CTS CORP 10-Q

Item 2. Management’s Discussion and Analysis of Fin ancial Condition and Results of Operations (“MD&A”) (in thousands of dollars, except percentages and per share amounts) The following discussion should be read in conjunction with our unaudited Condensed Consolidated Financial Statements and notes included under Item 1, as well as our Consolidated Financial Statements and notes and related Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2023. 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 a number of challenges including, without limitation, periodic market softness, competition from other suppliers, changes in technology, and the ability to add new customers, launch new products or penetrate new markets. Many of these, and other risks and uncertainties relating to the Company and our business, are discussed in further detail in Item 1A. of our Annual Report on Form 10-K and other filings made with the SEC. Results of Operations: First Quarter 2024 versus First Quarter 2023 The following table highlights changes in significant components of the Unaudited Condensed Consolidated Statements of Earnings for the quarters ended March 31, 2024 and March 31, 2023: Three Months Ended March 31, 2024 March 31, 2023 Percent Change Percentage of Net Sales – 2024 Percentage of Net Sales – 2023 Net sales $ 125,750 $ 145,994 (13.9 )% 100.0 % 100.0 % Cost of goods sold 80,660 94,342 (14.5 ) 64.1 64.6 Gross margin 45,090 51,652 (12.7 ) 35.9 35.4 Selling, general and administrative expenses 22,260 21,979 1.3 17.7 15.1 Research and development expenses 6,601 6,586 0.2 5.2 4.5 Restructuring charges 1,693 912 85.6 1.3 0.6 Total operating expenses 30,554 29,477 3.7 24.3 20.2 Operating earnings 14,536 22,175 (34.4 ) 11.6 15.2 Total other (expense) income, net (878 ) 534 (264.4 ) (0.7 ) 0.4 Earnings before income taxes 13,658 22,709 (39.9 ) 10.9 15.6 Income tax expense 2,539 4,365 (41.8 ) 2.0 3.0 Net earnings $ 11,119 $ 18,344 (39.4 )% 8.8 % 12.6 % Earnings per share: Diluted net earnings per share $ 0.36 $ 0.58 Net sales were $125,750 in the first quarter of 2024, a decrease of $20,244 or 13.9% from the first quarter of 2023. Net sales to non-transportation markets decreased $12,471 or 17.4% while net sales to transportation markets decreased $7,773 or 10.5%. The decline in 25 net sales was primarily driven by decreased volumes from our distribution and OEM customers in the industrial end market, lower volumes of commercial vehicle related products, and lower sales to transportation customers in China. Changes in foreign exchange rates also decreased net sales by $630 year-over-year primarily due to the U.S. Dollar appreciating compared to the Chinese Renminbi. Gross margin was $45,090 in the first quarter of 2024, a decrease of $6,562 or 12.7% from the first quarter of 2023. The decrease in gross margin was driven by lower sales volumes. Changes in foreign exchange rates decreased gross margin by $797 year-over-year primarily due to the U.S. Dollar appreciating compared to the Mexican Peso. Income from our hedges materially offset the negative foreign exchange impact. See Note 13 “Derivative Financial Instruments” in the Notes to the Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q for further information. Our gross margin percentage increased from 35.4% for the first quarter of 2023 to 35.9% for the first quarter of 2024 primarily due to improved product mix and the impact of certain cost saving actions previously taken as discussed in Note 9 “Costs Associated with Exit and Restructuring Activities” in the Notes to the Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q. Selling, general and administrative ("SG&A") expenses were $22,260 or 17.7% of net sales in the first quarter of 2024, versus $21,979 or 15.1% of net sales in the first quarter of 2023. The increase in SG&A expenses as a percentage of net sales was primarily driven by lower net sales in the first quarter of 2024. Research and development (“R&D”) expenses were $6,601 or 5.2% of net sales in the first quarter of 2024 compared to $6,586 or 4.5% of net sales in the first quarter of 2023. Our R&D expenses are in line with our commitment to continue investing in research and product development to drive organic growth. Restructuring charges were $1,693 or 1.3% of net sales in the first quarter of 2024 compared to $912 or 0.6% of net sales in the first quarter of 2023. The restructuring charges in the quarter ended March 31, 2024 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 Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q for further information. Other income and expense items are summarized in the following table: Three Months Ended March 31, March 31, 2024 2023 Interest expense $ (801 ) $ (694 ) Interest income 1,386 1,063 Other (expense) income, net (1,463 ) 165 Total other (expense) income, net $ (878 ) $ 534 Other expense, net for 2024 is primarily driven by foreign currency losses primarily related to the Chinese Renminbi. Three Months Ended March 31, March 31, 2024 2023 Effective tax rate 18.6 % 19.2 % Our effective income tax rate was 18.6% and 19.2% in the first quarters of 2024 and 2023, respectively. The decrease in the effective income tax rate is primarily due to tax benefits recorded from a change in the mix of earnings by jurisdiction and a decrease in the impact of foreign withholding taxes. 