What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2024-07-30 compared with 2024-05-01 · 104 added, 56 removed, 108 unchanged (60% of the section changed)

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)

(in thousands, 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.

14 unchanged sentences

of our Annual Report on Form 10-K and other filings made with the SEC.

On July 29, 2024, we acquired substantially all of the assets of SyQwest, LLC (“SyQwest”), a leading designer and manufacturer of a broad set of sonar and acoustic sensing solutions primarily for naval applications, for $125 million, net of cash and debt and up to $15 million in future contingent consideration.

The SyQwest acquisition will strengthen our strategy and scale in the defense end market.

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:

Second Quarter 2024 versus Second Quarter 2023

The following table highlights changes in significant components of the Unaudited Condensed Consolidated Statements of Earnings for the quarters ended June 30, 2024 and June 30, 2023:

Three Months Ended

March 31, 2024

March 31, 2023

June 30, 2024

June 30, 2023

Percentage of Net Sales –

6 unchanged sentences

Operating earnings

Total other (expense) income, net

Total other income (expense), net

Earnings before income taxes

2 unchanged sentences

Diluted net earnings per share

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

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.

Net sales were $130,162 in the second quarter of 2024, a decrease of $15,020 or 10.3% from the second quarter of 2023.

Net sales to the transportation market decreased $17,800 or 21.7% while net sales to non-transportation markets increased $2,780 or 4.4%.

The overall decline in net sales was primarily driven by decreased volumes from our commercial vehicle related products and lower sales to transportation customers in China.

Changes in foreign exchange rates decreased net sales by $552 year-over-year primarily due to the U.S.

Dollar appreciating compared to the Chinese Renminbi and Euro.

Gross margin was $46,372 in the second quarter of 2024, a decrease of $4,370 or 8.6% from the second quarter of 2023.

The year over year decrease was driven by lower sales volumes.

Our gross margin percentage increased from 35.0% for the second quarter of 2023 to 35.6% for the second 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.

Additionally, changes in foreign exchange rates had a net benefit on our gross margin of approximately $414 primarily from our Mexican Peso hedges.

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.

Selling, general and administrative (“SG&A”) expenses were $21,332 or 16.4% of net sales in the second quarter of 2024 versus $23,694 or 16.3% of net sales in the second quarter of 2023.

Research and development (“R&D”) expenses were $6,086 or 4.7% of net sales in the second quarter of 2024 compared to $6,721 or 4.6% of net sales in the comparable quarter of 2023.

Restructuring charges were $1,190 or 1.3% of net sales in the second quarter of 2024 compared to $1,895 or 1.3% of net sales in the second quarter of 2023.

The restructuring charges in the quarter ended June 30, 2024 were primarily related to actions undertaken to better align our cost structure with lower end-market demand.

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.

3 unchanged sentences

Interest income

Other (expense) income, net

Total other (expense) income, net

Other expense, net for 2024 is primarily driven by foreign currency losses primarily related to the Chinese Renminbi.

Other expense, net

Total other income (expense), net

Other expense, net for the quarter ended June 30, 2024 is primarily driven by foreign currency losses, particularly related to the Chinese Renminbi and Mexican Peso, primarily offset by higher interest income from our cash and cash equivalent balances.

Three Months Ended

Effective tax rate

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.

Our effective income tax rate was 17.2% and 19.8% in the second quarters of 2024 and 2023, respectively.

The decrease in the effective income tax rate is primarily attributable to a mix of earnings taxed at lower rates.

Results of Operations:

Six Months ended June 30, 2024 versus Six Months Ended June 30, 2023

The following table highlights changes in significant components of the Unaudited Condensed Consolidated Statements of Earnings for the six months ended June 30, 2024, and June 30, 2023:

Six Months Ended

June 30, 2024

June 30, 2023

Percentage of Net Sales –

Cost of goods sold

Selling, general and administrative expenses

Research and development expenses

Restructuring charges

Total operating expenses

Operating earnings

Total other expense, net

Earnings before income taxes

Income tax expense

Earnings per share:

Diluted net earnings per share

Net sales were $255,912 in the six months ended June 30, 2024, a decrease of $35,264 or 12.1% from the six months ended June 30, 2023.

Net sales to the transportation market decreased $25,572 or 16.4% while net sales to non-transportation markets decreased $9,692 or 7.2%.

The decline in overall net sales was primarily driven by lower volumes of commercial vehicle related products, lower sales to transportation customers in China and decreased volumes from our OEM customers in the industrial end market.

Changes in foreign exchange rates decreased net sales for the six months ended June 30, 2024 by $1,182 due to the U.S.

Dollar appreciating compared to the Chinese Renminbi and Euro.

Gross margin was $91,462 for the six months ended June 30, 2024, a decrease of $10,932 or 10.7% from the six months ended June 30, 2023.

The year over year decrease in gross margin was primarily driven by lower sales volumes.

