What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-02-24 compared with 2022-02-25 · 1584 added, 81 removed, 148 unchanged (92% of the section changed)

Management's Discussion and Analysis of Financial Condition and Results of Operations

This section of this Form 10-K generally discusses 2021 and 2020 items and year-to-year comparisons between 2021 and 2020.

This section of this Annual Report on Form 10-K generally discusses 2022 and 2021 items and year-to-year comparisons between 2022 and 2021.

Discussions of 2020 items and year-to-year comparisons between 2021 and 2020 that are not included in this Annual Report on Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2021.

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Move products ensure required movements are effectively and accurately executed.

We are committed to achieving our vision by continuing to invest in the development of products and technologies, and talent within these categories.

We are committed to achieving our vision by continuing to invest in the development of products, technologies and talent within these categories.

We manufacture sensors, actuators, and connectivity components in North America, Europe, and Asia.

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We are subject to challenges including periodic market softness, competition from other suppliers, changes in technology, and the ability to add new customers, launch new products or penetrate new markets.

On February 28, 2022, we acquired 100% of the outstanding shares of TEWA for $24,515.

TEWA is a designer and manufacturer of high-quality temperature sensors.

TEWA has complementary capabilities with our existing temperature sensing platform, and the acquisition supports our end market diversification strategy and expands our presence in Europe.

On June 30, 2022, we acquired 100% of the outstanding shares of Ferroperm for $72,340.

Ferroperm specializes in the design and manufacture of high performance piezoceramic components for use in complex and demanding medical, industrial, and aerospace applications.

Ferroperm has complementary capabilities with our existing medical diagnostics and imaging product lines.

The acquisition supports our end market diversification strategy and expands our presence in European end markets.

On February 6, 2023, we acquired 100% of the outstanding shares of maglab AG ("maglab") for $4,164 in cash subject to additional earnout payments based on future performance.

Maglab has deep expertise in magnetic system design and current measurement solutions for use in e-mobility, industrial automation, and renewable energy applications.

Maglab's domain expertise coupled with CTS’

commercial, technical and operational capabilities position us to advance our status as a recognized innovator in electric motor sensing and controls markets.

COVID-19 Impact and Supply Chain Uncertainties

The COVID-19 pandemic and subsequent supply chain uncertainties have had a significant negative impact on the global economy in 2022 and 2021.

This has disrupted the financial markets, negatively impacted the global supply chain and increased the cost of materials and operations, particularly within the global automotive industry.

These events have disrupted the financial markets, negatively impacted the global supply chain and increased the cost of materials and operations, particularly within the global automotive industry.

Key semiconductor chip and other critical part shortages continue to force OEMs to shut down production, often on short notice.

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These developments are outside of our control, remain highly uncertain, and cannot be predicted.

In addition, the supply chain shortages continue to put pressure on our manufacturing costs and equally our gross margins.

In addition, the supply chain shortages continue to put pressure on our manufacturing costs and our gross margins.

We continue to actively monitor the ongoing impacts of the COVID-19 pandemic and supply chain issues and will seek to mitigate and minimize their impact on our business, when possible.

We anticipate these challenges to continue to impact our results in 2022 and we remain cautious about the financial impact of these potential disruptions on our business.

We anticipate the supply chain disruptions to continue to impact our results in 2023 and we remain cautious about the financial impact of these potential disruptions on our business.

Results of Operations:

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(Amounts in thousands, except percentages and per share amounts):

The following table highlights changes in significant components of the Consolidated Statements of (Loss) Earnings for the years ended December 31, 2021, and December 31, 2020:

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The following table highlights changes in significant components of the Consolidated Statements of Earnings (Loss) for the years ended December 31, 2022, and December 31, 2021:

Years Ended December 31,

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Total other (expense) income, net

(Loss) earnings before taxes

Income tax (benefit) expense

Net (loss) earnings

Diluted (loss) earnings per share:

Diluted net (loss) earnings per share

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Earnings (loss) before taxes

Income tax expense (benefit)

Net earnings (loss)

Diluted earnings (loss) per share:

Diluted net earnings (loss) per share

Net sales were $586,869 for the year ended December 31, 2022, an increase of $73,944, or 14.4% from 2021.

Net sales growth was driven by the overall improvement in the economy including our focus on end-customer diversification.

Net sales growth was driven by increased demand for our products in all end markets we serve.

Net sales to transportation markets increased $19,615 or 6.9%.

Net sales to other markets increased $54,329, or 23.7%.

The Sensor Scientific, Inc.

acquisition, which was completed in December 2020, added sales of $7,112 in 2021.

Changes in foreign exchange rates increased net sales by $6,938 year-over-year primarily due to the U.S.

Dollar depreciating compared to the Chinese Renminbi and Euro.

Gross margin as a percent of sales was 36.0% in 2021 versus 32.8% in 2020.

The increase in gross margin was driven primarily by sales volume and mix .

We continue to experience significant inflation in material and freight costs as well as interruptions in the supply chain particularly due to the global semiconductor chip and resin shortages impacting the operations of our business.

The impact of the supply chain shortages and OEM shutdowns are expected to continue to have an adverse effect on our operations that we are continuing to mitigate.

The TEWA and Ferroperm acquisitions added sales of $23,489 in 2022.

Changes in foreign exchange rates decreased net sales by $10,985 year-over-year primarily due to the U.S.

Dollar appreciating compared to the Chinese Renminbi and Euro.

Gross margin was $210,538 for the year ended December 31, 2022, an increase of $25,919 or 14.0% from the year ended December 31, 2021.

The increase in gross margin was driven by sales volume and mix partially offset by increased material freight costs, changes in foreign exchange rates of $3,577 and $4,048 in inventory step-up amortization charges taken relating to the TEWA and Ferroperm acquisitions.

We continue to experience significant inflation in material and freight costs as well as interruptions in the supply chain, particularly due to the global semiconductor chip shortages.

The impact of the supply chain shortages and OEM shutdowns are expected to continue to have an adverse effect on our operations that we are continuing to attempt to mitigate.

Selling, general and administrative ("SG&A") expenses were $91,520, or 15.6% of sales for the year ended December 31, 2022, versus $82,597 or 16.1% of sales in 2021.

Total SG&A expenses tracked higher with higher costs associated with increased net sales including primarily the restoration of cost saving measures, including incentive compensation in 2021.

Research and development (“R&D”) expenses were $23,856, or 4.7% of sales in 2021 compared to $24,317, or 5.7% of sales in 2020.

The decrease in overall R&D expenses was primarily due to changes in timing and mix of certain projects.

The increase in SG&A expenses was driven by the acquisitions and increased incentive compensation.

Research and development (“R&D”) expenses were $24,100, or 4.1% of sales in 2022 compared to $23,856, or 4.7% of sales in 2021, in line with our commitment to continue investing in research and product development to drive organic growth.

Restructuring charges were $1,912, or 0.3% of net sales in 2022, compared to $1,687, or 0.3% of net sales in 2021.

We continue to implement certain restructuring actions to improve our cost structure to remain competitive.

We continue to implement certain restructuring actions to improve our cost structure and competitive position.

Other income and expense items are summarized in the following table:

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Interest income

Other (expense) income

Total other (expense) income, net

Other expense, net in 2021 was primarily driven by increased pension expense including $126,269 in settlement charges from our U.S.

Other expense

Total other (expense), net

The reduction in other expense, net was primarily driven by decreased pension expense due to the U.S.

pension plan termination, effective in 2021.

Other expense, net for the year ended December 31, 2022 was primarily driven by $6,803 in excise taxes incurred as part of the U.S.

pension plan termination, $1,776 in derivative losses associated with the acquisition of Ferroperm, and foreign currency losses primarily related to the Euro and Chinese Renminbi offset partially by income from the U.S.

pension plan investments realized prior to the final termination.

Other expense, net in 2021 was primarily driven by increased pension expense including $126,269 in

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settlement charges from our U.S.

pension plan termination process in the second and third quarters of 2021 as well as foreign currency translation losses, mainly due to the appreciation of the U.S.

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The effective income tax rate in 2022 was 26.2% compared to 31.2% in the prior year.

This increase is primarily attributable to the impact of the U.S.

pension plan settlement charges taken in 2021.

The decrease in our effective income tax rate is primarily attributed to a one-time non-cash settlement expense related to the termination of the U.S.

pension plan incurred in the second and third quarters of 2021.

Liquidity and Capital Resources

We have historically funded our capital and operating needs primarily through cash flows from operating activities, supported by available credit under our Revolving Credit Facility (as defined below).

We believe that cash flows from operating activities and available borrowings under our Revolving Credit Facility will be adequate to fund our working capital needs, capital expenditures, investments, and debt service requirements for at least the next twelve months and for the foreseeable future thereafter.

However, we may choose to pursue additional equity and debt financing to provide additional liquidity or to fund acquisitions.

Cash and cash equivalents were $156,910 at December 31, 2022 and $141,465 at December 31, 2021, of which $90,244 and $124,635 respectively, were held outside the United States.

The increase in cash and cash equivalents of $49,692 was primarily driven by cash generated from operating activities of $86,141 partially offset by $(20,712) and $(15,896) in financing and investing activities, respectively.

Total debt as of December 31, 2022 and December 31, 2021 was $83,670 and $50,000, respectively.

Total debt as a percentage of total capitalization, defined as long-term debt as a percentage of total debt and shareholders’ equity, was 9.7% at December 31, 2021, compared to 11.4% at December 31, 2020.

Total debt as a percentage of total capitalization, defined as long-term debt as a percentage of total debt and shareholders’

equity, was 14.2% at December 31, 2022, compared to 9.7% at December 31, 2021.

Cash Flows from Operating Activities

Net cash provided by operating activities was $121,197 during the year ended December 31, 2022.

Components of net cash provided by operating activities included net loss of $(41,866), depreciation and amortization expense of $26,930, non-cash pension and other post-retirement plan expenses of $132,650, and other net non-cash items totaling $(24,912), and a net cash outflow from changes in assets and liabilities of $(6,661).

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Components of net cash provided by operating activities included net earnings of $59,575, depreciation and amortization expense of $29,753, other net non-cash items totaling $10,260, and a net cash inflow from changes in assets and liabilities of $21,609 primarily driven by $34,016 received from the U.S.

pension plan termination.

Net cash provided by operating activities was $86,141 during the year ended December 31, 2021.

Components of net cash provided by operating activities included net earnings of $34,686, depreciation and amortization expense of $26,670, stock-based compensation of $3,417, other net non-cash items totaling $930, and a net cash inflow from changes in assets and liabilities of $10,064.

Components of net cash provided by operating activities included net loss of $(41,866), depreciation and amortization expense of $26,930, non-cash pension and other post-retirement plan expenses of $132,650, and other net non-cash items totaling $24,912, and a net cash outflow from changes in assets and liabilities of $6,661.

Cash Flows from Investing Activities

Net cash used in investing activities for the year ended December 31, 2021 was $15,896, driven primarily by capital expenditures.

Net cash used in investing activities for the year ended December 31, 2020 was $23,167, driven by capital expenditures of $14,858 and the payment for the Sensor Scientific, Inc.

(“SSI”) acquisition of $8,309.

Net cash used in investing activities for the year ended December 31, 2022 was $111,188, driven by the acquisition payments for the TEWA and Ferroperm acquisitions of $96,855 and capital expenditures of $14,333.

See Note 3 "Business Acquisitions" in the Notes to the Consolidated Financial Statements in this Annual Report on Form 10-K.

Net cash used in investing activities for the year ended December 31, 2021, was $15,896, driven primarily by capital expenditures.

Cash Flows from Financing Activities

Net cash used in financing activities for the year ended December 31, 2021, was $20,712.

The net cash outflow was the result of net payments of long-term debt of $4,600, treasury stock purchases of $8,786, dividend payments of $5,173, taxes paid on behalf of equity award participants of $1,503, and a contingent consideration payment of $650.

Net cash provided by financing activities for the year ended December 31, 2022, was $4,336.

The net cash inflow was the result of net cash from debt of $33,638 associated with completed acquisitions, partially offset by treasury stock purchases of $21,447, dividend payments of $5,131, taxes paid on behalf of equity award participants of $1,524, and contingent consideration payments of $1,200.

Net cash used in financing activities for the year ended December 31, 2021, was $20,712.

The net cash outflow was the result of net payments of long-term debt of $45,100, treasury stock purchases of $8,080, dividend payments of $5,179, taxes paid on behalf of equity award participants of $1,917, and a contingent consideration payment of $1,057.

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Capital Resources

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Weighted-average interest rate

On December 15, 2021, we entered into a second amended and restated five-year credit agreement with a group of banks (the “Revolving Credit Facility”) to (i) increase the total credit facility availability to $400,000 which may be increased by $200,000 at the request of the Company, subject to the administrative agent's approval, (ii) extend the maturity of the Revolving Credit Facility from February 12, 2024 to December 15, 2026, (iii) replace LIBOR with SOFR as the primary reference rate used to calculate interest on the loans under the Revolving Credit Facility, (iv) increase available sublimits for letters of credit, and swingline loans as well as providing for additional alternative currency borrowing capabilities, and (v) modify the financial and non-financial covenants to provide the Company additional flexibility.

This new unsecured credit facility replaced the prior $300,000 unsecured credit facility, which would have expired February 12, 2024.

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The commitment fee ranges from 0.175% to 0.25% based on our net leverage ratio.

Our liquidity, access to capital, and borrowing costs could be adversely impacted by declines in our credit rating, our financial performance, and global credit market conditions, as well as a broad range of other factors, including those related to the COVID-19 pandemic discussed in this Form 10-K.

See “Item 1A.

Risk Factors” for additional discussion of these and other risks that our business faces.

We were in compliance with all debt covenants at December 31, 2022

See “Item 1A.

Risk Factors”

for additional discussion of these and other risks that our business faces.

As of December 31, 2022, our material cash requirements for our known contractual and other obligations were as follows:

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Long-term debt, including interest – Outstanding principal on our Revolving Credit Facility was $50,000 at December 31, 2021, with no amounts payable within 12 months.

Additionally, we had future interest payments based on our hedged borrowings under our Revolving Credit Facility of $3,720 through maturity in December 2026, with approximately $1,162 payable within 12 months.

Interest payments under the Revolving Credit Facility are determined based upon the average outstanding balance of our borrowings and the prevailing interest rate during that time and are inclusive of our hedge impact.