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, 26 investments, and debt service requirements for at least the next twelve months and for the foreseeable future thereafter. However, we may choose to pursue additional equity and debt financing to provide additional liquidity or to fund acquisitions. Cash and cash equivalents were $162,425 at March 31, 2024, and $163,876 at December 31, 2023, of which $110,183 and $99,940, respectively, were held outside the United States. Total long-term debt was $67,500 as of March 31, 2024 and $67,500 as of December 31, 2023. Cash Flow Overview Cash Flows from Operating Activities Net cash provided by operating activities was $18,311 during the three months ended March 31, 2024. Components of net cash provided by operating activities included net earnings of $11,119, depreciation and amortization expense of $7,325, other net non-cash items of $132, and a net cash outflow from changes in assets and liabilities of $265. Net cash provided by operating activities was $11,186 during the three months ended March 31, 2023. Components of net cash provided by operating activities included net earnings of $18,344, depreciation and amortization expense of $6,918, other net non-cash items of $7,821, and a net cash outflow from changes in assets and liabilities of $15,649 primarily driven by 2022’s annual bonus payout and an increase in accounts receivables. Cash Flows from Investing Activities Net cash used in investing activities for the three months ended March 31, 2024 was $4,035, driven by capital expenditures. Net cash used in investing activities for the three months ended March 31, 2023 was $7,896, driven by payments for the Maglab acquisition and finalization of the TEWA Temperature Sensors SP. Zo.o. (“TEWA”) net working capital adjustment of $3,356 and capital expenditures of $4,540. See Note 3 “Business Acquisitions” in the Notes to the Condensed Consolidated Financial Statements. Cash Flows from Financing Activities Net cash used in financing activities for the three months ended March 31, 2024 was $16,308. The net cash outflow was the result of treasury stock purchases of $11,958 (net of excise taxes unpaid), dividends paid of $1,233, and taxes paid on behalf of equity award participants of $3,117. Net cash used in financing activities for the three months ended March 31, 2023 was $16,625. The net cash outflow was the result of treasury stock purchases of $8,802, dividends paid of $1,272, taxes paid on behalf of equity award participants of $3,142, and net cash used in the paydown of long-term debt of $3,409. Capital Resources Revolving Credit Facility Long‑term debt is comprised of the following: As of March 31, December 31, 2024 2023 Total credit facility $ 400,000 $ 400,000 Balance outstanding 67,500 67,500 Standby letters of credit 1,640 1,640 Amount available, subject to covenant restrictions $ 330,860 $ 330,860 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 sub limits 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 27 flexibility. This new unsecured credit facility replaced the prior $300,000 unsecured credit facility, which would have expired on 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%. The Revolving Credit Facility includes a swingline sublimit of $20,000 and a letter of credit sub limit 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 March 31, 2024. Critical Accounting Policies and Estimates The Company’s Condensed Consolidated Financial Statements are prepared in accordance with U.S. GAAP. In connection with the preparation of the Condensed Consolidated Financial Statements, the Company uses estimates and makes judgments and assumptions about future events that affect the reported amounts of assets, liabilities, revenue, expenses, and the related disclosures. The assumptions, estimates, and judgments are based on historical experience, current trends, and other factors the Company believes are relevant at the time it prepares the Condensed Consolidated Financial Statements. The critical accounting policies and estimates are consistent with those discussed in Note 1, “Summary of Significant Accounting Policies”, to the Consolidated Financial Statements and the MD&A section of the Company’s Annual Report on Form 10-K for the year ended December 31, 2023. During and as of the three months ended March 31, 2024, there were no significant changes in the application of critical accounting policies or estimates. Significant Customers Our net sales to customers representing at least 10% of total net sales is as follows: Three months ended March 31, 2024 March 31, 2023 Cummins Inc. 13.6 % 14.1 % Toyota Motor Corporation 13.3 % 10.7 % No other customer accounted for 10% or more of total net sales during these periods. Forward ‑ Looking Statements Readers are cautioned that the statements contained in this document regarding expectations of our performance or other matters that may affect our business, results of operations, or financial condition are, or may be deemed to be, “forward-looking statements” as defined by the “safe harbor” provisions in the Private Securities Litigation Reform Act of 1995. Such statements are made in reliance on the safe harbor provisions of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements, other than statements of historical fact, included or incorporated in this document, including statements regarding our strategy, financial position, guidance, funding for continued operations, cash reserves, liquidity, projected costs, plans, projects, awards and contracts, and objectives of management, among others, are forward-looking statements. Words such as “expect,” “anticipate,” “should,” “believe,” “hope,” “target,” “continued,” “project,” “plan,” “goals,” “opportunity,” “appeal,” “estimate,” “potential,” “predict,” “demonstrates,” “may,” “will,” “might,” “could,” “intend,” “shall,” “possible,” “would,” “approximately,” “likely,” “outlook,” “schedule,” “on track,” “poised,” “pipeline,” and variations of these terms or the negative of these terms and similar expressions are intended to identify these forward-looking statements , but the absence of these words does not mean that a statement is 28 not forward-looking. These forward-looking statements are not guarantees of future performance, conditions or results. Forward-looking statements are based on management’s expectations, certain assumptions, and currently available information. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof and are based on various assumptions as to future events, the occurrence of which necessarily are subject to uncertainties. These forward-looking statements are made subject to certain risks, uncertainties, and other factors, which could cause CTS’ actual results, performance, or achievements to differ materially from those presented in the forward-looking statements. Examples of factors that may affect future operating results and financial condition include, but are not limited to: supply chain disruptions; changes in the economy generally, including inflationary and/or recessionary conditions, and in respect to the business in which CTS operates; unanticipated issues in integrating acquisitions; the results of actions to reposition CTS’ business; rapid technological change; general market conditions in the transportation, as well as conditions in the industrial, aerospace and defense, and medical markets; reliance on key customers; unanticipated public health crises, natural disasters or other events; environmental compliance and remediation expenses; the ability to protect CTS’ intellectual property; pricing pressures and demand for CTS’ products; risks associated with CTS’ international operations, including trade and tariff barriers, exchange rates and political and geopolitical risks (including, without limitation, the potential impact U.S./China relations and the conflict between Russia and Ukraine may have on our business, results of operations and financial condition); the amount and timing of any share repurchases; and the effect of any cybersecurity incidents on our business. Many of these, and other risks and uncertainties, are discussed in further detail in Item 1A. of CTS’ most recent Annual Report on Form 10-K and other filings made with the SEC. CTS undertakes no obligation to publicly update CTS’ forward-looking statements to reflect new information or events or circumstances that arise after the date hereof, including market or industry changes.  Item 3. Quantitative and Qualita tive Disclosures About Market Risk See Item 7A, Quantitative and Qualitative Disclosures about Market Risk, of our Annual Report on Form 10-K for the year ended December 31, 2023. During the three months ended March 31, 2024, there have been no material changes in our exposure to market risk. 29 Item 4. Control s and Procedures Evaluation of Disclosure Controls and Procedures Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this Quarterly Report on Form 10-Q. 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 Quarterly Report on Form 10-Q 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 have been detected. Changes in Internal Control Over Financial Reporting There were no changes in our internal control over financial reporting for the quarter ended March 31, 2024, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. PART II - OTHE R INFORMATION