What changed in this filing

/stocks — the workspaceLOADING

Item 8. Financial Statements and Supplementary Data

2021-02-25 compared with 2020-02-20 · 368 added, 310 removed, 991 unchanged (41% of the section changed)

7 unchanged sentences

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated February 25, 2021 expressed an unqualified opinion.

Change in accounting principle

As discussed in Note 1 to the financial statements, the Company has changed its method of accounting for operating leases as of January 1, 2019 due to the adoption of ASU 2016-02, Leases (Topic 842).

Basis for opinion

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The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

(1) relates to accounts or disclosures that are material to the financial statements;

and (2) involved our especially challenging, subjective, or complex judgments.

The communication of a critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Acquisition of Quality Thermistor, Inc.

As described further in Note 19 to the financial statements, the Company acquired Quality Thermistor, Inc.

(QTI) on July 31, 2019 for a total purchase price of $75 million.

Accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based on their respective fair values, including identified intangible assets of approximately $33 million, which is primarily comprised of customer relationships of $31 million.

The Company estimated the fair value of the customer relationships using the multi-period excess earnings method, which is an income approach that required management to make significant estimates and assumptions related to future revenues and cash flows and the selection of the discount rate.

We identified the measurement of the acquisition-date fair value of the acquired customer relationships as a critical audit matter.

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The principal consideration for our determination that the acquisition-date fair value of the customer relationships is a critical audit matter was the evaluation required a high degree of estimation uncertainty in determining the following internally developed assumptions for which there was limited observable market information:

1) forecasted revenue growth rates for existing customers, 2) estimated customer attrition rate, and 3) the discount rate.

Goodwill impairment assessment

The Company’s consolidated goodwill balance was $109.5 million as of December 31, 2020.

As described in Note 1 and Note 8 to the consolidated financial statements, the Company evaluates goodwill for impairment at the reporting unit level annually and performed a quantitative impairment assessment as of October 1, 2020 for each of its three reporting units.

The quantitative impairment assessment involves the comparison of the fair value of a reporting unit to its carrying amount.

The Company determines the fair value of each reporting unit using a combination of discounted cash flow analysis and market-based valuation methodologies, which requires significant management judgment.

We have identified the quantitative goodwill impairment assessment as a critical audit matter.

The principal consideration for our determination that the quantitative impairment assessment is a critical matter was the significant auditor judgment required to evaluate the reporting units’ forecasted revenues, forecasted cash flows over a multi-year period, discount rates, and estimated valuation multiples.

Our audit procedures related to the critical audit matter included the following, among others:

Tested certain internal controls over the Company’s acquisition-date valuation process, including controls over the development of the key assumptions such as the forecasted revenues, customer attrition rate, and the discount rate.

Evaluated the Company’s forecasted revenue growth rates for existing customers by comparing the forecasted growth assumptions to peer and historical results.

Tested the Company’s selected customer attrition rate by comparing it to QTI’s historical customer attrition data.

Assessed the Company’s discount rate by comparing it against a discount rate range that was independently developed using a publicly available market data for comparable peers and performing a sensitivity analysis based on that data.

Specialists were utilized in evaluating significant assumptions, including the customer attrition rate and discount rate.

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Tested the design and operating effectiveness of the key controls over the Company’s goodwill impairment assessment, including controls over the development of the significant assumptions such as the forecasted revenues and cash flows, discount rates, and estimated valuation multiples ;

Evaluated the forecasted revenues and cash flows for each reporting unit by comparing the forecasted growth assumptions to both current and historical results, as well as forecasted industry trends;

Assessed the Company’s discount rates for each reporting unit by comparing them against discount rates independently developed using publicly available market data for comparable peers;

Assessed the estimated valuation multiples for each reporting unit by evaluating the reasonableness of the selected comparable publicly traded companies and the resulting market multiples calculations.

Specialists were involved in evaluating the valuation methodology and significant assumptions such as discount rates and estimated valuation multiples.

/s/ GRANT THORNTON LLP

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Consolidated Statements of Earnings

(in thousands)

(in thousands, except per share amounts)

Years Ended December 31,

3 unchanged sentences

Restructuring charges

(Gain) loss on sale of assets

Gain on sale of assets

Operating earnings

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Interest income

Other (expense) income

Total other (expense) income, net

Other income (expense)

Total other income (expense), net

Earnings before taxes

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Years Ended December 31,

Other comprehensive earnings (loss):

Other comprehensive (loss) earnings:

Changes in fair market value of derivatives, net of tax

1 unchanged sentence

Cumulative translation adjustment, net of tax

Other comprehensive earnings (loss)

Other comprehensive (loss) earnings

Comprehensive earnings

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Depreciation and amortization

Pensions and other post-retirement plan expense

Stock-based compensation

Restructuring and impairment charges

Pension and other post-retirement plan expense

Asset impairment charges

Restructuring non-cash charges

Deferred income taxes

(Gain) loss on sale of assets

Loss (gain) on foreign currency hedges, net of cash received

Changes in assets and liabilities, net of acquisitions and divestitures:

Gain on sales of fixed assets

(Gain) loss on foreign current hedges, net of tax

Changes in assets and liabilities, net of acquisitions:

Accounts receivable

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Accrued payroll and benefits

Accrued expenses and other liabilities

Income taxes payable

Operating lease liabilities

Other liabilities

Accrued expenses and other liabilities

Pension and other post-retirement plans

Total adjustments

Net cash provided by operating activities

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Net cash used in investing activities

Cash flows from financing activities:

CASH FLOWS FROM FINANCING ACTVITIES:

Payments of long-term debt

( 3,792,550 )

( 1,885,800 )

( 1,060,100 )

Proceeds from borrowings of long-term debt

Payments of short-term notes payable

Purchase of treasury stock

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Taxes paid on behalf of equity award participants

Net cash provided by (used) in financing activities

Contingent consideration payment

Net cash (used in) provided by financing activities

Effect of exchange rate on cash and cash equivalents

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Cash paid for income taxes, net

Non-cash investing and financing activities:

Non-cash financing and investing activities:

Capital expenditures incurred not paid

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Comprehensive

Earnings/(Loss)

Balances at January 1, 2018

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Cash dividends of $ 0.16 per share

Acquired 342,100 shares of treasury stock

Issued shares on vesting of restricted stock units

Implementation of ASU No.

Stock compensation

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Issued shares on vesting of restricted stock units

Implementation of ASU No.

Stock compensation

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Description of Business:

CTS Corporation ("CTS", "we", "our", "us" or the "Company") is a global manufacturer of sensors, electronic components, and actuators operating as a single reportable business segment.

CTS Corporation ("CTS", "we", "our", "us" or the "Company") is a global manufacturer of sensors, connectivity components, and actuators operating as a single reportable business segment.

We operate manufacturing facilities located throughout North America, Asia and Europe and service major markets globally.

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All highly liquid investments with maturities of three months or less at the date of purchase are considered to be cash equivalents.

Accounts Receivable and Allowance for Doubtful Accounts:

Accounts Receivable and Allowance for Credit Losses:

Accounts receivable consists primarily of amounts due from normal business activities.

We maintain an allowance for doubtful accounts for estimated uncollectible accounts receivable.

Our reserves for estimated credit losses are based upon historical experience and specific customer collection issues.

We maintain an allowance for credit losses for estimated uncollectible accounts receivable.

Our reserves for estimated credit losses are based upon historical experience, specific customer collection issues, current conditions and reasonable and supportable forecasts that affect the collectability of the remaining cashflows over the contractual terms of our receivables and other financial assets.

Accounts are written off against the allowance account when they are determined to no longer be collectible.

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We do not require collateral.

The allowance for doubtful accounts is based on management's estimates of the collectability of its accounts receivable after analyzing historical bad debts, customer concentrations, customer creditworthiness, and current economic trends.

Uncollectible trade receivables are charged against the allowance for doubtful accounts when all reasonable efforts to collect the amounts due have been exhausted.

The allowance for credit losses is based on management's estimates of the collectability of its accounts receivable after analyzing historical credit losses, customer concentrations, customer creditworthiness, current economic trends, specific customer collection issues, and reasonable and supportable forecasts that affect the collectability of the remaining cashflows over the contractual terms of our receivables.