See Note 13, “Debt,” in our Annual Report on 10K for further details of our debt.

Operating lease payments – We enter into various noncancelable lease agreements for land, buildings and equipment under non-cancellable operating leases used in our operations .

Long-term debt, including interest –

Outstanding principal on our Revolving Credit Facility was $83,670 at December 31, 2022, with no amounts payable within 12 months.

Additionally, we have minimum contractual future interest payments on our hedged borrowings under our Revolving Credit Facility estimated to be $6,295 through maturity, with approximately $1,464 payable within 12 months based on the December 31, 2022 exchange rate.

We may paydown certain portions of these obligations early.

See Note 13 and 14, "Debt" and “Derivatives,”

respectively, in the Notes to the Consolidated Financial Statements in this Annual Report on Form 10-K for further details of our debt and hedging activities.

Operating lease payments –

We enter into various noncancelable lease agreements for land, buildings and equipment under non-cancellable operating leases used in our operations.

Operating lease obligations were $32,559, with $5,357 payable within 12 months.

See Note 12, “Leases,” in our Annual Report on 10K for further detail of our obligations and the timing of expected future payments.

Retirement obligations – Expected future payments relating to our defined benefit postretirement plans were $6,609, with $825 payable in 12 months.

See Note 7, “Retirement Plan,” in our Annual Report on 10K for further detail of our obligations and the timing of expected future payments.

We have historically funded our capital and operating needs primarily through cash flows from operating activities, supported by available credit under our Revolving Credit Facility.

We believe that cash flows from operating activities and available borrowings under our Revolving Credit Facility will be adequate to fund our working capital needs, capital expenditures, and debt service requirements for at least the next twelve months and for the foreseeable future thereafter.

However, we may choose to pursue additional equity and debt financing to provide additional liquidity or to fund acquisitions.

See Note 12, “Leases,”

in the Notes to the Consolidated Financial Statements in this Annual Report on Form 10-K for further detail of our obligations and the timing of expected future payments.

Retirement obligations –

Expected future contributions relating to our defined benefit postretirement plans were $6,240, with $759 payable in 12 months.

See Note 7, “Retirement Plan,”

in the Notes to the Consolidated Financial Statements in this Annual Report on Form 10-K for further detail of our obligations and the timing of expected future payments.

We have no off-balance sheet arrangements that have a material current effect or are reasonably likely to have a material future effect on our financial condition or changes in our financial condition.

On February 28, 2022, we acquired TEWA, a designer and manufacturer of high-quality temperature sensors.

The net cash payment of $24,515 for this acquisition was funded by the Company's cash on hand.

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On June 30, 2022, we acquired Ferroperm, a designer and manufacturer of high performance piezoceramic components for use in complex and demanding medical, industrial, and aerospace applications.

The net cash payment of $72,340 for this acquisition was funded by a combination of cash on hand and borrowings under our Revolving Credit Facility.

On February 6, 2023, we acquired 100% of the outstanding shares of maglab for $4,164 in cash subject to additional earnout payments based on future performance.

The acquisition was funded from cash on hand.

Critical Accounting Estimates and Policies

The Securities and Exchange Commission ("SEC") has defined a company’s critical accounting policies as the ones that are most important to the portrayal of a company’s financial condition and results of operations, and which require a company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain.

Based on this definition, we have identified the critical accounting policies and judgments addressed below.

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The excess costs of acquired businesses over the fair values of the assets acquired and liabilities assumed are recognized as goodwill.

The valuations of the acquired assets and liabilities will impact the determination of future operating results.

Determining the fair value of assets acquired and liabilities assumed requires management’s judgment and often involves the use of significant estimates and assumptions, including assumptions with respect to future cash inflows and outflows, revenue growth rates, discount rates, customer attrition rates, asset lives, contributory asset charges, and market multiples, among other items.

The valuations of the acquired assets and liabilities assumed will impact the determination of future operating results.

We determine the fair values of intangible assets acquired generally in consultation with third-party valuation advisors.

Intangible assets other than goodwill are recognized if the benefit of the intangible asset is obtained through contractual or other legal rights, or if the intangible asset can be sold, transferred, licensed or exchanged, regardless of the Company’s intent to do so.

Goodwill represents the excess purchase price over the fair value of the tangible net assets and intangible assets acquired in a business combination and is reviewed annually for impairment or more frequently if impairment indicators arise.

Finite-lived intangible assets are reviewed for impairment if facts and circumstances warrant.

Impairment Assessment – Goodwill

Impairment Assessment –

Goodwill of a reporting unit is tested for impairment on the first day of its fiscal fourth quarter, or more frequently if an event occurs or circumstances change that would more-likely-than-not reduce the fair value of a reporting unit below its carrying amount.

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Unanticipated competition,

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More-likely-than-not expectation that a reporting unit or a significant portion of a reporting unit will be sold or otherwise disposed of,

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If, after assessing the totality of events or circumstances we determine that it is not more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, we do not need to perform a quantitative analysis.

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If a quantitative assessment is required, we estimate the fair value of each reporting unit using a combination of discounted cash flow analysis and market-based valuation methodologies.

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Changes in these estimates and assumptions could materially affect the determination of fair value and impact the goodwill impairment assessment.

For 2021, w e elected to perform the quantitative assessment.

For 2022, we elected to perform the qualitative assessment.

Based upon our latest assessment, we determined that our goodwill was not impaired as of October 1, 2022.

We will monitor future results and will perform a test if indicators trigger an impairment review.

Impairment Assessment – Other Intangible Assets and Other Long-Lived Assets

Impairment Assessment –

Other Intangible Assets and Other Long-Lived Assets

We evaluate the impairment of identifiable intangibles and other long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable.

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If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value.

Our income tax expense, deferred tax assets and liabilities, and liabilities for unrecognized tax benefits reflect management’s best estimate of current and future taxes to be paid.

We are subject to income taxes in the United States and numerous foreign jurisdictions.

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The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in a multitude of jurisdictions across our global operations.

Accounting Standards Codification (“ASC”) No.

740 states that a tax benefit from an uncertain tax position may be recognized when it is more-likely-than-not that the position will be sustained upon examination, including resolution of any related appeals or litigation processes, on the basis of its technical merits.

Accounting Standards Codification (“ASC”) 740 states that a tax benefit from an uncertain tax position may be recognized when it is more-likely-than-not that the position will be sustained upon examination, including resolution of any related appeals or litigation processes, on the basis of its technical merits.

We record unrecognized tax benefits as liabilities in accordance with ASC 740 and adjust these liabilities when our judgment changes as a result of the evaluation of new information not previously available.

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These differences will be reflected as increases or decreases to income tax expense in the period in which new information is available.

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Critical Accounting Policies

Revenue Recognition

We recognize revenue in accordance with the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) 606 Revenue from Contracts with Customers net of estimated reserves.

We recognize revenue in accordance with the Financial Accounting Standards Board’s (“FASB”) ASC 606 Revenue from Contracts with Customers, net of estimated reserves.

Our revenue reserves contain uncertainties because they require management to make assumptions and to apply judgment to estimate the value of future credits to customers for price adjustments.

We base these estimates on the most likely value method considering all reasonably available information, including our historical experience and current expectations, and are reflected in the transaction price when sales are recorded.

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Product Warranties

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We believe our reserve level is appropriate considering the quantities and quality of the inventories.

Retirement Plans

Actuarial assumptions are used in determining pension income and expense and our defined benefit obligations.

We utilize actuaries from consulting companies in each applicable country to develop our discount rates, matching high-quality bonds currently available and expected to be available during the period to maturity of the pension benefit in order to provide the necessary future cash flows to pay the accumulated benefits when due.

After considering the recommendations of our actuaries, we have assumed a discount rate, expected rate of return on plan assets, and a rate of compensation increase in determining our annual pension income and expense and the projected benefit obligation.

In February 2020, the CTS Board of Directors authorized management to explore termination of the U.S.-based pension plan ("Plan"), subject to certain conditions.

On June 1, 2020, we entered into the Fifth Amendment to the Plan whereby we set an effective termination date for the Plan of July 31, 2020.

In February 2021, we received a determination letter from the Internal Revenue Service that allowed us to proceed with the termination process for the Plan.

As a result, we offered a lump sum payment to eligible participants with vested qualified Plan benefits in lieu of receiving monthly annuity payments in the second quarter of 2021 and purchased a group annuity contract that transferred our remaining obligations for the remaining participants in the third quarter.

For a further discussion of the process and related financial impact please see Note 7 to Item 8 of this Annual Report on Form 10-K.

Environmental Contingencies

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Changes in the estimates on which the accruals are based, unanticipated government enforcement action, or changes in health, safety, environmental, and chemical control regulations and testing requirements could, and have, resulted in higher or lower costs.

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Recent Accounting Pronouncements

The information set forth under Note 1 to Item 8 of this Annual Report on Form 10-K is incorporated herein by reference.

The information set forth under Note 1 - "Summary of Significant Accounting Policies" in the Notes to the Consolidated Financial Statements in this Annual Report on Form 10-K is incorporated herein by reference.

Quantitative and Qualita tive Disclosures About Market Risk

(in thousands)

Our cash flows and earnings are subject to fluctuations resulting from changes in foreign currency exchange rates, interest rates and commodity prices.

We manage our exposure to these market risks through internally established policies and procedures and, when deemed appropriate, through the use of derivative financial instruments.

Our policies do not allow speculation in derivative instruments for profit or execution of derivative instrument contracts for which there are no underlying exposures.

We do not use financial instruments for trading purposes, and we are not a party to any leveraged derivatives.

We monitor our underlying market risk exposures on an ongoing basis and believe that we can modify or adapt our hedging strategies as needed.

Interest Rate Risk

We are exposed to risk of changes in interest rates on our Revolving Credit Facility.

There was $83,670 and $50,000 outstanding under our Revolving Credit Facility at December 31, 2022 and 2021, respectively.

As of December 31, 2022, we had interest rate swaps that fix interest costs on $50,000 of our long-term debt through December 2026 and $22,500 of our long-term debt through June 2027.

The remaining long-term debt is unhedged as of December 31, 2022.

A 100 basis point change in interest rates would not materially impact our total interest expense.

Foreign Currency Risk

We are exposed to foreign currency exchange rate risks.

Our significant foreign subsidiaries are located in China, Czech Republic, Denmark, Mexico, and Taiwan.

During 2022, net sales from outside the U.S.

were approximately 44% of total net sales.

During 2021, net sales to customers from outside the U.S.

were approximately 42% of total net sales.

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The Company’s foreign exchange exposures result primarily from the sale of products in foreign currencies, foreign currency denominated purchases, and employee-related and other costs of running operations in foreign countries.

Changes in foreign exchange rates could affect the Company’s sales, costs, balance sheet values and earnings;

therefore, we have entered into foreign currency forward contracts with notional values of $12,602 and $17,732 as of December 31, 2022 to hedge our exposure against the Euro and Mexican Peso, respectively.

In addition, we entered into a cross currency interest rate swap agreement on June 27, 2022 that synthetically swapped $25,000 of variable rate debt to Krone denominated variable rate debt.

Upon completion of the Ferroperm acquisition on June 30, 2022, the transaction was designated as a net investment hedge for accounting purposes and will mature on June 30, 2027.

Accordingly, any gains or losses on this derivative instrument will be included in the foreign currency translation component of other comprehensive income until the net investment is sold, diluted or liquidated.

Interest payments received for the cross currency-swap are excluded from the net investment hedge effectiveness assessment and are recorded in interest expense in the Condensed Consolidated Statements of Earnings.

The assumptions used in measuring fair value of the cross-currency swap are considered level 2 inputs, which are based upon the Krone to United States Dollar exchange rate market.

At December 31, 2022 we had a net unrealized loss of $557 in accumulated other comprehensive (loss) income.

Commodity Price Risk

Many of our products require the use of raw materials that are produced in only a limited number of regions around the world or are available from only a limited number of suppliers.

Our results of operations may be materially and adversely affected if we have difficulty obtaining these raw materials, the quality of available raw materials deteriorates, or there are significant price increases for these raw materials.

For periods in which the prices of these raw materials are rising, we may be unable to pass on the increased cost to our customers, which would result in decreased margins for the products in which they are used.

For periods in which the prices are declining, we may be required to write down our inventory carrying cost of these raw materials, since we record our inventory at the lower of cost or net realizable value.

Due to the impact from the COVID-19 pandemic, freight costs increased significantly in 2022.

While the Company is exposed to significant changes in certain commodity prices and expects higher freight costs into 2023, the Company actively monitors these exposures and may take various actions from time to time to mitigate any negative impacts relating thereto.

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Financial Stateme nts and Supplementary Data

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders

CTS Corporation

Opinion on the financial statements

We have audited the accompanying consolidated balance sheets of CTS Corporation (an Indiana corporation) and subsidiaries (the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of earnings (loss), comprehensive earnings, changes in shareholders’

equity, and cash flows for each of the three years in the period ended December 31, 2022, and the related notes and financial statement schedules included under Item 15(a) (collectively referred to as the “financial statements”).

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated February 24, 2023 expressed an unqualified opinion.

Basis for opinion

These financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on the Company’s financial statements based on our audits.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that our audits provide a reasonable basis for our opinion.

Critical audit matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Acquisition of TEWA Temperature Sensors SP.

As described further in Note 3 to the financial statements, the Company acquired TEWA Temperature Sensors SP.

(“TEWA”) on February 28, 2022 for a total purchase price of $24.5 million.

Accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based on their respective fair values, including identified intangible assets of approximately $13.7 million, which is primarily comprised of customer relationships of $13 million.

The Company estimated the fair value of the customer relationships using the multi-period excess earnings method, which is an income approach that required management to make significant estimates and assumptions related to future revenues and cash flows and the selection of the discount rate.

We identified the measurement of the acquisition-date fair value of the acquired customer relationships as a critical audit matter.

The principal considerations for our determination that the acquisition-date fair value of the acquired customer relationships is a critical audit matter was the high degree of auditor judgment and an increased extent of effort, which included utilizing specialists, to test

CTS CORPORATION 30

management’s internally developed assumptions for which there was limited observable market information.

These assumptions were:

1) the forecasted revenue growth rates for existing customers, 2) the estimated customer attrition rate, and 3) the discount rate.

Our audit procedures related to the critical audit matter included the following, among others:

We tested certain internal controls over the Company’s acquisition-date valuation process, including controls over the development of the key assumptions such as the forecasted revenues, customer attrition rate, and the discount rate.

We evaluated the Company’

forecasted revenue growth rates for existing customers by comparing the forecasted growth assumptions to peer and historical results.

We tested, with the assistance of specialists, the Company’s selected customer attrition rate by comparing it to TEWA’s historical customer attrition data.

We assessed, with the assistance of specialists, the Company’s discount rate by comparing it against a discount rate range that was independently developed using publicly available market data for comparable peers and performing a sensitivity analysis based on that data.

/s/ GRANT THORNTON LLP

We have served as the Company’s auditor since 2005.

Chicago, Illinois

February 24, 2023

CTS CORPORATION 31

CTS CORPORATION AND SUBSIDIARIES

Consolidated State ments of Earnings (Loss)

(in thousands, except per share amounts)

Years Ended December 31,

Cost of goods sold

Selling, general and administrative expenses

Research and development expenses

Restructuring charges

Operating earnings

Other (expense) income:

Interest expense

Interest income

Other (expense) income

Total other (expense) income, net

Earnings (loss) before taxes

Income tax expense (benefit)

Net earnings (loss)

Net earnings (loss) per share:

Basic weighted-average common shares outstanding

Effect of dilutive securities

Diluted weighted-average common shares outstanding

Cash dividends declared per share

The accompanying notes are an integral part of the consolidated financial statements.

CTS CORPORATION 32

CTS CORPORATION AND SUBSIDIARIES

Consolidated Statements o f Comprehensive Earnings

(in thousands)

Years Ended December 31,

Net earnings (loss)

Other comprehensive earnings (loss):

Changes in fair market value of derivatives, net of tax

Changes in unrealized pension cost, net of tax

Cumulative translation adjustment, net of tax

Other comprehensive earnings (loss)

Comprehensive earnings

The accompanying notes are an integral part of the consolidated financial statements.

CTS CORPORATION 33

CTS CORPORATION AND SUBSIDIARIES

Consolidated B alance Sheets

(in thousands)

Current Assets

Cash and cash equivalents

Accounts receivable, net

Inventories, net

Other current assets

Total current assets

Property, plant and equipment, net

Operating lease assets, net

Prepaid pension asset

Other intangible assets, net

Deferred income taxes

Total other assets

LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities

Accounts payable

Operating lease obligations

Accrued payroll and benefits

Accrued expenses and other liabilities

Total current liabilities

Long-term debt

Long-term operating lease obligations

Long-term pension obligations

Deferred income taxes

Other long-term obligations

Total Liabilities

Commitments and Contingencies (Note 11)

Shareholders' Equity

Additional contributed capital

Retained earnings

Accumulated other comprehensive loss

Total shareholders' equity before treasury stock

Treasury stock

Total shareholders' equity

Total Liabilities and Shareholders' Equity

The accompanying notes are an integral part of the consolidated financial statements.

CTS CORPORATION 34

CTS CORPORATION AND SUBSIDIARIES

Consolidated Statem ents of Cash Flows

(in thousands)

Years Ended December 31,

CASH FLOWS FROM OPERATING ACTIVITIES:

Net earnings (loss)

Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:

Depreciation and amortization

Non-cash inventory charges

Pensions and other post-retirement plan (income) expense

Stock-based compensation

Asset impairment charges

Restructuring non-cash charges

Deferred income taxes

Gain on foreign current hedges, net of tax

Changes in assets and liabilities, net of acquisitions:

Accounts receivable

Operating lease assets

Accounts payable

Accrued payroll and benefits

Operating lease liabilities

Accrued expenses and other liabilities

Pension and other post-retirement plans

Net cash provided by operating activities

CASH FLOWS FROM INVESTING ACTIVITIES:

Capital expenditures

Payments for acquisitions, net of cash acquired

Net cash used in investing activities

CASH FLOWS FROM FINANCING ACTVITIES:

Payments of long-term debt

Proceeds from borrowings of long-term debt

Purchase of treasury stock

Dividends paid

Taxes paid on behalf of equity award participants

Contingent consideration payments

Net cash provided by (used in) financing activities

Effect of exchange rate on cash and cash equivalents

Net increase (decrease) in cash and cash equivalents

Cash and cash equivalents at beginning of year

Cash and cash equivalents at end of year

Supplemental cash flow information:

Cash paid for interest

Cash paid for income taxes, net

Non-cash financing and investing activities:

Capital expenditures incurred not paid

The accompanying notes are an integral part of the consolidated financial statements.

CTS CORPORATION 35

CTS CORPORATION AND SUBSIDIARIES

Consolidated Statements of Shareholders' Equity

(in thousands)

Comprehensive

Balances at January 1, 2020

Changes in fair market value of derivatives, net of tax

Changes in unrealized pension cost, net of tax

Cumulative translation adjustment, net of tax

Cash dividends of $ 0.16 per share

Acquired 342,731 shares of treasury stock

Issued shares on vesting of restricted stock units

Stock compensation

Balances at December 31, 2020

Changes in fair market value of derivatives, net of tax

Changes in unrealized pension cost, net of tax

Cumulative translation adjustment, net of tax

Cash dividends of $ 0.16 per share

Acquired 266,722 shares for treasury stock

Issued shares on vesting of restricted stock units

Stock compensation

Balances at December 31, 2021

Changes in fair market value of derivatives, net of tax

Changes in unrealized pension cost, net of tax

Cumulative translation adjustment, net of tax

Cash dividends of $ 0.16 per share

Acquired 583,526 shares for treasury stock

Issued shares on vesting of restricted stock units

Stock compensation

Balances at December 31, 2022

The accompanying notes are an integral part of the consolidated financial statements.

CTS CORPORATION 36

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except for share and per share data)

NOTE 1 —

Summary of Significant Accounting Policies

Description of Business:

CTS Corporation ("CTS", "we", "our", "us" or the "Company") is a global manufacturer of sensors, connectivity components, and actuators operating as a single reportable business segment.

We operate manufacturing facilities located throughout North America, Asia and Europe and service major markets globally.

Principles of Consolidation:

The consolidated financial statements include the accounts of CTS and its wholly owned subsidiaries.

All significant intercompany accounts and transactions have been eliminated.

Use of Estimates:

The preparation of financial statements in conformity with the accounting principles generally accepted in the United States of America ("U.S.

GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period.

Actual results could differ materially from those estimates.

Cash and Cash Equivalents:

All highly liquid investments with maturities of three months or less at the date of purchase are considered to be cash equivalents.

Accounts Receivable and Allowance for Credit Losses:

Accounts receivable consists primarily of amounts due from normal business activities.

We maintain an allowance for credit losses for estimated uncollectible accounts receivable.

Our reserves for estimated credit losses are based upon historical experience, specific customer collection issues, current conditions and reasonable and supportable forecasts that affect the collectability of the remaining cash flows over the contractual terms of our receivables and other financial assets.

Accounts are written off against the allowance account when they are determined to no longer be collectible.

Concentration of Credit Risk:

Financial instruments that potentially subject us to concentrations of credit risk consist of cash and cash equivalents and trade receivables.

Our cash and cash equivalents, at times, may exceed federally insured limits.

Cash and cash equivalents are deposited primarily in banking institutions with global operations.

We have not experienced any losses in such accounts.

We believe we are not exposed to any significant credit risk related to cash and cash equivalents.

Trade receivables subject us to the potential for credit risk with major customers.

We sell our products to customers principally in the aerospace and defense, industrial, medical, and transportation markets, primarily in North America, Europe, and Asia.

We perform ongoing credit evaluations of our customers to minimize credit risk.

We do not require collateral.

The allowance for credit losses is based on management's estimates of the collectability of our accounts receivable after analyzing historical credit losses, customer concentrations, customer creditworthiness, current economic trends, specific customer collection issues, and reasonable and supportable forecasts that affect the collectability of the remaining cash flows over the contractual terms of our receivables.

Uncollectible trade receivables are charged against the allowance for credit losses when all reasonable efforts to collect the amounts due have been exhausted.

Our net sales to significant customers as a percentage of total net sales were as follows:

Years Ended December 31,

Toyota Motor Corporation

No other customer accounted for 10% or more of total net sales during these periods.

We value our inventories at the lower of the actual cost to purchase or manufacture using the first-in, first-out ("FIFO") method, or net realizable value.

We review inventory quantities on hand and record a provision for excess and obsolete inventory based on historical consumption trends as well as forecasts of product demand including related production requirements.

Once reserves are established, write-downs of inventory are considered permanent adjustments to the cost basis of inventory.

Our reserves contain uncertainties because the calculation requires management to make assumptions and to apply judgment regarding historical experience, market conditions, and product life cycles.

Changes in actual demand or market conditions could adversely impact our reserve calculations.

CTS CORPORATION 37

Property, Plant and Equipment:

Property, plant and equipment is stated at cost, less accumulated depreciation.

Depreciation is computed primarily over the estimated useful lives of the various classes of assets using the straight-line method.

Useful lives for buildings and improvements range from 10 to 45 years , machinery and equipment from three to 15 year s, and software from 2 to 15 year s.

Depreciation on leasehold improvements is computed over the lesser of the lease term or estimated useful lives of the assets.

Amounts expended for maintenance and repairs are charged to expense as incurred.

Major overhauls that extend the useful lives of existing assets are capitalized.

Upon disposition, any related gains or losses are included in operating earnings.

Income Taxes:

We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements.

Under this method, we determine deferred tax assets and liabilities on the basis of the differences between the financial statement and tax bases of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse.

The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.

We recognize deferred tax assets to the extent that we believe that these assets are more-likely-than-not to be realized.

In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations.

If we determine that we would be able to realize our deferred tax assets in the future in excess of their net recorded amount, we would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.

We record uncertain tax positions in accordance with Accounting Standards Codification ("ASC") Topic 740 on the basis of a two-step process in which (1) we determine whether it is more-likely-than-not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority.

We recognize interest and penalties related to unrecognized tax benefits on the income tax expense line in the accompanying Consolidated Statements of Earnings (Loss).

Accrued interest and penalties are included in the related tax liability line in the Consolidated Balance Sheets.

See Note 19, "Income Taxes" for further information.

Goodwill and Indefinite-lived Intangible Assets:

Goodwill represents the excess of the purchase price over the fair values of the net assets acquired in a business combination.

In accordance with ASC 350, Intangibles—Goodwill and Other , goodwill is not amortized, but instead is tested for impairment annually or more frequently if circumstances indicate a possible impairment may exist.

Absent any interim indicators of impairment, the Company tests for goodwill impairment as of the first day of its fourth fiscal quarter of each year.

Based upon our latest assessment, we determined that our goodwill was no t impaired as of October 1, 2022.

In addition to goodwill, we also had an acquired in-process research and development ("IPR&D") intangible asset that was treated as indefinite-lived intangible assets and therefore was not subject to amortization until the completion or abandonment of the associated research and development efforts.

In the third quarter of 2020, due to the restructuring actions further outlined in Note 9 - "Costs Associated with Exit and Restructuring Activities", we identified a triggering event associated with a specific asset group including IPR&D due to executed restructuring actions.

This resulted in the recognition of $ 2,200 of impairment charges, and a revaluation of associated contingent liabilities totaling $ 1,900 .

The net impact of $ 300 was recorded as restructuring charges in the Consolidated Statements of Earnings (Loss) in 2020.

Other Intangible Assets and Long-lived Assets:

We account for long-lived assets (excluding indefinite-lived intangible assets) in accordance with the provisions of ASC 360, Property, Plant, and Equipment .

This statement requires that long-lived assets, which includes fixed assets and finite-lived intangible assets, be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

If an impairment test is warranted, recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the sum of the undiscounted cash flows expected to result from the use and the eventual disposition of the asset.

If such assets are considered to be impaired, the impairment to be recognized is measured by the amount in which the carrying amount of the assets exceeds the fair value of the assets.

Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

In 2020, we recorded a charge of $ 1,016 due to the impairment of a specific asset group that was recorded in selling, general and administrative expenses in the Consolidated Statements of Earnings (Loss).

Intangible assets (excluding indefinite-lived intangible assets) consist primarily of technology, customer lists and relationships, patents, and trade names.

These assets are recorded at cost and usually amortized on a straight-line basis over their estimated lives.

We assess useful lives based on the period over which the asset is expected to contribute to cash flows.

CTS CORPORATION 38

Revenue Recognition:

Product revenue is recognized upon the transfer of promised goods to a customer in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods net of reserves.

We follow the five step model to determine when this transfer has occurred:

1) identify the contract(s) with the customer;

2) identify the performance obligations in the contract;

3) determine the transaction price;

4) allocate the transaction price to the performance obligations in the contract;

5) recognize revenue when (or as) the entity satisfies a performance obligation.

Our revenue reserves contain uncertainties because they require management to make assumptions and to apply judgment to estimate the value of future credits to customers for product returns, price adjustments, and stock rotation adjustments.

Research and Development:

Research and development ("R&D") costs include expenditures for search and investigation aimed at discovery of new knowledge to be used to develop new products or processes or to significantly enhance existing products or production processes.

R&D costs also include the implementation of new knowledge through design, testing of product alternatives, or construction of prototypes.

We expense all R&D costs as incurred, net of customer reimbursements for sales of prototypes and non-recurring engineering charges.

We create prototypes and tools related to R&D projects.

A prototype is defined as a constructed product not intended for production resulting in a commercial sale.

We also incur engineering costs related to R&D activities.

Such costs are incurred to support such activities to improve the reliability, performance and cost-effectiveness of our existing products and to design and develop innovative products that meet customer requirements for new applications.

Furthermore, we may engage in activities that develop tooling machinery and equipment for our customers.

We occasionally enter into agreements with our customers whereby we receive a contractual guarantee based on achieving milestones to be reimbursed the costs we incur in the product development process or to construct molds, dies, and other tools that are used to make many of the products we sell.

The costs we incur are included in other current assets on the Consolidated Balance Sheets until reimbursement is received from the customer.

Reimbursements received from customers are netted against such costs and included in our Consolidated Statements of Earnings (Loss) if the amount received is in excess of the costs that we incur.

The following is a summary of amounts to be received from customers as of December 31, 2022 and 2021:

As of December 31,

Cost of molds, dies and other tools included in other current assets

Financial Instruments:

We use forward contracts to mitigate currency risk related to forecasted foreign currency revenue and costs.

