What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-10-29 compared with 2024-07-30 · 87 added, 74 removed, 138 unchanged (54% of the section changed)

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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.

On July 29, 2024, we acquired 100% of the outstanding membership interests of SyQwest, LLC (“SyQwest”), a leading designer and manufacturer of a broad set of sonar and acoustic sensing solutions primarily for naval applications, for $121.9 million, net of cash and up to $15 million in future contingent consideration.

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

The acquisition was funded from both cash on hand and borrowings on our Revolving Credit Facility.

Results of Operations:

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:

Third Quarter 2024 versus Third Quarter 2023

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

Three Months Ended

June 30, 2024

June 30, 2023

September 30, 2024

September 30, 2023

Percentage of Net Sales –

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Diluted net earnings per share

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%.

Net sales were $132,424 in the third quarter of 2024, a decrease of $2,128 or 1.6% from the third quarter of 2023.

Net sales to the transportation market decreased $12,959 or 17.1% while net sales to other diversified end-markets increased $10,831 or 18.5%.

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.

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.

Partially offsetting the sales decline were sales from our acquisition of SyQwest of $3,615, as well as changes in foreign exchange rates.

Net sales increased $508 year-over-year related to changes in foreign exchange rates primarily due to the U.S.

Dollar depreciating compared to the Chinese Renminbi and Euro.

Gross margin was $49,788 in the third quarter of 2024, an increase of $3,387 or 7.3% from the third quarter of 2023.

Our gross margin percentage increased from 34.5% for the third quarter of 2023 to 37.6% for the third quarter of 2024 primarily due to improved end-market mix, operational improvements, 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 $1,464 primarily due to rate changes between the U.S.

Dollar and the Mexican Peso.

Selling, general and administrative (“SG&A”) expenses were $22,509 or 17.0% of net sales in the third quarter of 2024 versus $18,666 or 13.9% of net sales in the third quarter of 2023.

This increase is primarily related to the reduction of incentive and equity-based compensation expense that occurred in the third quarter of 2023.

Research and development (“R&D”) expenses were $5,031 or 3.8% of net sales in the third quarter of 2024 compared to $6,321 or 4.7% of net sales in the comparable quarter of 2023.

This decrease is primarily related to the timing of non-recurring engineering expense reimbursement during the quarter.

Restructuring charges were $773 or 0.7% of net sales in the third quarter of 2024 compared to $3,226 or 2.4% of net sales in the third quarter of 2023.

The restructuring charges in the quarter ended September 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.

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Three Months Ended

September 30,

Interest expense

Interest income

Other expense, net

Other income (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.

Total other income (expense), net for the quarter ended September 30, 2024 is primarily driven by foreign currency gains, particularly related to the Chinese Renminbi, Euro and Mexican Peso, partially offset by higher interest expense from our increased debt position as a result of our recent acquisition of SyQwest during the quarter ended September 30, 2024.

Three Months Ended

September 30,

Effective tax rate

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.

Our effective income tax rate was 16.8% and 25.4% in the third 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 and tax benefits from the filing of the US federal income tax return..

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

Nine Months ended September 30, 2024 versus Nine Months Ended September 30, 2023

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

Nine Months Ended

September 30, 2024

September 30, 2023

Percentage of Net Sales –

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Operating earnings

Total other expense, net

Total other income (expense), net

Earnings before income taxes

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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.

Net sales were $388,336 in the nine months ended September 30, 2024, a decrease of $37,392 or 8.8% from the nine months ended September 30, 2023.

Net sales to the transportation market decreased $38,530 or 16.6% while net sales to other diversified end-markets increased $1,138 or 0.5%.

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 sales in the industrial end market.

Changes in foreign exchange rates decreased net sales for the nine months ended September 30, 2024 by $674 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.

Gross margin was $141,250 for the nine months ended September 30, 2024, a decrease of $7,545 or 5.1% from the nine months ended September 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.