Uncollectible trade receivables are charged against the allowance for credit losses when all reasonable efforts to collect the amounts due have been exhausted.

Our net sales to significant customers as a percentage of total net sales were as follows:

Years Ended December 31,

Honda Motor Co.

Toyota Motor Corporation

Honda Motor Co.

We sell parts to these three transportation customers for certain vehicle platforms under purchase agreements that have no volume commitments and are subject to purchase orders issued on a periodic basis.

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1) recognize the funded status of a benefit plan (measured as the difference between plan assets at fair value and the projected benefit obligation) in our Consolidated Balance Sheets;

2) recognize the gains or losses and prior service costs or credits that arise during the period but are not recognized as components of net periodic benefit/cost as a component of other comprehensive earnings;

2) recognize the gains or losses and prior service costs or credits that arise during the period but are not recognized as components of

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net periodic benefit/cost as a component of other comprehensive earnings;

and 3) measure defined benefit plan assets and obligations as of the date of our fiscal year-end.

During 2020, the Company commenced the termination process on our primary U.S.

Pension Plan (“U.S.

Plan”) and expects to offer employees a lump sum settlement and then complete the transfer of any remaining U.S.

Plan assets to a third-party administrator, which the Company expects to complete by the end of 2021.

See Note 7, "Retirement Plans" for further information.

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Property, Plant and Equipment:

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Depreciation is computed primarily over the estimated useful lives of the various classes of assets using the straight-line method.

Useful lives for buildings and improvements range from 10 to 45 years , machinery and equipment from 3 to 15 years , and software from 2 to 15 years .

Useful lives for buildings and improvements range from 10 to 45 year s, machinery and equipment from 3 to 15 year s, and software from 2 to 15 year s.

Depreciation on leasehold improvements is computed over the lesser of the lease term or estimated useful lives of the assets.

Amounts expended for maintenance and repairs are charged to expense as incurred.

Major overhauls that extend the useful lives of existing assets are capitalized.

Upon disposition, any related gains or losses are included in operating earnings .

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Absent any interim indicators of impairment, the Company tests for goodwill impairment as of the first day of its fourth fiscal quarter of each year.

In addition to goodwill, we also have acquired in-process research and development ("IPR&D") intangible assets that are treated as indefinite-lived intangible assets and therefore not subject to amortization until the completion or abandonment of the associated research and development efforts.

If these efforts are abandoned in the future, the carrying value of the IPR&D asset will be expensed.

If the research and development efforts are successfully completed, the IPR&D will be reclassified as a finite-lived asset and amortized over its useful life.

We have the option to perform a qualitative assessment (commonly referred to as "step zero" test) to determine whether further quantitative analysis for impairment of goodwill and indefinite-lived intangible assets is necessary.

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If, after assessing the totality of events or circumstances, we determine that it is not more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, we do not need to perform a quantitative analysis.

We completed our annual impairment test during 2019 by performing a qualitative assessment and determined that our goodwill was not impaired as of the measurement date.

We have not recorded any impairment of goodwill or other indefinite-lived intangible assets in the years ended December 31, 2019 , 2018 and 2017 .

We typically perform a quantitative assessment at least every three years, or as conditions require.

Our previous quantitative test was in 2017, therefore, we performed the current year assessment using a quantitative approach .

Based upon our latest assessment, we determined that our goodwill was no t impaired as of October 1, 2020.

If these efforts are abandoned in the future, the carrying value of the IPR&D asset will be expensed.

If the research and development efforts are successfully completed, the IPR&D will be reclassified as a finite-lived asset and amortized over its useful life.

In the third quarter of 2020, due to the restructuring actions further outlined in Note 9, we identified a triggering event associated with a specific asset group including IPR&D due to executed restructuring actions.

This resulted in the

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recognition of $ 2,200 of impairment charges, and a revaluation of associated contingent liabilities totaling $ 1,900 .

The net impact of $ 300 was recorded as restructuring charges in the Consolidated Statements of Earnings.

Other Intangible Assets and Long-lived Assets:

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If an impairment test is warranted, recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the sum of the undiscounted cash flows expected to result from the use and the eventual disposition of the asset.

If such assets are considered to be impaired, the

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impairment to be recognized is measured by the amount in which the carrying amount of the assets exceeds the fair value of the assets.

If such assets are considered to be impaired, the impairment to be recognized is measured by the amount in which the carrying amount of the assets exceeds the fair value of the assets.

Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

We recorded a charge of $ 1,016 during the first quarter due to the impairment of a specific asset group that was recorded in selling, general and administrative expenses in the Consolidated Statements of Earnings.

Intangible assets (excluding indefinite-lived intangible assets) consist primarily of technology, customer lists and relationships, patents, and trade names.

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Furthermore, we may engage in activities that develop tooling machinery and equipment for our customers.

We occasionally enter into agreements with our customers whereby we receive a contractual guarantee to be reimbursed the costs we incur to construct molds, dies, and other tools that are used to make many of the products we sell.

We occasionally enter into agreements with our customers whereby we receive a contractual guarantee based on achieving milestones to be reimbursed the costs we incur in the product development process or to construct molds, dies, and other tools that are used to make many of the products we sell.

The costs we incur are included in other current assets on the Consolidated Balance Sheets until reimbursement is received from the customer.

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As of December 31,

Cost of molds, dies and other tools included in other current assets

Cost of molds, dies and other tools included in other

current assets

Financial Instruments:

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We estimate the fair value of our financial instruments as follows:

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Method for determining fair value

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We have debt issuance costs related to our long-term debt that are being amortized using the straight-line method over the life of the debt.

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Stock-Based Compensation:

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The amount of compensation expense recognized for PSUs is dependent upon a quarterly assessment of the likelihood of achieving the performance conditions and is subject to adjustment based on management's assessment of the Company's performance relative to the target number of shares performance criteria.

Forfeitures are recorded as they occur.

See Note 17, "Stock-Based Compensation" for further information.

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dollar as the functional currency with all remeasurement adjustments included in the determination of net earnings.

Foreign currency (losses) gains recorded in the Consolidated Statement of Earnings includes the following:

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Foreign currency gains (losses) recorded in the Consolidated Statement of Earnings includes the following:

Years Ended December 31,

Foreign currency (losses) gains

Foreign currency gains (losses)

The assets and liabilities of our U.K.

2 unchanged sentences

Our Consolidated Statement of Earnings accounts are translated at the average rates during the period.

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Shipping and Handling:

2 unchanged sentences

When applicable, we classify sales taxes on a net basis in our consolidated financial statements.

Changes in Accounting Principles:

Beginning in January 2019, CTS adopted the provisions of Accounting Standards Update ("ASU") 2016-02, " Leases (Topic 842) " under the optional transition method, which requires, if necessary, a cumulative effect adjustment to the opening balance of retained earnings.

The lease liability is based on the present value of minimum lease payments discounted using our secured incremental borrowing rate at the date of adoption.

Existing deferred rent liabilities, resulting from our historical practice of using the straight line method for recognizing lease expense, were reclassified upon adoption to reduce the measurement of the lease assets.

We elected the package of practical expedients permitted under the transition guidance, which among other things, allows us to carry forward the historical accounting relating to lease identification and classification for existing leases at adoption.

Our leases are classified as operating leases and expense is recorded in a manner similar to historical accounting guidance.

We have also elected the practical expedient to not separate lease and non-lease components for the majority of our leases and to keep leases with an initial term of 12 months or less off of the balance sheet.

Upon adoption we recorded a lease liability of $ 24,792 and a right of use asset of $ 22,066 .

No adjustment to the opening balance of retained earnings was required.

Reclassifications:

Certain reclassifications have been made to prior year amounts to conform to the current year presentation.

The reclassifications had no impact on previously reported net earnings.

Recently Issued Accounting Pronouncements

2019-12 "Simplifying the Accounting for Income Taxes"

In December 2019, the Financial Accounting Standards Board (“FASB”) issued ASU 2019-12, Simplifying the Accounting for Income Taxes , as part of its Simplification Initiative to reduce the cost and complexity in accounting for income taxes.

ASU 2019-12 removes certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences.

ASU 2019-12 also amends other aspects of the guidance to help simplify and promote consistent application of GAAP.

The guidance is effective for interim and annual periods beginning after December 15, 2020, with early adoption permitted.

We will adopt this ASU in the first quarter of 2020 and it is not expected to have a material impact on our consolidated financial statements.

Accounting Pronouncements Recently Adopted

2018-14 "Compensation - Retirement Benefits - Defined Benefit Plans - General"

In August 2018, the FASB issued ASU No.

In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No.

2018-14, " Compensation - Retirement Benefits - Defined Benefit Plans - General ." This ASU modifies the disclosure requirements for defined benefit and other postretirement plans.

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Adoption on a retrospective basis for all periods presented is required.

This ASU will impact our financial statement disclosures but will not have an impact on our consolidated financial position, results of operations, or cash flows.

We have applied the requirements of this ASU to the financial statements.

2018-13 "Fair Value Measurement (Topic 820):

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Early adoption is permitted upon issuance of the standard for disclosures modified or removed with a delay of adoption of the additional disclosures until their effective date.

We will adopt this ASU in the first quarter of 2020 it is not expected to have a material impact on our financial statement disclosures.

We adopted this ASU on January 1, 2020 and it did not have a material impact on our financial statements.

2016-16 "Income Taxes (Topic 740) Intra-Entity Transfers of Assets Other Than Inventory"

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GAAP prohibits the recognition of current and deferred income taxes for intra-entity asset transfers until the asset is sold to a third party.

This ASU will now require companies to recognize the income tax effect of an intra-entity asset transfer (other than inventory)

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when the transaction occurs.

This ASU will now require companies to recognize the income tax effect of an intra-entity asset transfer (other than inventory) when the transaction occurs.

This ASU is effective for public companies, for fiscal years beginning after December 15, 2019 and interim periods within those annual reporting periods.

Early adoption is permitted and is to be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption.

We will adopt this ASU during the first quarter of 2020 and it is not expected to have a material impact on our financial statements.

We adopted this ASU on January 1, 2020 and it did not have a material impact on our financial statements.

ASU 2016-13 " Financial Instruments - Credit Losses (Topic 326):

2 unchanged sentences

Measurement of Credit Losses on Financial Instruments , which amends the current accounting guidance and requires the measurement of all expected losses based on historical experience, current conditions and reasonable and supportable forecasts.

For trade receivables, loans, and other financial instruments, we will be required to use a forward-looking expected loss model rather than the incurred loss model for recognizing credit losses which reflects losses that are probable.

For trade receivables, loans, and other financial

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instruments, we will be required to use a forward-looking expected loss model rather than the incurred loss model for recognizing credit losses which reflects losses that are probable.

The standard will become effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted.

Application of the amendments is through a cumulative-effect adjustment to retained earnings as of the effective date.

We adopted this ASU on January 1, 2020 and we have determined that it will not have a material impact on our financial statements.

We adopted this ASU on January 1, 2020 and it did not have a material impact on our financial statements.

Recently Issued Accounting Pronouncements

2020-04 "Reference Rate Reform (Topic 848):

Facilitation of the Effects of Reference Rate Reform on Financial Reporting"

In March 2020, the FASB issued ASU 2020-04, “ Reference Rate Reform (Topic 848):

Facilitation of the Effects of Reference Rate Reform on Financial Reporting ”, which provides temporary optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting as it relates to our LIBOR indexed instruments.

ASU 2020-04 provides optional expedients and exceptions for applying U.S.

GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met.

ASU 2020-04 is effective for all entities as of March 12, 2020 through December 31, 2022, and an entity may elect to apply ASU 2020-04 for contract modifications by Topic or Industry Subtopic as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued.

We are currently evaluating the impact of the transition from LIBOR to alternative reference interest rate in our financial instruments.

Our LIBOR based credit facility includes a provision for the determination of a successor LIBOR rate, and we are still evaluating the impact to potential future hedging activities.

2019-12 "Simplifying the Accounting for Income Taxes"

In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes , as part of its Simplification Initiative to reduce the cost and complexity in accounting for income taxes.

ASU 2019-12 also amends other aspects of the guidance to help simplify and promote consistent application of GAAP.

The guidance is effective for interim and annual periods beginning after December 15, 2020, with early adoption permitted.

We do not expect the adoption of this ASU to have a material impact on our financial statements or results .

NOTE 2 – Revenue Recognition

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Contract assets will be reviewed for impairment when events or circumstances indicate that they may not be recoverable.

To the extent the transaction price includes variable consideration, we estimate the amount of variable consideration that should be included in the transaction price utilizing the most likely amount method based on an analysis of historical experience and current facts and circumstances, which requires significant judgment.

Variable consideration is included in the transaction price if, in our judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur.

Contract Assets and Liabilities

Contract assets and liabilities included in our Consolidated Balance Sheets are as follows:

As of December 31,

Contract Assets

Prepaid rebates included in Other current assets

Prepaid rebates included in Other assets

Total Contract Assets

Contract Liabilities

Customer discounts and price concessions included in Accrued expenses and other liabilities

Customer rights of return included in Accrued expenses and other liabilities

Total Contract Liabilities

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During the twelve months ended December 31, 2019 , we recognized revenues of $ 256 that was included in contract liabilities at the beginning of the period.

Disaggregated Revenue

D isaggregated Revenue

The following table presents revenues disaggregated by the major markets we serve:

Twelve Months Ended December 31,

Twelve Months Ended

Transportation

Aerospace & Defense

NOTE 3 — Accounts Receivable

The components of accounts receivable are as follows:

NOTE 3 - Business Acquisitions

Sensor Scientific, Inc.

On December 30, 2020, we acquired 100 % of the outstanding shares of Sensor Scientific, Inc.

SSI is a manufacturer of high-quality thermistors and temperature sensor assemblies serving original equipment manufacturers (OEMs) for applications that require precision and reliability in the medical, industrial and defense markets.

SSI has complementary capabilities with our existing temperature sensing platform and expands our presence in the medical end market.

It also provides high quality ceramic processing capabilities and valuable customer partnerships that expands our temperature sensing product portfolio and builds on our strategy to focus on innovative products that sense, connect and move.

The purchase price, which includes assumed changes in working capital, of $ 10,309 has been allocated to the fair values of assets and liabilities acquired as of December 30, 2020.

The allocation of purchase price is preliminary pending the completion of the valuation of intangible assets and finalization of management's estimates.

The final purchase price allocation may result in a materially different allocation than that recorded as of December 31, 2020.

The following table summarizes the consideration paid and the fair values of the assets acquired, and the liabilities assumed at the date of acquisition:

Consideration Paid

Cash paid, net of cash acquired of $ 470

Contingent consideration

Purchase price

Fair Values at

December 30, 2020

Current assets

Property, plant and equipment

Intangible assets

Fair value of assets acquired

Less fair value of liabilities acquired

Purchase price

Goodwill represents value the Company expects to be created by combining the operations of the acquired business with the Company's operations, including the expansion of customer relationships within our existing business, access to new customers, and potential cost savings and synergies.

Goodwill related to the acquisition is expected to be deductible for tax purposes.

All contingent consideration is payable in cash and is based on success factors related to the integration process as well as upon the achievement of a revenue performance target through the year ending December 31, 2022.

The Company recorded $ 2,000 as the acquisition date fair value of the contingent consideration based on an estimate of the probability of achieving the performance target s.

This represents the maximum amount of contingent consideration payable.

This amount is also reflected as an addition to purchase price and will be evaluated quarterly.

The fair value of the contingent consideration requires significant judgment.

The Company's fair value estimates used in the contingent consideration valuation are considered Level 3 fair value measurements.

The fair value

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estimates were based on assumptions management believes to be reasonable, but that are inherently uncertain, including estimates of future revenues and timing of events and activities that are expected to take place.

Intangible assets acquired have been assigned a provisional value of $ 5,161 and an estimated weighted average amortization period of 10 years.

They are included as customer lists/relationships in our Consolidated Balance Sheets.

Due to the timing of the acquisition, the identification and valuation of all intangible assets remains incomplete;

however, management used historical experience and projections to estimate the potential value at December 31, 2020.

The amount and assumptions included above remain an estimate that will be adjusted once purchase accounting is complete.

No revenues or earnings from SSI are included in our Consolidated Statements of Earnings.

Quality Thermistor, Inc.

On July 31, 2019, we acquired 100 % of the outstanding shares of Quality Thermistor, Inc.

(QTI) for $ 75 million plus a contingent earn out of up to $ 5 million based on sales performance objectives.

The purchase price includes adjustments for debt assumed and changes in working capital.

QTI, doing business as QTI Sensing Solutions, is a leading designer and manufacturer of high-quality temperature sensors serving original equipment manufacturers with mission-critical applications in the industrial, aerospace, defense and medical markets.

This acquisition provides us with a new core temperature sensing technology that expands our sensing product portfolio, while increasing our presence in the industrial and medical markets.

The final purchase price of $ 73,906 has been allocated to the fair values of assets and liabilities acquired as of July 31, 2019.

The following table summarizes the consideration paid and the fair values of the assets acquired, and the liabilities assumed at the date of acquisition :

Consideration Paid

Cash paid, net of cash acquired of $ 567

Contingent consideration

Purchase price

Fair Values at

July 31, 2019

Current assets

Property, plant and equipment

Intangible assets

Fair value of assets acquired

Less fair value of liabilities acquired

Purchase price

Goodwill related to the acquisition is expected to be deductible for tax purposes.

The contingent earn-out was payable in cash upon the achievement of a revenue performance target for the year ending December 31, 2019.

The Company recorded contingent consideration for the earn out of $ 1,056 as of December 31, 2019 based on the achievement performance target for the full year 2019 results and the balance was paid out in Q1 2020.

This amount was reflected as an addition to purchase price and was settled in Q1 2021.

The following table summarizes the carrying amounts and weighted average lives of the acquired intangible assets:

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Carrying Value

Customer lists/relationships

Trademarks, tradenames, and other intangibles

Results of operations for QTI are included in our consolidated financial statements beginning on July 31, 2019.

The amount of net sales and net loss from QTI since the acquisition date that have been included in the Consolidated Statements of Earnings are as follows:

For the period July

31, 2019 through

December 31, 2019

NOTE 4 — Accounts Receivable, net

The components of accounts receivable, net are as follows:

As of December 31,

Accounts receivable, gross

Allowance for doubtful accounts

Allowance for credit losses

Accounts receivable, net

NOTE 4 — Inventories

Inventories consist of the following:

NOTE 5 — Inventories, net

Inventories, net consist of the following:

As of December 31,

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Inventories, net

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NOTE 5 — Property, Plant and Equipment

Property, plant and equipment is comprised of the following:

NOTE 6 — Property, Plant and Equipment, net

Property, plant and equipment, net is comprised of the following:

As of December 31,

7 unchanged sentences

Depreciation expense

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NOTE 7 — Retirement Plans

2 unchanged sentences

Pension plans covering hourly employees generally provide benefits of stated amounts for each year of service.

All benefits for the U.S.

based pension plan were frozen in 2017 and 2013 for union and non-union employees, respectively.

We also provide post-retirement life insurance benefits for certain retired employees.

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locations were December 31, 2020, and 2019.

During 2017, we offered certain former vested employees in our U.S.

pension plan a one-time option to receive a lump sum distribution of their benefits from pension plan assets.

The pension plan made approximately $ 23,912 in lump sum payments to settle its obligation to these participants.

These settlement payments decreased the projected benefit obligation and plan assets by $ 23,912 , and resulted in a non-cash settlement charge of $ 13,476 related to unrecognized net actuarial losses that were previously included in accumulated other comprehensive loss.

The measurement date of this settlement was December 31, 2017 .

In February 2020, the CTS Board of Directors authorized and empowered management to explore termination of our U.S.

based pension plans at management's discretion, subject to certain conditions.

Management has not yet made a final decision on whether to pursue a plan termination and the potential timing thereof.

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In February 2020, the CTS Board of Directors authorized management to explore termination of the U.S.

Pension Plan (“Plan”) at management's discretion, subject to certain conditions.

On June 1, 2020, we amended the Plan whereby we set an effective termination date of July 31, 2020.

In February 2021, we received the determination letter from the Internal Revenue Service that allows us to proceed with the termination process.

The completion of the Plan termination process, including offering lump sum settlements and the final purchases of annuities, is expected to occur in 2021.

We do not expect any cash contributions from the Company to the Plan as a result of this termination because plan assets significantly exceed estimated liabilities.

In connection with the decision to terminate the Plan, we remeasured the projected benefit obligation in the fourth quarter of 2020 based on the expected Plan termination costs.

Upon settlement of the pension liability, we will reclassify the related pension losses, currently recorded to accumulated other comprehensive loss, to the consolidated statements of earnings.

As of December 31, 2020, we had gross unrecognized losses related to the Plan of $ 125,005 in accumulated other comprehensive loss that are expected to be recognized in the income statement in 2021.

Since the amount of the settlement depends on a number of factors determined as of the liquidation date, including lump sum payout estimates, the annuity pricing interest rate environment and asset experience, we are currently unable to determine the ultimate cost of the settlement.

However, w e estimate that non-cash settlement charges of approximately $ 10,000 to $ 20,000 to be recognized in the second or third quarter of 2021 with the remaining amount of the gross accumulated other comprehensive loss balance to be recognized by the end of 2021.

The following table provides a reconciliation of benefit obligation, plan assets, and the funded status of the pension plans for U.S.

locations at the measurement dates.

I n connection with the Plan termination process, we remeasured the projected benefit obligation based on the expected Plan termination costs including estimates for the anticipated amount of lump sum payments as well as estimates for insurance company pricing on the portion of the obligation not distributed through lump sum payments.

These changes as well as a reduction in the discount rate used to determine the benefit obligation were the primary drivers in the increase to the obligation.

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Pension Plans

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Benefits paid

Actuarial loss (gain)

Actuarial loss

Foreign exchange impact

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Benefits paid

Actuarial loss (gain)

Actuarial loss

Projected benefit obligation at December 31

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The components of the prepaid (accrued) cost of the domestic and foreign pension plans are classified in the following lines in the Consolidated Balance Sheets at December 31:

U.S.Pension Plans

Pension Plans

Prepaid pension asset

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Net prepaid (accrued) cost

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The components of the accrued cost of the post-retirement life insurance plan are classified in the following lines in the Consolidated Balance Sheets at December 31:

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Post-Retirement

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pension plans, net of tax:

U.S.Pension Plans

Pension Plans

Balance at January 1, 2019

Amortization of retirement benefits, net of tax

Net actuarial gain

Net actuarial (loss) gain

Foreign exchange impact

Tax impact due to implementation of ASU 2018-02

Balance at January 1, 2020

Amortization of retirement benefits, net of tax

Net actuarial (loss) gain

Net actuarial gain (loss)

Foreign exchange impact

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Amortization of retirement benefits, net of tax

Net actuarial loss

Tax impact due to implementation of ASU No.

Net actuarial gain

Balance at January 1, 2020

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The variance resulting from the difference between the expected and actual return on plan assets is included in the amortization calculation upon reflection in the market-related value of plan assets.

In 2020 , we expect to recognize approximately $ 6,429 of pre-tax losses included in accumulated other comprehensive loss related to our pension plans and post-retirement life insurance plan, respectively.

In 2021, we expect to recognize approximately $ 125,214 of pre-tax losses included in accumulated other comprehensive loss related to our pension plans and post-retirement life insurance plan.

This includes approximately $ 125,005 in pre-tax non-cash settlement charges expected from the U.S.

Plan termination.

The pre-tax non-cash settlement charge is an estimate and could be in the range of $ 110,000 and $ 135,000 based on changes in market conditions.

The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for those Pension Plans with accumulated benefit obligation in excess of fair value of plan assets is shown below:

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Amortization of unrecognized loss

Settlement loss

Net expense (income)

Weighted-average actuarial assumptions (2)

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During the fourth quarter of each year, we review our actuarial assumptions in light of current economic factors to determine if the assumptions need to be adjusted.

2020 assumptions reflect termination basis accounting.

Net post-retirement expense includes the following components:

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During the fourth quarter of each year, we review our actuarial assumptions in light of current economic factors to determine if the assumptions need to be adjusted.