These forward contracts are designed as cash flow hedges.

At least quarterly, we assess the effectiveness of these hedging relationships based on the total change in their fair value using regression analysis.

In addition, we use interest rate swaps to convert a portion of our revolving credit facility's variable rate of interest into a fixed rate.

As a result of the use of these derivative instruments, the Company is exposed to the risk that counterparties to derivative contracts will fail to meet their contractual obligations.

To mitigate the counterparty credit risk, the Company has a policy of only entering into contracts with carefully selected major financial institutions based upon their credit ratings and other factors and by using netting agreements.

Our established policies and procedures for mitigating credit risk on principal transactions include reviewing and establishing limits for credit exposure and continually assessing the creditworthiness of counterparties.

We estimate the fair value of our cash, cash equivalents, accounts receivable and accounts payable as cost due to the short-term nature of these instruments.

Please refer to Note 13 - "Debt" and Note 14 - "Accumulated Other Comprehensive (Loss) Income" for information on the method of determining fair value for our debt and financial derivatives, respectively.

Debt Issuance Costs:

We have debt issuance costs related to our long-term debt that are being amortized using the straight-line method over the term of the debt.

Debt issuance costs are capitalized and reflected as an asset in deferred financing costs in the accompanying Consolidated Balance Sheets.

Amortization of debt issuance costs are recorded in interest expense.

Stock-Based Compensation:

We recognize expense related to the fair value of stock-based compensation awards, consisting of restricted stock units ("RSUs"), cash-settled restricted stock units, and performance share units ("PSUs") in the Consolidated Statements of Earnings (Loss).

The grant date fair values of our service-based and performance-based RSUs are the closing price of our common stock on the date of grant.

The grant date fair value of our market-based RSUs is determined by using a simulation, or Monte Carlo, approach.

Under this approach, stock returns from a comparative group of companies are simulated over the performance period, considering both stock price

CTS CORPORATION 39

volatility and the correlation of returns.

The simulated results are then used to estimate the future payout based on the performance and payout relationship established by the conditions of the award.

The future payout is discounted to the measurement date using the risk-free interest rate.

Our RSU awards primarily have a graded vesting schedule.

We recognize expense on a straight-line basis over the requisite service period for each separately vesting tranche of the award as if the award was, in substance, multiple awards.

Compensation expense for PSUs is measured by determining the fair value of the award using the closing share price on the grant date and is recognized ratably from the grant date to the vesting date for the number of awards expected to vest.

The amount of compensation expense recognized for PSUs is dependent upon a quarterly assessment of the likelihood of achieving the performance conditions and is subject to adjustment based on management's assessment of the Company's performance relative to the target number of shares performance criteria.

Forfeitures are recorded as they occur.

See Note 17, "Stock-Based Compensation" for further information.

Earnings (Loss) Per Share:

Basic earnings (loss) per share excludes any dilution and is computed by dividing net earnings (loss) available to common shareholders by the weighted-average number of common shares outstanding for the period.

Diluted earnings per share is calculated by dividing net earnings by the weighted average shares outstanding assuming dilution.

Dilutive common shares outstanding is computed using the Treasury Stock Method and reflects the additional shares that would be outstanding if dilutive stock options were exercised, and restricted stock units were settled for common shares during the period.

In addition, dilutive shares include any shares issuable related to performance share units for which the performance conditions would have been met as of the end of the period and therefore would be considered contingently issuable.

If the common stock equivalents have an anti-dilutive effect, they are excluded from the computation of diluted earnings per share.

There was no anti-dilutive impact for the year ended December 31, 2021 as result of a net loss incurred in the period.

If there is a net loss for the period, then basic earnings (loss) per share equals diluted earnings (loss) per share.

Our antidilutive securities consist of the following:

Years Ended December 31,

Antidilutive securities

Foreign Currencies:

The financial statements of the majority of our non-U.S.

subsidiaries are remeasured into U.S.

dollars using the U.S.

dollar as the functional currency with all remeasurement adjustments included in the determination of net earnings (loss).

Foreign currency (losses) gains recorded in the Consolidated Statements of Earnings (Loss) includes the following:

Years Ended December 31,

Foreign currency (losses) gains

The assets and liabilities of our non U.S.

dollar functional subsidiaries are translated into U.S.

dollars at the current exchange rate at period end, with the resulting translation adjustments made directly to the "accumulated other comprehensive loss" component of shareholders' equity.

Our Consolidated Statements of Earnings (Loss) accounts are translated at the average rates during the period.

Shipping and Handling:

All fees billed to the customer for shipping and handling are classified as a component of net sales.

All costs associated with shipping and handling are classified as a component of cost of goods sold or operating expenses, depending on the nature of the underlying purchase.

When applicable, we classify sales taxes on a net basis in our consolidated financial statements.

Reclassifications:

Certain reclassifications have been made to prior year amounts to conform to the current year presentation.

The reclassifications had no impact on previously reported net earnings.

Accounting Pronouncements Recently Adopted

2020-04, "Reference Rate Reform (Topic 848):

Facilitation of the Effects of Reference Rate Reform on Financial Reporting"

CTS CORPORATION 40

In March 2020, the Financial Accounting Standards Board (“FASB”) issued ASU 2020-04, Reference Rate Reform (Topic 848):

Facilitation of the Effects of Reference Rate Reform on Financial Reporting , which provides temporary optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting as it relates to our LIBOR indexed instruments.

ASU 2020-04 provides optional expedients and exceptions for applying U.S.

GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met.

ASU 2020-04 is effective for all entities as of March 12, 2020 through December 31, 2022, and an entity may elect to apply ASU 2020-04 for contract modifications by Topic or Industry Subtopic as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued.

We amended and restated our credit and underlying interest rate swap agreements effective December 15, 2021.

We have elected to continue to apply hedge accounting as we have determined that the hedge remains effective.

See Note 13 - "Debt" for further discussion of the credit agreement modification.

NOTE 2 –

Revenue Recognition

The core principle of ASC 606 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

The guidance provides a five-step process to achieve that core principle:

Identify the contract(s) with a customer

Identify the performance obligations

Determine the transaction price

Allocate the transaction price

Recognize revenue when the performance obligations are met

We recognize revenue when the performance obligations specified in our contracts have been satisfied, after considering the impact of variable consideration and other factors that may affect the transaction price.

Our contracts normally contain a single performance obligation that is fulfilled on the date of delivery based on shipping terms stipulated in the contract.

We usually expect payment within 30 to 90 days from the shipping date, depending on our terms with the customer.

None of our contracts as of December 31, 2022 or 2021 contained a significant financing component.

Differences between the amount of revenue recognized and the amount invoiced, collected from, or paid to our customers are recognized as contract assets or liabilities.

Contract assets will be reviewed for impairment when events or circumstances indicate that they may not be recoverable.

To the extent the transaction price includes variable consideration, we estimate the amount of variable consideration that should be included in the transaction price utilizing the most likely value method based on an analysis of historical experience and current facts and circumstances, which may require significant judgment.

Variable consideration is included in the transaction price if, in our judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur.

Disaggregated Revenue

The following table presents revenues disaggregated by the major markets we serve:

Transportation

Aerospace & Defense

NOTE 3 - Business Acquisitions

TEWA Temperature Sensors SP.

CTS CORPORATION 41

On February 28, 2022, we acquired 100 % of the outstanding shares of TEWA Temperature Sensors SP.

(“TEWA”).

TEWA is a designer and manufacturer of high-quality temperature sensors.

TEWA has complementary capabilities with our existing temperature sensing platform, and the acquisition supports our end market diversification strategy and expands our presence in Europe.

The purchase price of $ 24,515 , which includes assumed changes in working capital, net of cash acquired of $ 2,979 , has been allocated to the fair values of assets and liabilities acquired as of February 28, 2022.

The allocation of the purchase price continues to be preliminary pending the completion of the working capital settlement in the first quarter of 2023.

The purchase price will be reduced by $ 794 due to final settlements in the first quarter of 2023.

The following table summarizes the consideration paid and the fair values of the assets acquired, and the liabilities assumed as of the date of acquisition:

Fair Values at

February 28, 2022

Accounts Receivable

Other current assets

Property, plant and equipment

Intangible assets

Fair value of assets acquired

Less fair value of liabilities acquired

Purchase price

Goodwill represents value the Company expects to be created by combining the operations of the acquired business with the Company's operations, including the expansion of customer relationships, access to new customers, and potential cost savings and synergies.

Goodwill related to the acquisition is expected to be deductible for tax purposes.

The Company recorded a $ 1,180 step-up of inventory to its fair value as of the acquisition date based on the preliminary valuation.

The step-up was amortized as a non-cash charge to cost of goods sold as the acquired inventory was sold with all of it recognized in the twelve months ended December 31, 2022.

The following table summarizes the carrying amounts and weighted average lives of the acquired intangible assets:

Carrying Value

Customer lists/relationships

Trademarks, tradenames, and other intangibles

Ferroperm Piezoceramics A/S Acquisition

On June 30, 2022, we acquired 100 % of the outstanding shares of Ferroperm Piezoceramics A/S (“Ferroperm”).

Ferroperm specializes in the design and manufacture of high performance piezoceramic components for use in complex and demanding medical, industrial, and aerospace applications.

Ferroperm has complementary capabilities with our existing medical diagnostics and imaging product lines.

The acquisition supports our end market diversification strategy and expands our presence in European end markets.

The purchase price of $ 72,340 , which includes assumed changes in working capital, net of cash acquired of $ 5,578 , has been allocated to the fair values of assets and liabilities acquired as of June 30, 2022.

The allocation of the purchase price continues to be preliminary pending the completion of the valuation of intangible assets.

The final purchase price allocation may result in a materially different allocation than that recorded as of December 31, 2022.

The following table summarizes the consideration paid, the fair values of the assets acquired, and the liabilities assumed as of the date of acquisition:

CTS CORPORATION 42

Fair Values at

June 30, 2022

Accounts Receivable

Other current assets

Property, plant and equipment

Intangible assets

Fair value of assets acquired

Less fair value of liabilities acquired

Purchase price

Goodwill related to the acquisition is expected to be deductible for tax purposes.

The Company recorded a $ 3,012 step-up of inventory to its fair value as of the acquisition date based on the preliminary valuation.

The step-up was amortized as a non-cash charge to cost of goods sold as the acquired inventory was sold with all of it recognized in the twelve months ended December 31, 2022.

Intangible assets acquired have been assigned a provisional value of $ 36,448 with an estimated weighted average amortization period of 12 years .

They are included as customer lists/relationships in our Condensed Consolidated Balance Sheets and subsequent notes.

Due to the timing of the acquisition, the identification and valuation of all intangible assets remains incomplete;

however, management used historical experience and projections to estimate the potential value at December 31, 2022.

The amount and assumptions included above remain an estimate that will be adjusted once purchase accounting is complete.

Maglab AG Acquisition

On February 6, 2023, we acquired 100 % of the outstanding sh ares of maglab AG ("maglab") for $ 4,164 in cash subject to additional earnout payments based on future performance.

Maglab has deep expertise in magnetic system design and current measurement solutions for use in e-mobility, industrial automation, and renewable energy applications.

Maglab's domain expertise coupled with CTS’

commercial, technical and operational capabilities position us to advance our status as a recognized innovator in electric motor sensing and controls markets.

NOTE 4 —

Accounts Receivable, net

The components of accounts receivable, net are as follows:

As of December 31,

Accounts receivable, gross

Allowance for credit losses

Accounts receivable, net

NOTE 5 —

Inventories, net

Inventories, net consist of the following:

As of December 31,

Finished goods

Work-in-process

Raw materials

Inventory reserves

Inventories, net

CTS CORPORATION 43

NOTE 6 —

Property, Plant and Equipment, net

Property, plant and equipment, net is comprised of the following:

As of December 31,

Land and land improvements

Buildings and improvements

Machinery and equipment

Accumulated depreciation

Property, plant and equipment, net

Depreciation expense recorded in the Consolidated Statements of Earnings (Loss) includes the following:

For the Years Ended

Depreciation expense

NOTE 7 —

Retirement Plans

As of December 31, 2022, we have two active noncocntributory defined benefit pension plans ("pension plans") covering less than 1 % of our active employees.

These two plans consist of a U.S.

supplemental retirement plan ("SERP") and a Taiwan pension plan.

The SERP is comprised entirely of participants who were past employees of the Company.

We also provide post-retirement life insurance benefits for certain retired employees.

Domestic employees who were hired prior to 1982 and certain former union employees are eligible for life insurance benefits upon retirement.

We fund life insurance benefits through term life insurance policies and intend to continue funding all of the premiums on a pay-as-you-go basis.

We recognize the funded status of a benefit plan in our consolidated balance sheets.

The funded status is measured as the difference between plan assets at fair value and the projected benefit obligation.

We also recognize, as a component of other comprehensive earnings, net of tax, the gains or losses and prior service costs or credits that arise during the period but are not recognized as components of net periodic benefit/cost.

The measurement dates for the pension plans for our U.S.

locations were December 31, 2022 and 2021.

In February 2020, the CTS Board of Directors authorized management to explore termination of the U.S.-based pension plan ("Plan"), subject to certain conditions.

On June 1, 2020, we entered into the fifth amendment to the Plan whereby we set an effective termination date for the Plan of July 31, 2020.

In February 2021, we received a determination letter from the Internal Revenue Service that allowed us to proceed with the termination process for the Plan.

During the second quarter of 2021, the Company offered the option of receiving a lump sum payment to eligible participants with vested qualified Plan benefits in lieu of receiving monthly annuity payments.

Approximately 365 participants elected to receive the settlement, and lump sum payments of approximately $ 35,594 were made from Plan assets to these participants in June 2021.

As required under U.S.

GAAP, the Company recognizes a settlement gain or loss when the aggregate amount of lump-sum distributions to participants equals or exceeds the sum of the service and interest cost components of the net periodic pension cost.

The amount of settlement gain or loss recognized is the pro rata amount of the existing unrealized gain or loss immediately prior to the settlement.

In general, both the projected benefit obligation and fair value of plan assets are required to be remeasured in order to determine the settlement gain or loss.

Upon the partial settlement of the pension liability due to the lump sum offering in the second quarter of 2021, the Company recognized a non-cash and non-operating settlement charge of $ 20,063 related to pension losses, reclassified from accumulated other comprehensive loss to other (income) expense in the Company's Condensed Consolidated Statements of Earnings (Loss).

On July 29, 2021, the Plan purchased a group annuity contract that transferred our benefit obligations for approximately 2,700 CTS participants and beneficiaries in the United States (“Transferred Participants”).

As part of the purchase of the group annuity contract, Plan benefit obligations and related annuity administration services for Transferred Participants were irrevocably assumed and guaranteed by the insurance company effective as of August 3, 2021.

There will be no change to pension benefits for Transferred Participants.

The purchase of the group annuity contract was fully funded directly by Plan assets.

CTS CORPORATION 44

As a result of the final settlement of the pension liability with the purchase of annuities, we reclassified the remaining related unrecognized pension losses of $ 106,206 that were previously recorded in accumulated other comprehensive loss to the Consolidated Statements of Earnings (Loss) in the third quarter of 2021.

In January 2022, we transferred approximately $ 17,500 of funds from Plan assets to a qualified replacement plan (QRP) managed by the Company.

This plan requires that these assets be used to fund future annual Company contributions to our U.S.

401(k) program.

The remaining Plan assets were transferred to the Company in the third quarter of 2022 as part of the final termination process.

As a result, approximately $ 34,016 was transferred to the Company, which resulted in $ 6,803 of excise tax being recorded in Other Expense in the Company's Condensed Consolidated Statements of Earnings (Loss).

The following table provides a reconciliation of benefit obligation, plan assets, and the funded status of the pension plans for U.S.

locations at the measurement dates.

Pension Plans

Accumulated benefit obligation

Change in projected benefit obligation:

Projected benefit obligation at January 1

Interest cost

Benefits paid

Actuarial (gain) loss

Plan settlements

Foreign exchange impact

Projected benefit obligation at December 31

Change in plan assets:

Assets at fair value at January 1

Actual return on assets

Company contributions

Benefits paid

Plan settlements

Qualified replacement plan transfer

Asset reversion

Foreign exchange impact

Assets at fair value at December 31

Funded status (plan assets less projected benefit obligations)

CTS CORPORATION 45

The measurement dates for the post-retirement life insurance plan were December 31, 2022 and 2021.

The following table provides a reconciliation of benefit obligation, plan assets, and the funded status of the post-retirement life insurance plan at those measurement dates.

Post-Retirement

Life Insurance Plan

Accumulated benefit obligation

Change in projected benefit obligation:

Projected benefit obligation at January 1

Interest cost

Benefits paid

Actuarial (gain) loss

Projected benefit obligation at December 31

Change in plan assets:

Assets at fair value at January 1

Actual return on assets

Company contributions

Benefits paid

Assets at fair value at December 31

Funded status (plan assets less projected benefit obligations)

The components of the prepaid (accrued) cost of the domestic and foreign pension plans are classified in the following lines in the Consolidated Balance Sheets at December 31:

Pension Plans

Prepaid pension asset

Accrued expenses and other liabilities

Long-term pension obligations

Net (accrued) prepaid cost

The components of the accrued cost of the post-retirement life insurance plan are classified in the following lines in the Consolidated Balance Sheets at December 31:

Post-Retirement

Life Insurance Plan

Accrued expenses and other liabilities

Long-term pension obligations

Total accrued cost

CTS CORPORATION 46

We have also recorded the following amounts to accumulated other comprehensive loss for the U.S.

pension plans, net of tax:

Pension Plans

Balance at January 1, 2021

Amortization of retirement benefits, net of tax

Net actuarial gain

Settlement charges

Foreign exchange impact

Balance at January 1, 2022

Amortization of retirement benefits, net of tax

Net actuarial gain (loss)

Foreign exchange impact

Balance at December 31, 2022

We have recorded the following amounts to accumulated other comprehensive loss for the post-retirement life insurance plan, net of tax:

Balance at January 1, 2021

Amortization of retirement benefits, net of tax

Net actuarial loss

Balance at January 1, 2022

Amortization of retirement benefits, net of tax

Net actuarial loss

Balance at December 31, 2022

The accumulated actuarial gains and losses included in other comprehensive earnings are amortized in the following manner:

The component of unamortized net gains or losses related to our qualified pension plan is amortized based on the expected future life expectancy of the plan participants (estimated to be approximately 11 years at December 31, 2022 ), because substantially all of the participants in those plans are inactive.

The component of unamortized net gains or losses related to our post-retirement life insurance plan is amortized based on the estimated remaining future service period of the plan participants (estimated to be approximately 3 years at December 31, 2022 ).

The Company uses a market-related approach to value plan assets, reflecting changes in the fair value of plan assets over a five-year period.

The variance resulting from the difference between the expected and actual return on plan assets is included in the amortization calculation upon reflection in the market-related value of plan assets.

The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for those pension plans with accumulated benefit obligation in excess of fair value of plan assets is shown below:

As of December 31,

Projected benefit obligation

Accumulated benefit obligation

Fair value of plan assets

CTS CORPORATION 47

Net pension expense includes the following components:

Pension Plans

Interest cost

Expected return on plan assets (1)

Amortization of unrecognized loss

Settlement charges

Weighted-average actuarial assumptions (2)

Benefit obligation assumptions:

Discount rate

Rate of compensation increase

Pension income/expense assumptions:

Discount rate

Expected return on plan assets (1)

Rate of compensation increase

(1) Expected return on plan assets is net of expected investment expenses and certain administrative expenses.

(2) During the fourth quarter of each year, we review our actuarial assumptions in light of current economic factors to determine if the assumptions need to be adjusted.

2020 assumptions reflect termination basis accounting for our Plan.

Net post-retirement expense includes the following components:

Post-Retirement

Life Insurance Plan

Years Ended December 31,

Interest cost

Amortization of unrecognized gain

Weighted-average actuarial assumptions (1)

Benefit obligation assumptions:

Discount rate

Rate of compensation increase

Pension income/post-retirement expense assumptions:

Discount rate

Rate of compensation increase

(1) During the fourth quarter of each year, we review our actuarial assumptions in light of current economic factors to determine if the assumptions need to be adjusted.

All pension plan assets were allocated to fixed income/debt securities as of December 31, 2021.

Historically, we employed a liability-driven investment strategy whereby a mix of equity and fixed-income investments are used to pursue a de-risking strategy which over time seeks to reduce interest rate mismatch risk and other risks while achieving a return that matches or exceeds the growth in projected pension plan liabilities.

Risk tolerance was established through careful consideration of plan liabilities and funded status.

The investment portfolio primarily contained a diversified mix of equity and fixed-income investments.

Other assets such as private equity were used modestly to enhance long-term returns while improving portfolio diversification.

Investment risk was measured and monitored on an

CTS CORPORATION 48

ongoing basis through quarterly investment portfolio reviews, annual liability measurements, and asset/liability studies at regular intervals.

As a result of the termination of the Plan and final reversion activities in 2022, no assets remained in the Plan as of December 31, 2022.

The following table summarizes the fair values of our pension plan assets:

As of December 31,

Equity securities - U.S.

Bond funds - other (3) (4)

Cash and cash equivalents (2)

Total fair value of plan assets

The fair values at December 31, 2021, are classified within the following categories in the fair value hierarchy:

Equity securities - U.S.

Bond funds - other (3) (4)

Cash and cash equivalents (2)

(1) Comprised of common stocks of companies in various industries.

The Pension Plan fund manager may shift investments from value to growth strategies or vice-versa, from small cap to large cap stocks or vice-versa, in order to meet the Pension Plan's investment objectives, which are to provide for a reasonable amount of long-term growth of capital without undue exposure to volatility and protect the assets from erosion of purchasing power.

(2) Comprised of investment grade short-term investment and money-market funds.

(3) Comprised predominately of investment grade U.S.

corporate bonds with various maturities and U.S.

high-yield corporate bonds;

emerging market debt (local currency sovereign bonds, U.S.

dollar-denominated sovereign bonds and U.S.

dollar-denominated corporate bonds);

(4) Comprised of investments that are measured at fair value using the NAV per share practical expedient.

In accordance with the provisions of ASC 820-10, these investments have not been classified in the fair value hierarchy.

The fair value amount not leveled is presented to allow reconciliation of the fair value hierarchy to total fund pension plan assets.

The pension plan assets recorded at fair value are measured and classified in a hierarchy for disclosure purposes consisting of three levels based on the observability of inputs available in the marketplace used to measure fair value as discussed below:

Fair value measurements that are based on quoted prices (unadjusted) in active markets that the pension plan trustees have the ability to access for identical assets or liabilities.

Market price data generally is obtained from exchange or dealer markets.

Fair value measurements based on inputs other than quoted prices included in Level 1 that are observable for the asset, either directly or indirectly.

Level 2 inputs include quoted prices for similar assets in active or inactive markets, and inputs other than quoted prices that are observable for the asset, such as interest rates and yield curves that are observable at commonly quoted intervals.

Fair value measurements based on valuation techniques that use significant inputs that are unobservable.

The table below reconciles the Level 3 partnership assets within the fair value hierarchy:

Fair value of Level 3 partnership assets at January 1, 2021

Capital contributions

Realized and unrealized loss

Capital distributions

Fair value of Level 3 partnership assets at December 31, 2021

Capital contributions

Realized and unrealized loss

Capital distributions

Fair value of Level 3 partnership assets at December 31, 2022

CTS CORPORATION 49

The partnership fund manager used a market approach in estimating the fair value of the plan's Level 3 assets.

The market approach estimates fair value by first determining the entity's earnings before interest, taxes, depreciation, and amortization and then multiplying that value by an estimated multiple.

When establishing an appropriate multiple, the fund manager considered recent comparable private company transactions and multiples paid.

The entity's net debt was then subtracted from the calculated amount to arrive at an estimated fair value for the entity.

We expect to make $ 99 of contributions to the U.S.

plans and $ 220 of contributions to the non-U.S.

plans during 2023.

Expected benefit payments under the defined benefit pension plans and the postretirement benefit plan, for the next five years subsequent to 2022 and in the aggregate for the following five years are as follows:

Defined Contribution Plans

We sponsor a 401(k) plan that covers substantially all of our U.S.

employees as well as offer similar defined contribution plans at certain foreign locations.

Contributions and costs were generally determined as a percentage of the covered employee's annual salary.

We ceased matching employee contributions in the second quarter of 2020 in light of COVID-19 concerns, and we reimplemented the match in February 2021.

During 2022, our investment committee, in consultation with the plan’s advisors, determined the 401(k) plan’s position in CTS stock would be liquidated and funds would be reinvested in other investments.

This was completed in the fourth quarter of 2022.

Effective January 1, 2022, in connection with the U.S.

Plan termination process, we amended our 401(k) plan and transitioned to a non-elective contribution for all U.S.

employees that is also determined as a percentage of the covered employee's salary, provides for immediate vesting and is provided regardless of individual contribution plans.

In addition, we began offering a Roth 401(k) option to employees.

Expenses related to defined contribution plans include the following:

Years Ended December 31,

401(k) and other defined contribution plan expense

CTS CORPORATION 50

NOTE 8 —

Goodwill and Other Intangible Assets

Other Intangible Assets

Other intangible assets, net consist of the following components:

As of December 31, 2022

Other intangible assets:

Customer lists / relationships

Technology and other intangibles

Other intangible assets, net

Amortization expense for the year ended December 31, 2022

As of December 31, 2021

Other intangible assets:

Customer lists / relationships

Technology and other intangibles

Other intangible assets, net

Amortization expense for the year ended December 31, 2021

Amortization expense for the year ended December 31, 2020

The estimated amortization expense for the next five years and thereafter is as follows:

Total future amortization expense

Changes in the net carrying amount of goodwill were as follows:

Goodwill as of December 31, 2020

Increase due to acquisition

Decrease from purchase accounting adjustments

Goodwill as of December 31, 2021

Increase due to acquisitions

Foreign exchange impact

Goodwill as of December 31, 2022

Refer to Note 3 - "Business Acquisitions" for further information on the increase due to acquisitions in 2022.

We performed our annual impairment test as of October 1, 2022, our measurement date, and concluded that there was no impairment in any of our reporting units.

The fair value estimates used in the goodwill impairment analysis required significant judgment.

The Company's fair value estimates for the purposes of determining the goodwill impairment charge are considered Level 3 fair value measurements.

The fair value estimates were based on assumptions management believes to be reasonable, but that are inherently

CTS CORPORATION 51

uncertain, including estimates of future revenues and operating margins and assumptions about the overall economic climate and the competitive environment for the business.

NOTE 9 —

Costs Associated with Exit and Restructuring Activities

Restructuring charges are reported as a separate line within operating earnings in the Consolidated Statements of Earnings (Loss).

Total restructuring charges were:

Years Ended December 31,

Restructuring charges

September 2020 Plan

In September 2020, we initiated a restructuring plan focused on optimizing our manufacturing footprint and improving operational efficiency by better utilizing our systems capabilities.

This plan includes transitioning certain administrative functions to a shared service center, realignment of manufacturing locations, and certain other efficiency improvement actions ("September 2020 Plan").

The restructuring cost of the September 2020 Plan is now estimated to be in the range of $ 3,500 to $ 4,500 , including workforce reduction charges, building and equipment relocation charges, other contract and asset related costs.

We have incurred $ 2,059 in program costs to date.

We recorded $ 266 and $ 662 in workforce reduction costs during the three and twelve months ended December 31, 2022.

The total restructuring liability associated with these actions was $ 634 as of December 30, 2022.

There was no liability related to the September 2020 Plan as of December 31, 2021.

Other Restructuring Activities

From time to time we incur other restructuring activities that are not part of a formal plan.

During the years ended December 31, 2022 and 2021, we incurred restructuring charges of $ 1,250 and $ 1,717 , respectively, for exit and disposal activities at four sites, building and equipment relocation, and workforce reduction costs across the Company.

The remaining restructuring liability associated with these actions was $ 235 and $ 962 at December 31, 2022 and December 31, 2021, respectively.

The following table displays the restructuring liability activity for all plans for the year ended December 31, 2022:

Restructuring liability at January 1, 2022

Restructuring charges

Other activities (1)

Restructuring liability at December 31, 2022

(1) Other charges include the effects of currency translation, non-cash asset write-downs, travel, legal and other charges.

