What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2025-04-30 compared with 2024-10-29 · 62 added, 122 removed, 103 unchanged (64% of the section changed)

Management’s Discussion and Analysis of Fin ancial Condition and Results of Operations (“MD&A”)

(in thousands, except percentages and per share amounts)

(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, 2024.

CTS Corporation (“CTS”, “we”, “our” or “us”) is a leading designer and manufacturer of products that Sense, Connect and Move.

CTS is a global manufacturer of sensors, connectivity components, and actuators.

CTS was established in 1896 as a provider of high-quality telephone products and was incorporated as an Indiana corporation in February 1929.

Our principal executive offices are located in Lisle, Illinois.

We design, manufacture, and sell a broad line of sensors, connectivity components, and actuators primarily to original equipment manufacturers (“OEMs”), tier one suppliers for the aerospace and defense, industrial, medical, and transportation markets, and the U.S.

Our vision is to be a leading provider of sensing and motion devices as well as connectivity components, enabling an intelligent and seamless world.

4 unchanged sentences

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.

We operate manufacturing facilities in North America, Asia, and Europe.

Sales and marketing are accomplished through our sales engineers.

We also utilize independent manufacturers' representatives and distributors to extend our sales capability.

There is an increasing proliferation of sensing and motion applications within various markets we serve.

1 unchanged sentence

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.

We are subject to a number of challenges including, without limitation, periodic market softness, competition from other suppliers, changes in technology, changes in the economy generally, including inflationary and/or recessionary conditions and increased tariffs, as well as 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.

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:

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:

First Quarter 2025 versus First Quarter 2024

The following table highlights changes in significant components of the Unaudited Condensed Consolidated Statements of Earnings for the quarters ended March 31, 2025 and March 31, 2024:

Three Months Ended

September 30, 2024

September 30, 2023

March 31, 2025

March 31, 2024

Percentage of Net Sales –

11 unchanged sentences

Diluted net earnings per share

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.

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.

Net sales were $125,769 in the first quarter of 2025, essentially flat with the first quarter of 2024.

Net sales to the diversified end markets increased $8,046 or 13.6% while net sales to transportation markets decreased $8,027 or 12.1%.

The SyQwest acquisition added net sales of $2,987.

Changes in foreign exchange rates also decreased net sales by $835 year-over-year primarily due to the U.S.

Dollar appreciating compared to the Euro.

Gross margin was $46,549 in the first quarter of 2025, an increase of $1,459 or 3.2% from the first quarter of 2024.

The increase in gross margin was primarily driven by improved mix of sales by end market.

Changes in foreign exchange rates increased gross margin by $1,739 year-over-year primarily due to the U.S.

Dollar depreciating compared to the Mexican Peso.

Losses from our hedges partially offset the positive foreign exchange impact.

See Note 11, “Derivative Financial Instruments” in the Notes to the Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q for further information.

As a result, our gross margin percentage increased from 35.9% for the first quarter of 2024 to 37.0% for the first quarter of 2025.

Selling, general and administrative (“SG&A”) expenses were $23,623 or 18.8% of net sales in the first quarter of 2025, versus $22,260 or 17.7% of net sales in the first quarter of 2024.

The increase in SG&A expenses as a percentage of net sales was primarily driven by higher depreciation and amortization expense in the first quarter of 2025.

The SyQwest acquisition added additional depreciation and amortization expense of $1,378.

Research and development (“R&D”) expenses were $6,190 or 4.9% of net sales in the first quarter of 2025 compared to $6,601 or 5.2% of net sales in the first quarter of 2024.

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 $451 or 0.4% of net sales in the first quarter of 2025 compared to $1,693 or 1.3% of net sales in the first quarter of 2024.

The restructuring charges in the quarter ended March 31, 2025 were primarily related to headcount reductions in response to softening demand in the transportation end market.

See Note 7, “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.

1 unchanged sentence

Three Months Ended

September 30,

Interest expense

1 unchanged sentence

Other income (expense), net

Total other income (expense), net

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.