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Our pension plan asset allocation at December 31, 2020, and 2019, and target allocation for 2021 by asset category are as follows:

Target Allocations

Percentage of Plan Assets

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Equity securities

Debt securities

We employ a liability-driven investment strategy whereby a mix of equity and fixed-income investments are used to pursue a de-risking strategy which over time seeks to reduce interest rate mismatch risk and other risks while achieving a return that matches or exceeds the growth in projected pension plan liabilities.

Fixed income/Debt securities

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Historically, we employed a liability-driven investment strategy whereby a mix of equity and fixed-income investments are used to pursue a de-risking strategy which over time seeks to reduce interest rate mismatch risk and other risks while achieving a return that matches or exceeds the growth in projected pension plan liabilities.

Risk tolerance is established through careful consideration of plan liabilities and funded status.

The investment portfolio primarily contains a diversified mix of equity and fixed-income investments.

The investment portfolio primarily contained a diversified mix of equity and fixed-income investments.

Other assets such as private equity are used modestly to enhance long-term returns while improving portfolio diversification.

Investment risk is measured and monitored on an ongoing basis through quarterly investment portfolio reviews, annual liability measurements, and asset/liability studies at regular intervals.

As part of the planned termination of the U.S.

pension plan, a new investment allocation strategy was put in place to protect the funded status of the U.S.

plan assets subsequent to Board approval of U.S.

pension plan termination.

The target allocation for U.S.

plan assets for 2021 is 100 % fixed income investments including cash and cash equivalents.

The following table summarizes the fair values of our pension plan assets:

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Equity securities - U.S.

Equity funds - U.S.

holdings (1) (7)

Bond funds - government (4) (7)

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The fair values at December 31, 2020, are classified within the following categories in the fair value hierarchy:

Quoted Prices

Equity securities - U.S.

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Bond funds - other (5) (7)

Real estate (6) (7)

Cash and cash equivalents (2)

Partnerships (3)

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The fair values at December 31, 2019, are classified within the following categories in the fair value hierarchy:

Quoted Prices

Equity securities - U.S.

Equity funds - U.S.holdings (1) (7)

Bond funds - government (4) (7)

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Comprised of long-term government bonds with a minimum maturity of 10 years and zero-coupon Treasury securities ("Treasury Strips") with maturities greater than 20 years.

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Comprised predominately of investment grade U.S.

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The entity's net debt is then subtracted from the calculated amount to arrive at an estimated fair value for the entity.

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We expect to make $ 551 of contributions to the U.S.

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plans during 2021.

The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:

Post-Retirement

Life Insurance Plan

Expected benefit payments under the defined benefit pension plans and the postretirement benefit plan, excluding the impact of the Plan termination process, for the next five years subsequent to 2020 and in the aggregate for the following five years are as follows:

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Defined Contribution Plans

We sponsor a 401(k) plan that covers substantially all of our U.S.

employees as well as offer similar defined contribution plans at certain foreign locations.

Contributions and costs are generally determined as a percentage of the covered employee's annual salary.

We ceased matching employee contributions in Q2 2020 in light of COVID-19 concerns, and we have reimplemented the match in February 2021.

Expenses related to defined contribution plans include the following:

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401(k) and other defined contribution plan expense

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NOTE 8 — Goodwill and Other Intangible Assets

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As of December 31, 2020

Weighted Average Remaining Amortization Period (in years)

Other intangible assets:

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Other intangible assets, net

Amortization expense for the year ended December 31, 2019

Amortization expense for the year ended

December 31, 2020

In the third quarter of 2020, due to the restructuring actions further outlined in Note 9, we performed an interim impairment assessment.

This resulted in the recognition of $ 2,200 of impairment charges related to in process research and development, and a revaluation of associated contingent liabilities totaling $ 1,900 .

The net impact of $ 300 was recorded as restructuring expense in the Consolidated Statements of Earnings.

As of December 31, 2019

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Amortization expense for the year ended December 31, 2018

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The estimated amortization expense for the next five years and thereafter is as follows:

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Goodwill as of December 31, 2018

Increase from acquisitions

Increase from acquisition

Goodwill as of December 31, 2019

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Goodwill as of December 31, 2020

See Note 3 for further information on the increase due to acquisition.

We performed our impairment test as of October 1, 2020, our measurement date, and concluded there was no impairment in any of our reporting units.

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The fair value estimates used in the goodwill impairment analysis required significant judgment.

The Company's fair value estimates for the purposes of determining the goodwill impairment charge are considered Level 3 fair value measurements.

The fair value estimates were based on assumptions management believes to be reasonable, but that are inherently uncertain, including estimates of future revenues and operating margins and assumptions about the overall economic climate and the competitive environment for the business.

NOTE 9 — Costs Associated with Exit and Restructuring Activities

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Restructuring charges

September 2020 Plan

In September 2020, we initiated a restructuring plan focused on optimizing our manufacturing footprint and improving operational efficiency by better utilizing our systems capabilities.

This plan includes transitioning certain administrative functions to a shared service center, realignment of manufacturing locations, and certain other efficiency improvement actions ("September 2020 Plan").

The restructuring cost of the plan is estimated to be in the range of $ 4,600 and $ 6,000 , including workforce reduction charges, building and equipment relocation charges, other contract and asset related costs.

In addition to these charges, we expect an additional $ 4,000 to $ 5,100 of other costs to be incurred related to the initiatives that would not qualify as restructuring charges.

These costs would include certain employee overlap and training costs as well as additional capital expenditures.

Restructuring charges under this plan were $ 1,422 during the year ended December 31, 2020, consisting of $ 812 of workforce reduction costs, $ 300 of asset impairment charges (see Note 8) and $ 310 of other contract termination and facility closure costs.

The total restructuring liability related to the September 2020 Plan was $ 512 at December 31, 2020.

June 2016 Plan

In June 2016, we announced plans to restructure operations by phasing out production at our Elkhart, IN facility and transitioning it into a research and development center supporting our global operations ("June 2016 Plan").

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In 2017, we revised this plan to include an additional $ 1,100 in planned costs related to the relocation of our corporate headquarters in Lisle, IL and our plant in Bolingbrook, IL, both of which have now been consolidated into a single facility.

Restructuring charges under this plan, which is substantially complete, were $ 4,284 , $ 4,559 , and $ 4,139 during the years ended December 31, 2019 , 2018 , and 2017 , respectively.

Restructuring charges under this plan, which is substantially complete, were $( 32 ), $ 4,284 , and $ 4,559 during the

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years ended December 31, 20 20 , 20 19 , and 20 18 , respectively.

The total restructuring liability related to the June 2016 Plan was $ 3 and $ 233 at December 31, 20 20 and 201 9 , respectively.

Any additional costs related to line movements, equipment charges, and other costs will be expensed as incurred.

Any additional costs related to product line movements, equipment charges, and other costs will be expensed as incurred.

The following table displays the restructuring charges associated with the June 2016 Plan as well as a summary of the actual costs incurred through December 31, 2020:

June 2016 Plan

Planned Costs

incurred through

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Other charges include the effects of currency translation, travel, legal and other charges.

April 2014 Plan

In April 2014, we announced plans to restructure our operations and consolidate our Canadian operations into other existing facilities as part of our overall plan to simplify our business model and rationalize our global footprint ("April 2014 Plan").

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The total restructuring liability related to the April 2014 Plan was $ 839 and $ 703 at December 31, 2020 and 2019, respectively.

The remaining liability is expected to be settled in the first half of 2021.

Other Restructuring Activities

From time to time we incur other restructuring activities that are not part of a formal plan.

Beginning in Q3 2019, we incurred restructuring charges of $ 3,412 for exit and disposal activities at three sites and workforce reduction costs across the company.

The remaining restructuring liability associated with these actions was $ 1,057 at December 31, 2019 .

During the years ended December 31, 2020 and 2019, we incurred restructuring charges of $ 442 and $ 3,412 , respectively, for exit and disposal activities at three sites and workforce reduction costs across the company.

The remaining restructuring liability associated with these actions was $ 9 and $ 1,057 at December 31, 2020 and December 31, 2019, respectively.

The following table displays the restructuring liability activity for all plans the year ended December 31, 2020:

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Accrued professional fees

Contract liabilities

Accrued customer-related liabilities

Dividends payable

Remediation reserves

Derivative liabilities

Other accrued liabilities

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We accrue for specific warranty claims if we believe that the facts of a specific claim make it probable that a liability in excess of our historical experience has been incurred, and provide disclosures for specific claims whenever it is reasonably possible that a material loss may be incurred which cannot be estimated.

We have an outstanding warranty claim for which we have not yet determined the root cause of a product performance issue.

Testing is ongoing.

We are not able to quantify the potential impact on our operations, if any, because we have not yet determined the root cause.

We cannot provide assurance that the ultimate disposition of environmental, legal, and product warranty claims will not materially exceed the amount of our accrued losses and adversely impact our consolidated financial position, results of operations, or cash flows.

Our accrued liabilities and disclosures will be adjusted accordingly if additional information becomes available in the future.

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NOTE 12 — Leases

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Operating lease liabilities represent the present value of lease payments over the lease term, discounted using an estimate of our secured incremental borrowing rate because none of our leases contain a rate implicit in the lease arrangement.

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The operating lease assets and liabilities are adjusted to include the impact of any lease incentives and non-lease components.

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Options to extend or terminate a lease are included in the lease term when it is reasonably likely that we will exercise that option.

We have elected not to record leases with an initial term of 12 months or less on the balance sheet and instead recognize those lease payments on a straight-line basis over the lease term.

We occasionally enter into short term operating leases with an initial term of twelve months or less.

These leases are not recorded in the Consolidated Balance Sheets.

We determine if an arrangement is a lease or contains a lease at its inception, which normally does not require significant estimates or judgments.

Our lease agreements do not contain any material residual value guarantees or material restrictive covenants and we currently have no material sublease agreements.

Total lease expense for the twelve months ended December 31, 2019 is as follows:

Year Ended December 31,

In accordance with FASB Staff Q&A - Topic 842 and Topic 840:

Accounting for Lease Concessions Related to the Effects of the COVID-19 Pandemic ("FASB Staff Q&A") issued in April 2020, we have elected to account for any lease concessions resulting directly from COVID-19 as if the enforceable rights and obligations for the concessions existed in the respective contracts at lease inception and as such we will not account for any concession as a lease modification.

Guidance from the FASB Staff Q&A provided methods to account for rent deferrals which include the option to treat the lease as if no changes to the lease contract were made or to treat deferred payments as variable lease payments.

The FASB Staff Q&A allows entities to select the most practical approach and does not require the same approach be applied consistently to all leases.

As a result, we have accounted for lease deferrals as if no changes to the lease contract were made and will continue to recognize lease expense, on a straight-line basis, during the deferral periods.

During the twelve months ended December 31, 2020, these rent concessions related to COVID-19 were not material.

Components of lease expense for the twelve months ended December 31, 2020 and December 31, 2019 were as follows:

Operating lease cost

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Total lease cost

Rent expense prior to adoption of ASC 842 was $ 5,726 and $ 4,762 for the years ended December 31, 2018 and 2017, respectively.

Future minimum lease payments relating to our existing lease liabilities as of December 31, 2019 is as follows:

Operating Leases (1)

Present value of lease payments

(1) Operating lease payments include $ 3,244 of payments related to options to extend lease terms that are reasonably expected to be exercised.

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Rent expense prior to adoption of ASC 842 was $ 5,726 for the year ended December 31, 2018.

Supplemental cash flow information related to leases was as follows:

Cash paid for amounts included in the measurement of lease

Leased assets obtained in exchange for new operating lease

Supplemental balance sheet information related to leases was as follows:

As of December 31

Balance Sheet Classification:

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Weighted-average discount rate

Supplemental cash flow information related to leases:

Cash paid for amounts included in the measurement of lease liabilities

Leased assets obtained in exchange for new operating lease liabilities

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Remaining maturity of our existing lease liabilities as of December 31, 2020 is as follows:

Operating Leases (1)

Present value of lease payments

Operating lease payments include $ 3,822 of payments related to options to extend lease terms that are reasonably expected to be exercised.

NOTE 13 — Debt

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Standby letters of credit

Amount available

Amount available, subject to covenant restrictions

Weighted-average interest rate

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We have debt issuance costs related to our long-term debt that are being amortized using the straight-line method over the life of the debt.

Amortization expense for the twelve months ended December 31, 2019 was approximately $ 163 and $ 185 in 2018 and 2017 .

These costs are included in interest expense in our Consolidated Statement of Earnings.

We use interest rate swaps to convert the revolving credit facility's variable rate of interest into a fixed rate on a portion of the debt as described more fully in Note 13 "Derivatives." These swaps are treated as cash flow hedges and consequently, the changes in fair value were recorded in other comprehensive earnings.

Amortization expense was approximately $ 168 for the twelve months ended December 31, 2020, $ 163 in 2019 and $ 185 in 2018.

These costs are included in interest expense in our Consolidated Statements of Earnings.

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NOTE 13 — Derivatives

We use interest rate swaps to convert the revolving credit facility's variable rate of interest into a fixed rate on a portion of the debt as described more fully in Note 1 4 "Derivative Financial Instruments ." These swaps are treated as cash flow hedges and consequently, the changes in fair value were recorded in other comprehensive earnings.

NOTE 14 — Derivative Financial Instruments

Our earnings and cash flows are subject to fluctuations due to changes in foreign currency exchange rates and interest rates.

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We manage our credit risk by entering into derivative contracts with only highly rated financial institutions and by using netting agreements.

The effective portion of derivative gains and losses are recorded in accumulated other comprehensive loss until the hedged transaction affects earnings upon settlement, at which time they are reclassified to cost of goods sold or net sales.

If it is probable that an anticipated hedged transaction will not occur by the end of the originally specified time period, we reclassify the gains or losses related to that hedge from accumulated other comprehensive loss to other income (expense).

The effective portion of derivative gains and losses are recorded in accumulated other comprehensive (loss) income until the hedged transaction affects earnings upon settlement, at which time they are reclassified to cost of goods sold or net sales.

We assess hedge effectiveness qualitatively by verifying that the critical terms of the hedging instrument and the forecasted transaction continue to match, and that there have been no adverse developments that have increased the risk that the counterparty will default.

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We continue to monitor the Company’s overall currency exposure and may elect to add cash flow hedges in the future.

At December 31, 2019 , we had a net unrealized gain of $ 655 in accumulated other comprehensive loss, of which $ 595 is expected to be reclassified to income within the next 12 months.

At December 31, 2020, we had a net unrealized gain of $ 910 in accumulated other comprehensive (loss) income, of which $ 820 is expected to be reclassified to earnings within the next 12 months.

The notional amount of foreign currency forward contracts outstanding was $ 14,958 at December 31, 2020.

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The difference to be paid or received under the terms of the swap agreements will be recognized as an adjustment to interest expense when settled.

These swaps are treated as cash flow hedges and consequently, the changes in fair value are recorded in other comprehensive loss.

The estimated net amount of the existing gains or losses that are reported in accumulated other comprehensive loss that are expected to be reclassified into earnings within the next twelve months is approximately $ 82 .

These swaps are treated as cash flow hedges and consequently, the changes in fair value are recorded in other comprehensive (loss) income.

The estimated net amount of the existing losses that are reported in accumulated other comprehensive (loss) income that are expected to be reclassified into earnings within the next twelve months is approximately $ 517 .

The location and fair values of derivative instruments designated as hedging instruments in the Consolidated Balance Sheets as of December 31, 2020, are shown in the following table:

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Interest rate swaps reported in Other current assets

Interest rate swaps reported in Other assets

Interest rate swaps reported in Accrued liabilities

Interest rate swaps reported in Other long-term obligations

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Cost of goods sold

Selling, general and administrative

Selling, general and administrative expense

Total amounts reclassified from AOCI to earnings

Loss recognized in other expense for hedge ineffectiveness

Loss recognized in other expense for derivatives not designated as cash flow hedges

Total derivative gain on foreign exchange contracts recognized in earnings

Gain recognized in other expense for hedge ineffectiveness

Total derivative (loss) gain on foreign exchange contracts

recognized in earnings

Interest Rate Swaps:

Benefit recorded in interest expense

NOTE 14 — Accumulated Other Comprehensive Loss

Shareholders’ equity includes certain items classified as accumulated other comprehensive loss (“AOCI”) in the Consolidated Balance Sheets, including:

Unrealized gains (losses) on derivatives relate to interest rate swaps to convert a portion of our revolving credit facility's outstanding balance from a variable rate of interest into a fixed rate and foreign currency forward contracts used to hedge our exposure to changes in exchange rates affecting certain revenues and costs denominated in foreign currencies.

(Expense) benefit recorded in interest expense

Total (losses) gains on derivatives

NOTE 15 — Accumulated Other Comprehensive (Loss) Income

Shareholders’ equity includes certain items classified as accumulated other comprehensive (loss) income (“AOCI”) in the Consolidated Balance Sheets, including:

Unrealized gains (losses) on hedges relate to interest rate swaps to convert a portion of our revolving credit facility's outstanding balance from a variable rate of interest into a fixed rate and foreign currency forward contracts used to hedge our exposure to changes in exchange rates affecting certain revenues and costs denominated in foreign currencies.

These hedges are designated as cash flow hedges, and we have deferred income statement recognition of gains and losses until the hedged transactions occur, at which time amounts are reclassified into earnings.

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Further information related to our pension obligations is included in Note 7 – Retirement Plans.

Cumulative translation adjustment relate to our non-U.S.

Cumulative translation adjustment relates to our non-U.S.

subsidiary companies that have designated a functional currency other than the U.S.

We are required to translate the subsidiary functional currency financial statements to dollars using a combination of historical, period-end, and average foreign exchange rates.

This combination of rates creates the foreign currency translation adjustment component of other comprehensive earnings.

In 2018, CTS adopted the provision of ASU No.

2018-02 "Income Statement - Reporting Comprehensive Income (Topic 220):

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income." This ASU allows for the reclassification from AOCI to retained earnings for the stranded tax effects resulting from the Tax Cuts and Jobs Act that was enacted in December 2017.

The total impact due to adoption of this standard was an increase in retained earnings of $17,433.

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The components of AOCI for 2019 are as follows:

As of December 31, 2018

As of December 31, 2019

This combination of rates creates the foreign currency translation adjustment component of other comprehensive income.

The components of accumulated other comprehensive (loss) income for the twelve months ended December 31, 2020 are as follows:

Changes in fair market value of derivatives:

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Changes in unrealized pension cost:

Income tax benefit (expense)

Cumulative translation adjustment:

Income tax benefit

Total accumulated other comprehensive (loss) earnings

The components of AOCI for 2018 are as follows:

As of December 31, 2017

Impact of ASU No.

As of December 31, 2018

Cumulative translation adjustment:

Income tax benefit (expense)

Total accumulated other comprehensive loss

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The components of accumulated other comprehensive (loss) income for the twelve months ended December 31, 2019 are as follows:

Changes in fair market value of derivatives:

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Cumulative translation adjustment:

Income tax benefit (expense)

Total accumulated other comprehensive (loss) earnings

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Income tax benefit

Total accumulated other comprehensive (loss)

NOTE 16 — Shareholders' Equity

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On February 7, 2019, the Board of Directors authorized a stock repurchase program with a maximum dollar limit of $ 25,000 in stock repurchases, which replaced the previous authorized plan that was approved by our Board of Directors in April 2015.

During the year ended December 31, 2019 we purchased 420,770 shares for approximately $ 11,746 , of which $566 was repurchased under the previous plan and $11,180 was repurchased under the most recent board-authorized share repurchase program.

During the year ended December 31, 2018 we purchased 342,100 shares for $ 9,440 under the previous authorized plan.

During the year ended December 31, 2020 we purchased 342,731 shares for approximately $ 8,080 .

During the year ended December 31, 2019 we purchased 420,770 shares for $ 11,746 , of which $ 566 was repurchased under the previous plan and $ 11,180 was repurchased under the most recent board-authorized share repurchased program.

Approximately $ 5,740 was available for future purchases.

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At December 31, 2020, we had five stock-based compensation plans:

the Non-Employee Directors' Stock Retirement Plan ("Directors' Plan"), the 2004 Omnibus Long-Term Incentive Plan ("2004 Plan"), the 2009 Omnibus Equity and Performance Incentive Plan ("2009 Plan"), the 2014 Performance & Incentive Plan ("2014 Plan"), and the 2018 Equity and Incentive Compensation Plan ("2018 Plan").

the Non-Employee Directors' Stock Retirement Plan ("Directors' Plan"), the 2004 Omnibus Long-Term Incentive Plan ("2004 Plan"), the 2009 Omnibus Equity and Performance Incentive Plan ("2009

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Plan"), the 2014 Performance & Incentive Plan ("2014 Plan"), and the 2018 Equity and Incentive Compensation Plan ("2018 Plan").

Future grants can only be made under the 2018 Plan.

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We recorded a tax deduction related to equity awards that vested during the year ended December 31, 2020, in the amount of $ 1,285 .

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The following table summarizes the unrecognized compensation expense related to non-vested RSUs by type and the weighted-average period in which the expense is to be recognized:

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Performance stock options outstanding

Maximum potential RSU and cash settled awards outstanding

Maximum potential RSU and cash settled

awards outstanding

Maximum potential awards outstanding

RSUs and cash settled awards vested and released

RSUs and cash settled awards vested and

Awards available to be granted

Stock Options

Stock options are exercisable in cumulative annual installments over a maximum 10 -year period, commencing at least one year from the date of grant.

Stock options are generally granted with an exercise price equal to the market price of our stock on the date of grant.

The stock options generally vest over four years and have a 10 -year contractual life.

The awards generally contain provisions to either accelerate vesting or allow vesting to continue on schedule upon retirement if certain service and age requirements are met.

The awards also provide for accelerated vesting if there is a change in control event.

We estimate the fair value of the stock option on the grant date using the Black-Scholes option-pricing model and assumptions for expected price volatility, option term, risk-free interest rate, and dividend yield.

Expected price volatilities are based on historical volatilities of our common stock.

The expected option term was derived from historical data of exercise behavior.

The dividend yield was based on historical dividend payments.

The risk-free rate for periods within the contractual life of the option was based on the U.S.

Treasury yield curve in effect at the time of grant.

The only outstanding stock options at December 31, 2019 , or 2018 were the performance-based stock options described below.

Performance-Based Stock Options

During 2015 and 2016, the Compensation committee of the Board of Directors (the "Committee") granted a total of 350,000 performance-based stock options, of which 225,000 remain outstanding after considering forfeitures.

The Performance-Based Option Awards have an exercise price of $ 18.37 , a term of five years and generally will become exercisable (provided the optionee remains employed by the Company or an affiliate) upon our attainment of at least $600,000 in revenues during any of our trailing four quarterly periods (as determined by the Committee) during the term.

We have not recognized any expense on these Performance-Based Option Awards for the years ended December 31, 2019 and 2018 , since the revenue target is not deemed likely to be attained based on our current forecast.

Service-Based Restricted Stock Units

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The award rate for the 2018-2020, 2019-2021, and 2020-2022 PSUs is dependent upon our achievement of sales growth targets, cash flow targets, and relative total shareholder return ("RTSR") using a matrix based on the percentile ranking of our stock price performance compared to a peer group over a three-year period.

These awards are weighted 35 % for achievement of the sales growth metric, 30% for achievement of the cash flow metric, and 35% for achievement of the RTSR metric.

Other PSUs are granted from time to time based on other performance criteria.

The initial fair value of the PSUs is equivalent to the trading value of our common stock on the grant date.

The fair value is subsequently adjusted quarterly based on management's assessment of the Company's performance relative to the target number of shares performance criteria.

