CTS(CTS) - 2021 Q4 - Annual Report

PART I Business CTS Corporation is a global manufacturer of sensors, connectivity components, and actuators serving diverse end markets - CTS Corporation designs, manufactures, and sells a broad line of sensors, connectivity components, and actuators categorized by their ability to Sense, Connect, or Move[11] Net Sales by Industry (% of consolidated net sales) | Industry | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Transportation | 55% | 57% | 64% | | Industrial | 27% | 25% | 20% | | Medical | 9% | 9% | 9% | | Aerospace and Defense | 9% | 9% | 7% | | Total | 100% | 100% | 100% | Significant Customers' Share of Net Sales | Customer | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Cummins Inc. | 15.0% | 13.1% | 16.1% | | Toyota Motor Corporation | 12.4% | 13.4% | 11.6% | - The company faces supply chain disruptions and inflationary pressures, particularly semiconductor shortages, which are expected to continue into fiscal 2022[25] - As of December 31, 2021, the company employed 3,820 people, with 86% located outside the U.S.[43] Risk Factors The company faces risks from customer concentration, industry cyclicality, supply chain disruptions, and international operations - A substantial portion of revenue is derived from a small number of customers, creating vulnerability to order decreases from key clients[62][63] - The business is exposed to cyclical industries like transportation, which can experience significant downturns affecting demand[67][68] - The COVID-19 pandemic has caused significant supply chain disruptions, including semiconductor shortages, leading to increased costs[73][107] - The company faces risks from its international operations, including political instability, currency fluctuations, and trade restrictions[112] - The company is exposed to potential security breaches and cybersecurity threats targeting the manufacturing industry[127] Properties The company operates over 1.6 million square feet of manufacturing and non-manufacturing facilities globally Summary of Facilities as of Dec 31, 2021 | Facility Type | Total Square Footage | | :--- | :--- | | Manufacturing | 1,050,724 | | Non-Manufacturing | 561,425 | - Manufacturing facilities are located across North America, Asia, and Europe, including Mexico, China, Taiwan, and the Czech Republic[131] Legal Proceedings The company is involved in ordinary course litigation and believes it has established adequate accruals for potential liabilities - The company is periodically involved in litigation arising from the ordinary course of business[132] - Management believes adequate accruals have been established for expected liabilities from pending legal matters[132] Mine Safety Disclosures This section is not applicable to the company's operations - Not applicable[134] PART II Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities The company's stock trades on the NYSE, and a $50 million stock repurchase program was active in 2021 - The company's common stock trades on the NYSE under the symbol "CTS"[137] - A $50 million stock repurchase program was authorized in May 2021, with $41.2 million remaining available at year-end[138] Issuer Purchases of Equity Securities (Q4 2021) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | Oct 1 - Oct 31, 2021 | 88,000 | $31.63 | | Nov 1 - Nov 30, 2021 | 2,942 | $35.00 | | Dec 1 - Dec 31, 2021 | 27,745 | $34.61 | | Total | 118,687 | $32.41 | Management's Discussion and Analysis of Financial Condition and Results of Operations Net sales grew 21.0% in 2021, but a large pension settlement charge resulted in a significant net loss Results of Operations (in millions, 2021 vs 2020) | Metric | 2021 | 2020 | % Change | | :--- | :--- | :--- | :--- | | Net sales | $512.9 | $424.1 | 21.0% | | Gross margin | $184.6 | $139.1 | 32.8% | | Gross margin % | 36.0% | 32.8% | - | | Operating earnings | $76.5 | $45.1 | 69.5% | | Net (loss) earnings | ($41.9) | $34.7 | (220.7)% | | Diluted (loss) EPS | ($1.30) | $1.06 | - | - The significant 2021 net loss was driven by a $126.3 million non-cash pension settlement charge[152] - Net sales growth was driven by a 17.7% increase in the transportation market and a 25.3% increase in other markets[148] - The company ended 2021 with $141.5 million in cash and increased its revolving credit facility to $400 million[154][161] Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks from foreign currency, interest rates, and commodity prices, which it manages with derivatives - The company uses interest rate swaps to manage risk, fixing the interest cost on $50 million of its long-term debt[185] - 42% of 2021 net sales originated outside the U.S., creating foreign currency risk managed with forward contracts[186][187] - The company faces commodity price risk and experienced significant increases in freight costs in 2021[188][189] Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements and the independent auditor's report for fiscal year 2021 Consolidated Balance Sheet Data (in millions) | Account | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Total Assets | $664.5 | $626.0 | | Total current assets | $289.1 | $233.2 | | Goodwill | $109.8 | $109.5 | | Total Liabilities | $200.9 | $202.4 | | Total current liabilities | $114.1 | $104.9 | | Long-term debt | $50.0 | $54.6 | | Total Shareholders' Equity | $463.6 | $423.7 | Consolidated Cash Flow Data (in millions) | Cash Flow | Year Ended Dec 31, 2021 | Year Ended Dec 31, 2020 | | :--- | :--- | :--- | | Net cash from operating activities | $86.1 | $76.8 | | Net cash used in investing activities | ($15.9) | ($23.2) | | Net cash used in financing activities | ($20.7) | ($61.3) | | Net increase (decrease) in cash | $49.7 | ($8.5) | - The independent auditor identified the quantitative goodwill impairment assessment as a critical audit matter[193] - The company completed its U.S. pension plan termination, resulting in settlement charges of $126.3 million[277][279][281] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure This section is not applicable to the company - Not applicable[386] Controls and Procedures Management concluded that the company's disclosure controls, procedures, and internal control over financial reporting were effective - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2021[387] - The company's internal control over financial reporting was deemed effective based on the COSO framework[389] - No material changes were made to internal controls during the fourth quarter of 2021[390] Other Information This section is not applicable to the company - Not applicable[398] PART III Directors, Executive Officers and Corporate Governance Information regarding directors and corporate governance is incorporated by reference from the 2022 proxy statement - Information is incorporated by reference from the company's 2022 proxy statement[401] Executive Compensation Executive compensation details are incorporated by reference from the 2022 proxy statement - Information is incorporated by reference from the company's 2022 proxy statement[402] Equity Compensation Plan Information as of Dec 31, 2021 | Plan Category | Securities to be Issued Upon Exercise | Securities Remaining Available for Future Issuance | | :--- | :--- | :--- | | Approved by security holders | 820,021 | 1,734,419 | | Not approved by security holders | 4,722 | 0 | | Total | 824,743 | 1,734,419 | Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters Information on security ownership is incorporated by reference from the 2022 proxy statement - Information is incorporated by reference from the company's 2022 proxy statement[404] Certain Relationships and Related Transactions, and Director Independence Information on related transactions and director independence is incorporated by reference from the 2022 proxy statement - Information is incorporated by reference from the company's 2022 proxy statement[406] Principal Accountant Fees and Services Information on principal accountant fees is incorporated by reference from the 2022 proxy statement - Information is incorporated by reference from the company's 2022 proxy statement[407] PART IV Exhibits and Financial Statements Schedules This section lists all financial statements, schedules, and exhibits filed as part of the annual report - This item lists all financial statements, schedules, and exhibits filed with the Form 10-K[410] - The included financial statement schedule is Schedule II: Valuation and Qualifying Accounts and Reserves[410]