Our gross margin percentage increased from 35.2% in the first six months of 2023 to 35.7% for first six months 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.

Additionally, changes in foreign exchange rates had a net benefit on our gross margin of approximately $400 primarily from our Mexican Peso hedges.

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.

SG&A expenses were $43,591 or 17.0% of net sales for the six months ended June 30, 2024 versus $45,673 or 15.7% of net sales for the six months ended June 30, 2023.

R&D expenses were $12,687 or 5.0% of net sales for the six months ended June 30, 2024 compared to $13,307 or 4.6% of net sales for the six months ended June 30, 2023.

Restructuring charges were $2,884 or 1.1% of net sales for the six months ended June 30, 2024 compared to $2,807 or 1.0% of net sales for the six months ended June 30, 2023.

The restructuring charges were primarily related to actions undertaken to better align our cost structure with lower end-market demand.

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:

Six Months Ended

Interest expense

Interest income

Other expense, net

Total other expense, net

The reduction in total other expense, net was primarily driven by higher interest income from our short-term investments classified as cash equivalents and lower expense related to foreign exchange losses.

Six Months Ended

Effective tax rate

Our effective income tax rate was 17.8% and 19.5% for the six months ended June 30, 2024 and 2023, respectively.

The decrease in the effective income tax rate is primarily attributable to a mix of earnings taxed at lower rates.

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.

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

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

Cash and cash equivalents were $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 and cash equivalents were $161,246 at June 30, 2024, and $163,876 at December 31, 2023, of which $117,210 and $99,940, respectively, were held outside the United States.

Total long-term debt was $65,000 as of June 30, 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.

Net cash provided by operating activities was $37,940 during the six months ended June 30, 2024.

Components of net cash provided by operating activities included net earnings of $25,826, depreciation and amortization expense of $14,651, other net non-cash items of $629, and a net cash outflow from changes in assets and liabilities of $3,166.

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.

Net cash provided by operating activities was $34,607 during the six months ended June 30, 2023.

Components of net cash provided by operating activities included net earnings of $31,241, depreciation and amortization expense of $14,175, other net non-cash items of $4,295, and a net cash outflow from changes in assets and liabilities of $15,104 primarily driven by 2022’s annual bonus payout and an increase in accounts receivable.

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.

Net cash used in investing activities for the six months ended June 30, 2024 was $8,672, driven by payments on capital expenditures.

Net cash used in investing activities for the six months ended June 30, 2023 was $(11,846), driven by payments for the Maglab acquisition, finalization of the TEWA Temperature Sensors SP.

(“TEWA”) net working capital adjustment of $3,359 and capital expenditures of $8,487.

1 unchanged sentence

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.

Net cash used in financing activities for the six months ended June 30, 2024 was $(32,059).

The net cash outflow was the result of treasury stock purchases of $22,892, net cash used in the paydown of long-term debt of $2,500, taxes paid on behalf of equity award participants of $3,131, payments of contingent consideration of $1,076 and dividends paid of $2,460.

Net cash used in financing activities for the six months ended June 30, 2023 was $(29,967).

The net cash outflow was the result of treasury stock purchases of $17,562, net cash used in the paydown of long-term debt of $6,630, taxes paid on behalf of equity award participants of $3,240, and dividends paid of $2,535.

Capital Resources

5 unchanged sentences

Amount available, subject to covenant restrictions

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

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

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 swing line 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.

3 unchanged sentences

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.

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 March 31, 2024.

We were in compliance with all debt covenants at June 30, 2024.

On July 29, 2024, we acquired substantially all of the assets of SyQwest, LLC for $125 million and additional earn out payments based on future performance.

The acquisition was funded by a combination of cash on hand and borrowings under our Revolving Credit Facility.

Critical Accounting Policies and Estimates

1 unchanged sentence

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 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.

During and as of the three and six months ended June 30, 2024, there were no significant changes in the application of critical accounting policies or estimates.

Significant Customers

1 unchanged sentence

Three Months Ended

March 31, 2024

March 31, 2023

Six Months Ended

June 30, 2024

June 30, 2023

June 30, 2024

June 30, 2023

Toyota Motor Corporation

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

We continue to focus on broadening our customer base to diversify our non-transportation end market exposure.

Forward ‑ Looking Statements

2 unchanged sentences

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

not forward-looking.

These forward-looking statements are not guarantees of future performance, conditions or results.

5 unchanged sentences

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;

unanticipated issues in integrating acquisitions including, without limitation the integration of SyQwest, LLC.;

the results of actions to reposition CTS’ business;

11 unchanged sentences

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.

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.

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.

During the six months ended June 30, 2024, there have been no material changes in our exposure to market risk.

Control s and Procedures

7 unchanged sentences

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.

There were no changes in our internal control over financial reporting for the quarter ended June 30, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHE R INFORMATION

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis