CTS(CTS) - 2022 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents the unaudited condensed consolidated financial statements and management's discussion and analysis for CTS Corporation Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements for CTS Corporation, including statements of earnings, comprehensive earnings, balance sheets, cash flows, and shareholders' equity, along with detailed notes explaining accounting policies, acquisitions, debt, equity, and other financial items Condensed Consolidated Statements of Earnings (Loss) This section provides a detailed breakdown of CTS Corporation's earnings and losses for the specified periods Three Months Ended September 30, 2022 vs 2021 (in thousands of dollars): | Metric | Sep 30, 2022 | Sep 30, 2021 | | :-------------------------------- | :----------- | :----------- | | Net sales | $151,911 | $122,382 | | Gross margin | $53,346 | $45,662 | | Operating earnings | $22,644 | $18,967 | | Net earnings (loss) | $11,798 | $(63,896) | | Basic EPS | $0.37 | $(1.97) | | Diluted EPS | $0.37 | $(1.97) | Nine Months Ended September 30, 2022 vs 2021 (in thousands of dollars): | Metric | Sep 30, 2022 | Sep 30, 2021 | | :-------------------------------- | :----------- | :----------- | | Net sales | $444,588 | $380,394 | | Gross margin | $159,534 | $135,948 | | Operating earnings | $71,376 | $58,043 | | Net earnings (loss) | $44,635 | $(51,031) | | Basic EPS | $1.39 | $(1.58) | | Diluted EPS | $1.38 | $(1.58) | Condensed Consolidated Statements of Comprehensive Earnings This section details the company's comprehensive earnings, including net earnings and other comprehensive income or loss components Three Months Ended September 30, 2022 vs 2021 (in thousands of dollars): | Metric | Sep 30, 2022 | Sep 30, 2021 | | :-------------------------------- | :----------- | :----------- | | Net earnings (loss) | $11,798 | $(63,896) | | Other comprehensive (loss) earnings | $(6,179) | $72,228 | | Comprehensive earnings | $5,619 | $8,332 | Nine Months Ended September 30, 2022 vs 2021 (in thousands of dollars): | Metric | Sep 30, 2022 | Sep 30, 2021 | | :-------------------------------- | :----------- | :----------- | | Net earnings (loss) | $44,635 | $(51,031) | | Other comprehensive (loss) earnings | $(4,324) | $91,078 | | Comprehensive earnings | $40,311 | $40,047 | Condensed Consolidated Balance Sheets This section presents a snapshot of the company's financial position, including assets, liabilities, and shareholders' equity at specific dates As of September 30, 2022 vs December 31, 2021 (in thousands of dollars): | Metric | Sep 30, 2022 | Dec 31, 2021 | | :-------------------------------- | :----------- | :----------- | | Total Assets | $734,679 | $664,462 | | Total Liabilities | $244,067 | $200,884 | | Total Shareholders' Equity | $490,612 | $463,578 | | Cash and cash equivalents | $147,908 | $141,465 | | Accounts receivable, net | $97,004 | $82,191 | | Inventories, net | $63,465 | $49,506 | | Goodwill | $138,945 | $109,798 | | Long-term debt | $85,478 | $50,000 | Condensed Consolidated Statements of Cash Flows This section outlines the cash inflows and outflows from operating, investing, and financing activities for the specified periods Nine Months Ended September 30, 2022 vs 2021 (in thousands of dollars): | Metric | Sep 30, 2022 | Sep 30, 2021 | | :-------------------------------- | :----------- | :----------- | | Net cash provided by operating activities | $95,739 | $60,117 | | Net cash used in investing activities | $(105,788) | $(8,395) | | Net cash provided by (used in) financing activities | $15,623 | $(15,411) | | Net increase in cash and cash equivalents | $6,443 | $36,754 | | Cash and cash equivalents at end of period | $147,908 | $128,527 | Condensed Consolidated Statements of Shareholders' Equity This section details changes in shareholders' equity, including net earnings, dividends, stock repurchases, and other comprehensive income adjustments Changes in Total Equity for Nine Months Ended September 30, 2022 (in thousands of dollars): | Item | Amount | | :-------------------------------- | :----------- | | Balances at December 31, 2021 | $463,578 | | Net earnings | $44,635 | | Changes in fair market value of derivatives, net of tax | $3,667 | | Changes in unrealized pension cost, net of tax | $341 | | Cumulative translation adjustment, net of tax | $(8,332) | | Cash dividends of $0.04 per share | $(3,855) | | Purchases of treasury stock | $(13,446) | | Issued shares on vesting of restricted stock units | $(1,413) | | Stock compensation | $5,807 | | Balances at September 30, 2022 | $490,612 | Changes in Total Equity for Nine