A summary of PSU activity for the year ended December 31, 2020 is presented below:

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The following table summarizes each grant of performance awards outstanding at December 31, 2020:

Maximum Number of Units to be Granted

2017-2019 Performance RSUs

February 9, 2017

35% RTSR, 35% sales growth, 30% operating cash flow

2017-2019 Performance RSUs

February 9, 2017

Operating Earnings

Vesting Dependency

Maximum Number

of Units to be Granted

2018 - 2020 Performance RSUs

February 8, 2018

35% RTSR, 35% sales growth, 30% operating cash flow

35% RTSR, 35% sales growth,

30% operating cash flow

2018 - 2020 Performance RSUs

February 16, 2018

35% RTSR, 35% sales growth, 30% operating cash flow

35% RTSR, 35% sales growth,

30% operating cash flow

2019-2021 Performance RSUs

February 7, 2019

35% RTSR, 35% sales growth, 30% operating cash flow

35% RTSR, 35% sales growth,

30% operating cash flow

2019 Supplemental Performance RSUs

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September 24, 2019

50% EBITDA growth, 50% Sales growth

50% EBITDA growth,

50% Sales growth

2020 - 2022 Performance RSUs

February 6, 2020

25% RTSR, 40% sales growth,

35% operating cash flow

Focus 2025 Performance RSUs

April 23, 2020

Cumulative revenues of $750 million over a trailing four-quarter period

Cash-Settled Restricted Stock Units

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These derivative financial instruments are measured at fair value on a recurring basis.

The table below summarizes the financial asset that were measured at fair value on a recurring basis as of December 31, 2019 and the (gain) loss recorded during the year ended December 31, 2019 :

Asset Carrying

The table below summarizes the financial liabilities and assets that were measured at fair value on a recurring basis as of December 31, 2020 and the loss recorded during the year ended December 31, 2020:

(Liability) Asset Carrying

Quoted Prices

(Gain) loss for Year Ended

Interest rate swap

Foreign currency hedges

The table below summarizes the financial assets that were measured at fair value on a recurring basis as of December 31, 2018 and the (gain) loss recorded during the year ended December 31, 2018 :

CTS CORPORATION 59

The table below summarizes the financial assets that were measured at fair value on a recurring basis as of December 31, 2019 and the gain recorded during the year ended December 31, 2019 :

Asset Carrying

Quoted Prices

(Gain) loss for

Interest rate swap

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There is a readily determinable market for our long-term debt and it is classified within Level 2 of the fair value hierarchy as the market is not deemed to be active.

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The fair value of long-term debt approximates carrying value and was determined by valuing a similar hypothetical coupon bond and attributing that value to our long-term debt under the Revolving Credit Facility.

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Total provision for income taxes

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Significant components of our deferred tax assets and liabilities are as follows:

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Total net deferred tax assets

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The long-term deferred tax assets and long-term deferred tax liabilities are as follows below:

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state tax credits that management does not anticipate will be utilized.

A valuation allowance of $ 180 was recorded in 2020 against the U.S.

federal foreign tax credit carryforwards of $ 7,467 , which expire in varying amounts between 2028 and 2029 .

No valuation allowance was recorded in 2020 against the U.S.

federal foreign tax credit carryforwards of $ 5,785 , which expire in varying amounts between 2023 and 2029 as well as the research and development tax credits of $ 7,495 , which expire in varying amounts between 2021 and 2039.

federal research and development tax credits of $ 7,502 , which expire in varying amounts between 2021 and 2040 .

We assessed the anticipated realization of those tax credits utilizing future taxable income projections.

Based on those projections, management believes it is more-likely-than-not that we will realize the benefits of these credit carryforwards.

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The following table reconciles taxes at the U.S.

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State income taxes, net of federal income tax benefit

earnings taxed at rates different than the U.S.

earnings taxed at rates different than the

statutory rate

Foreign source earnings, net of associated foreign tax credits

Foreign source earnings, net of associated foreign

Benefit of tax credits

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Effective income tax rate

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was signed into law making significant changes to the Internal Revenue Code.

Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, the transition of U.S international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017.

We recognized a provisional amount of $ 18,001 as an additional income tax expense in the fourth quarter of 2017.

This amount included $ 11,734 related to the mandatory deemed one-time transition tax and $ 6,267 related to the remeasurement of certain deferred tax assets and liabilities.

On December 22, 2017, Staff Accounting Bulletin No.

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The remeasurement period for SAB 118 ended on December 22, 2018, and upon completion of our analysis we determined the final impact of the Tax Act resulted in an additional tax benefit of $ 348 during the fourth quarter of 2018.

This amount included a $ 589 tax benefit related to the one-time transition tax and $ 241 tax expense related to the remeasurement of certain deferred tax assets and liabilities.

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Following the enactment of the 2017 Tax Cut and Jobs Act and the associated one-time transition tax, in general, repatriation of foreign earnings to the US can be completed with no incremental US Tax.

Following the enactment of the 2017 Tax Cut and Jobs Act and the associated one-time transition tax, in general, repatriation of foreign earnings to the U.S.

can be completed with no incremental U.S.

However, there are limited other taxes that continue to apply such as foreign withholding and certain state taxes.

The company records a deferred tax liability for the estimated foreign earnings and state tax cost associated with the undistributed foreign earnings that are not permanently reinvested.

In 2020 the Company made the decision to no longer permanently reinvest the earnings of its Taiwan subsidiary.

As a result, a provision for the expected taxes on repatriation of those earnings has been recorded.

The Tax Act also includes provisions for Global Intangible Low-Taxed Income (“GILTI”) wherein taxes on foreign income are imposed in excess of a deemed return on tangible assets of foreign corporations.

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As of December 31, 2020, we have approximately $ 3,128 of unrecognized tax benefits, which if recognized, would impact the effective tax rate.

We do not anticipate any significant changes in our unrecognized tax benefits within the next 12 months.

We anticipate uncertain tax positions of approximately $ 900 to be settled in the next 12 months.

A reconciliation of the beginning and ending unrecognized tax benefits is provided below:

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Increase related to current year tax positions

(Decrease) increase related to prior year tax positions

Decrease related to prior year tax

Decrease related to lapse in statute of limitation

Decrease related to settlements with taxing authorities

Decrease related to settlements with taxing

Balance at December 31

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As of December 31, 2020, and 2019, $ 301 and $ 707 , respectively, of interest and penalties were accrued.

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We are subject to taxation in the U.S., various states, and in non-U.S.

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tax returns range from 2008 through 2019 based on local statutes.

NOTE 19 - Business Acquisitions

On July 31, 2019, we acquired 100% of the outstanding shares of Quality Thermistor, Inc.

(QTI) for $75 million plus a contingent earn out of up to $5 million based on sales performance objectives.

The purchase price includes adjustments for debt assumed and changes in working capital.

This acquisition provides us with a new core temperature sensing technology that expands our sensing product portfolio, while increasing our presence in the industrial and medical markets.

The final purchase price of $ 73,906 has been allocated to the fair values of assets and liabilities acquired as of July 31, 2019.

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The following table summarizes the consideration paid and the fair values of the assets acquired and the liabilities assumed at the date of acquisition:

Consideration Paid

Cash paid, net of cash acquired of $567

Contingent consideration

Purchase price

Fair Values at July 31, 2019

Current assets

Property, plant and equipment

Intangible assets

Fair value of assets acquired

Less fair value of liabilities acquired

Purchase price

Goodwill related to the acquisition is expected to be deductible for tax purposes.

The contingent earn out is payable in cash upon the achievement of a revenue performance target for the year ending December 31, 2019 .

The Company recorded contingent consideration for the earn out of $ 1,056 based on the achievement performance target for the full year 2019 results.

This amount is reflected as an addition to purchase price.

The following table summarizes the carrying amounts and weighted average lives of the acquired intangible assets:

Carrying Value

Weighted Average Amortization Period

Customer lists/relationships

Trademarks, tradenames, and other intangibles

Results of operations for QTI are included in our consolidated financial statements beginning on July 31, 2019.

The amount of net sales and net loss from QTI since the acquisition date that have been included in the Consolidated Statements of Earnings are as follows:

For the period July 31, 2019 through December 31, 2019

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NOTE 20 — Geographic Data

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Sales are attributed to countries based upon the origin of the sale.

Long-Lived Assets

Years Ended December 31,

Long-Lived Tangible Assets

United States

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(in thousands)

Charged to Expense

(Write-offs) / Recoveries

Year ended December 31, 2019

Allowance for doubtful accounts

Year ended December 31, 2018

Allowance for doubtful accounts

Year ended December 31, 2017

Allowance for doubtful accounts

(Write-offs) /

Year ended December 31, 2020 Allowance for

credit losses

Year ended December 31, 2019 Allowance for

credit losses

Year ended December 31, 2018 Allowance for

credit losses

CTS CORPORATION 64

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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-K

Item 8. Financial Statements and Supplementary Data