CTS CORP 10-K

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This section of this Annual Report on Form 10-K generally discusses 2023 and 2022 items and year-to-year comparisons between 2023 and 2022. Discussions of 2021 items and year-to-year comparisons between 2022 and 2021 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, 2022. Overview CTS Corporation ("CTS", "we", "our" or "us") is a leading designer and manufacturer of products that Sense, Connect and Move. Our vision is to be a leading provider of sensing and motion devices as well as connectivity components, enabling an intelligent and seamless world. These devices are categorized by their ability to Sense, Connect or Move. Sense products provide vital inputs to electronic systems. Connect products allow systems to function in synchronization with other systems. Move products ensure required movements are effectively and accurately executed. We are committed to achieving our vision by continuing to invest in the development of products, technologies and talent within these categories. We manufacture sensors, actuators and connectivity components in North America, Europe, and Asia. CTS provides engineered products to OEMs and tier one suppliers in the aerospace and defense, industrial, medical, and transportation markets. There is an increasing proliferation of sensing and motion applications within various markets we serve. In addition, the increasing connectivity of various devices to the internet results in greater demand for communication bandwidth and data storage, increasing the need for our connectivity products. Our success is dependent on the ability to execute our strategy to support these trends. We are subject to 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 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. Results of Operations: Year Ended December 31, 2023 versus Year Ended December 31, 2022 (Amounts in thousands, except percentages and per share amounts): The following table highlights changes in significant components of the Consolidated Statements of Earnings for the years ended December 31, 2023, and December 31, 2022: Years Ended December 31, Percent of Net Sales 2023 2022 Percent Change 2023 2022 Net sales $ 550,422 $ 586,869 (6.2 )% 100 % 100 % Cost of goods sold 359,563 376,331 (4.5 ) 65.3 64.1 Gross margin 190,859 210,538 (9.3 ) 34.7 35.9 Selling, general and administrative expenses 83,816 91,520 (8.4 ) 15.2 15.6 Research and development expenses 24,918 24,100 3.4 4.5 4.1 Restructuring charges 7,074 1,912 270.0 1.3 0.3 Total operating expenses 115,808 117,532 (1.5 ) 21.0 20.0 Operating earnings 75,051 93,006 (19.3 ) 13.6 15.8 Total other income (expense), net 102 (12,269 ) (100.8 ) 0.0 (2.1 ) Earnings before taxes 75,153 80,737 (6.9 ) 13.7 13.8 Income tax expense 14,621 21,162 (30.9 ) 2.7 3.6 Net earnings $ 60,532 $ 59,575 1.6 % 11.0 % 10.2 % Diluted earnings per share: Diluted net earnings per share $ 1.92 $ 1.85 Net sales were $550,422 for the year ended December 31, 2023, a decrease of $36,447, or 6.2% from 2022. The decline in net sales was primarily driven by decreased volume of industrial and commercial vehicle products. Net sales to the non-transportation markets decreased $34,203 or 12.1%, while net sales to the transportation markets decreased $2,245 or 0.8%. CTS CORPORATION 23 Table of Contents The TEWA Temperature Sensors SP. Zo.o. (“TEWA”) and Meggitt A/S (a/k/a Ferroperm Piezoceramics A/S, “Ferroperm”) acquisitions, both completed in 2022, added net sales of $37,460 and $23,477 in 2023 and 2022, respectively, while the Maglab acquisition added net sales of $1,755 in 2023. Changes in foreign exchange rates decreased net sales by $2,459 year-over-year primarily due to the U.S. Dollar appreciating compared to the Chinese Renminbi. Gross margin was $190,859 for the year ended December 31, 2023, a decrease of $19,679 or 9.3% from the year ended December 31, 2022. The decrease in gross margin was driven by lower sales volumes as well as changes in foreign exchange rates of $6,247 primarily due to the U.S. Dollar appreciating compared to the Chinese Renminbi and Peso. Selling, general and administrative ("SG&A") expenses were $83,816, or 15.2% of sales for the year ended December 31, 2023, versus $91,520 or 15.6% of sales in 2022. The decrease in SG&A expenses was primarily driven by lower incentive compensation associated with lower financial performance as well as cost reduction measures implemented due to challenging market conditions. Research and development (“R&D”) expenses were $24,918, or 4.5% of sales in 2023 compared to $24,100, or 4.1% of sales in 2022, in line with our commitment to continue investing in research and product development to drive organic growth. Restructuring charges were $7,074, or 1.3% of net sales in 2023, compared to $1,912, or 0.3% of net sales in 2022. The restructuring charges in the year ended December 31, 2023 were primarily related to costs associated with our plant closure and consolidation activities. See Note 9 “Costs Associated with Exit and Restructuring Activities” in the Notes to the Consolidated Financial Statements in this Annual Report on Form 10-K for further information. Other income and expense items are summarized in the following table: Years Ended December 31, 2023 2022 Interest expense $ (3,331 ) $ (2,192 ) Interest income 4,625 1,326 Other expense (1,192 ) (11,403 ) Total other (expense), net $ 102 $ (12,269 ) Interest income increased due to investments of available cash into short-term, cash equivalent, high yield deposit accounts. Other expense, net for 2023 is primarily driven by foreign currency losses primarily related to the Chinese Renminbi offset partially by income from the qualified replacement plan assets. Other expense, net for 2022 was primarily driven by $6,803 in excise taxes incurred as part of the U.S. pension plan termination and $1,776 in derivative losses associated with the acquisition of Ferroperm, as well as foreign currency losses primarily related to the Chinese Renminbi offset partially by income from the U.S. pension plan investments realized prior to its final termination. Years Ended December 31, 2023 2022 Effective tax rate 19.5% 26.2% The effective income tax rate in 2023 was 19.5% compared to 26.2% in the prior year. The decrease is primarily attributed to 2023 tax benefits associated with foreign tax credits related to a 2023 tax law change, research and development credits, and lower discrete tax impacts associated with executive incentive compensation and pension termination costs. 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. CTS CORPORATION 24 Table of Contents Cash and cash equivalents were $163,876 at December 31, 2023 and $156,910 at December 31, 2022, of which $99,940 and $90,244, respectively, were held outside the United States. Total debt as of December 31, 2023 and December 31, 2022 was $67,500 and $83,670, respectively. Cash Flows from Operating Activities Net cash provided by operating activities was $88,811 during the year ended December 31, 2023. Components of net cash provided by operating activities included net earnings of $60,532, depreciation and amortization expense of $28,710, other net non-cash items totaling $3,108, offset by a net cash outflow from changes in assets and liabilities of $(3,539) primarily driven by reductions in accounts payable and accrued payroll and benefits as a result of lower sales and incentive compensation accruals. 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 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. Cash Flows from Investing Activities Net cash used in investing activities for the year ended December 31, 2023 was $18,097, driven by capital expenditures of $14,738 and $3,359 of acquisition payments, primarily from the Maglab acquisition as well as final working capital adjustments from the TEWA and Ferroperm acquisitions. 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, 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. Cash Flows from Financing Activities Net cash used by financing activities for the year ended December 31, 2023, was $65,399. The net cash outflow was the result of treasury stock purchases of $40,926, net cash for debt paydowns of $16,170, dividend payments of $5,040, and taxes paid on behalf of equity award participants of $3,263. 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. Capital Resources Long-term debt was comprised of the following: As of December 31, 2023 2022 Total credit facility availability $ 400,000 $ 400,000 Balance outstanding 67,500 83,670 Standby letters of credit 1,640 1,640 Amount available, subject to covenant restrictions $ 330,860 $ 314,690 Weighted-average interest rate 6.07 % 2.96 % On December 15, 2021, we entered into a second amended and restated five-year credit agreement with a group of banks (the “Revolving Credit Facility”) to (i) increase the total credit facility availability to $400,000 which may be increased by $200,000 at the request of the Company, subject to the administrative agent's approval, (ii) extend the maturity of the Revolving Credit Facility from February 12, 2024 to December 15, 2026, (iii) replace LIBOR with SOFR as the primary reference rate used to calculate interest on the loans under the Revolving Credit Facility, (iv) increase available sublimits for letters of credit, and swingline loans as well as providing for additional alternative currency borrowing capabilities, and (v) modify the financial and non-financial covenants to provide the Company additional flexibility. This new unsecured credit facility replaced the prior $300,000 unsecured credit facility, which would have expired February 12, 2024. Borrowings in U.S. dollars under the Revolving Credit Facility bear interest, at a per annum rate equal to the applicable Term SOFR rate (but not less than 0.0%), plus the Term SOFR adjustment, and plus an applicable margin, which ranges from 1.00% to 1.75%, based CTS CORPORATION 25 Table of Contents 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. 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. The contractual rate of these arrangements ranges from 1.49% to 2.49%. The Revolving Credit Facility includes a swing line sublimit of $20,000 and a letter of credit sublimit of $20,000. We also pay a quarterly commitment fee on the unused portion of the Revolving Credit Facility. The commitment fee ranges from 0.175% to 0.25% based on our net leverage ratio. We were in compliance with all debt covenants at December 31, 2023. 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. In addition, we have $99,940 of foreign cash balances and our ability to repatriate these funds timely and in a tax efficient manner may be restricted. See “Item 1A. Risk Factors” for additional discussion of risks that our business faces. As of December 31, 2023, our material cash requirements for our known contractual and other obligations were as follows: • Long-term debt, including interest – Outstanding principal on our Revolving Credit Facility was $67,500 at December 31, 2023, 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 $4,655 through maturity, with approximately $1,955 payable within 12 months based on the December 31, 2023 exchange rate. We may paydown certain portions of these obligations early. As of December 31, 2023, we had interest rate swaps that fix interest costs on $50,000 of our long-term debt through December 2026 and a cross-currency swap on $17,500 of our long-term debt through June 2027. See Note 13, “Debt” and Note 14, “Derivatives,” 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 used in our operations. Operating lease obligations were $37,856, with $6,215 payable within 12 months. 