Total other expense, net

Interest income decreased due to lower investments of available cash into short-term, cash equivalent, high-yield deposit accounts as a result of the SyQwest acquisition in the third quarter of 2024.

Interest expense increased due to higher borrowings to fund the SyQwest acquisition.

Three Months Ended

September 30,

Effective tax rate

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:

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 –

Cost of goods sold

Selling, general and administrative expenses

Research and development expenses

Restructuring charges

Total operating expenses

Operating earnings

Total other income (expense), net

Earnings before income taxes

Income tax expense

Earnings per share:

Diluted net earnings per share

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 $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 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 $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.

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:

Nine Months Ended

September 30,

Interest expense

Interest income

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 17.4% 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.

Our effective income tax rate was 17.1% and 18.6% in the first quarters of 2025 and 2024, respectively.

The decrease in the effective income tax rate is primarily attributed to a change in mix of earnings taxed at lower rates and the establishment of valuation allowances on certain tax credits in the first quarter of 2024.

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

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

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

Cash and cash equivalents were $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 and cash equivalents were $90,288 at March 31, 2025, and $94,334 at December 31, 2024, of which $89,210 and $92,944, respectively, were held outside the United States.

Total long-term debt was $86,700 as of March 31, 2025 and $92,300 as of December 31, 2024.

Cash Flow Overview

Cash Flows from Operating Activities

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.

Net cash provided by operating activities was $15,518 during the three months ended March 31, 2025.

Components of net cash provided by operating activities included net earnings of $13,367, depreciation and amortization expense of $8,494, other net non-cash items of $1,339, and a net cash outflow from changes in assets and liabilities of $7,682.

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.

Cash Flows from Investing Activities

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.

See Note 3 "Business Acquisitions" in the Notes to the Condensed Consolidated Financial Statements.

Net cash used in investing activities for the three months ended March 31, 2025 and the three months ended March 31, 2024 were $4,465 and $4,035, respectively.

Capital expenditures made up the investing activities for both periods.

Cash Flows from Financing Activities

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).

Net cash used in financing activities for the three months ended March 31, 2025 was $15,900.

The net cash outflow was the result of treasury stock purchases of $6,465 (net of excise taxes unpaid), dividends paid of $1,201, taxes paid on behalf of equity award participants of $2,634, and net cash used in the paydown of long-term debt of $5,600.

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 tax), dividends paid of $1,233, and taxes paid on behalf of equity award participants of $3,117.

Capital Resources

1 unchanged sentence

Long‑term debt is comprised of the following:

September 30,

Total credit facility

2 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 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.

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 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.

3 unchanged sentences

The contractual rate of these arrangements ranges from 1.49% to 2.45%.

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

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 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.

We were in compliance with all debt covenants at March 31, 2025.

Critical Accounting Policies and Estimates

3 unchanged sentences

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, 2024.

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.

During and as of the three months ended March 31, 2025, there were no significant changes in the application of critical accounting policies or estimates.

Significant Customers

1 unchanged sentence

Three Months Ended

Nine Months Ended

September 30, 2024

September 30, 2023

September 30, 2024

September 30, 2023

March 31, 2025

March 31, 2024

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.

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.

4 unchanged sentences

supply chain disruptions;

changes in the economy generally, including inflationary and/or recessionary conditions, and in respect to the business in which CTS operates;

changes in the economy generally, including inflationary and/or recessionary conditions and increased tariffs, and in respect to the business in which CTS operates;

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

7 unchanged sentences

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);

risks associated with CTS’ international operations, including trade and tariff barriers, exchange rates and political and geopolitical risks (including, without limitation, the impact of tariffs on China, Canada and Mexico, and other nations, the potential impact of U.S./China relations and the impact of 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;

5 unchanged sentences

See Item 7A, Quantitative and Qualitative Disclosures about Market Risk, of our Annual Report on Form 10-K for the year ended December 31, 2024.

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

During the three months ended March 31, 2025, 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 September 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 March 31, 2025, 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