The total liability of $ 869 is included in accrued expenses and other liabilities at December 31, 2022.

NOTE 10 —

Accrued Expenses and Other Liabilities

The components of accrued expenses and other liabilities are as follows:

Accrued product-related costs

Accrued income taxes

Accrued property and other taxes

Accrued professional fees

Accrued customer-related liabilities

Dividends payable

Remediation reserves

Derivative liabilities

Other accrued liabilities

Total accrued expenses and other liabilities

CTS CORPORATION 52

NOTE 11 —

Contingencies

Certain processes in the manufacture of our current and past products create by-products classified as hazardous waste.

We have been notified by the U.S.

Environmental Protection Agency ("EPA"), state environmental agencies, and in some cases, groups of potentially responsible parties, that we may be potentially liable for environmental contamination at several sites currently and formerly owned or operated by us.

Two of those sites, Asheville, North Carolina and Mountain View, California, are designated National Priorities List sites under the U.S.

Environmental Protection Agency’s Superfund program.

We accrue a liability for probable remediation activities, claims and proceedings against us with respect to environmental matters if the amount can be reasonably estimated, and provide disclosures including the nature of a loss whenever it is probable or reasonably possible that a potentially material loss may have occurred but cannot be estimated.

We record contingent loss accruals on an undiscounted basis.

A roll-forward of remediation reserves included in accrued expenses and other liabilities in the Consolidated Balance Sheets is comprised of the following:

Years Ended December 31,

Balance at beginning of period

Remediation expense

Remediation payments

Other activity (1)

Balance at end of the period

(1) Other activity includes currency translation adjustments not recorded through remediation expense

The Company operates under and in accordance with a federal consent decree, dated March 7, 2017, with the EPA for the CTS of Asheville, Inc.

Superfund Site (“Site”).

On February 8, 2023, the Company received a letter from the EPA (the “EPA Letter”) seeking reimbursement of its past response costs and interest thereon relating to any release or threatened release of hazardous substances at the Site in the amount of $ 9,955 from the three potentially responsible parties associated with the site, including the Company.

The Company is analyzing its potential exposure for the costs sought i n the EPA Letter and will respond thereto in due course;

however, at this time, we are unable to reasonably estimate the liability from the EPA Letter, and therefore, we did not record an accrual for the EPA Letter in our December 31, 2022 financial statements.

Unrelated to the environmental claims described above, certain other legal claims are pending against us with respect to matters arising out of the ordinary conduct of our business.

We provide product warranties when we sell our products and accrue for estimated liabilities at the time of sale.

Warranty estimates are forecasts based on the best available information and historical claims experience.

We accrue for specific warranty claims if we believe that the facts of a specific claim make it probable that a liability in excess of our historical experience has been incurred and provide disclosures for specific claims whenever it is reasonably possible that a material loss may be incurred which cannot be estimated.

We cannot provide assurance that the ultimate disposition of environmental, legal, and product warranty claims will not materially exceed the amount of our accrued losses and adversely impact our consolidated financial position, results of operations, or cash flows.

Our accrued liabilities and disclosures will be adjusted accordingly if additional information becomes available in the future.

NOTE 12 —

We lease certain land, buildings and equipment under non-cancellable operating leases used in our operations.

Operating lease assets represent our right to use an underlying asset for the lease term.

Operating lease liabilities represent the present value of lease payments over the lease term, discounted using an estimate of our secured incremental borrowing rate because none of our leases contain a rate implicit in the lease arrangement.

The operating lease assets and liabilities are adjusted to include the impact of any lease incentives and non-lease components.

We have elected not to separate lease and non-lease components, which include taxes and common area maintenance in some of our leases.

Variable lease payments that depend on an index or a rate are included in lease payments using the prevailing index or rate in effect at lease commencement.

Options to extend or terminate a lease are included in the lease term when it is reasonably likely that we will exercise that option.

We occasionally enter into short term operating leases with an initial term of twelve months or less.

These leases are not recorded in the Consolidated Balance Sheets.

CTS CORPORATION 53

We determine if an arrangement is a lease or contains a lease at its inception, which normally does not require significant estimates or judgments.

Our lease agreements do not contain any material residual value guarantees or material restrictive covenants and we currently have no material sublease agreements.

In accordance with FASB Staff Q&A - Topic 842 and Topic 840:

Accounting for Lease Concessions Related to the Effects of the COVID-19 Pandemic ("FASB Staff Q&A") issued in April 2020, we elected to account for any lease concessions resulting directly from the COVID-19 pandemic as if the enforceable rights and obligations for the concessions existed in the respective contracts at lease inception and as such we will not account for any concession as a lease modification.

Guidance from the FASB Staff Q&A provided methods to account for rent deferrals which include the option to treat the lease as if no changes to the lease contract were made or to treat deferred payments as variable lease payments.

The FASB Staff Q&A allows entities to select the most practical approach and does not require the same approach be applied consistently to all leases.

As a result, we have accounted for lease deferrals as if no changes to the lease contract were made and will continue to recognize lease expense, on a straight-line basis, during the deferral periods.

During the year ended December 31, 2020, these rent concessions related to the COVID-19 pandemic were not material.

Components of lease expense for the years ended December 31, 2022, 2021, and 2020 were as follows:

Operating lease cost

Short-term lease cost

Total lease cost

Supplemental cash flow information related to leases was as follows:

Cash paid for amounts included in the measurement of lease obligations

Leased assets obtained in exchange for new operating lease obligations

Supplemental balance sheet information related to leases was as follows:

As of December 31,

Operating lease obligations

Long-term operating lease obligations

Total lease liabilities

Weighted-average remaining lease terms (years)

Weighted-average discount rate

Remaining maturity of our existing lease liabilities as of December 31, 2022 is as follows:

Operating Leases (1)

Present value of lease payments

(1) Operating lease payments include $ 1,759 of payments related to options to extend lease terms that are reasonably expected to be exercised.

CTS CORPORATION 54

NOTE 13 —

Long-term debt was comprised of the following:

As of December 31,

Total credit facility availability

Balance outstanding

Standby letters of credit

Amount available, subject to covenant restrictions

Weighted-average interest rate

On December 15, 2021, we entered into a second amended and restated five-year credit agreement with a group of banks (the “Revolving Credit Facility”) to (i) increase the total credit facility to $ 400,000 which may be increased by $ 200,000 at the request of the Company, subject to the administrative agent's approval, (ii) extend the maturity of the Revolving Credit Facility from February 12, 2024 to December 15, 2026 , (iii) replace LIBOR with SOFR as the primary reference rate used to calculate interest on the loans under the Revolving Credit Facility, (iv) increase available sublimits for letters of credit, and swingline loans as well as providing for additional alternative currency borrowing capabilities, and (v) modify the financial and non-financial covenants to provide the Company additional flexibility.

This new unsecured credit facility replaced the prior $ 300,000 unsecured credit facility, which would have expired February 12, 2024.

Borrowings in U.S.

dollars under the Revolving Credit Facility bear interest, at a per annum rate equal to the applicable Term SOFR rate (but not less than 0.0 %), plus the Term SOFR adjustment, and plus an applicable margin, which ranges from 1.00 % to 1.75 %, based on our net leverage ratio.

Similarly, borrowings of alternative currencies under the Revolving Credit Facility bear interest equal to a defined risk-free reference rate, plus the applicable risk-free rate adjustment and plus an applicable margin, which ranges from 1.00 % to 1.75 %, based on our net leverage ratio.

The Revolving Credit Facility includes a swing line sublimit of $ 20,000 and a letter of credit sublimit of $ 20,000 .

We also pay a quarterly commitment fee on the unused portion of the Revolving Credit Facility.

The commitment fee ranges from 0.175 % to 0.25 % based on our net leverage ratio.

The Revolving Credit Facility requires, in addition to customary representations and warranties, that we comply with a maximum net leverage ratio and a minimum interest coverage ratio.

Failure to comply with these covenants could reduce the borrowing availability under the Revolving Credit Facility.

We were in compliance with all debt covenants at December 31, 2022.

The Revolving Credit Facility requires that we deliver quarterly financial statements, annual financial statements, auditor certifications, and compliance certificates within a specified number of days after the end of a quarter and year.

Additionally, the Revolving Credit Facility contains restrictions limiting our ability to:

dispose of assets;

incur certain additional debt;

repay other debt or amend subordinated debt instruments;

create liens on assets;

make investments, loans or advances;

make acquisitions or engage in mergers or consolidations;

engage in certain transactions with our subsidiaries and affiliates;

and make stock repurchases and dividend payments.

We have debt issuance costs related to our long-term debt that are being amortized using the straight-line method over the life of the debt.

Amortization expense was approximately $ 194 for the year ended December 31, 2022 , $ 169 in 2021 and $ 168 in 2020 .

These costs are included in interest expense in our Consolidated Statements of Earnings (Loss).

NOTE 14 —

Derivative Financial Instruments

Our earnings and cash flows are subject to fluctuations due to changes in foreign currency exchange rates and interest rates.

We selectively use derivative financial instruments including foreign currency forward contracts and interest rate swaps to manage our exposure to these risks.

The use of derivative financial instruments exposes the Company to credit risk, which relates to the risk of nonperformance by a counterparty to the derivative contracts.

We manage our credit risk by entering into derivative contracts with only highly rated financial institutions and by using netting agreements.

The effective portion of derivative gains and losses are recorded in accumulated other comprehensive (loss) income until the hedged transaction affects earnings upon settlement, at which time they are reclassified to costs of goods sold or net sales.

If it is probable that an anticipated hedged transaction will not occur by the end of the originally specified time period, we reclassify the gains or losses related to that hedge from accumulated other comprehensive (loss) income to other income (expense),net.

CTS CORPORATION 55

We assess hedge effectiveness qualitatively by verifying that the critical terms of the hedging instrument and the forecasted transaction continue to match, and that there have been no adverse developments that have increased the risk that the counterparty will default.

No recognition of ineffectiveness was recorded in our Consolidated Statement of Earnings (Loss) for the year ended December 31, 2022.

Foreign Currency Hedges

We use forward contracts to mitigate currency risk related to a portion of our forecasted foreign currency revenues and costs.

The currency forward contracts are designed as cash flow hedges and are recorded in the Consolidated Balance Sheets at fair value.

We continue to monitor the Company’s overall currency exposure and may elect to add cash flow hedges in the future.

At December 31, 2022 , we had a net unrealized gain of $ 915 in accumulated other comprehensive (loss) income, of which $ 849 in gains are expected to be reclassified to earnings within the next 12 months.

The notional amount of foreign currency forward contracts outstanding was $ 30,033 at December 31, 2022.

Interest Rate Swaps

We use interest rate swaps to convert a portion of our revolving credit facility's outstanding balance from a variable rate of interest to a fixed rate.

As of December 31, 2022 , we have agreements to fix interest rates on $ 50,000 of long-term debt through December 2026.

The difference to be paid or received under the terms of the swap agreements will be recognized as an adjustment to interest expense when settled.

These swaps are treated as cash flow hedges and consequently, the changes in fair value are recorded in other comprehensive (loss) income.

The estimated net amount of the existing losses that are reported in accumulated other comprehensive (loss) income that are expected to be reclassified into earnings within the next twelve months is approximately $ 1,561 .

The location and fair values of derivative instruments designated as hedging instruments in the Consolidated Balance Sheets as of December 31, 2022, are shown in the following table:

As of December 31,

Interest rate swaps reported in Other current assets

Interest rate swaps reported in Other assets

Interest rate swaps reported in Accrued expenses and other liabilities

Interest rate swaps reported in Other long-term obligations

Cross-currency swap reported in Accrued expenses and other liabilities

Foreign currency hedges reported in Other current assets

The Company has elected to net its foreign currency derivative assets and liabilities in the balance sheet in accordance with ASC 210-20 ( Balance Sheet, Offsetting ).

On a gross basis, there were foreign currency derivative assets of $ 1,090 and foreign currency derivative liabilities of $ 145 at December 31, 2022.

CTS CORPORATION 56

The effect of derivative instruments on the Consolidated Statements of Earnings (Loss) is as follows:

Years Ended December 31,

Foreign Exchange Contracts:

Amounts reclassified from AOCI to earnings:

Cost of goods sold

Selling, general and administrative expense

Total amounts reclassified from AOCI to earnings

Gain recognized in other expense for hedge ineffectiveness

Total derivative gain (loss) on foreign exchange contracts

recognized in earnings

Interest Rate Swaps:

Income (Expense) recorded in interest expense

Cross-Currency Swaps:

Income recorded in interest expense

Total gains (losses) on derivatives

Cross-Currency Swap

The Company has operations and investments in various international locations and is subject to risks associated with changing foreign exchange rates.

As part of the strategy to limit foreign exchange exposure, the Company entered into a cross currency interest rate swap agreement on June 27, 2022 that synthetically swapped $ 25,000 of variable rate debt to Krone denominated variable rate debt.

Upon completion of the Ferroperm acquisition on June 30, 2022, the transaction was designated as a net investment hedge for accounting purposes and will mature on June 30, 2027 .

Interest payments received for the cross-currency swap are excluded from the net investment hedge effectiveness assessment and are recorded in interest expense in the Condensed Consolidated Statements of Earnings.

The assumptions used in measuring fair value of the cross currency-swap are considered level 2 inputs, which are based upon the Krone to United States Dollar exchange rate market.

At December 31, 2022 we had a net unrealized loss of $ 557 in accumulated other comprehensive (loss) income.

Prior to designation as a net investment hedge, a gain of $ 111 was recorded in other expense within the Condensed Consolidated Statements of Earnings during the second quarter of 2022.

Derivative Contracts Not Designated as Hedges

In the second quarter of 2022, the Company used derivative contracts to manage foreign currency exchange risk related to funds to be used for the purchase price of the Ferroperm acquisition.

These contracts were not designated as hedges and therefore changes in the fair values of these instruments were recognized directly in earnings.

All contracts were settled in conjunction with the closing of the Ferroperm acquisition.

As a result of these contracts, the Company recognized a $ 1,776 loss in other expense in the Consolidated Statements of Earnings (Loss) in 2022.

NOTE 15 —

Accumulated Other Comprehensive (Loss) Income

Shareholders’

equity includes certain items classified as accumulated other comprehensive (loss) income (“AOCI”) in the Consolidated Balance Sheets, including:

Unrealized gains (losses) on hedges relate to interest rate swaps to convert a portion of our revolving credit facility's outstanding balance from a variable rate of interest into a fixed rate and foreign currency forward contracts used to hedge our exposure to changes in exchange rates affecting certain revenues and costs denominated in foreign currencies.