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 $5,781, with $750 payable in 12 months. See Note 7, “Retirement Plans,” 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. Acquisitions 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. 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. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates. CTS CORPORATION 26 Table of Contents Critical Accounting Estimates Goodwill, Intangibles and Other Long-Lived Assets Purchase Accounting We use the acquisition method of accounting to allocate costs of acquired businesses to the assets acquired and liabilities assumed based on their estimated fair values at the dates of acquisition. 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 assumed 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. 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. Impairment Assessment – Goodwill 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. Examples of such events or circumstances include, but are not limited to, the following: • Significant decline in market capitalization relative to net book value, • Significant adverse change in regulatory factors or in the business climate, • Unanticipated competition, • More-likely-than-not expectation that a reporting unit or a significant portion of a reporting unit will be sold or otherwise disposed of, • Testing for recoverability of a significant asset group within a reporting unit, and • Allocation of a portion of goodwill to a business to be disposed. If we believe that one or more indicators of impairment have occurred, we perform an impairment test. We have the option to perform a qualitative assessment (commonly referred to as a "step zero" test) to determine whether further quantitative analysis for impairment of goodwill and indefinite-lived intangible assets is necessary. The qualitative assessment includes a review of macroeconomic conditions, industry and market considerations, internal cost factors, and our own overall financial and share price performance, among other factors. 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. 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. Determining fair value using a quantitative approach requires significant judgment, including judgments about projected revenues, cash flows over a multi-year period, discount rates and estimated valuation multiples. The discount rate applied to our forecasts of future cash flows is based on our estimated weighted average cost of capital. In assessing the reasonableness of our determined fair values, we evaluate our results against our market capitalization. Changes in these estimates and assumptions could materially affect the determination of fair value and impact the goodwill impairment assessment. For 2023, we elected to perform the qualitative assessment. Based upon our latest assessment, we determined that our goodwill was not impaired as of October 1, 2023. 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 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. Factors considered that may trigger an impairment review consist of, but are not limited to, the following: • Significant decline in market capitalization relative to net book value, • Significant underperformance relative to expected historical or projected future operating results, • Significant changes in the manner of use of the acquired assets or the strategy for the overall business, and CTS CORPORATION 27 Table of Contents • Significant negative industry or economic trends. If we believe that one or more indicators of impairment have occurred, we perform a recoverability test by comparing the carrying amount of an asset or asset group to the sum of the undiscounted cash flows expected to result from the use and the eventual disposition of the asset or asset group. 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. Income Taxes 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. Significant judgments and estimates are required in the determination of our consolidated income tax provision. Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, which will result in taxable or deductible amounts in the future. In evaluating our ability to recover our deferred tax assets in the jurisdiction from which they arise, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax-planning strategies, and results of recent operations. The assumptions about future taxable income require the use of significant judgment and are consistent with the plans and estimates we are using to manage our underlying businesses. 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”) 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. Because of the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the unrecognized tax benefit liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which new information is available. Critical Accounting Policies Revenue Recognition 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. Product Warranties Provisions for estimated warranty expenses are made at the time products are sold. The expense and corresponding accrual primarily relate to our products sold to our transportation markets. These estimates are established using a quoted industry rate and are based on customer specific circumstances. We adjust our warranty reserve for any known or anticipated warranty claims as new information becomes available. We evaluate our warranty obligations at least quarterly and adjust our accruals if it is probable that future costs will be different than our current reserve. Over the last three years, product warranty reserves have ranged from 0.4% to 2.7% of net sales. We believe our reserve level is appropriate considering all facts and circumstances surrounding any outstanding quality claims and our historical experience selling our products to our customers. Inventories 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 28 Table of Contents Over the last three years, our reserves for excess and obsolete inventories have ranged from 13.7% to 17.4% of gross inventory. We believe our reserve level is appropriate considering the quantities and quality of the inventories. Environmental Contingencies U.S. GAAP requires a liability to be recorded for contingencies when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated. We record environmental contingent loss accruals on an undiscounted basis. Significant judgment is required to determine the existence and amounts of our environmental liabilities. We regularly consult with attorneys and consultants to determine the relevant facts and circumstances before we record a liability. 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. Recent Accounting Pronouncements 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. Item 7A. Quantitative and Qualita tive Disclosures About Market Risk (in thousands, except percentages) 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 $67,500 and $83,670 outstanding under our Revolving Credit Facility at December 31, 2023 and 2022, respectively. As of December 31, 2023, we had interest rate swaps that fix interest costs on $50,000 of our long-term debt through December 2026 and a cross-currency swap on $17,500 of our long-term debt through June 2027. 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 2023, net sales from outside the U.S. were approximately 45% of total net sales. During 2022, net sales to customers from outside the U.S. were approximately 44% of total net sales. 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 $13,548 and $31,787 as of December 31, 2023 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, 2023, we had a net unrealized loss of $1,138 in accumulated other comprehensive income (loss). 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 most significant raw materials and purchased components include conductive CTS CORPORATION 29 Table of Contents inks and contactors, passive connectivity components, integrated circuits and semiconductors, certain rare earth elements ("REEs"), ceramic powders, plastic components, molding compounds, printed circuit boards and assemblies, quartz blanks and crystals, wire harness assemblies, copper, brass, silver, gold, platinum, lead, aluminum, and steel-based raw materials and components. 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. As the Company is exposed to significant changes in certain commodity prices, we actively monitor these exposures and may take various actions from time to time to mitigate any negative impacts relating thereto. CTS CORPORATION 30 Table of Contents Item 8. 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, 2023 and 2022, 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, 2023, 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, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, 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, 2023, 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 23, 2024, 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. Ferroperm Piezoceramics A/S acquisition – valuation of acquired customer relationships As described further in Note 3 to the financial statements, the Company acquired Ferroperm Piezoceramics A/S (“Ferroperm”) on June 30, 2022 for a total purchase price of $72.4 million. Accordingly, the purchase price has been allocated to the assets acquired and liabilities assumed based on their respective fair values, including identified intangible assets of approximately $38.1 million, which is primarily comprised of customer relationships of $31.8 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 were the high degree of auditor judgment and an increased extent of effort, which included utilizing specialists, to test 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 discount rate. CTS CORPORATION 31 Table of Contents • We evaluated the Company’s forecasted revenue growth rates for existing customers by comparing the forecasted growth assumptions to peer and historical results. • We compared, with the assistance of specialists, the Company’s selected customer attrition rate to Ferroperm’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 23, 2024 CTS CORPORATION 32 Table of Contents CTS CORPORATION AND SUBSIDIARIES Consolidated State ments of Earnings (Loss) (in thousands, except per share amounts) Years Ended December 31, 2023 2022 2021 Net sales $ 550,422 $ 586,869 $ 512,925 Cost of goods sold 359,563 376,331 328,306 Gross margin 190,859 210,538 184,619 Selling, general and administrative expenses 83,816 91,520 82,597 Research and development expenses 24,918 24,100 23,856 Restructuring charges 7,074 1,912 1,687 Operating earnings 75,051 93,006 76,479 Other (expense) income: Interest expense ( 3,331 ) ( 2,192 ) ( 2,111 ) Interest income 4,625 1,326 840 Other (expense) income ( 1,192 ) ( 11,403 ) ( 136,088 ) Total other income (expense), net 102 ( 12,269 ) ( 137,359 ) Earnings (loss) before taxes 75,153 80,737 ( 60,880 ) Income tax expense (benefit) 14,621 21,162 ( 19,014 ) Net earnings (loss) $ 60,532 $ 59,575 $ ( 41,866 ) Net earnings (loss) per share: Basic $ 1.93 $ 1.86 $ ( 1.30 ) Diluted $ 1.92 $ 1.85 $ ( 1.30 ) Basic weighted-average common shares outstanding 31,359 31,968 32,327 Effect of dilutive securities 220 270 — Diluted weighted-average common shares outstanding 31,579 32,238 32,327 Cash dividends declared per share $ 0.16 $ 0.16 $ 0.16 The accompanying notes are an integral part of the consolidated financial statements. CTS CORPORATION 33 Table of Contents CTS CORPORATION AND SUBSIDIARIES Consolidated