Our gross margin percentage was 36.4% for the first nine months of 2024, an increase from 35.0% in the first nine months of 2023 primarily due to improved end-market mix, operational improvements, 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 $627.

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.

SG&A expenses were $66,100 or 17.0% of net sales for the nine months ended September 30, 2024 versus $64,339 or 15.1% of net sales for the nine months ended September 30, 2023.

R&D expenses were $17,718 or 4.6% of net sales for the nine months ended September 30, 2024 compared to $19,628 or 4.6% of net sales for the nine months ended September 30, 2023.

Restructuring charges were $3,657 or 0.9% of net sales for the nine months ended September 30, 2024 compared to $6,033 or 1.4% of net sales for the nine months ended September 30, 2023.

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

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

Six Months Ended

Nine Months Ended

September 30,

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

Other income (expense), net

Total other income (expense), net

The reduction in total other income (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.

Nine Months Ended

September 30,

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.

Our effective income tax rate was 17.4% and 21.4% for the nine months ended September 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 and tax benefits from the filing of the US federal income tax return.

Liquidity and Capital Resources

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

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 and cash equivalents were $94,875 at September 30, 2024, and $163,876 at December 31, 2023, of which $86,181 and $99,940, respectively, were held outside the United States.

Total long-term debt was $102,700 as of September 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 $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 $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.

Net cash provided by operating activities was $73,335 during the nine months ended September 30, 2024.

Components of net cash provided by operating activities included net earnings of $44,508, depreciation and amortization expense of $22,644, other net non-cash items of $1,246, and a net cash inflow from changes in assets and liabilities of $4,940.

Net cash provided by operating activities was $56,742 during the nine months ended September 30, 2023.

Components of net cash provided by operating activities included net earnings of $45,212, depreciation and amortization expense of $21,425, other net non-cash items of $5,055, and a net cash outflow from changes in assets and liabilities of $14,950 primarily driven by 2022’s annual bonus payout and an increase in inventory primarily from pre-determined inventory builds, associated with 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.

Cash Flows from Investing Activities

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.

Net cash used in investing activities for the nine months ended September 30, 2024 was $(134,456), driven by payments for the SyQwest acquisition of $(121,913) and for payments on capital expenditures of $(12,543).

Net cash used in investing activities for the nine months ended September 30, 2023 was $(14,595), 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 $11,236.

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Cash Flows from Financing Activities

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).

Net cash used in financing activities for the nine months ended September 30, 2024 was $(7,494).

The net cash outflow was the result of treasury stock purchases of $(34,787), net cash cash borrowings of long-term debt of $35,200, taxes paid on behalf of equity award participants of $(3,154), payments of contingent consideration of $(1,076) and dividends paid of $(3,677).

Net cash used in financing activities for the nine months ended September 30, 2023 was $(39,937).

The net cash outflow was the result of treasury stock purchases of $(25,890), net cash used in the paydown of long-term debt of $(7,006), taxes paid on behalf of equity award participants of $(3,249), and dividends paid of $(3,792).

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Long‑term debt is comprised of the following:

September 30,

Total credit facility

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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 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.

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

On July 29, 2024, we acquired 100% of the outstanding membership interests of SyQwest a leading designer and manufacturer of a broad set of sonar and acoustic sensing solutions primarily for naval applications, for $121.9 million, net of cash and up to $15 million in future contingent consideration.

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

The acquisition was funded from both cash on hand and borrowings on our Revolving Credit Facility.

Critical Accounting Policies and Estimates

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

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

Significant Customers

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Three Months Ended

Six Months Ended

June 30, 2024

June 30, 2023

June 30, 2024

June 30, 2023

Nine Months Ended

September 30, 2024

September 30, 2023

September 30, 2024

September 30, 2023

Toyota Motor Corporation

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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.

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.

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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 including, without limitation the integration of SyQwest, LLC.;

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

the results of actions to reposition CTS’ business;

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

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

Control s and Procedures

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Changes in 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.

There were no changes in our internal control over financial reporting for the quarter ended September 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