Months Ended September 30, 2021 (in thousands of dollars): | Item | Amount | | :-------------------------------- | :----------- | | Balances at December 31, 2020 | $423,682 | | Net earnings | $(51,031) | | Changes in fair market value of derivatives, net of tax | $100 | | Changes in unrealized pension cost, net of tax | $90,976 | | Cumulative translation adjustment, net of tax | $2 | | Cash dividends of $0.12 per share | $(3,882) | | Acquired treasury stock | $(4,939) | | Issued shares on vesting of restricted stock units | $(1,490) | | Stock compensation | $4,106 | | Balances at September 30, 2021 | $457,374 | Notes to Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures for the financial statements, covering accounting policies, acquisitions, debt, equity, and other significant financial items NOTE 1 — Basis of Presentation The unaudited condensed consolidated financial statements are prepared in accordance with SEC rules, relying on management estimates and assumptions. No material changes to significant accounting policies have occurred since the December 31, 2021 Annual Report on Form 10-K - The financial statements are unaudited and prepared by management, reflecting all necessary adjustments for fair presentation[22][23] - No material changes in significant accounting policies have occurred compared to the 2021 Annual Report on Form 10-K[24] NOTE 2 – Revenue Recognition Revenue is recognized when performance obligations are satisfied, typically upon delivery or shipment, with payment expected within 30 to 90 days. The company disaggregates revenue by major markets, showing growth across Transportation, Industrial, Medical, and Aerospace & Defense sectors - Revenue is recognized when performance obligations are met, usually upon delivery or shipment, with payment terms typically 30 to 90 days[25] Disaggregated Revenue by Major Markets (in thousands of dollars): | Market | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :---------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Transportation | $78,377 | $62,342 | $232,200 | $209,750 | | Industrial | $43,857 | $36,356 | $125,267 | $98,433 | | Medical | $16,380 | $12,409 | $49,277 | $36,487 | | Aerospace & Defense | $13,297 | $11,275 | $37,844 | $35,724 | | Total | $151,911 | $122,382 | $444,588 | $380,394 | NOTE 3 – Business Acquisitions CTS Corporation completed two acquisitions in 2022: TEWA Temperature Sensors in February for $24.5 million and Ferroperm Piezoceramics in June for $72.0 million. Both acquisitions aim to expand market presence in Europe and complement existing product lines, with preliminary purchase price allocations including significant goodwill and intangible assets - Acquired TEWA Temperature Sensors on February 28, 2022, for $24,485 thousand, expanding temperature sensing capabilities and European presence[29][30] TEWA Acquisition - Fair Values at February 28, 2022 (in thousands of dollars): | Asset/Liability | Fair Value | | :-------------------------- | :----------- | | Current assets | $5,650 | | Property, plant and equipment | $644 | | Other assets | $27 | | Goodwill | $7,669 | | Intangible assets | $12,503 | | Fair value of assets acquired | $26,493 | | Less fair value of liabilities acquired | $(2,008) | | Purchase price | $24,485 | - Acquired Ferroperm Piezoceramics A/S on June 30, 2022, for $72,043 thousand, enhancing piezoceramic components for medical, industrial, and aerospace applications and further expanding European market presence[35][36] Ferroperm Acquisition - Fair Values at June 30, 2022 (in thousands of dollars): | Asset/Liability | Fair Value | | :-------------------------- | :----------- | | Accounts Receivable | $3,073 | | Inventory | $6,848 | | Other current assets | $1,001 | | Property, plant and equipment | $3,953 | | Other assets | $158 | | Goodwill | $24,298 | | Intangible assets | $36,448 | | Fair value of assets acquired | $75,779 | | Less fair value of liabilities acquired | $(3,736) | | Purchase price | $72,043 | NOTE 4 – Accounts Receivable, net Accounts receivable, net, increased to $97.0 million as of September 30, 2022, from $82.2 million at December 31, 2021, primarily due to an increase in gross receivables, partially offset by a decrease in the allowance for credit losses Accounts Receivable, Net (in thousands of dollars): | Component | Sep 30, 2022 | Dec 31, 2021 | | :-------------------------- | :----------- | :----------- | | Accounts receivable, gross | $98,388 | $83,848 | | Less: Allowance for credit losses | $(1,384) | $(1,657) | | Accounts receivable, net | $97,004 | $82,191 | NOTE 5 – Inventories, net Inventories, net, increased to $63.5 million as of September 30, 2022, from $49.5 million at December 31, 2021, driven by increases across finished goods, work-in-process, and raw materials, despite an increase in inventory reserves Inventories, Net (in thousands of dollars): | Component | Sep 30, 2022 | Dec 31, 2021 | | :-------------------------- | :----------- | :----------- | | Finished goods | $13,539 | $11,955 | | Work-in-process | $22,328 | $18,878 | | Raw materials | $38,460 | $28,078 | | Less: Inventory reserves | $(10,862) | $(9,405) | | Inventories, net | $63,465 | $49,506 | NOTE 6 – Property, Plant and Equipment, net Property, plant and equipment, net, slightly decreased to $95.9 million as of September 30, 2022, from $96.9 million at December 31, 2021, with depreciation expense for the nine months ended September 30, 2022, at $13.5 million Property, Plant and Equipment, Net (in thousands of dollars): | Component | Sep 30, 2022 | Dec 31, 2021 | | :-------------------------------- | :----------- | :----------- | | Land and land improvements | $1,100 | $1,095 | | Buildings and improvements | $71,644 | $69,614 | | Machinery and equipment | $253,659 | $247,708 | | Less: Accumulated depreciation | $(230,497) | $(221,541) | | Property, plant and equipment, net | $95,906 | $96,876 | - Depreciation expense for the nine months ended September 30, 2022, was $13,548 thousand, up from $13,166 thousand in the prior year[43] NOTE 7 – Retirement Plans The company reported net pension income for both domestic and foreign plans in 2022, a significant shift from expense in 2021, primarily due to the termination of the U.S.-based pension plan in 2021 and related settlement charges. In 2022, the final termination process included transferring remaining Plan assets to the Company, resulting in $6.8 million in excise tax Net Pension (Income) Expense (in thousands of dollars): | Period | Sep 30, 2022 | Sep 30, 2021 | | :-------------------------- | :----------- | :----------- | | Three months ended | $(2,076) | $107,447 | | Nine months ended | $(1,944) | $131,227 | - The U.S.-based pension plan termination process, initiated in 2020, was finalized in 2021, leading to significant non-cash settlement charges of $20,063 thousand (Q2 2021) and $106,206 thousand (Q3 2021)[47][49][51] - In Q3 2022, approximately $34,016 thousand of remaining Plan assets were transferred to the Company, resulting in $6,803 thousand of excise tax recorded as Other Expense[52] NOTE 8 – Goodwill and Other Intangible Assets Other intangible assets, net, increased to $106.2 million as of September 30, 2022, from $69.9 million at December 31, 2021, primarily due to acquisitions. Goodwill also increased significantly to $138.9 million from $109.8 million, driven by the TEWA and Ferroperm acquisitions Other Intangible Assets, Net (in thousands of dollars): | Component | Sep 30, 2022 Net Amount | Dec 31, 2021 Net Amount | | :-------------------------------- | :---------------------- | :---------------------- | | Customer lists/relationships | $86,770 | $47,676 | | Technology and other intangibles | $19,437 | $22,212 | | Total other intangible assets, net | $106,207 | $69,888 | Amortization Expense for Other Intangible Assets (in thousands of dollars): | Period | Amortization Expense | | :-------------------------------- | :------------------- | | Three months ended Sep 30, 2022 | $3,262 | | Nine months ended Sep 30, 2022 | $8,179 | | Three months ended Sep 30, 2021 | $2,348 | | Nine months ended Sep 30, 2021 | $7,065 | Changes in Goodwill (in thousands of dollars): | Item | Total | | :-------------------------------- | :----------- | | Balance at December 31, 2021 | $109,798 | | Acquisitions | $31,967 | | Foreign currency translation | $(2,820) | | Balance at September 30, 2022 | $138,945 | NOTE 9 – Costs Associated with Exit and Restructuring Activities Restructuring charges increased significantly to $1.4 million for the nine months ended September 30, 2022, from $0.6 million in the prior year, reflecting ongoing efforts to optimize manufacturing footprint and improve operational efficiency, including the September 2020 Plan and other activities Restructuring Charges (in thousands of dollars): | Period | Sep 30, 2022 | Sep 30, 2021 | | :-------------------------- | :----------- | :----------- | | Three months ended | $492 | $319 | | Nine months ended | $1,434 | $551 | - The September 2020 Plan, focused on manufacturing footprint optimization and operational efficiency, has incurred $1,793 thousand in program costs to date, with a total estimated cost of $3,500 to $4,500 thousand[59] Restructuring Liability Activity (in thousands of dollars): | Item | Amount | | :-------------------------------- | :----------- | | Restructuring liability at January 1, 2022 | $962 | | Restructuring charges | $1,434 | | Cost paid | $(1,412) | | Restructuring liability at September 30, 2022 | $984 | NOTE 10 – Accrued Expenses and Other Liabilities Total accrued expenses and other liabilities decreased slightly to $35.7 million as of September 30, 2022, from $36.7 million at December 31, 2021, with notable changes in accrued income taxes and other accrued liabilities Accrued Expenses and Other Liabilities (in thousands of dollars): | Component | Sep 30, 2022 | Dec 31, 2021 | | :-------------------------------- | :----------- | :----------- | | Accrued product related costs | $3,068 | $3,188 | | Accrued income taxes | $9,118 | $6,761 | | Accrued property and other taxes | $1,916 | $2,370 | | Accrued professional fees | $2,031 | $1,629 | | Accrued customer related liabilities | $3,261 | $3,254 | | Dividends payable | $1,274 | $1,289 | | Remediation reserves | $10,635 | $10,979 | | Derivative liabilities | $0 | $437 | | Other accrued liabilities | $4,438 | $6,811 | | Total accrued expenses and other liabilities | $35,741 | $36,718 | NOTE 11 – Commitments and Contingencies The company faces environmental liabilities, including Superfund sites, and other legal claims arising from ordinary business conduct. Liabilities are accrued when probable and estimable, but the ultimate disposition of these claims could materially impact financial results - The company is potentially liable for environmental contamination at several sites, including two designated National Priorities List sites (Asheville, NC and Mountain View, CA)[64] Remediation Reserves Roll-Forward (in thousands of dollars): | Item | Sep 30, 2022 | Dec 31, 2021 | | :-------------------------- | :----------- | :----------- | | Balance at beginning of period | $10,979 | $10,642 | | Remediation expense | $1,710 | $2,254 | | Net remediation payments | $(2,080) | $(1,929) | | Other activity | $26 | $12 | | Balance at end of the period | $10,635 | $10,979 | - The company accrues for estimated product warranty liabilities at the time of sale, based on historical claims experience and specific claim assessments[67] NOTE 12 - Debt Long-term debt increased to $85.5 million as of September 30, 2022, from $50.0 million at December 31, 2021, under the $400 million Revolving Credit Facility. The facility, amended in December 2021, extended maturity to December 2026 and replaced LIBOR with SOFR, with the company in compliance with all debt covenants Long-term Debt (in thousands of dollars): | Component | Sep 30, 2022 | Dec 31, 2021 | | :-------------------------------- | :----------- | :----------- | | Total credit facility | $400,000 | $400,000 | | Balance outstanding | $85,478 | $50,000 | | Standby letters of credit | $1,640 | $1,740 | | Amount available, subject to covenant restrictions | $312,882 | $348,260 | | Weighted-average interest rate | 2.22% | 1.16% | - The Revolving Credit Facility was amended in December 2021 to increase total availability to $400 million, extend maturity to December 2026, and replace LIBOR with SOFR as the primary reference rate[70] - The company was in compliance with all debt covenants as of September 30, 2022[72] NOTE 13 - Derivative Financial Instruments CTS uses derivative financial instruments, including foreign currency forward contracts, interest rate swaps, and a cross-currency swap, to manage exposure to foreign currency and interest rate risks. These instruments are recorded at fair value, with effective portions of gains/losses recorded in accumulated other comprehensive loss until settlement, and a total net gain of $470 thousand on derivatives recognized in earnings for Q3 2022 - The company uses foreign currency forward contracts, interest rate swaps, and a cross-currency swap to manage foreign currency exchange and interest rate risks[74][79][81][83] Fair Values of Derivative Instruments (in thousands of dollars): | Instrument | Sep 30, 2022 | Dec 31, 2021 | | :-------------------------------- | :----------- | :----------- | | Interest rate swaps (asset) | $3,330 | $0 | | Interest rate swaps (liability) | $0 | $(790) | | Foreign currency hedges (asset) | $789 | $135 | | Net investment hedge (asset) | $1,675 | $0 | Effect of Derivative Instruments on Earnings (in thousands of dollars): | Item | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2022 | | :-------------------------------- | :------------------------------ | :----------------------------- | | Total derivative gain on foreign exchange contracts | $216 | $524 | | Income (expense) recorded in Interest expense (Interest Rate Swaps) | $79 | $(194) | | Income (expense) recorded in Interest expense (Cross-Currency Swap) | $175 | $175 | | Total net gains on derivatives | $470 | $505 | NOTE 14 – Accumulated Other Comprehensive Loss Accumulated Other Comprehensive Loss (AOCI) includes unrealized gains/losses on hedges, pension obligations, and cumulative translation adjustments. AOCI increased to $(8.8) million as of September 30, 2022, from $(4.5) million at December 31, 2021, primarily due to significant cumulative translation adjustments and changes in unrealized pension costs - AOCI components include unrealized gains/losses on derivatives, unrealized pension costs, and cumulative translation adjustments[91][92][93] Components of Accumulated Other Comprehensive Loss (Net, in thousands of dollars): | Component | As of Dec 31, 2021 | Gain (Loss) Recognized in OCI (9M 2022) | Reclassified from AOCI to Earnings (9M 2022) | As of Sep 30, 2022 | | :-------------------------------- | :----------------- | :-------------------------------------- | :------------------------------------------- | :----------------- | | Changes in fair market value of derivatives | $(488) | $3,922 | $(254) | $3,180 | | Changes in unrealized pension cost | $(2,006) | $1,647 | $(1,306) | $(1,665) | | Cumulative translation adjustment | $(2,032) | $(8,332) | $0 | $(10,364) | | Total AOCI | $(4,526) | $(2,763) | $(1,560) | $(8,849) | - Foreign exchange transaction losses for the nine months ended September 30, 2022, were $3,980 thousand, compared to $1,412 thousand in the prior year[94] NOTE 15 – Shareholders' Equity Common shares outstanding decreased to 31.9 million as of September 30, 2022, from 32.2 million at December 31, 2021, primarily due to share repurchases. The company repurchased 384,428 shares for $13.4 million during the nine months ended September 30, 2022, under a $50 million program with $27.8 million remaining Share Count Data: | Item | Sep 30, 2022 | Dec 31, 2021 | | :-------------------------- | :----------- | :----------- | | Common Shares authorized | 75,000,000 | 75,000,000 | | Common Shares issued | 57,310,837 | 57,245,060 | | Common Shares outstanding | 31,860,064 | 32,178,715 | | Treasury stock shares held | 25,450,773 | 25,066,345 | - The Board approved a new $50 million share repurchase program on May 13, 2021, replacing the prior program[100] - During the nine months ended September 30, 2022, 384,428 shares were repurchased for $13,446 thousand, with approximately $27,768 thousand remaining available for future purchases[100] NOTE 16- Stock-Based Compensation Stock-based compensation expense increased to $5.8 million for the nine months ended September 30, 2022, from $4.1 million in the prior year, driven by higher expenses for performance and market-based RSUs. The company has several active plans, with future grants only under the 2018 Plan - The company has five active stock-based compensation plans, with future grants exclusively under the 2018 Equity and Incentive Compensation Plan[104] Stock-Based Compensation Expense (in thousands of dollars): | RSU Type | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2022 | | :-------------------------- | :------------------------------ | :----------------------------- | | Service-based RSUs | $766 | $2,134 | | Performance and Market-based RSUs | $1,338 | $3,379 | | Cash-settled RSUs | $137 | $294 | | Total | $2,241 | $5,807 | | Income tax benefit | $515 | $1,336 | | Net expense | $1,726 | $4,471 | Unrecognized Compensation Expense for Non-Vested RSUs (as of Sep 30, 2022, in thousands of dollars): | RSU Type | Unrecognized Compensation Expense | Weighted Average Period (years) | | :-------------------------- | :-------------------------------- | :------------------------------ | | Service-based RSUs | $2,013 | 1.41 | | Performance and Market-based RSUs | $5,282 | 1.82 | | Total | $7,295 | 1.70 | NOTE 17 — Fair Value Measurements The company measures financial assets and liabilities at fair value on a recurring basis, primarily classifying interest rate swaps, foreign currency hedges, and a cross-currency swap within Level 2 of the fair value hierarchy due to market-based observable inputs. Contingent consideration is classified as Level 3 due to significant unobservable inputs Financial Assets and Liabilities Measured at Fair Value (as of Sep 30, 2022, in thousands of dollars): | Instrument | Carrying Value | Level 1 | Level 2 | Level 3 | | :-------------------------- | :------------- | :------ | :------ | :------ | | Interest rate swaps (Asset) | $3,330 | $0 | $3,330 | $0 | | Foreign currency hedges (Asset) | $789 | $0 | $789 | $0 | | Cross-currency swap (Asset) | $1,675 | $0 | $1,675 | $0 | | Qualified replacement plan assets (Asset) | $15,635 | $15,635 | $0 | $0 | | Contingent consideration (Liability) | $(300) | $0 | $0 | $(300) | - Interest rate swaps, foreign currency hedges, and the cross-currency swap are classified within Level 2 of the fair value hierarchy, using standard valuation models with market-based observable inputs[113] - Contingent consideration is classified as Level 3, requiring significant judgment and unobservable inputs based on management's estimates of future revenues and timing of events[114] NOTE 18 — Income Taxes The effective tax rate for Q3 2022 increased to 31.8% from 28.9% in Q3 2021, primarily due to a nondeductible cost associated with the U.S. pension plan termination. For the nine months ended September 30, 2022, the effective tax rate decreased to 25.6% from 32.5% in 2021, mainly due to a one-time non-cash settlement expense related to the pension plan termination in the prior year Effective Tax Rates: | Period | Sep 30, 2022 | Sep 30, 2021 | | :-------------------------- | :----------- | :----------- | | Three Months Ended | 31.8% | 28.9% | | Nine Months Ended | 25.6% | 32.5% | - The increase in Q3 2022 effective tax rate is primarily attributed to a nondeductible cost associated with the U.S. pension plan termination[117][119] - The decrease in the nine-month effective tax rate for 2022 is primarily attributed to a one-time non-cash settlement expense related to the U.S. pension plan termination in 2021[120] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial performance, condition, and results of operations for the three and nine months ended September 30, 2022. It covers an overview of the business, the impact of COVID-19 and supply chain issues, detailed financial results, liquidity, capital resources, critical accounting policies, significant customers, and forward-looking statements Overview CTS Corporation is a leading designer and manufacturer of 'Sense, Connect, and Move' products for aerospace & defense, industrial, medical, and transportation markets. The company recently acquired TEWA Temperature Sensors and Ferroperm Piezoceramics to expand its market presence and product lines - CTS Corporation designs and manufactures products that Sense, Connect, and Move, serving aerospace & defense, industrial, medical, and transportation markets[123][124] - Acquired TEWA Temperature Sensors (Feb 2022) and Ferroperm Piezoceramics (June 2022) to diversify end markets and expand European presence[126][127] COVID-19 Impact and Supply Chain Uncertainties The COVID-19 pandemic and ongoing supply chain uncertainties, particularly semiconductor chip shortages, continue to negatively impact the global economy and CTS's operations, leading to increased material and freight costs and production disruptions. These challenges are expected to persist into 2023 - COVID-19 and supply chain uncertainties have disrupted financial markets, impacted the global supply chain, and increased material and operational costs[128] - Key semiconductor chip and other critical part shortages continue to force OEM production shutdowns, creating risks of excess inventory and pressure on manufacturing costs and gross margins[128][131][141] - Challenges from supply chain issues are anticipated to continue impacting results for the remainder of 2022 and into 2023[128][131][141] Results of Operations: Third Quarter 2022 versus Third Quarter 2021 In Q3 2022, net sales increased by 24.1% to $151.9 million, driven by growth in both transportation and non-transportation markets, including contributions from recent acquisitions. Gross margin improved by 16.8%, and operating earnings rose by 19.4%, while the company reported a net profit of $11.8 million compared to a net loss in Q3 2021, largely due to decreased pension expense Key Financial Highlights (Three Months Ended September 30, in thousands of dollars, except percentages): | Metric | 2022 | 2021 | Percent Change | | :-------------------------------- | :----------- | :----------- | :------------- | | Net sales | $151,911 | $122,382 | 24.1% | | Cost of goods sold | $98,565 | $76,720 | 28.5% | | Gross margin | $53,346 | $45,662 | 16.8% | | Selling, general and administrative expenses | $24,003 | $19,922 | 20.5% | | Research and development expenses | $6,207 | $6,454 | (3.8%) | | Restructuring charges | $492 | $319 | 54.2% | | Operating earnings | $22,644 | $18,967 | 19.4% | | Total other expense, net | $(5,346) | $(108,786) | (95.1%) | | Net earnings (loss) | $11,798 | $(63,896) | n/a | - Net sales increased by $29,529 thousand (24.1%) year-over-year, with