Statements o f Comprehensive Earnings (in thousands) Years Ended December 31, 2023 2022 2021 Net earnings (loss) $ 60,532 $ 59,575 $ ( 41,866 ) Other comprehensive earnings (loss): Changes in fair market value of derivatives, net of tax ( 505 ) 3,499 311 Changes in unrealized pension cost, net of tax 120 1,203 91,081 Cumulative translation adjustment, net of tax 5,320 ( 848 ) 4 Other comprehensive earnings $ 4,935 $ 3,854 $ 91,396 Comprehensive earnings $ 65,467 $ 63,429 $ 49,530 The accompanying notes are an integral part of the consolidated financial statements. CTS CORPORATION 34 Table of Contents CTS CORPORATION AND SUBSIDIARIES Consolidated B alance Sheets (in thousands) December 31, 2023 2022 ASSETS Current Assets Cash and cash equivalents $ 163,876 $ 156,910 Accounts receivable, net 78,569 90,935 Inventories, net 60,031 62,260 Other current assets 16,873 15,655 Total current assets 319,349 325,760 Property, plant and equipment, net 92,592 97,300 Operating lease assets, net 26,425 22,702 Other assets Goodwill 157,638 152,361 Other intangible assets, net 103,957 108,053 Deferred income taxes 25,183 23,461 Other assets 16,023 18,850 Total other assets 302,801 302,725 Total Assets $ 741,167 $ 748,487 LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Accounts payable $ 43,499 $ 53,211 Operating lease obligations 4,394 3,936 Accrued payroll and benefits 14,585 20,063 Accrued expenses and other liabilities 34,561 35,322 Total current liabilities 97,039 112,532 Long-term debt 67,500 83,670 Long-term operating lease obligations 24,965 21,754 Long-term pension obligations 4,655 5,048 Deferred income taxes 14,729 16,010 Other long-term obligations 5,457 3,249 Total Liabilities 214,345 242,263 Commitments and Contingencies (Note 11) Shareholders' Equity Common stock 319,269 316,803 Additional contributed capital 45,097 46,144 Retained earnings 602,232 546,703 Accumulated other comprehensive income (loss) 4,264 ( 671 ) Total shareholders' equity before treasury stock 970,862 908,979 Treasury stock ( 444,040 ) ( 402,755 ) Total shareholders' equity 526,822 506,224 Total Liabilities and Shareholders' Equity $ 741,167 $ 748,487 The accompanying notes are an integral part of the consolidated financial statements. CTS CORPORATION 35 Table of Contents CTS CORPORATION AND SUBSIDIARIES Consolidated Statem ents of Cash Flows (in thousands) Years Ended December 31, 2023 2022 2021 CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings (loss) $ 60,532 $ 59,575 $ ( 41,866 ) Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: Depreciation and amortization 28,710 29,753 26,930 Non-cash inventory charges — 4,048 — Pensions and other post-retirement plan expense (income) 135 ( 1,792 ) 132,650 Stock-based compensation 5,181 7,726 6,105 Restructuring non-cash charges 1,484 — — Deferred income taxes ( 4,046 ) 492 ( 30,982 ) Change in fair value of contingent consideration liability 200 — — Loss (gain) on foreign currency hedges, net of cash 154 ( 214 ) ( 35 ) Changes in assets and liabilities, net of acquisitions: Accounts receivable 12,590 ( 5,913 ) ( 928 ) Inventories 2,353 ( 8,211 ) ( 3,570 ) Operating lease assets ( 3,723 ) 1,266 1,687 Other assets 767 5,625 ( 2,076 ) Accounts payable ( 9,751 ) ( 2,293 ) 3,136 Accrued payroll and benefits ( 6,518 ) 450 5,023 Operating lease liabilities 3,668 ( 1,431 ) ( 1,709 ) Accrued expenses and other liabilities ( 2,815 ) ( 1,381 ) ( 7,937 ) Pension and other post-retirement plans ( 110 ) 33,497 ( 287 ) Net cash provided by operating activities 88,811 121,197 86,141 CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures ( 14,738 ) ( 14,333 ) ( 15,641 ) Payments for acquisitions, net of cash acquired ( 3,359 ) ( 96,855 ) ( 255 ) Net cash used in investing activities ( 18,097 ) ( 111,188 ) ( 15,896 ) CASH FLOWS FROM FINANCING ACTIVITIES: Payments of long-term debt ( 774,529 ) ( 722,942 ) ( 808,800 ) Proceeds from borrowings of long-term debt 758,359 756,580 804,200 Purchase of treasury stock ( 40,926 ) ( 21,447 ) ( 8,786 ) Dividends paid ( 5,040 ) ( 5,131 ) ( 5,173 ) Taxes paid on behalf of equity award participants ( 3,263 ) ( 1,524 ) ( 1,503 ) Contingent consideration payments — ( 1,200 ) ( 650 ) Net cash (used in) provided by financing activities ( 65,399 ) 4,336 ( 20,712 ) Effect of exchange rate on cash and cash equivalents 1,651 1,100 159 Net increase in cash and cash equivalents 6,966 15,445 49,692 Cash and cash equivalents at beginning of year 156,910 141,465 91,773 Cash and cash equivalents at end of year $ 163,876 $ 156,910 $ 141,465 Supplemental cash flow information: Cash paid for interest $ 3,126 $ 2,016 $ 1,950 Cash paid for income taxes, net $ 20,235 $ 20,080 $ 16,887 Non-cash financing and investing activities: Capital expenditures incurred not paid $ 2,083 $ 2,480 $ 2,348 Excise taxes on purchase of treasury stock incurred not paid $ 359 $ — $ — The accompanying notes are an integral part of the consolidated financial statements. CTS CORPORATION 36 Table of Contents CTS CORPORATION AND SUBSIDIARIES Consolidated Statements of Shareholders' Equity (in thousands, except share and per share amounts) Common Stock Additional Contributed Capital Retained Earnings Accumulated Other Comprehensive Loss Treasury Stock Total Balances at January 1, 2021 $ 311,190 $ 41,654 $ 539,281 $ ( 95,921 ) $ ( 372,522 ) $ 423,682 Net earnings — — ( 41,866 ) — — ( 41,866 ) Changes in fair market value of derivatives, net of tax — — — 311 — 311 Changes in unrealized pension cost, net of tax — — — 91,081 — 91,081 Cumulative translation adjustment, net of tax — — — 4 — 4 Cash dividends of $ 0.16 per share — — ( 5,173 ) — — ( 5,173 ) Acquired 266,722 shares of treasury stock — — — — ( 8,786 ) ( 8,786 ) Issued shares on vesting of restricted stock units 3,430 ( 4,932 ) — — — ( 1,502 ) Stock compensation — 5,827 — — — 5,827 Balances at December 31, 2021 $ 314,620 $ 42,549 $ 492,242 $ ( 4,525 ) $ ( 381,308 ) $ 463,578 Net earnings — — 59,575 — — 59,575 Changes in fair market value of derivatives, net of tax — — — 3,499 — 3,499 Changes in unrealized pension cost, net of tax — — — 1,203 — 1,203 Cumulative translation adjustment, net of tax — — — ( 848 ) — ( 848 ) Cash dividends of $ 0.16 per share — — ( 5,114 ) — — ( 5,114 ) Acquired 583,526 shares for treasury stock — — — — ( 21,447 ) ( 21,447 ) Issued shares on vesting of restricted stock units 2,183 ( 3,708 ) — — — ( 1,525 ) Stock compensation — 7,303 — — — 7,303 Balances at December 31, 2022 $ 316,803 $ 46,144 $ 546,703 $ ( 671 ) $ ( 402,755 ) $ 506,224 Net earnings — — 60,532 — — 60,532 Changes in fair market value of derivatives, net of tax — — — ( 505 ) — ( 505 ) Changes in unrealized pension cost, net of tax — — — 120 — 120 Cumulative translation adjustment, net of tax — — — 5,320 — 5,320 Cash dividends of $ 0.16 per share — — ( 5,003 ) — — ( 5,003 ) Acquired 970,109 shares for treasury stock — — — — ( 41,285 ) ( 41,285 ) Issued shares on vesting of restricted stock units 2,466 ( 5,729 ) — — — ( 3,263 ) Stock compensation — 4,682 — — — 4,682 Balances at December 31, 2023 $ 319,269 $ 45,097 $ 602,232 $ 4,264 $ ( 444,040 ) $ 526,822 The accompanying notes are an integral part of the consolidated financial statements. CTS CORPORATION 37 Table of Contents 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, 2023 2022 2021 Cummins Inc. 15.0 % 15.3 % 15.0 % Toyota Motor Corporation 12.5 % 11.5 % 12.4 % No other customer accounted for 10% or more of total net sales during these periods. Inventories: 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 38 Table of Contents 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 years , and software from two to 15 years . 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, 2023. 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. 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. 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; and 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. 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. CTS CORPORATION 39 Table of Contents 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, 2023 and 2022: As of December 31, 2023 2022 Cost of molds, dies and other tools included in other current assets $ 3,505 $ 2,569 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 Income (Loss)," for information on the method of determining fair value for our debt and financial derivatives, respectively. 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 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. CTS CORPORATION 40 Table of Contents 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 a 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, (units) 2023 2022 2021 Antidilutive securities 18,486 21,687 — 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, 2023 2022 2021 Foreign currency losses $ ( 1,982 ) $ ( 4,875 ) $ ( 3,305 ) 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 income (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. Sales Taxes: 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. Recently issued accounting pronouncements not yet adopted ASU No. 2023-07, "Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosure" In November 2023, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures , which requires public entities to disclose information about their reportable segments' significant expenses and other segment items on an interim and annual basis. Public entities with a single reportable segment are required to apply the disclosure requirements in ASU 2023-07, as well as existing segment disclosures and reconciliation required under ASC 280 on an interim and annual basis. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023, and for the interim periods beginning after December 15, 2024, with early adoption permitted. The Company is currently evaluating the impact of adopting ASU 2023-07. ASU No. 2023-09, "Income Taxes (Topic 740): Improvements to Income Tax Disclosures" In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures , which requires public entities, on an annual basis, to provide disclosure of specific categories in the reconciliation of the effective tax rate, as well as disclosure of income taxes paid, disaggregated by jurisdiction. ASU 2023-09 is effective for fiscal years beginning after December 15, 2024, with early adoption permitted. The Company is currently evaluating the impact of adopting ASU 2023-09. CTS CORPORATION 41 Table of Contents 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, 2023 or 2022 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: Years Ended December 31, 2023 2022 2021 Transportation $ 301,451 $ 303,696 $ 284,080 Industrial 129,440 170,867 133,371 Medical 68,252 64,278 48,159 Aerospace & Defense 51,279 48,028 47,315 Total $ 550,422 $ 586,869 $ 512,925 In the above table, Telecommunications and Information Technology net sales are included in the Industrial end-market for all periods presented. The end-market sales for 2022 were adjusted by immaterial amounts to align the classification of certain customers in connection with our recent acquisitions with our enterprise-level end market information. NOTE 3 - Business Acquisitions TEWA Temperature Sensors SP. Zo.o. Acquisition On February 28, 2022, we acquired 100 % of the outstanding shares of TEWA Temperature Sensors SP. Zo.o. (“TEWA”). TEWA is a designer and manufacturer of high-quality temperature sensors. TEWA has complementary capabilities with our existing temperature sensing platform, and the acquisition supports our end market diversification strategy and expands our presence in Europe. The final purchase price of $ 23,721 , net of cash acquired of $ 2,979 , has been