These hedges are designated as cash flow hedges, and we have deferred income statement recognition of gains and losses until the hedged transactions occur, at which time amounts are reclassified into earnings.

Further information related to our derivative financial instruments is included in Note 14, “Derivative Financial Instruments”

and Note 18, “Fair Value Measurements”.

Unrealized gains (losses) on pension obligations are deferred from income statement recognition until the gains or losses are realized.

Amounts reclassified to earnings from AOCI are included in net periodic pension income (expense).

Further information related to our pension obligations is included in Note 7, “Retirement Plans”.

Cumulative translation adjustment relates to our non-U.S.

subsidiary companies that have designated a functional currency other than the U.S.

We are required to translate the subsidiary functional currency financial statements to U.S.

CTS CORPORATION 57

using a combination of historical, period-end, and average foreign exchange rates.

This combination of rates creates the foreign currency translation adjustment component of other comprehensive income.

The components of accumulated other comprehensive (loss) income for the year ended December 31, 2022 are as follows:

Changes in fair market value of derivatives:

Income tax benefit (expense)

Changes in unrealized pension cost:

Income tax benefit (expense)

Cumulative translation adjustment:

Income tax benefit (expense)

Total accumulated other comprehensive (loss) income

The components of accumulated other comprehensive (loss) income for the year ended December 31, 2021 are as follows:

Changes in fair market value of derivatives:

Income tax (expense) benefit

Changes in unrealized pension cost:

Income tax (expense) benefit

Cumulative translation adjustment:

Income tax benefit (expense)

Total accumulated other comprehensive (loss)

CTS CORPORATION 58

NOTE 16 —

Shareholders' Equity

Share count and par value data related to shareholders' equity are as follows:

As of December 31,

Preferred Stock

Par value per share

Shares authorized

Shares outstanding

Par value per share

Shares authorized

Shares issued

Shares outstanding

Treasury stock

On May 13, 2021, the Board of Directors approved a share repurchase program that authorizes the Company to repurchase up to $ 50,000 of the Company’s common stock.

The repurchase program has no set expiration date and replaced the repurchase program approved by the Board of Directors on February 7, 2019.

During the year ended December 31, 2022, 583,526 shares of common stock were repurchased for approximately $ 21,447 .

Approximately $ 19,767 is still available for future purchases under this program.

On February 9, 2023, the Board approved a new share repurchase program that authorizes the Company to repurchase up to $ 50 million of its common stock.

The repurchase program has no set expiration date and supersedes and replaces the repurchase program approved by the Board in May 2021.

A roll forward of common shares outstanding is as follows:

As of December 31,

Balance at beginning of the year

Restricted stock unit issuances

Balance at end of period

NOTE 17 —

Stock-Based Compensation

At December 31, 2022 , we had five stock-based compensation plans:

the Non-Employee Directors' Stock Retirement Plan ("Directors' Plan"), the 2004 Omnibus Long-Term Incentive Plan ("2004 Plan"), the 2009 Omnibus Equity and Performance Incentive Plan ("2009 Plan"), the 2014 Performance & Incentive Plan ("2014 Plan"), and the 2018 Equity and Incentive Compensation Plan ("2018 Plan").

Future grants can only be made under the 2018 Plan.

The 2018 Plan allows for grants of stock options, stock appreciation rights, restricted stock, restricted stock units ("RSUs"), performance shares, performance units, and other stock awards subject to the terms of the 2018 Plan.

The following table summarizes the compensation expense included in selling, general and administrative expenses in the Consolidated Statements of Earnings (Loss) related to stock-based compensation plans:

Years Ended December 31,

Service-Based RSUs

Performance-Based RSUs

Cash-settled awards

Income tax benefit

CTS CORPORATION 59

The fair value of all equity awards that vested during the periods ended December 31, 2022, 2021, and 2020 were $ 4,535 , $ 7,063 , and $ 5,680 , respectively.

We recorded a tax deduction related to equity awards that vested during the year ended December 31, 2022 , in the amount of $ 1,624 .

The following table summarizes the unrecognized compensation expense related to non-vested RSUs by type and the weighted-average period in which the expense is to be recognized:

Service-Based RSUs

Performance-Based RSUs

We recognize expense on a straight-line basis over the requisite service period for each separately vesting portion of the award as if the award was, in substance, multiple awards.

The following table summarizes the status of these plans as of December 31, 2022:

Directors' Plan

Awards originally available to be granted

Performance stock options outstanding

Maximum potential RSU and cash settled

awards outstanding

Maximum potential awards outstanding

RSUs and cash settled awards vested and

Awards available to be granted

Service-Based Restricted Stock Units

Service-based RSUs entitle the holder to receive one share of common stock for each unit when the unit vests.

RSUs are issued to officers, key employees, and non-employee directors as compensation.

Generally, the RSUs vest over a three-year period.

RSUs granted to non-employee directors generally vest one year after being granted.

Upon vesting, the non-employee directors elect to either receive the stock associated with the RSU immediately or defer receipt of the stock to a future date.

The fair value of the RSUs is equivalent to the trading value of our common stock on the grant date.

A summary of RSU activity for the year ended December 31, 2022 is presented below:

Outstanding at January 1, 2022

Outstanding at December 31, 2022

Releasable at December 31, 2022

Years Ended December 31,

Weighted-average grant date fair value

Intrinsic value of RSUs released

CTS CORPORATION 60

A summary of non-vested RSU activity for the year ended December 31, 2022 is presented below:

Nonvested at January 1, 2022

Nonvested at December 31, 2022

Performance-Based Restricted Stock Units

We grant performance-based restricted stock unit awards ("PSUs") to certain executives and key employees.

PSUs are usually awarded in the range from zero percent to 200 % of a targeted number of shares.

The award rate for the 2018-2020, 2019-2021, and 2020-2022 PSUs was dependent upon our achievement of sales growth targets, cash flow targets, and relative total shareholder return ("RTSR") using a matrix based on the percentile ranking of our stock price performance compared to a peer group over a three-year period.

Other PSUs are granted from time to time based on other performance criteria.

The initial fair value of the PSUs is equivalent to the trading value of our common stock on the grant date.

The fair value is subsequently adjusted quarterly based on management's assessment of the Company's performance relative to the target number of shares performance criteria.

A summary of PSU activity for the year ended December 31, 2022 is presented below:

Outstanding at January 1, 2022

Added by performance factor

Outstanding at December 31, 2022

Releasable at December 31, 2022

The following table summarizes each grant of performance awards outstanding at December 31, 2022:

Vesting Dependency

Maximum Number

of Units to be Granted

2020 - 2022 QTI Performance RSUs

September 24, 2019

50 % EBITDA growth, 50 % Sales growth

2020 - 2022 Performance RSUs

February 6, 2020

25 % RTSR, 40 % sales growth, 35 % operating cash flow

2021 - 2023 Performance RSUs

25 % RTSR, 40 % sales growth, 35 % operating cash flow

2022 - 2024 Performance RSUs

February 10, 2022

35 % RTSR, 35 % sales growth, 30 % operating cash flow

Focus 2025 Performance RSUs

Cumulative revenues of $ 750 million over a trailing four-quarter period

CTS CORPORATION 61

Cash-Settled Restricted Stock Units

Cash-Settled RSUs entitle the holder to receive the cash equivalent of one share of common stock for each unit when the unit vests.

These RSUs are issued to key employees residing in foreign locations as direct compensation.

Generally, these RSUs vest over a three-year period.

Cash-settled RSUs are classified as liabilities and are remeasured at each reporting date until settled.

At December 31, 2022, and 2021 , we had 46,641 and 32,085 cash-settled RSUs outstanding, respectively.

At December 31, 2022, and 2021 , liabilities of $ 566 and $ 400 , respectively were included in accrued expenses and other liabilities on our Consolidated Balance Sheets.

NOTE 18 —

Fair Value Measurements

The table below summarizes the financial assets and liabilities that were measured at fair value on a recurring basis as of December 31, 2022 and the gain recorded during the year ended December 31, 2022:

Asset (Liability) Carrying

Quoted Prices

Interest rate swap

Foreign currency hedges

Cross-currency swap

Qualified replacement plan assets

The table below summarizes the financial assets that were measured at fair value on a recurring basis as of December 31, 2021 and the (loss) recorded during the year ended December 31, 2021:

(Liability) Asset Carrying

Quoted Prices

(Loss) Gain for

Interest rate swap

Foreign currency hedges

Contingent consideration

We use interest rate swaps to convert a portion of our Revolving Credit Facility’s outstanding balance from a variable rate of interest into a fixed rate and foreign currency forward contracts to hedge the effect of foreign currency changes on certain revenues and costs denominated in foreign currencies.

In addition, the Company entered into a cross currency swap agreement in order to manage its exposure to changes in interest rates related to foreign debt.

These derivative financial instruments are measured at fair value on a recurring basis.

The fair value of our interest rate swaps, and foreign currency hedges were measured using standard valuation models using market-based observable inputs over the contractual terms, including forward yield curves, among others.

There is a readily determinable market for these derivative instruments, but that market is not active and therefore they are classified within Level 2 of the fair value hierarchy.

The QRP assets consist of investment funds maintained for future contributions to the Company’s U.S.

401(k) program.

The investments are Level 1 marketable securities and are recorded in Other Assets on our Condensed Consolidated Balance Sheets.

Refer to Note 7 - "Retirement Plans" for further information on the QRP.

The fair value of the contingent consideration required significant judgment.

The Company's fair value estimates used in the contingent consideration valuation are considered Level 3 fair value measurements.

The fair value estimates were based on assumptions management believes to be reasonable, but that are inherently uncertain, including estimates of future revenues and timing of events and activities that are expected to take place.

A roll-forward of the contingent consideration is as follows:

CTS CORPORATION 62

Consideration

Balance at December 31, 2021 in accrued expenses and other liabilities

Settled in cash

Change in fair value

Balance at December 31, 2022 in accrued expenses and other liabilities

Our long-term debt consists of debt outstanding under the Revolving Credit Facility which is recorded at its carrying value.

There is a readily determinable market for our long-term debt and it is classified within Level 2 of the fair value hierarchy as the market is not deemed to be active.

The fair value of long-term debt approximates carrying value and was determined by valuing a similar hypothetical coupon bond and attributing that value to our long-term debt under the Revolving Credit Facility.

NOTE 19 —

Earnings (Loss) before income taxes consist of the following:

Years Ended December 31,

Significant components of income tax provision/(benefit) are as follows:

Years Ended December 31,

Total Current

Total Deferred

Total provision for income taxes

CTS CORPORATION 63

Significant components of our deferred tax assets and liabilities are as follows:

As of December 31,

Post-retirement benefits

Inventory reserves

Loss carry-forwards

Credit carry-forwards

Accrued expenses

Research and development expenditures

Operating lease liabilities

Stock compensation

Foreign exchange loss

Gross deferred tax assets

Depreciation and amortization

Qualified replacement plan

Operating lease assets

Subsidiaries' unremitted earnings

Gross deferred tax liabilities

Net deferred tax assets

Deferred tax asset valuation allowance

Total net deferred tax assets

The deferred tax assets and deferred tax liabilities, classified as non-current, are as follows below:

As of December 31,

Non-current deferred tax assets

Non-current deferred tax liabilities

Total net deferred tax assets

At each reporting date, we weigh all available positive and negative evidence to assess whether it is more-likely-than-not that the Company's deferred tax assets, including deferred tax assets associated with accumulated loss carryforwards and tax credits in the various jurisdictions in which it operates, will be realized.

As of December 31, 2022, and 2021, we recorded deferred tax assets related to certain U.S.

state and non-U.S.

income tax loss carryforwards of $ 4,547 and $ 5,070 , respectively, and U.S.

tax credits of $ 10,467 and $ 19,665 , respectively.

The deferred tax assets expire in various years primarily between 2023 and 2042 .

Generally, we assess if it is more-likely-than-not that our net deferred tax assets will be realized during the available carry-forward periods.

As a result, we have determined that valuation allowances of $ 8,386 and $ 9,489 should be provided for certain deferred tax assets at December 31, 2022, and 2021, respectively.

As of December 31, 2022, the valuation allowances relate to certain U.S.

state and non-U.S.

loss carry-forwards and certain U.S.

state tax credits that management does not anticipate will be utilized.

A valuation allowance of $ 172 was recorded in 2022 against the U.S.

federal foreign tax credit carryforwards of $ 362 .

These credits begin to expire in varying amounts between 2028 and 2032 .

No valuation allowance was recorded in 2022 against the U.S.

federal research and development tax credits of $ 8,082 .

These credits begin to expire in varying amounts between 2023 and 2042 .

We assessed the anticipated realization of those tax credits utilizing future taxable income projections.

Based on those projections, management believes it is more-likely-than-not that we will realize the benefits of these credit carryforwards.

CTS CORPORATION 64

The following table reconciles taxes at the U.S.

federal statutory rate to the effective income tax rate:

Years Ended December 31,

Taxes at the U.S.

statutory rate

State income taxes, net of federal income tax benefit

earnings taxed at rates different than the U.S.

statutory rate

Foreign source earnings, net of associated foreign tax credits

Benefit of tax credits

Non-deductible expenses

Stock compensation - excess tax benefits

Adjustment to valuation allowances

Change in unrecognized tax benefits

Impacts of unremitted foreign earnings

Release of disproportionate tax effects of OCI

Excise tax paid upon U.S.

pension termination

Effective income tax rate

In 2020, the Company began the termination of the U.S.-based pension plan.

As a result of the final settlement of the pension liability in 2021, we reclassified the disproportionate tax effect related to the pension plan of $ 5,375 that was previously recorded in accumulated other comprehensive loss to income tax expense.

In 2022, the remaining assets of the pension plan were liquidated and reverted back to CTS.

These funds are subject to both income and excise taxes.

The excise taxes of $ 6,803 are nondeductible for U.S.

tax purposes.

Further information related to our pension terminations is included in Note 7 –

"Retirement Plans."

Following the enactment of the 2017 Tax Cut and Jobs Act ("Tax Act") and the associated one-time transition tax, in general, repatriation of foreign earnings to the U.S.

can be completed with no incremental U.S.