acquisitions contributing $8,588 thousand, partially offset by a $4,137 thousand decrease due to foreign exchange rates[130] - The significant reduction in total other expense, net, was primarily driven by decreased pension expense due to the U.S. pension plan termination in 2021, despite $6,803 thousand in excise taxes in Q3 2022[137] Results of Operations: Nine Months ended September 30, 2022 versus Nine Months Ended September 30, 2021 For the nine months ended September 30, 2022, net sales grew by 16.9% to $444.6 million, with strong performance in both transportation and non-transportation markets, including acquisition contributions. Gross margin increased by 17.3%, and operating earnings rose by 23.0%. The company achieved net earnings of $44.6 million, a significant turnaround from a net loss in the prior year, largely due to reduced pension-related expenses Key Financial Highlights (Nine Months Ended September 30, in thousands of dollars, except percentages): | Metric | 2022 | 2021 | Percent Change | | :-------------------------------- | :----------- | :----------- | :------------- | | Net sales | $444,588 | $380,394 | 16.9% | | Cost of goods sold | $285,054 | $244,446 | 16.6% | | Gross margin | $159,534 | $135,948 | 17.3% | | Selling, general and administrative expenses | $68,029 | $59,184 | 14.9% | | Research and development expenses | $18,695 | $18,170 | 2.9% | | Restructuring charges | $1,434 | $551 | 160.3% | | Operating earnings | $71,376 | $58,043 | 23.0% | | Total other (expense), net | $(11,410) | $(133,674) | (91.5%) | | Net earnings (loss) | $44,635 | $(51,031) | (187.5%) | | Diluted net earnings (loss) per share | $1.38 | $(1.58) | | - Net sales increased by $64,194 thousand (16.9%) year-over-year, with acquisitions contributing $14,092 thousand, partially offset by a $6,650 thousand decrease due to foreign exchange rates[139] - The significant reduction in total other expense, net, was primarily driven by decreased pension expense due to the U.S. pension plan termination in 2021, despite $6,803 thousand in excise taxes and $1,776 thousand in derivative losses related to the Ferroperm acquisition in 2022[146] Liquidity and Capital Resources CTS primarily funds its operations through cash flows and its Revolving Credit Facility. As of September 30, 2022, cash and cash equivalents were $147.9 million, and total long-term debt was $85.5 million. Net cash provided by operating activities was $95.7 million, while investing activities used $105.8 million (primarily for acquisitions) and financing activities provided $15.6 million - Cash and cash equivalents were $147,908 thousand at September 30, 2022, up from $141,465 thousand at December 31, 2021[150] - Total long-term debt increased to $85,478 thousand at September 30, 2022, from $50,000 thousand at December 31, 2021, with debt as a percentage of total capitalization rising to 14.8% from 9.7%[150] Cash Flow Activities (Nine Months Ended September 30, 2022, in thousands of dollars): | Activity | Amount | | :-------------------------------- | :----------- | | Net cash provided by operating activities | $95,739 | | Net cash used in investing activities | $(105,788) | | Net cash provided by financing activities | $15,623 | - The Revolving Credit Facility has a total credit facility of $400,000 thousand, with $85,478 thousand outstanding and $312,882 thousand available as of September 30, 2022[154] Critical Accounting Policies and Estimates The company's critical accounting policies and estimates remain consistent with those disclosed in its Annual Report on Form 10-K for the year ended December 31, 2021, with no significant changes in their application during the three and nine months ended September 30, 2022 - Critical accounting policies and estimates are consistent with the Company's Annual Report on Form 10-K for the year ended December 31, 2021[161] - No significant changes in the application of critical accounting policies or estimates occurred during the three and nine months ended September 30, 2022[161] Significant Customers Cummins Inc. and Toyota Motor Corporation were significant customers, each accounting for over 10% of total net sales during the reported periods. The company continues to pursue a strategy of broadening its customer base to diversify non-transportation end market exposure Net Sales to Significant Customers (as % of total net sales): | Customer | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2022 | | :-------------------------- | :------------------------------ | :----------------------------- | | Cummins Inc. | 15.6% | 16.1% | | Toyota Motor Corporation | 11.6% | 11.5% | - The company focuses on broadening its customer base to diversify non-transportation end market exposure[162] Forward‑Looking Statements This section contains cautionary forward-looking statements, which are subject to various risks and uncertainties that could cause actual results to differ materially. These risks include the impact of COVID-19, economic conditions, integration of acquisitions, technological changes, market conditions, reliance on key customers, and international operational risks - Forward-looking statements are based on management's expectations and assumptions, subject to uncertainties that could cause actual results to differ materially[163] - Key risk factors include the ultimate impact of COVID-19, general economic conditions (including recessionary conditions), unanticipated issues in integrating acquisitions, rapid technological change, reliance on key customers, and risks associated with international operations (e.g., exchange rates, geopolitical risks)[165] Item 3. Quantitative and Qualitative Disclosures about Market Risk The company refers to its Annual Report on Form 10-K for detailed quantitative and qualitative disclosures about market risk. No material changes in market risk exposure were reported during the three months ended September 30, 2022 - Detailed market risk disclosures are provided in Item 7A of the Annual Report on Form 10-K for the year ended December 31, 2021[166] - There have been no material changes in the company's exposure to market risk during the three months ended September 30, 2022[166] Item 4. Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of September 30, 2022, providing reasonable assurance for timely and accurate reporting. No material changes in internal control over financial reporting occurred during the quarter - Disclosure controls and procedures were evaluated and deemed effective as of September 30, 2022, providing reasonable assurance for information disclosure[168] - No material changes in internal control over financial reporting occurred during the quarter ended September 30, 2022[170] PART II. OTHER INFORMATION This section provides additional information beyond the financial statements, including legal proceedings, risk factors, equity sales, and exhibits Item 1. Legal Proceedings CTS is involved in various legal proceedings arising from its ordinary business conduct and has established adequate accruals for expected liabilities. However, there is no assurance that the final resolution of these matters will not materially adversely affect the company's financial position or results of operations - The company is involved in litigation arising from the ordinary conduct of its business and has established adequate accruals for expected future liability[170] - There is no assurance that the final resolution of existing or future lawsuits will not have a material adverse effect on the business[170] Item 1A. Risk Factors There have been no significant changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2021 - No significant changes to risk factors from the Annual Report on Form 10-K for the year ended December 31, 2021[172] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During July and August 2022, CTS repurchased 52,000 shares of common stock under its publicly announced program for a total of $1.7 million, with an average price of $33.58 per share in July and $39.22 in August. Approximately $27.8 million remains available for future repurchases Common Stock Repurchases (July 1, 2022 - August 31, 2022): | Period | Total Number of Shares Purchased | Average Price per Share | | :-------------------------------- | :----------------------------- | :---------------------- | | July 1, 2022 through July 31, 2022 | 46,400 | $33.58 | | August 1, 2022 through August 31, 2022 | 5,600 | $39.22 | | Total | 52,000 | | - As of August 31, 2022, approximately $27,768 thousand remains available for future purchases under the publicly announced share repurchase program[174] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications required by the Sarbanes-Oxley Act and financial statements formatted in Inline XBRL - Includes certifications pursuant to Section 302 and Section 906 of the Sarbanes-Oxley Act of 2002[176] - Financial statements and notes are formatted in Inline XBRL[177] SIGNATURES The report is duly signed on behalf of CTS Corporation by the Corporate Controller (Principal Accounting Officer) and the Vice President and Chief Financial Officer (Principal Financial Officer), dated October 26, 2022 - 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)[181] - The report was dated October 26, 2022[181]