allocated to the fair values of assets and liabilities acquired as of February 28, 2022. The purchase price was reduced by $ 794 for the final settlement of net working capital during the first quarter of 2023. The purchase accounting was completed in the first quarter of 2023. The following table summarizes the consideration paid, the fair values of the assets acquired, and the liabilities assumed as of the date of acquisition: CTS CORPORATION 42 Table of Contents Fair Values at February 28, 2022 Accounts Receivable $ 2,521 Inventory 3,136 Other current assets 69 Property, plant and equipment 654 Other assets 27 Goodwill 8,473 Intangible assets 13,650 Fair value of assets acquired 28,530 Less fair value of liabilities acquired ( 4,809 ) Purchase price $ 23,721 Goodwill represents value the Company expects to be created by combining the operations of the acquired business with the Company's operations, including the expansion of customer relationships, access to new customers, and potential cost savings and synergies. Goodwill related to the acquisition is expected to be deductible for tax purposes. The Company recorded a $ 1,180 step-up of inventory to its fair value as of the acquisition date 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 Weighted Average Amortization Period Customer lists/relationships $ 13,000 12.0 Trademarks, tradenames, and other intangibles 650 3.0 Total $ 13,650 Supplemental pro forma disclosures are not included as the amounts are deemed to be immaterial. Ferroperm Piezoceramics A/S Acquisition On June 30, 2022, we acquired 100 % of the outstanding shares of Ferroperm Piezoceramics A/S (“Ferroperm”). Ferroperm specializes in the design and manufacture of high performance piezoceramic components for use in complex and demanding medical, industrial, and aerospace applications. Ferroperm has complementary capabilities with our existing medical diagnostics and imaging product lines. The acquisition supports our end market diversification strategy and expands our presence in European end markets. The final purchase price of $ 72,340 , net of cash acquired of $ 5,578 , has been allocated to the fair values of assets and liabilities acquired as of June 30, 2022. The valuation of intangible assets and associated deferred tax liability was finalized in the first quarter of 2023. The following table summarizes the final consideration paid, the fair values of the assets acquired, and the liabilities assumed as of the date of acquisition: Fair Values at June 30, 2022 Accounts Receivable $ 3,073 Inventory 6,848 Other current assets 1,003 Property, plant and equipment 3,953 Other assets 158 Goodwill 31,985 Intangible assets 38,100 Fair value of assets acquired 85,120 Less fair value of liabilities acquired ( 12,780 ) Purchase price $ 72,340 CTS CORPORATION 43 Table of Contents 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 $ 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. The following table summarizes the carrying amounts and weighted average lives of the acquired intangible assets: Carrying Value Weighted Average Amortization Period Customer lists/relationships $ 31,800 16.0 Technology and other intangibles 6,300 14.0 Total $ 38,100 Supplemental pro forma disclosures are not included as the amounts are deemed to be immaterial. Maglab AG Acquisition On February 6, 2023, we acquired 100 % of the outstanding shares of maglab AG ("Maglab"). Maglab has deep expertise in magnetic system design and current measurement solutions for use in e-mobility, industrial automation, and renewable energy applications. Maglab's domain expertise coupled with CTS’ commercial, technical and operational capabilities position us to advance our status as a recognized innovator in electric motor sensing and controls markets. The final purchase price of $ 7,717 has been allocated to the fair values of assets and liabilities acquired as of February 6, 2023. The purchase price was increased by $ 3 for the final settlement of net working capital during the second quarter of 2023. The following table summarizes the final consideration paid, the fair values of the assets acquired, and the liabilities assumed as of the date of acquisition: Consideration Paid Cash paid, net of cash acquired of $ 14 $ 4,153 Contingent consideration 3,564 Purchase price $ 7,717 Fair Values at February 6, 2023 Accounts receivable $ 348 Inventory 43 Other current assets 41 Property, plant and equipment 35 Goodwill 4,997 Intangible assets 2,860 Fair value of assets acquired 8,324 Less fair value of liabilities acquired ( 607 ) Purchase price $ 7,717 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 following table summarizes the carrying amounts and weighted average lives of the acquired intangible assets: CTS CORPORATION 44 Table of Contents Carrying Value Weighted Average Amortization Period Customer lists/relationships $ 2,800 13.0 Technology and other intangibles 60 3.0 Total $ 2,860 All contingent consideration is payable in cash and is based on success factors related to the integration process as well as upon the achievement of annual revenue and customer order targets through the fiscal year ending December 31, 2025. The Company recorded $ 3,564 as the acquisition date fair value of the contingent consideration based on the estimate of the probability of achieving the performance targets. This amount is also reflected as an addition to the purchase price. The contingent consideration has a maximum payout of $ 6,300 . Supplemental pro forma disclosures are not included as the amounts are deemed to be immaterial. NOTE 4 — Accounts Receivable, net The components of accounts receivable, net are as follows: As of December 31, 2023 2022 Accounts receivable, gross $ 79,500 $ 92,171 Less: Allowance for credit losses ( 931 ) ( 1,236 ) Accounts receivable, net $ 78,569 $ 90,935 NOTE 5 — Inventories, net Inventories, net consist of the following: As of December 31, 2023 2022 Finished goods $ 20,279 $ 12,865 Work-in-process 19,213 22,819 Raw materials 33,187 37,362 Less: Inventory reserves ( 12,648 ) ( 10,786 ) Inventories, net $ 60,031 $ 62,260 NOTE 6 — Property, Plant and Equipment, net Property, plant and equipment, net is comprised of the following: As of December 31, 2023 2022 Land and land improvements $ 536 $ 1,100 Buildings and improvements 74,188 71,938 Machinery and equipment 261,435 258,159 Less: Accumulated depreciation ( 243,567 ) ( 233,897 ) Property, plant and equipment, net $ 92,592 $ 97,300 Depreciation expense recorded in the Consolidated Statements of Earnings (Loss) includes the following: For the Years Ended 2023 2022 2021 Depreciation expense $ 17,686 $ 18,126 $ 17,517 CTS CORPORATION 45 Table of Contents NOTE 7 — Retirement Plans As of December 31, 2023, we have two active noncontributory defined benefit pension plans ("Pension Plans") covering less than 1 % of our active employees. These Pension Plans consist of a U.S. supplemental retirement plan ("SERP") and a Taiwan pension plan. The SERP is comprised entirely of participants who are former 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. and non-U.S. locations and the post-retirement life insurance plan was December 31, 2023 and 2022. In February 2020, our 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. 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 income (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. The QRP 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). 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 provides a reconciliation of the benefit obligation, plan assets, and the funded status of the pension plans for U.S. and non-U.S. locations at the measurement dates. CTS CORPORATION 46 Table of Contents U.S. Pension Plans Non-U.S. Pension Plan 2023 2022 2023 2022 Accumulated benefit obligation $ 788 $ 814 $ 1,083 $ 1,771 Change in projected benefit obligation: Projected benefit obligation at January 1 $ 814 $ 1,008 $ 2,146 $ 2,335 Service cost — — 22 20 Interest cost 38 18 37 13 Benefits paid ( 103 ) ( 103 ) ( 387 ) ( 238 ) Actuarial (gain) loss 39 ( 109 ) ( 394 ) 239 Foreign exchange impact — — ( 2 ) ( 223 ) Projected benefit obligation at December 31 $ 788 $ 814 $ 1,422 $ 2,146 Change in plan assets: Assets at fair value at January 1 $ — $ 49,382 $ 1,376 $ 1,421 Actual return on assets — 2,134 28 116 Company contributions 103 103 184 213 Benefits paid ( 103 ) ( 103 ) ( 387 ) ( 238 ) Qualified replacement plan transfer — ( 17,500 ) — — Asset reversion — ( 34,016 ) — — Foreign exchange impact — — ( 2 ) ( 136 ) Assets at fair value at December 31 $ — $ — $ 1,199 $ 1,376 Funded status (plan assets less projected benefit obligations) $ ( 788 ) $ ( 814 ) $ ( 223 ) $ ( 770 ) The following table provides a reconciliation of the benefit obligation, plan assets, and the funded status of the post-retirement life insurance plan at those measurement dates. Post-Retirement Life Insurance Plan 2023 2022 Accumulated benefit obligation $ 4,145 $ 4,018 Change in projected benefit obligation: Projected benefit obligation at January 1 $ 4,018 $ 5,231 Service cost 1 1 Interest cost 192 102 Benefits paid ( 146 ) ( 147 ) Actuarial (gain) loss 80 ( 1,169 ) Projected benefit obligation at December 31 $ 4,145 $ 4,018 Change in plan assets: Assets at fair value at January 1 $ — $ — Company contributions 146 147 Benefits paid ( 146 ) ( 147 ) Other — — Assets at fair value at December 31 $ — $ — Funded status (plan assets less projected benefit obligations) $ ( 4,145 ) $ ( 4,018 ) The components of the accrued cost of the domestic and foreign pension plans are classified in the following lines in the Consolidated Balance Sheets at December 31: U.S. Pension Plans Non-U.S. Pension Plan 2023 2022 2023 2022 Accrued expenses and other liabilities ( 99 ) ( 99 ) — — Long-term pension obligations ( 689 ) ( 715 ) ( 222 ) ( 770 ) Net accrued cost $ ( 788 ) $ ( 814 ) $ ( 222 ) $ ( 770 ) 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: CTS CORPORATION 47 Table of Contents Post-Retirement Life Insurance Plan 2023 2022 Accrued expenses and other liabilities $ ( 478 ) $ ( 455 ) Long-term pension obligations ( 3,667 ) ( 3,563 ) Total accrued cost $ ( 4,145 ) $ ( 4,018 ) We have also recorded the following amounts to accumulated other comprehensive income (loss) for the U.S. and non-U.S. pension plans, net of tax: U.S. Pension Plans Non-U.S. Pension Plan Unrecognized Loss Unrecognized Loss Balance at January 1, 2022 $ 312 $ 1,803 Amortization of retirement benefits, net of tax — ( 155 ) Net actuarial (loss) gain ( 108 ) 132 Foreign exchange impact — ( 172 ) Balance at January 1, 2023 $ 204 $ 1,608 Amortization of retirement benefits, net of tax — ( 134 ) Net actuarial gain (loss) 13 ( 396 ) Foreign exchange impact — 77 Balance at December 31, 2023 $ 217 $ 1,155 We have recorded the following amounts to accumulated other comprehensive income (loss) for the post-retirement life insurance plan, net of tax: Unrecognized Gain Balance at January 1, 2022 $ ( 109 ) Amortization of retirement benefits, net of tax — Net actuarial loss ( 900 ) Balance at January 1, 2023 $ ( 1,009 ) Amortization of retirement benefits, net of tax 259 Net actuarial gain 61 Balance at December 31, 2023 $ ( 689 ) 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 future life expectancy of the plan participants (estimated to be approximately 11 years at December 31, 2023 ), because substantially all of the participants in those plans are former employees who are now retired. 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 three years at December 31, 2023 ). 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 the fair value of plan assets is shown below: As of December 31, 2023 2022 Projected benefit obligation $ 2,210 $ 2,961 Accumulated benefit obligation $ 1,871 $ 2,585 Fair value of plan assets $ 1,199 $ 1,377 CTS CORPORATION 48 Table of Contents Net pension expense includes the following components: Years Ended December 31, Years Ended December 31, U.S. Pension Plans Non-U.S. Pension Plan 2023 2022 2021 2023 2022 2021 Service cost $ — $ — $ — $ 22 $ 20 $ 26 Interest cost 38 18 2,861 37 13 17 Expected return on plan assets (1) — ( 2,134 ) ( 474 ) ( 13 ) ( 9 ) ( 17 ) Amortization of unrecognized loss 22 30 3,703 172 167 184 Settlement charges — — 126,269 — — — Net expense $ 60 $ ( 2,086 ) $ 132,359 $ 218 $ 191 $ 210 Weighted-average actuarial assumptions (2) Benefit obligation assumptions: Discount rate 4.83 % 5.04 % 2.46 % 1.63 % 1.75 % 0.63 % Rate of compensation increase N/A N/A N/A 3.00 % 5.00 % 3.00 % Pension income/expense assumptions: Discount rate 5.04 % 2.46 % 2.10 % 1.75 % 0.63 % 0.63 % Expected return on plan assets (1) N/A N/A 1.44 % 1.75 % 0.63 % 0.63 % Rate of compensation increase N/A N/A N/A 5.00 % 5.00 % 3.00 % (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. Net post-retirement expense includes the following components: Post-Retirement Life Insurance Plan Years Ended December 31, 2023 2022 2021 Service cost $ 1 $ 1 $ 1 Interest cost 192 102 80 Amortization of unrecognized gain ( 336 ) — — Net expense $ ( 143 ) $ 103 $ 81 Weighted-average actuarial assumptions (1) Benefit obligation assumptions: Discount rate 4.90 % 5.11 % 2.66 % Rate of compensation increase N/A N/A N/A Pension income/post-retirement expense assumptions: Discount rate 5.11 % 2.66 % 2.27 % Rate of compensation increase N/A N/A N/A (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. The fair value of assets in the non-U.S. pension plan are 100% categorized as cash and cash equivalents, which use Level 1 inputs in the fair value determination. We expect to make $ 99 of contributions to the U.S. plans and $ 171 of contributions to the non-U.S. plan during 2024. Expected benefit payments under the Pension Plans and the postretirement benefit plan, for the five years subsequent to 2023 (i.e., 2024-2028, inclusive), and in the aggregate for the five years thereafter (i.e., 2029-2033, inclusive) are as follows: CTS CORPORATION 49 Table of Contents U.S. Pension Plan Non-U.S. Pension Plan Post- Retirement Life Insurance Plan 2024 $ 99 $ 50 $ 478 2025 94 56 439 2026 90 61 406 2027 85 96 377 2028 80 64 351 2029-2033 219 444 1,467 Total $ 667 $ 771 $ 3,518 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 to employees at certain foreign locations. Contributions and costs were generally determined as a percentage of the covered employee's annual salary. During 2022, our investment committee, in consultation with the plan’s advisors, determined the 401(k) plan’s position in CTS common stock would be liquidated and the resulting funds would be reinvested in other investments. That process 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 whether the individual employee contributes to the applicable plan. 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, 2023 2022 2021 401(k) and other defined contribution plan expense $ 3,858 $ 3,878 $ 3,242 NOTE 8 — Goodwill and Other Intangible Assets Other Intangible Assets Other intangible assets, net consist of the following components: As of December 31, 2023 Gross Carrying Amount Accumulated Amortization Net Amount Weighted Average Remaining Amortization Period (in years) Other intangible assets: Customer lists / relationships $ 144,671 $ ( 63,006 ) $ 81,665 9.6 Technology and other intangibles 54,052 ( 31,760 ) 22,292 7.4 Other intangible assets, net $ 198,723 $ ( 94,766 ) $ 103,957 8.1 Amortization expense for the year ended December 31, 2023 $ 11,024 CTS CORPORATION 50 Table of Contents As of December 31, 2022 Gross Carrying Amount Accumulated Amortization Net Amount Other intangible assets: Customer lists / relationships $ 148,899 $ ( 59,603 ) $ 89,296 Technology and other intangibles 45,255 ( 26,498 ) 18,757 Other intangible assets, net $ 194,154 $ ( 86,101 ) $ 108,053 Amortization expense for the year ended December 31, 2022 $ 11,627 Amortization expense for the year ended December 31, 2021 $ 9,413 The changes in the gross carrying amounts of intangible assets are primarily due to a business acquisition and purchase accounting activity as discussed in Note 3, "Business Acquisitions," as well as foreign exchange impacts. The estimated amortization expense for the next five years and thereafter is as follows: Amortization expense 2024 $ 11,210 2025 10,716 2026 10,556 2027 10,498 2028 10,463 Thereafter 50,514 Total future amortization expense $ 103,957 Goodwill Changes in the net carrying amount of goodwill were as follows: Total Goodwill as of December 31, 2021 $ 109,798 Increase due to acquisitions 42,541 Decrease from purchase accounting adjustments 22 Goodwill as of December 31, 2022 $ 152,361 Increase due to acquisitions 2,914 Foreign exchange impact 2,363 Goodwill as of December 31, 2023 $ 157,638 Refer to Note 3 - "Business Acquisitions," for further information on the increase due to acquisitions. We performed our annual impairment test as of October 1, 2023, 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 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, 2023 2022 2021 Restructuring charges $ 7,074 $ 1,912 $ 1,687 September 2020 Plan CTS CORPORATION 51 Table of Contents 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 included 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 $ 3,900 to $ 4,500 , including workforce reduction charges, building and equipment relocation charges, other contract and asset-related costs. We have incurred $ 3,896 in program costs to date. During the twelve months ended December 31, 2023, we recorded $ 1,837 in restructuring charges comprised of $ 513 and $ 1,324 in workforce reduction and asset impairment charges respectively. The total restructuring liability associated with these actions as of December 31, 2023 was $ 83 . The total restructuring liability as of December 31, 2022 was $ 634 . Closure and Consolidation of Juarez Manufacturing Facility and Operations During the first quarter of 2023, we announced the shutdown of our Juarez manufacturing facility. As a part of this activity, operations from the Juarez plant are being consolidated into our expanded Matamoros facility (collectively, the "Matamoros Consolidation"). We expect the Matamoros Consolidation to be completed in 2024. The total restructuring cost of the Matamoros Consolidation is now estimated to be in the range of $ 4,000 and $ 5,000 , including workforce reduction charges, building and equipment relocation charges and other contract and asset-related costs. In addition to these charges, we expect to incur an additional $ 1,500 to $ 2,500 of other costs relating to the Matamoros Consolidation that would not qualify as restructuring charges, but represent duplicative expenses arising from the transition process such as excess rent, utilities, personnel-related and other costs. During the year ended December 31, 2023, we incurred $ 3,699 in restructuring costs associated with the Matamoros Consolidation, comprised of $ 2,572 , $ 200 , $ 63 , and $ 864 in workforce reduction, building and equipment relocation costs, asset impairment and other charges, respectively. We also incurred $ 571 in other related costs. The restructuring liability associated with the Matamoros Consolidation was $ 194 and $ 17 as of December 31, 2023 and December 31, 2022. Other Restructuring Activities During the year ended December 31, 2023, we incurred total other restructuring charges of $ 1,539 , comprised of $ 942 , $ 279 and $ 318 in workforce reduction, building and equipment relocation costs, and asset impairment and other charges, respectively. The remaining restructuring liability associated with these actions was $ 246 and $ 218 at December 31, 2023 and December 31, 2022, respectively. The following table displays the restructuring liability activity for all plans for the year ended December 31, 2023: Restructuring liability at January 1, 2023 $ 869 Restructuring charges 7,074 Cost paid ( 6,056 ) Other activities (1) ( 1,364 ) Restructuring liability at December 31, 2023 $ 523 (1) Other charges include the effects of currency translation, non-cash asset write-downs, travel, legal and other charges. The total liability of $ 523 is included in accrued expenses and other liabilities at December 31, 2023. NOTE 10 — Accrued Expenses and Other Liabilities The components of accrued expenses and other liabilities are as follows: December 31, 2023 2022 Accrued product-related costs $ 2,183 $ 2,368 Accrued income taxes 6,899 9,630 Accrued property and other taxes 1,542 2,142 Accrued professional fees 1,232 1,472 Accrued customer-related liabilities 2,167 2,837 Dividends payable 1,233 1,272 Remediation reserves 12,044 11,048 Derivative liabilities 747 357 Other accrued liabilities 6,514 4,196 Total accrued expenses and other liabilities $ 34,561 $ 35,322 CTS CORPORATION 52 Table of Contents The increase in Other accrued liabilities is primarily due to a contingent liability accrual associated with the 2023 Maglab acquisition. Refer to Note 3 “Business Acquisitions”, for further discussion. NOTE 11 — Contingencies Certain processes in the manufacture of our current and past products may create by-products classified as hazardous waste. As a result, 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 or formerly owned or operated by us. Currently, none of these costs and accruals relate to sites that provide revenue generating activities for the Company. Two of those sites, Asheville, North Carolina (the "Asheville Site") and Mountain View, California, are designated National Priorities List sites under the EPA’s Superfund program. We accrue a liability for probable remediation activities, claims, and proceedings against us with respect to environmental matters if the amount can be reasonably estimated, and provide disclosures including the nature of a loss whenever it is probable or reasonably possible that a potentially material loss may have occurred but cannot be estimated. We record contingent loss accruals on an undiscounted basis. A roll-forward of remediation reserves included in accrued expenses and other liabilities in the Consolidated Balance Sheets is composed of the following: Years Ended December 31, 2023 2022 2021 Balance at beginning of period $ 11,048 $ 10,979 $ 10,642 Remediation expense 3,502 2,750 2,254 Remediation payments ( 2,497 ) ( 2,661 ) ( 1,929 ) Other activity (1) ( 9 ) ( 20 ) 12 Balance at end of the period $ 12,044 $ 11,048 $ 10,979 (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 Asheville Site. On February 8, 2023, the Company received a letter from the EPA (the “EPA Letter”) seeking reimbursement of its past response costs and interest thereon relating to any release or threatened release of hazardous substances at the Asheville Site in the aggregate amount of $ 9,955 from the three potentially responsible parties associated with the Asheville Site, including the Company. The Company expects its potential exposure to be between $ 1,900 and $ 9,955 . We have determined that no point within this range is more likely than another and therefore we have recorded a loss estimate of $ 1,900 as of December 31, 2023 in the Consolidated Balance Sheets. 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 — Leases 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. CTS CORPORATION 53 Table of Contents 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. 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. Components of lease expense for the years ended December 31, 2023, 2022, and 2021 were as follows: Years Ended December 31, 2023 2022 2021 Operating lease cost $ 5,762 $ 4,997 $ 5,144 Short-term lease cost 1,495 1,338 1,403 Total lease cost $ 7,257 $ 6,335 $ 6,547 For the years ended December 2023, 2022 and 2021 the Company recorded sublease income of $ 532 , $ 562 and $ 589 , respectively. Supplemental cash flow information related to leases was as follows: Years Ended December 31, 2023 2022 2021 Cash paid for amounts included in the measurement of lease obligations $ 5,797 $ 5,163 $ 3,666 Leased assets obtained in exchange for new operating lease obligations $ 7,831 $ 5,990 $ 1,253 Supplemental balance sheet information related to leases was as follows: As of December 31, 2023 2022 Operating lease obligations $ 4,394 $ 3,936 Long-term operating lease obligations 24,965 21,754 Total lease liabilities $ 29,359 $ 25,690 Weighted-average remaining lease terms (years) 6.22 6.46 Weighted-average discount rate 6.30 % 6.08 % Remaining maturity of our existing lease liabilities as of December 31, 2023 is as follows: Operating Leases (1) 2024 $ 6,215 2025 5,715 2026 4,052 2027 3,947 2028 4,037 Thereafter 13,890 Total $ 37,856 Less: interest ( 8,497 ) Present value of lease payments $ 29,359 (1) Operating lease payments include $ 1,386 of payments related to options to extend lease terms that are reasonably expected to be exercised. CTS CORPORATION 54 Table of Contents NOTE 13 — Debt Long-term debt was comprised of the following: As of December 31, 2023 2022 Total credit facility availability $ 400,000 $ 400,000 Balance outstanding 67,500 83,670 Standby letters of credit 1,640 1,640 Amount available, subject to covenant restrictions $ 330,860 $ 314,690 Weighted-average interest rate 6.07 % 2.96 % On December 15, 2021, we entered into a second amended and restated five-year credit agreement with a group of banks (the “Revolving Credit Facility”) to (i) increase the total credit facility to $ 400,000 which may be increased by $ 200,000 at the request of the Company, subject to the administrative agent's approval, (ii) extend the maturity of the Revolving Credit Facility from February 12, 2024 to December 15, 2026 , (iii) replace LIBOR with SOFR as the primary reference rate used to calculate interest on the loans under the Revolving Credit Facility, (iv) increase available sublimits for letters of credit, and swingline loans as well as providing for additional alternative currency borrowing capabilities, and (v) modify the financial and non-financial covenants to provide the Company additional flexibility. 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. 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. The contractual rate of these arrangements ranges from 1.49 % to 2.49 %. Refer to Note 14, "Derivatives," for further discussion on the impact of interest rate swaps. 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, 2023. The Revolving Credit Facility requires that we deliver quarterly financial statements, annual financial statements, auditor certifications, and compliance certificates within a specified number of days after the end of a quarter and year. Additionally, the Revolving Credit Facility contains restrictions limiting our ability to: dispose of assets; incur certain additional debt; repay other debt or amend subordinated debt instruments; create liens on assets; make investments, loans or advances; make acquisitions or engage in mergers or consolidations; engage in certain transactions with our subsidiaries and affiliates; and make stock repurchases and dividend payments. We have debt issuance costs related to our long-term debt that are being amortized using the straight-line method over the life of the debt. Amortization expense was approximately $ 194 for the year ended December 31, 2023 , $ 194 in 2022 and $ 169 in 2021 . 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 income (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 CTS CORPORATION 55 Table of Contents that an anticipated hedged transaction will not occur by the end of the originally specified time period, we reclassify the gains or losses related to that hedge from accumulated other comprehensive income (loss) to other income (expense), net. We assess hedge effectiveness qualitatively by verifying that the critical terms of the hedging instrument and the forecasted transaction continue to match, and that there have been no adverse developments that have increased the risk that the counterparty will default. No recognition of ineffectiveness was recorded in our Consolidated Statement of Earnings (Loss) for the year ended December 31, 2023. Foreign Currency Hedges We use forward contracts to mitigate currency risk related to a portion of our forecasted foreign currency revenues and costs. The currency forward contracts are designed as cash flow hedges and are recorded in the 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, 2023 , we had a net unrealized gain of $ 1,426 in accumulated other comprehensive income (loss), of which $ 1,285 in gains are expected to be reclassified to earnings within the next 12 months. The notional amount of foreign currency forward contracts outstanding was $ 45,335 at December 31, 2023. Interest Rate Swaps We use interest rate swaps to convert a portion of our revolving credit facility's outstanding balance from a variable rate of interest to a fixed rate. As of December 31, 2023 , 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 income (loss) that are expected to be reclassified into earnings within the next twelve months is approximately $ 1,121 . The location and fair values of derivative instruments designated as hedging instruments in the Consolidated Balance Sheets as of December 31, 2023, are shown in the following table: As of December 31, 2023 2022 Interest rate swaps reported in Other current assets $ 1,121 $ 1,561 Interest rate swaps reported in Other assets $ 706 $ 1,434 Cross-currency swap reported in Accrued expenses and other liabilities $ ( 747 ) $ ( 357 ) Foreign currency hedges reported in Other current assets $ 1,087 $ 945 The Company has elected to net its foreign currency derivative assets and liabilities in the balance sheet in accordance with ASC 210-20 ( Balance Sheet, Offsetting ). On a gross basis, there were foreign currency derivative assets of $ 1,283 and foreign currency derivative liabilities of $ 196 at December 31, 2023. CTS CORPORATION 56 Table of Contents The effect of derivative instruments on the Consolidated Statements of Earnings (Loss) is as follows: Years Ended December 31, 2023 2022 2021 Foreign Exchange Contracts: Amounts reclassified from AOCI to earnings: Net sales $ ( 130 ) $ — $ — Cost of goods sold 2,795 924 1,384 Selling, general and administrative expense — — — Total amounts reclassified from AOCI to earnings 2,665 924 1,384 Gain recognized in other expense for hedge ineffectiveness — — — Total derivative gains on foreign exchange contracts recognized in earnings $ 2,665 $ 924 $ 1,384 Interest Rate Swaps: Income (Expense) recorded in interest expense $ 1,789 $ 77 $ ( 744 ) Cross-Currency Swaps: Income recorded in interest expense $ 515 461 — Total gains on derivatives $ 4,969 $ 1,462 $ 640 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 . 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. At December 31, 2023, the variable rate debt associated with the cross-currency swap was $ 17,500 due to ongoing principle payments. 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, 2023 we had a net unrealized loss of $ 1,138 in accumulated other comprehensive income (loss). 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 Income (Loss) Shareholders’ equity includes certain items classified as accumulated other comprehensive income (loss) (“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.” CTS CORPORATION 57 Table of Contents • Cumulative translation adjustment relates to our non-U.S. subsidiary companies that have designated a functional currency other than the U.S. dollar. We are required to translate the subsidiary functional currency financial statements to U.S. dollars 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 income (loss) for the year ended December 31, 2023 are as follows: As of December 31, 2022 Gain (Loss) Recognized in OCI (Gain) Loss reclassified from AOCI to earnings As of December 31, 2023 Changes in fair market value of derivatives: Gross $ 3,911 $ 3,798 $ ( 4,453 ) $ 3,256 Income tax benefit (expense) ( 899 ) ( 874 ) 1,024 ( 749 ) Net 3,012 2,924 ( 3,429 ) 2,507 Changes in unrealized pension cost: Gross ( 1,179 ) 278 ( 224 ) ( 1,125 ) Income tax benefit (expense) 376 27 39 442 Net ( 803 ) 305 ( 185 ) ( 683 ) Cumulative translation adjustment: Gross ( 2,880 ) 5,325 — 2,445 Income tax benefit (expense) — — — — Net ( 2,880 ) 5,325 — 2,445 Total accumulated other comprehensive income (loss) $ ( 671 ) $ 8,554 $ ( 3,614 ) $ 4,269 The components of accumulated other comprehensive income (loss) for the year ended December 31, 2022 are as follows: As of December 31, 2021 Gain (Loss) Recognized in OCI (Gain) Loss reclassified from AOCI to earnings As of December 31, 2022 Changes in fair market value of derivatives: Gross $ ( 635 ) $ 5,547 $ ( 1,001 ) $ 3,911 Income tax (expense) benefit 147 ( 1,276 ) 230 ( 899 ) Net ( 488 ) 4,271 ( 771 ) 3,012 Changes in unrealized pension cost: Gross ( 2,744 ) 3,308 ( 1,743 ) ( 1,179 ) Income tax (expense) benefit 738 ( 760 ) 398 376 Net ( 2,006 ) 2,548 ( 1,345 ) ( 803 ) Cumulative translation adjustment: Gross ( 2,032 ) ( 848 ) — ( 2,880 ) Income tax benefit (expense) — — — — Net ( 2,032 ) ( 848 ) — ( 2,880 ) Total accumulated other comprehensive income (loss) $ ( 4,526 ) $ 5,971 $ ( 2,116 ) $ ( 671 ) CTS CORPORATION 58 Table of Contents NOTE 16 — Shareholders' Equity Share count and par value data related to shareholders' equity are as follows: As of December 31, 2023 2022 Preferred Stock Par value per share No par value No par value Shares authorized 25,000,000 25,000,000 Shares outstanding — — Common Stock Par value per share No par value No par value Shares authorized 75,000,000 75,000,000 Shares issued 57,444,228 57,330,761 Shares outstanding 30,824,248 31,680,890 Treasury stock Shares held 26,619,980 25,649,871 On February 9, 2023, our Board of Directors approved a share repurchase program that authorized the Company to repurchase up to $ 50,000 of the Company’s common stock. The repurchase program had no set expiration date and replaced the repurchase program approved by the Board of Directors on May 13, 2021. The purchases under the program were made from time to time in the open market (including, without limitation, the use of Rule 10b5-1 plans), depending on a number of factors, including our evaluation of general market and economic conditions, our financial condition and the trading price of our common stock. The repurchase program could have been extended, modified, suspended or discontinued at any time. During the year ended December 31, 2023, 970,109 shares of common stock were repurchased for approximately $ 41,337 , including 96,401 shares that were repurchased for approximately $ 4,245 under the May 2021 program. As of December 31, 2023 approximately $ 12,908 was still available for future purchases under the February 2023 program. As of 2023, we are subject to a 1% excise tax on stock repurchases under the United States Inflation Reduction Act of 2022 which we include in the cost of stock repurchases as a reduction of shareholders’ equity. As of December 31, 2023, we