However, there are limited other taxes that continue to apply such as foreign withholding and certain state taxes.

The Company records a deferred tax liability for the estimated foreign earnings and state tax cost associated with the undistributed foreign earnings that are not permanently reinvested.

In 2020 the Company made the decision to no longer permanently reinvest the earnings of its Taiwan subsidiary.

The Tax Act also includes provisions for Global Intangible Low-Taxed Income (“GILTI”) wherein taxes on foreign income are imposed in excess of a deemed return on tangible assets of foreign corporations.

We elected to recognize the tax on GILTI as an expense in the period the tax is incurred.

We recognize the financial statement benefit of a tax position when it is more-likely-than-not, based on its technical merits, that the position will be sustained upon examination.

A tax position that meets the more-likely-than-not threshold is then measured to determine the amount of benefit to be recognized in the financial statements.

As of December 31, 2022, we have approximately $ 2,079 of unrecognized tax benefits, which if recognized, would impact the effective tax rate.

We anticipate reducing our unrecognized tax benefits by approximately $ 222 in the next 12 months.

A reconciliation of the beginning and ending unrecognized tax benefits is provided below:

As of December 31,

Balance at January 1

Increase related to current year tax positions

Decrease related to prior year tax positions

Decrease related to lapse in statute of limitation

Decrease related to settlements with taxing authorities

Balance at December 31

Our continuing practice is to recognize interest and/or penalties related to unrecognized tax benefits as income tax expense.

As of December 31, 2022, and 2021 , $ 39 and $ 39 , respectively, of interest and penalties were accrued.

We are subject to taxation in the U.S., various states, and in non-U.S.

jurisdictions.

income tax returns are primarily subject to examination from 2019 through 2021 ;

however, U.S.

tax authorities also have the ability to review prior tax years to the extent loss carryforwards and tax credit carryforwards are utilized.

The open years for the non-U.S.

tax returns range from 2013 through 2021 based on local statutes.

CTS CORPORATION 65

NOTE 20 —

Geographic Data

Financial information relating to our operations by geographic area were as follows:

Years Ended December 31,

United States

Czech Republic

Other non-U.S.

Consolidated net sales

Sales are attributed to countries based upon the origin of the sale.

Years Ended December 31,

Long-Lived Tangible Assets

United States

Czech Republic

Other non-U.S

Consolidated long-lived assets

CTS CORPORATION 66

CTS CORPORATION

SCHEDULE II —

VALUATION AND QUALIFYING ACCOUNTS

(in thousands)

Year ended December 31, 2022 Allowance for

credit losses

Year ended December 31, 2021 Allowance for

credit losses

Year ended December 31, 2020 Allowance for

credit losses

CTS CORPORATION 67

Changes in and Disagreements with Acco untants on Accounting and Financial Disclosure

Not applicable.

Control s and Procedures

(a) Evaluation of Disclosure and Controls

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Annual Report on Form 10-K.

Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K were effective in providing reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud.

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.

Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.

Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within CTS Corporation have been detected.

(b) Management’s Annual Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934 as amended (the "Exchange Act")).

Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2022.

In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control—Integrated Framework (2013 framework).

We have excluded from the scope of our assessment of internal control over financial reporting the operations and related assets of TEWA Temperature Sensors SP.

and Ferroperm Piezoceramics A/S, which we acquired in 2022.

At December 31, 2022 and for the period from acquisitions through December 31, 2022, total assets and revenues subject to our internal control over financial reporting represented 15% of our consolidated total assets and 4% of our consolidated total net revenues.

Based on our assessment under the framework in Internal Control—Integrated Framework (2013 framework), our management concluded that our internal control over financial reporting was effective as of December 31, 2022.

The effectiveness of our internal control over financial reporting as of December 31, 2022 has been audited by Grant Thornton LLP, an independent registered public accounting firm, as stated in their report that is included herein.

There were no changes in our internal control over financial reporting for the quarter ended December 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

CTS CORPORATION 68

REPORT OF INDEPENDENT REGIST ERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders

CTS Corporation

Opinion on internal control over financial reporting

We have audited the internal control over financial reporting of CTS Corporation (an Indiana corporation) and subsidiaries (the “Company”) as of December 31, 2022, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended December 31, 2022, and our report dated February 24, 2023 expressed an unqualified opinion on those financial statements.

Basis for opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting (“Management’s Report”).

Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances.

We believe that our audit provides a reasonable basis for our opinion.

Our audit of, and opinion on, the Company’s internal control over financial reporting does not include the internal control over financial reporting of TEWA Temperature Sensors SP.

and Ferroperm Piezoceramics A/S, both wholly-owned subsidiaries, whose combined financial statements reflect total assets and revenues constituting 15 and 4 percent, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2022.

As indicated in Management’s Report, TEWA Temperature Sensors SP.

and Ferroperm Piezoceramics A/S were both acquired during 2022.

Management’s assertion on the effectiveness of the Company’s internal control over financial reporting excluded internal control over financial reporting of both TEWA Temperature Sensors SP.

and Ferroperm Piezoceramics A/S.

Definition and limitations of internal control over financial reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company;

and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ GRANT THORNTON LLP

Chicago, Illinois

February 24, 2023

CTS CORPORATION 69

Othe r Information

Not applicable.

Disclosure Regarding Foreign Jurisdictions that Prevent Inspections

Not applicable.

Directors, Executive Of ficers and Corporate Governance

Please see Part I, Item 1 of this Annual Report on Form 10-K for information about our executive officers, which is incorporated by reference herein.

Information with respect to Directors and Corporate Governance may be found in our definitive proxy statement to be delivered to shareholders in connection with our 2023 Annual Meeting of Shareholders.

Such information is incorporated herein by reference.

Execut ive Compensation

Information with respect to this item may be found in our definitive proxy statement to be delivered to shareholders in connection with our 2023 Annual Meeting of Shareholders.

Such information is incorporated herein by reference.

EQUITY COMPENSATION PLAN INFORMATION

The following table provides information about shares of CTS common stock that could be issued under all of our equity compensation plans as of December 31, 2022:

Plan Category

Securities to

be Issued Upon

Options, Warrants and

Average Excercise Price

of Outstanding

Available for

Future Issuance

in Column(a)) (3)

Equity compensation plans approved by security holders

Equity compensation plans not approved by security holders (1)

(1) In 1990, we adopted the Stock Retirement Plan for Non-Employee Directors.

Prior to December 1, 2004, we annually credited an account for each non-employee director with 800 CTS common stock units.

We also annually credited each deferred stock account with an additional number of CTS common stock units representing the amount of dividends which would have been paid on an equivalent number of shares of CTS common stock for each quarter during the preceding calendar year.

As of December 1, 2004, this plan was amended to preclude crediting any additional CTS common stock units under the plan.

Upon retirement, a participating non-employee director is entitled to receive one share of CTS common stock for each CTS common stock unit in his deferred stock account.

On December 31, 2022, the deferred stock accounts contained a total of 4,722 CTS common stock units.

(2) Based on achievement of the maximum targets for performance-based equity grants.

As a result, this aggregate reported number may overstate actual dilution.

The weighted-average exercise price disclosed in column (b) does not take either the deferred stock account holdings or these performance-based equity grants into account.

(3) All of these shares may be issued with respect to award vehicles other than just stock options or stock appreciation rights or other rights to acquire shares.

CTS CORPORATION 70

Security Ownership of Certain Beneficial O wners and Management and Related Shareholder Matters

Information with respect to this item may be found in our definitive proxy statement to be delivered to shareholders in connection with our 2023 Annual Meeting of Shareholders.

Such information is incorporated herein by reference.

Certain Relationships and Related Transactions, and Director Independence

Information with respect to this item may be found in our definitive proxy statement to be delivered to shareholders in connection with our 2023 Annual Meeting of Shareholders.

Such information is incorporated herein by reference.

Principal Accou ntant Fees and Services

Information with respect to the aggregate fees billed to us by our principal accountant, Grant Thornton LLP (PCAOB ID No.

248 ), may be found in our definitive proxy statement to be delivered to shareholders in connection with our 2023 Annual Meeting of Shareholders.

Such information is incorporated herein by reference.

CTS CORPORATION 71

Exhibits and Fina ncial Statements Schedules

(a) (1) Financial Statements

The financial statements are filed as part of this Annual Report on Form 10-K under “Item 8.

Financial Statements and Supplementary Data.”

(a) (2) Financial Statement Schedule:

Valuation and Qualifying Accounts and Reserves

Other schedules have been omitted because they are not applicable, or the required information is shown in the Consolidated Financial Statements or Notes thereto.

(a) (3) Exhibits

All references to documents filed pursuant to the Securities Exchange Act of 1934, including Forms 10-K, 10-Q and 8-K, were filed by CTS, File No.

Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit 3 to the Current Report on Form 8-K, filed with the SEC on June 3, 2022).

Amended Bylaws (incorporated herein by reference to Exhibit 3 to the Current Report on Form 8-K, filed with the SEC on November 22, 2022).

Description of Securities Registered under Section 12 of the Securities Exchange Act of 1934

CTS Corporation Stock Retirement Plan for Non-Employee Directors, effective April 30, 1990, as amended (incorporated by reference to Exhibit (10)(a) to the Quarterly Report on Form 10-Q for the quarter ended March 30, 2003, filed with the SEC on April 23, 2003).*

Amendment to the CTS Corporation Stock Retirement Plan for Non-Employee Directors, dated as of December 1, 2004 (incorporated by reference to Exhibit (10)(j) to the Annual Report on Form 10-K for the year ended December 31, 2004, filed with the SEC on March 4, 2005).

Prototype Individual Excess Benefit Retirement Plan (incorporated by reference to Exhibit 10(d) to the Quarterly Report on Form 10-Q for the quarter ended September 30, 2007, filed with the SEC on October 24, 2007).*

CTS Corporation Executive Severance Policy, effective as of September 10, 2009 (incorporated by reference to Exhibit 10 to the Quarterly Report on Form 10-Q for the quarter ended September 27, 2009, filed with the SEC on October 28, 2009).*

Prototype Change in Control Agreement (incorporated by reference to Exhibit 10(x) to the Annual Report on Form 10-K for the year ended December 31, 2011, filed with the SEC on February 24, 2012).*

First Amendment to the CTS Corporation Executive Severance Policy (incorporated by reference to Exhibit 10(b) to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2013, filed with the SEC on April 25, 2013).*

CTS Corporation 2014 Performance and Incentive Compensation Plan (incorporated by reference to Exhibit 10.1 to the Form 8-K, filed with the SEC on May 22, 2014).*

Credit Agreement Between CTS Corporation and CTS International B.V.

and BMO Harris Bank N.A.

dated February 12, 2019 (incorporated by reference to Exhibit 10.1 to the Form 8-K filed with the SEC on February 15, 2019).

Credit Agreement by and among CTS Corporation, the Lenders from time to time parties thereto, and BMO Harris Bank N.A, as L/C Issuer and Administrative Agent dated December 15, 2021 (incorporated by reference to Exhibit 10.1 to the Form 8-K filed with the SEC on December 17, 2021).

CTS Corporation Pension Plan Exhibit (Amended and Restated Effective As of July 1, 2015) (incorporated by reference to Exhibit 10(s) to the Form 10-K filed with the SEC on February 23, 2018).

Amendment to the CTS Corporation Pension Plan (Amended and Restated Effective as of July 1, 2015) as of October 6, 2016, (incorporated by reference to Exhibit 10(t) to the Form 10-K filed with the SEC on February 23, 2018).

CTS CORPORATION 72

Amendment to the CTS Corporation Pension Plan (Amended and Restated Effective as of July 1, 2015) as of June 26, 2017, (incorporated by reference to Exhibit 10(u) to the Form 10-K filed with the SEC on February 23, 2018).

Amendment to the CTS Corporation Pension Plan (Amended and Restated Effective as of July 1, 2015) as of September 22, 2017, (incorporated by reference to Exhibit 10(v) to the Form 10-K filed with the SEC on February 23, 2018).

Amendment to the CTS Corporation Pension Plan (Amended and Restated Effective as of July 1, 2015) as of June 28, 2018, (incorporated by reference to Exhibit 10.1 to Form 10-Q filed with the SEC on July 31, 2020).

Amendment to the CTS Corporation Pension Plan (Amended and Restated Effective as of July 1, 2015) as of June 1, 2020, (incorporated by reference to Exhibit 10.1 to Form 10-Q filed with the SEC on July 31, 2020).

CTS Corporation Director and Officer Indemnification Agreement (incorporated by reference to Exhibit 10.1 to the Form 8-K, filed with the SEC on February 18, 2015)

CTS Corporation 2018 Equity and Incentive Compensation Plan (incorporated by reference to Exhibit 10.1 to the Form 8-K, filed with the SEC on May 22, 2018).

Subsidiaries.

Consent of Grant Thornton LLP.

Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Certification pursuant to 18 U.S.C.

Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Certification pursuant to 18 U.S.C.

Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

The following financial statements from the Company's Annual Report on Form 10-K for the year ended December 31, 2022, formatted in Inline XBRL:

(i) Consolidated Statements of Earnings (Loss), (ii) Consolidated Statements of Comprehensive Earnings, (iii) Consolidated Balance Sheets, (iv) Consolidated Statements of Cash Flows, (v) Consolidated Statements of Stockholders' Equity and (vi) Notes to Consolidated Financial Statements, tagged as blocks of text and including detailed tags.

The cover page from the Company's Annual Report on Form 10-K for the year ended December 31, 2022, formatted in Inline XBRL

* Management contract or compensatory plan or arrangement.

Form 10-K Summary

CTS CORPORATION 73

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

CTS Corporation

February 24, 2023

/s/ Ashish Agrawal

Ashish Agrawal

Vice President and Chief Financial Officer

(Principal Financial Officer)

February 24, 2023

/s/ Thomas M.

Corporate Controller

(Principal Accounting Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

February 24, 2023

/s/ Kieran O'Sullivan

Kieran O'Sullivan

Chairman, President, and Chief Executive Officer

(Principal Executive Officer)

February 24, 2023

/s/ Robert A.

Lead Director

February 24, 2023

/s/ William S.

February 24, 2023

/s/ Alfonso G.

February 24, 2023

/s/ Ye Jane Li

February 24, 2023

/s/ Randy Stone

CTS CORPORATION 74

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis