Officer**), and Ashish Agrawal, **Vice President and Chief Financial Officer** (**Principal Financial Officer**)[201](index=201&type=chunk) - The signing date for the report is July **25, 2023**[201](index=201&type=chunk)

Financial Performance - Q1 2023 - Revenue was $146 million, a decrease of 1% compared to Q1 2022[3] - Adjusted gross margin was 354%, a decrease of 180 basis points from the prior year[3] - Adjusted diluted EPS was $061, a decrease of 9% compared to Q1 2022[3] - Non-transportation revenues increased by 5% compared to Q1 2022[12] - Acquisitions contributed $11 million in sales[12] - Organic revenue decreased by 8%[12] Business Highlights - New business wins totaled $152 million, including 6 EV platform wins[12] - The book-to-bill ratio was 096, with 9 new customers added[12] - The company generated $11 million in operating cash flow[12] - Transportation revenue decreased by 6% compared to Q1 2022, primarily due to semiconductor shortages[12, 38] Forward Looking Statements - The company is closely monitoring risks from interest rates, inflation, currency fluctuations, and the geopolitical landscape[34] - The company is maintaining a softer outlook in the industrial end market and distribution channel[20]

CTS Corporation (NYSE:CTS) Q1 2023 Earnings Conference Call April 27, 2023 10:00 AM ET Company Participants Kieran O’Sullivan - President and Chief Executive Officer Ashish Agrawal - Chief Financial Officer Conference Call Participants Justin Long - Stephens John Franzreb - Sidoti Hendi Susanto - Gabelli Funds Joshua Buchalter - TD Cowen Operator Good morning, and thank you for attending today's CTS Q1 2023 Earnings Call. My name is Daniel, and I'll be the moderator for today's call. [Operator Instructions] ...