accrued $ 359 for 2023 repurchases within Accrued expenses and other liabilities in the Consolidated Balance Sheet. On February 2, 2024, our Board of Directors approved a new share repurchase program that authorizes the Company to repurchase up to $ 100 million of its common stock. The repurchase program has no set expiration date and supersedes and replaces the repurchase program approved by the Board of Directors in February 2023. The purchases may be made from time to time in the open market (including, without limitation, the use of Rule 10b5-1 plans), depending on a number of factors, including our evaluation of general market and economic conditions, our financial condition and the trading price of our common stock. The repurchase program may be extended, modified, suspended or discontinued at any time. A roll forward of common shares outstanding is as follows: As of December 31, 2023 2022 Balance at beginning of the year 31,680,890 32,178,715 Repurchases ( 970,109 ) ( 583,526 ) Restricted stock unit issuances 113,467 85,701 Balance at end of period 30,824,248 31,680,890 NOTE 17 — Stock-Based Compensation At December 31, 2023 , 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, RSUs, performance shares, performance units, and other stock awards subject to the terms of the 2018 Plan. CTS CORPORATION 59 Table of Contents 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, 2023 2022 2021 Service-Based RSUs $ 2,869 $ 2,834 $ 2,714 Performance-Based RSUs 1,813 4,469 3,113 Cash-settled awards 499 423 278 Total $ 5,181 $ 7,726 $ 6,105 Income tax benefit 1,192 1,777 1,404 Net $ 3,989 $ 5,949 $ 4,701 The fair value of all equity awards that vested during the periods ended December 31, 2023, 2022, and 2021 were $ 8,282 , $ 4,535 , and $ 7,063 , respectively. We recorded a tax deduction related to equity awards that vested during the year ended December 31, 2023 , in the amount of $ 1,858 . The following table summarizes the unrecognized compensation expense related to non-vested RSUs by type and the weighted-average period in which the expense is to be recognized: Unrecognized compensation expense at December 31, 2023 Weighted- average period Service-Based RSUs $ 2,328 1.32 Performance-Based RSUs 2,245 1.58 Total $ 4,573 1.45 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, 2023: 2018 Plan 2014 Plan 2009 Plan 2004 Plan Directors' Plan Awards originally available to be granted 2,500,000 1,500,000 3,400,000 6,500,000 N/A Performance stock options outstanding — — — — — Maximum potential RSU and cash settled awards outstanding 663,052 35,100 30,000 14,545 4,722 Maximum potential awards outstanding 663,052 35,100 30,000 14,545 4,722 RSUs and cash settled awards vested and released 446,973 — — — — Awards available to be granted 1,389,975 — — — — 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 may 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. CTS CORPORATION 60 Table of Contents A summary of RSU activity for the year ended December 31, 2023 is presented below: Units Weighted Average Grant Date Fair Value Weighted Average Remaining Contractual Term Aggregate Intrinsic Value Outstanding at January 1, 2023 282,124 $ 27.44 Granted 92,174 42.73 Released ( 73,382 ) 32.78 Forfeited ( 19,950 ) 37.31 Outstanding at December 31, 2023 280,966 $ 30.36 18.18 $ 12,289 Releasable at December 31, 2023 144,267 $ 22.21 30.02 $ 6,310 Years Ended December 31, 2023 2022 2021 Weighted-average fair value upon release $ 45.19 $ 35.38 $ 33.81 Intrinsic value of RSUs released $ 3,316 $ 2,794 $ 5,408 A summary of non-vested RSU activity for the year ended December 31, 2023 is presented below: RSUs Weighted Average Grant Date Fair Value Nonvested at January 1, 2023 146,657 $ 33.64 Granted 92,174 42.73 Vested ( 82,182 ) 34.08 Forfeited ( 19,950 ) 37.31 Nonvested at December 31, 2023 136,699 $ 38.97 Performance-Based Restricted Stock Units We grant PRSUs to certain executives and key employees. PRSUs are usually awarded in the range from zero percent to 200 % of a targeted number of shares. The award rate for the 2021-2023, 2022-2024, and 2023-2025 PSUs is dependent upon our achievement of targets for sales growth, cash flow, and relative total shareholder return ("RTSR"). We use a matrix based on the percentile ranking of our stock price performance compared to a peer group over a three-year period to calculate the achievement of the RTSR targets. Other PRSUs are granted from time to time based on other performance criteria. The initial fair value of the PRSUs 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 PRSU activity for the year ended December 31, 2023 is presented below: Units Weighted Average Grant Date Fair Value Weighted Average Remaining Contractual Term Aggregate Intrinsic Value Outstanding at January 1, 2022 260,306 $ 33.20 Granted 71,832 43.80 Added by performance factor 53,035 32.11 Released ( 113,385 ) 32.11 Forfeited ( 51,132 ) 33.14 Outstanding at December 31, 2022 220,656 $ 36.96 1.83 $ 9,651 Releasable at December 31, 2022 — $ — $ — CTS CORPORATION 61 Table of Contents The following table summarizes each grant of PRSUs outstanding at December 31, 2023: Description Grant Date Vesting Year Vesting Dependency Target Units Outstanding Maximum Number of Units to be Granted 2021 - 2023 Performance RSUs February 9, 2021 2023 25 % RTSR, 40 % sales growth, 35 % operating cash flow 58,541 117,082 2022 - 2024 Performance RSUs February 10, 2022 2024 35 % RTSR, 35 % sales growth, 30 % operating cash flow 65,508 131,016 Focus 2025 Performance RSUs Varies 2024 Cumulative revenues of $ 750 million over a trailing four-quarter period 32,900 32,900 2023-2025 Performance RSUs February 9, 2023 2025 60 % sales growth, 40 % operating cash flow, RTSR modifier 63,707 127,414 Total 220,656 408,412 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, 2023, and 2022 , we had 42,062 and 46,641 cash-settled RSUs outstanding, respectively. At December 31, 2023 and 2022 , liabilities of $ 676 and $ 566 , 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, 2023 and the gain recorded during the year ended December 31, 2023: Asset (Liability) Carrying Value at December 31, 2023 Quoted Prices in Active Markets for Identical (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Gain (Loss) for Year Ended December 31, 2023 Interest rate swap $ 1,827 $ — $ 1,827 $ — $ 1,789 Foreign currency hedges $ 1,087 $ — $ 1,087 $ — $ 2,665 Cross-currency swap $ ( 747 ) $ — $ ( 747 ) $ — $ 515 Qualified replacement plan assets $ 13,392 $ 13,392 $ — $ — $ 710 Contingent consideration $ ( 3,764 ) $ — $ — $ ( 3,764 ) $ ( 200 ) The table below summarizes the financial assets 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 Value at December 31, 2022 Quoted Prices in Active Markets for Identical (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Gain for Year Ended December 31, 2022 Interest rate swap $ 2,995 $ — $ 2,995 $ — $ 77 Foreign currency hedges $ 945 $ — $ 945 $ — $ 924 Cross-currency swap $ ( 357 ) $ — $ ( 357 ) $ — $ 461 Qualified replacement plan assets $ 15,249 $ 15,249 $ — $ — $ — We use interest rate swaps to convert a portion of our Revolving Credit Facility’s outstanding balance from a variable rate of interest into a fixed rate and foreign currency forward contracts to hedge the effect of foreign currency changes on certain revenues and costs CTS CORPORATION 62 Table of Contents 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) plan. The investments are Level 1 marketable securities and are recorded in Other Assets on our Consolidated Balance Sheets. Gains and losses from these investments are recorded in other income and expense in the Consolidated Statements of Earnings. 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 customer order targets. These estimates are highly judgmental and changes to the estimate of expected future contingent consideration payments may occur, from time to time, due to various reasons, including actual results differing from estimates and/or from adjustments to the revenue or customer order target assumptions used as the basis for the liability. A roll-forward of the contingent consideration is as follows: Contingent Consideration Balance at December 31, 2022 $ — Acquisition date fair value of contingent consideration 3,564 Change in fair value 200 Balance at December 31, 2023 $ 3,764 As of December 31, 2023, approximately $ 1,076 of contingent consideration was recorded in accrued expenses and other liabilities with the remainder in other long-term obligations in the Consolidated Balance Sheets. 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 — Income Taxes Earnings (Loss) before income taxes consist of the following: Years Ended December 31, 2023 2022 2021 U.S. $ ( 9,265 ) $ 1,005 $ ( 128,699 ) Non-U.S. 84,418 79,732 67,819 Total $ 75,153 $ 80,737 $ ( 60,880 ) CTS CORPORATION 63 Table of Contents Significant components of income tax provision/(benefit) are as follows: Years Ended December 31, 2023 2022 2021 Current: U.S. $ ( 668 ) $ 1,365 $ 36 Non-U.S. 16,279 19,305 11,932 Total Current 15,611 20,670 11,968 Deferred: U.S. ( 1,475 ) 249 ( 35,979 ) Non-U.S. 485 243 4,997 Total Deferred ( 990 ) 492 ( 30,982 ) Total provision for income taxes $ 14,621 $ 21,162 $ ( 19,014 ) Significant components of our deferred tax assets and liabilities are as follows: As of December 31, 2023 2022 Post-retirement benefits $ 976 $ 947 Inventory reserves 1,323 1,361 Loss carry-forwards 3,911 4,547 Credit carry-forwards 13,415 10,467 Accrued expenses 4,852 4,543 Research and development expenditures 18,980 19,448 Operating lease liabilities 6,715 5,865 Stock compensation 2,371 2,426 Foreign exchange loss 2,010 2,075 Other 762 835 Gross deferred tax assets 55,315 52,514 Depreciation and amortization 23,349 23,067 Statutory inventory adjustments 1,359 1,110 Qualified replacement plan 3,080 3,507 Operating lease assets 6,355 5,531 Subsidiaries' unremitted earnings 1,599 2,562 Other 749 900 Gross deferred tax liabilities 36,491 36,677 Net deferred tax assets 18,824 15,837 Deferred tax asset valuation allowance ( 8,370 ) ( 8,386 ) Total net deferred tax assets $ 10,454 $ 7,451 The deferred tax assets and deferred tax liabilities, classified as non-current, are as follows: As of December 31, 2023 2022 Non-current deferred tax assets $ 25,183 $ 23,461 Non-current deferred tax liabilities $ ( 14,729 ) $ ( 16,010 ) Total net deferred tax assets $ 10,454 $ 7,451 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 carry-forwards and tax credits in the various jurisdictions in which it operates, will be realized. As of December 31, 2023, and 2022, we recorded deferred tax assets related to certain U.S. state and non-U.S. income tax loss carry-forwards of $ 3,911 and $ 4,547 , respectively, and U.S. and non-U.S. tax credits of $ 13,415 and $ 10,467 , respectively. The deferred tax assets expire in various years primarily between 2024 and 2043 . 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 $ 8,370 and $ 8,386 should be provided for certain deferred tax CTS CORPORATION 64 Table of Contents assets at December 31, 2023 and 2022, respectively. As of December 31, 2023, 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 for 2023 and 2022 of $ 172 and $ 172 was recorded against the U.S. federal foreign tax credit carry-forwards of $ 1,854 and $ 362 , respectively. These credits begin to expire in varying amounts between 2028 and 2033 . A valuation allowance of $ 449 was recorded in 2023 against the U.S. federal research and development tax credits of $ 9,362 . 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 2024 and 2043 . 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 tax credit carry-forwards. The following table reconciles taxes at the U.S. federal statutory rate to the effective income tax rate: Years Ended December 31, 2023 2022 2021 Taxes at the U.S. statutory rate 21.0 % 21.0 % 21.0 % State income taxes, net of federal income tax benefit ( 0.1 )% 0.2 % 4.3 % Non-U.S. earnings taxed at rates different than the U.S. statutory rate ( 4.4 )% ( 3.2 )% 3.1 % Foreign source earnings, net of associated foreign tax credits 2.7 % ( 0.6 )% 0.1 % Benefit of tax credits ( 2.4 )% ( 0.2 )% 0.8 % Non-deductible expenses 0.9 % 2.6 % ( 1.6 )% Stock compensation - excess tax benefits ( 0.7 )% ( 0.2 )% 0.7 % Adjustment to valuation allowances 1.2 % 1.4 % ( 3.1 )% Change in unrecognized tax benefits ( 0.2 )% ( 0.1 )% 0.4 % Impacts of unremitted foreign earnings 2.0 % 2.7 % ( 4.5 )% Release of disproportionate tax effects of OCI — — 8.8 % Excise tax paid upon U.S. pension termination — 1.8 % — Other ( 0.5 )% 0.8 % 1.2 % Effective income tax rate 19.5 % 26.2 % 31.2 % 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 income (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 termination is included in Note 7, "Retirement Plans." Under current U.S. tax regulations, in general, repatriation of foreign earnings to the U.S. can be completed with no incremental U.S. tax. 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 accordance with guidance issued by the FASB staff, the Company has adopted an accounting policy to treat any Global Intangible Low-Taxed Income (“GILTI”) inclusions as an expense in the period the tax was 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, 2023, we have approximately $ 1,943 of unrecognized tax benefits, which if recognized, would impact the effective tax rate. We do not anticipate any significant changes in our unrecognized tax benefits within the next 12 months. A reconciliation of the beginning and ending unrecognized tax benefits is provided below: As of December 31, 2023 2022 Balance at January 1 $ 2,079 $ 2,196 Increase related to current year tax positions 208 48 Decrease related to prior year tax positions ( 122 ) ( 165 ) Decrease related to lapse in statute of limitation ( 222 ) — Balance at December 31 $ 1,943 $ 2,079 CTS CORPORATION 65 Table of Contents Our continuing practice is to recognize interest and/or penalties related to unrecognized tax benefits as income tax expense. As of December 31, 2023 and 2022 , $ 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. Our U.S. income tax returns are primarily subject to examination from 2020 through 2022 ; however, U.S. tax authorities also have the ability to review prior tax years to the extent loss carry-forwards and tax credit carry-forwards are utilized. The open years for the non-U.S. tax returns range from 2014 through 2022 based on local statutes. NOTE 20 — Geographic Data Financial information relating to our operations by geographic area were as follows: Years Ended December 31, Net Sales 2023 2022 2021 United States $ 302,530 $ 326,561 $ 297,322 China 108,683 115,980 106,700 Czech Republic 42,068 35,990 36,252 Singapore 29,912 48,288 37,742 Denmark 29,208 17,864 6,979 Taiwan 22,619 30,199 27,768 Other non-U.S. 15,402 11,987 162 Consolidated net sales $ 550,422 $ 586,869 $ 512,925 Sales are attributed to countries based upon the origin of the sale. Years Ended December 31, Long-Lived Tangible Assets 2023 2022 United States $ 28,533 $ 32,694 China 25,847 28,255 Mexico 19,693 17,050 Czech Republic 7,840 8,519 Taiwan 6,321 6,446 Other non-U.S 4,358 4,336 Consolidated long-lived assets $ 92,592 $ 97,300 CTS CORPORATION 66 Table of Contents CTS CORPORATION SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS (in thousands) Balance at Beginning of Period Charged to Expense Charged to Other Accounts Write-offs / Recoveries Balance at End of Period Year ended December 31, 2023 Allowance for credit losses $ 1,236 $ 125 $ — $ ( 430 ) $ 931 Year ended December 31, 2022 Allowance for credit losses $ 1,657 $ 97 $ ( 22 ) $ ( 496 ) $ 1,236 Year ended December 31, 2021 Allowance for credit losses $ 764 $ 1,020 $ 4 $ ( 131 ) $ 1,657 CTS CORPORATION 67 Table of Contents Item 9. Changes in and Disagreements with Acco untants on Accounting and Financial Disclosure Not applicable. Item 9A. 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 Exchange Act 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 Exchange Act 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 Exchange Act). Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2023. 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). 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, 2023. The effectiveness of our internal control over financial reporting as of December 31, 2023 has been audited by Grant Thornton LLP, an independent registered public accounting firm, as stated in their report that is included herein. (c) Changes in Internal Control over Financial Reporting There were no changes in our internal control over financial reporting for the quarter ended December 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. CTS CORPORATION 68 Table of Contents 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, 2023, 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, 2023, 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, 2023, and our report dated February 23, 2024 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. 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 23, 2024 CTS CORPORATION 69 Table of Contents Item 9B. Othe r Information During the quarter ended December 31, 2023, no director or officer (as defined in Rule 16a-1(f) under the Exchange Act) of the Company adopted , modified or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement” (as each term is defined in Item 408 of Regulation S-K). Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections Not applicable. PART III Item 10. 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 our directors and our corporate governance policies and practices may be found in our definitive proxy statement to be delivered to shareholders in connection with our 2024 Annual Meeting of Shareholders. Such information is incorporated herein by reference. Item 11. 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 2024 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, 2023: Plan Category (a) Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights (2) (b) Weighted- Average Excercise Price of Outstanding Options, Warrants and Rights (2) (c) Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column(a)) (3) Equity compensation plans approved by security holders 742,697 $ 33.28 1,389,975 Equity compensation plans not approved by security holders (1) 4,722 — — Total 747,419 1,389,975 (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, 2023, 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 Table of Contents Item 12. 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 2024 Annual Meeting of Shareholders. Such information is incorporated herein by reference. Item 13. 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 2024 Annual Meeting of Shareholders. Such information is incorporated herein by reference. Item 14. 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 2024 Annual Meeting of Shareholders. Such information is incorporated herein by reference. CTS CORPORATION 71 Table of Contents PART IV Item 15. 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: Schedule II: 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. 1-4639. (3)(i) 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). (3)(ii) Amended Bylaws (incorporated herein by reference to Exhibit 3.1 to the Quarterly Report on Form 10-Q, filed with the SEC on October 26, 2023). (4)( 1 ) Description of Securities Registered under Section 12 of the Securities Exchange Act of 1934 (incorporated by reference to Exhibit 4.1 to the Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on February 24, 2023). (10)(a) 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).* (10)(b) 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). (10)(c) 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).* (10)(d) 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).* (10)(e) 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).* (10)(f) 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).* (10)(g) 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).* (10)(h) 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). (10)(i) 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) (10)(j) 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). CTS CORPORATION 72 Table of Contents (10)(k) Form Restricted Stock Unit Agreement (service-based) under the CTS Corporation 2018 Equity and Incentive Compensation Plan, covering grants made in 2021, 2022 and 2023, (incorporated by reference to Exhibit 10(a) to Form 10-Q filed with the SEC on April 27, 2023). (10)(l) Form Restricted Stock Unit Agreement (performance-based) under the CTS Corporation 2018 Equity and Incentive Compensation Plan, covering certain grants made in 2020, (incorporated by reference to Exhibit 10(b) to Form 10-Q filed with the SEC on April 27, 2023). (10)(m) Form Restricted Stock Unit Agreement (performance-based) under the CTS Corporation 2018 Equity and Incentive Compensation Plan, covering grants made in 2021, (incorporated by reference to Exhibit 10(c) to Form 10-Q filed with the SEC on April 27, 2023). (10)(n) Form Restricted Stock Unit Agreement (performance-based) under the CTS Corporation 2018 Equity and Incentive Compensation Plan, covering grants made in 2022, (incorporated by reference to Exhibit 10(d) to Form 10-Q filed with the SEC on April 27, 2023). (10)(o) Form Restricted Stock Unit Agreement (performance-based) under the CTS Corporation 2018 Equity and Incentive Compensation Plan, covering grants made in 2023, (incorporated by reference to Exhibit 10(e) to Form 10-Q filed with the SEC on April 27, 2023). (21) Subsidiaries. (23) Consent of Grant Thornton LLP. (31)(a) Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (31)(b) Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (32)(a) Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (32)(b) Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 97 Compensation Clawback Policy 101 The following financial statements from the Company's Annual Report on Form 10-K for the year ended December 31, 2023, 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. 104 The cover page from the Company's Annual Report on Form 10-K for the year ended December 31, 2023, formatted in Inline XBRL * Management contract or compensatory plan or arrangement. Item 16. Form 10-K Summary None. CTS CORPORATION 73 Table of Contents SIGNAT URES 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 Date: February 23, 2024 By: /s/ Ashish Agrawal Ashish Agrawal Vice President and Chief Financial Officer (Principal Financial Officer) Date: February 23, 2024 By: /s/ Thomas M. White Thomas M. White 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. Date: February 23, 2024 By: /s/ Kieran O'Sullivan Kieran O'Sullivan Chairman, President, and Chief Executive Officer (Principal Executive Officer) Date: February 23, 2024 By: /s/ Robert A. Profusek Robert A. Profusek Lead Director Date: February 23, 2024 By: /s/ William S. Johnson William S. Johnson Director Date: February 23, 2024 By: /s/ Alfonso G. Zulueta Alfonso G. Zulueta Director Date: February 23, 2024 By: /s/ Donna M. Costello Donna M. Costello Director Date: February 23, 2024 By: /s/ Randy Stone Randy Stone Director Date: February 23, 2024 By: /s/ Amy Dodrill Amy Dodrill Director CTS CORPORATION 74