CTS CORP 10-K

Item 8. Financial Statements and Supplementary Data REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Shareholders CTS Corporation Opinion on the financial statements We have audited the accompanying consolidated balance sheets of CTS Corporation (an Indiana corporation) and subsidiaries (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of earnings, comprehensive earnings, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2020, and the related notes and financial statement schedules included under Item 15(a) (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America. 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. Basis for opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical audit matter 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. 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. 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: CTS CORPORATION 26 Table of Contents • 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; and • 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 We have served as the Company’s auditor since 2005. Chicago, Illinois February 25, 2021 CTS CORPORATION 27 CTS CORPORATION AND SUBSIDIARIES Consolidated Statements of Earnings (in thousands, except per share amounts) Years Ended December 31, 2020 2019 2018 Net sales $ 424,066 $ 468,999 $ 470,483 Cost of goods sold 285,003 311,424 305,510 Gross margin 139,063 157,575 164,973 Selling, general and administrative expenses 67,787 70,408 73,569 Research and development expenses 24,317 25,967 25,304 Restructuring charges 1,830 7,448 5,062 Gain on sale of assets — ( 63 ) — Operating earnings 45,129 53,815 61,038 Other (expense) income: Interest expense ( 3,272 ) ( 2,648 ) ( 2,085 ) Interest income 1,047 1,737 1,826 Other income (expense) 2,575 ( 2,638 ) ( 2,676 ) Total other income (expense), net 350 ( 3,549 ) ( 2,935 ) Earnings before taxes 45,479 50,266 58,103 Income tax expense 10,793 14,120 11,571 Net earnings $ 34,686 $ 36,146 $ 46,532 Net earnings per share: Basic 1.07 1.11 1.41 Diluted 1.06 1.09 1.39 Basic weighted-average common shares outstanding 32,317 32,700 33,024 Effect of dilutive securities 267 405 545 Diluted weighted-average common shares outstanding 32,584 33,105 33,569 Cash dividends declared per share $ 0.16 $ 0.16 $ 0.16 The accompanying notes are an integral part of the consolidated financial statements. CTS CORPORATION 28 Table of Contents CTS CORPORATION AND SUBSIDIARIES Consolidated Statements of Comprehensive Earnings (in thousands) Years Ended December 31, 2020 2019 2018 Net earnings $ 34,686 $ 36,146 $ 46,532 Other comprehensive (loss) earnings: Changes in fair market value of derivatives, net of tax ( 1,307 ) ( 509 ) 795 Changes in unrealized pension cost, net of tax ( 2,965 ) 6,439 ( 1,830 ) Cumulative translation adjustment, net of tax 77 83 ( 311 ) Other comprehensive (loss) earnings $ ( 4,195 ) $ 6,013 $ ( 1,346 ) Comprehensive earnings $ 30,491 $ 42,159 $ 45,186 The accompanying notes are an integral part of the consolidated financial statements. CTS CORPORATION 29 CTS CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets (in thousands) December 31, 2020 2019 ASSETS Current Assets Cash and cash equivalents $ 91,773 $ 100,241 Accounts receivable, net 80,981 78,008 Inventories, net 45,870 42,237 Other current assets 14,607 16,992 Total current assets 233,231 237,478 Property, plant and equipment, net 97,437 105,038 Operating lease assets, net 23,281 24,644 Other assets Prepaid pension asset 56,642 62,082 Goodwill 109,497 106,056 Other intangible assets, net 79,121 85,215 Deferred income taxes 24,250 19,795 Other assets 2,590 3,046 Total other assets 272,100 276,194 Total Assets $ 626,049 $ 643,354 LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Accounts payable $ 50,489 $ 48,219 Operating lease obligations 3,294 2,787 Accrued payroll and benefits 12,978 9,564 Accrued expenses and other liabilities 38,171 36,378 Total current liabilities 104,932 96,948 Long-term debt 54,600 99,700 Long-term operating lease obligations 23,163 24,926 Long-term pension obligations 7,466 6,632 Deferred income taxes 7,010 5,637 Other long-term obligations 5,196 4,292 Total Liabilities 202,367 238,135 Commitments and Contingencies (Note 11) Shareholders' Equity Common stock 311,190 307,932 Additional contributed capital 41,654 43,689 Retained earnings 539,281 509,766 Accumulated other comprehensive loss ( 95,921 ) ( 91,726 ) Total shareholders' equity before treasury stock 796,204 769,661 Treasury stock ( 372,522 ) ( 364,442 ) Total shareholders' equity 423,682 405,219 Total Liabilities and Shareholders' Equity $ 626,049 $ 643,354 The accompanying notes are an integral part of the consolidated financial statements. CTS CORPORATION 30 Table of Contents CTS CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows (in thousands) Years Ended December 31, 2020 2019 2018 CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 34,686 $ 36,146 $ 46,532 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 26,670 24,619 22,514 Pensions and other post-retirement plan expense 2,698 1,009 422 Stock-based compensation 3,417 5,015 5,256 Asset impairment charges 1,016 — — Restructuring non-cash charges 300 1,704 — Deferred income taxes ( 2,048 ) 2,413 ( 1,008 ) Gain on sales of fixed assets — ( 63 ) — (Gain) loss on foreign current hedges, net of tax ( 20 ) 97 ( 82 ) Changes in assets and liabilities, net of acquisitions: Accounts receivable ( 343 ) 3,784 ( 9,877 ) Inventories ( 578 ) 4,371 ( 7,521 ) Operating lease assets 1,363 ( 2,578 ) — Other assets 3,701 ( 2,605 ) ( 2,675 ) Accounts payable 3,860 ( 4,658 ) 5,113 Accrued payroll and benefits 2,518 ( 5,940 ) 2,349 Income taxes payable ( 927 ) 941 1,564 Operating lease liabilities ( 1,257 ) 2,921 — Accrued expenses and other liabilities 1,983 ( 2,484 ) ( 4,053 ) Pension and other post-retirement plans ( 256 ) ( 287 ) ( 382 ) Net cash provided by operating activities 76,783 64,405 58,152 CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures ( 14,858 ) ( 21,733 ) ( 28,488 ) Proceeds from sale of assets — 137 3 Payments for acquisitions, net of cash acquired ( 8,309 ) ( 73,906 ) — Net cash used in investing activities ( 23,167 ) ( 95,502 ) ( 28,485 ) 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 3,747,450 1,935,500 1,033,800 Purchase of treasury stock ( 8,080 ) ( 11,746 ) ( 9,440 ) Dividends paid ( 5,179 ) ( 5,238 ) ( 5,285 ) Taxes paid on behalf of equity award participants ( 1,917 ) ( 2,657 ) ( 1,468 ) Contingent consideration payment ( 1,057 ) — — Net cash (used in) provided by financing activities ( 61,333 ) 30,059 ( 42,493 ) Effect of exchange rate on cash and cash equivalents ( 751 ) 346 187 Net decrease in cash and cash equivalents ( 8,468 ) ( 692 ) ( 12,639 ) Cash and cash equivalents at beginning of year 100,241 100,933 113,572 Cash and cash equivalents at end of year $ 91,773 $ 100,241 $ 100,933 Supplemental cash flow information: Cash paid for interest $ 2,597 $ 1,961 $ 1,582 Cash paid for income taxes, net $ 11,967 $ 11,113 $ 9,916 Non-cash financing and investing activities: Capital expenditures incurred not paid $ 729 $ 4,077 $ 4,312 The accompanying notes are an integral part of the consolidated financial statements. CTS CORPORATION 31 CTS CORPORATION AND SUBSIDIARIES Consolidated Statements of Shareholders' Equity (in thousands) Common Stock Additional Contributed Capital Retained Earnings Accumulated Other Comprehensive Loss Treasury Stock Total Balances at January 1, 2018 $ 304,777 $ 41,084 $ 420,160 $ ( 78,960 ) $ ( 343,256 ) $ 343,805 Net earnings — — 46,532 — — 46,532 Changes in fair market value of derivatives, net of tax — — — 795 — 795 Changes in unrealized pension cost, net of tax — — — ( 1,830 ) — ( 1,830 ) Cumulative translation adjustment, net of tax — — — ( 311 ) — ( 311 ) Cash dividends of $ 0.16 per share — — ( 5,278 ) — — ( 5,278 ) Acquired 342,100 shares of treasury stock — — — — ( 9,440 ) ( 9,440 ) Issued shares on vesting of restricted stock units 1,920 ( 3,389 ) — — — ( 1,469 ) Implementation of ASU No. 2018-02 — — 17,433 ( 17,433 ) — — Stock compensation — 5,125 — — — 5,125 Balances at December 31, 2018 $ 306,697 $ 42,820 $ 478,847 $ ( 97,739 ) $ ( 352,696 ) $ 377,929 Net earnings — — 36,146 — — 36,146 Changes in fair market value of derivatives, net of tax — — — ( 509 ) — ( 509 ) Changes in unrealized pension cost, net of tax — — — 6,439 — 6,439 Cumulative translation adjustment, net of tax — — — 83 — 83 Cash dividends of $ 0.16 per share — — ( 5,227 ) — — ( 5,227 ) Acquired 420,770 shares of treasury stock — — — — ( 11,746 ) ( 11,746 ) Issued shares on vesting of restricted stock units 1,235 ( 3,891 ) — — — ( 2,656 ) Stock compensation — 4,760 — — — 4,760 Balances at December 31, 2019 $ 307,932 $ 43,689 $ 509,766 $ ( 91,726 ) $ ( 364,442 ) $ 405,219 Net earnings — — 34,686 — — 34,686 Changes in fair market value of derivatives, net of tax — — — ( 1,307 ) — ( 1,307 ) Changes in unrealized pension cost, net of tax — — — ( 2,965 ) — ( 2,965 ) Cumulative translation adjustment, net of tax — — — 77 — 77 Cash dividends of $ 0.16 per share — — ( 5,171 ) — — ( 5,171 ) Acquired 342,731 shares for treasury stock — — — — ( 8,080 ) ( 8,080 ) Issued shares on vesting of restricted stock units 3,258 ( 5,175 ) — — — ( 1,917 ) Stock compensation — 3,140 — — — 3,140 Balances at December 31, 2020 $ 311,190 $ 41,654 $ 539,281 $ ( 95,921 ) $ ( 372,522 ) $ 423,682 The accompanying notes are an integral part of the consolidated financial statements. CTS CORPORATION 32 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except for share and per share data) NOTE 1 — Summary of Significant Accounting Policies Description of Business: 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. Principles of Consolidation: The consolidated financial statements include the accounts of CTS and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Use of Estimates: The preparation of financial statements in conformity with the accounting principles generally accepted in the United States of America ("U.S. GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates. Cash and Cash Equivalents: 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 Credit Losses: Accounts receivable consists primarily of amounts due from normal business activities. 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. Concentration of Credit Risk: Financial instruments that potentially subject us to concentrations of credit risk consist of cash and cash equivalents and trade receivables. Our cash and cash equivalents, at times, may exceed federally insured limits. Cash and cash equivalents are deposited primarily in banking institutions with global operations. We have not experienced any losses in such accounts. We believe we are not exposed to any significant credit risk related to cash and cash equivalents. Trade receivables subject us to the potential for credit risk with major customers. We sell our products to customers principally in the aerospace and defense, industrial, information technology, medical, telecommunications, and transportation markets, primarily in North America, Europe, and Asia. We perform ongoing credit evaluations of our customers to minimize credit risk. We do not require collateral. 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, 2020 2019 2018 Toyota Motor Corporation 13.4 % 11.6 % 10.5 % Cummins Inc. 13.1 % 16.1 % 15.2 % Honda Motor Co. 8.0 % 9.6 % 10.5 % 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. No other customer accounted for 10% or more of total net sales during these periods. Inventories: We value our inventories at the lower of the actual cost to purchase or manufacture or the net realizable value using the first-in, first-out ("FIFO") method. We review inventory quantities on hand and record a provision for excess and obsolete inventory based on forecasts of product demand and production requirements. Retirement Plans: We have various defined benefit and defined contribution retirement plans. Our policy is to annually fund the defined benefit pension plans at or above the minimum required by law. We: 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 CTS CORPORATION 33 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. Property, Plant and Equipment: Property, plant and equipment is stated at cost, less accumulated depreciation. 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 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 . Income Taxes: We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, we determine deferred tax assets and liabilities on the basis of the differences between the financial statement and tax bases of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. We recognize deferred tax assets to the extent that we believe that these assets are more-likely-than-not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If we determine that we would be able to realize our deferred tax assets in the future in excess of their net recorded amount, we would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes. We record uncertain tax positions in accordance with Accounting Standards Codification ("ASC") Topic 740 on the basis of a two-step process in which (1) we determine whether it is more-likely-than-not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority. We recognize interest and penalties related to unrecognized tax benefits on the income tax expense line in the accompanying Consolidated Statements of Earnings. Accrued interest and penalties are included in the related tax liability line in the Consolidated Balance Sheets. See Note 19, "Income Taxes" for further information. Goodwill and Indefinite-lived Intangible Assets: Goodwill represents the excess of the purchase price over the fair values of the net assets acquired in a business combination. In accordance with ASC 350, Intangibles—Goodwill and Other , goodwill is not amortized, but instead is tested for impairment annually or more frequently if circumstances indicate a possible impairment may exist. 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. 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. The qualitative assessment includes a review of macroeconomic conditions, industry and market considerations, internal cost factors, and our own overall financial and share price performance, among other factors. 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 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. 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. 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 CTS CORPORATION 34 Table of Contents 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: We account for long-lived assets (excluding indefinite-lived intangible assets) in accordance with the provisions of ASC 360, Property, Plant, and Equipment . This statement requires that long-lived assets, which includes fixed assets and finite-lived intangible assets, be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. 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 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. These assets are recorded at cost and usually amortized on a straight-line basis over their estimated lives. We assess useful lives based on the period over which the asset is expected to contribute to cash flows. Revenue Recognition: Product revenue is recognized upon the transfer of promised goods to a customer in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods. We follow the five step model to determine when this transfer has occurred: 1) identify the contract(s) with the customer; 2) identify the performance obligations in the contract; 3) determine the transaction price; 4) allocate the transaction price to the performance obligations in the contract; 5) recognize revenue when (or as) the entity satisfies a performance obligation. Research and Development: Research and development ("R&D") costs include expenditures for search and investigation aimed at discovery of new knowledge to be used to develop new products or processes or to significantly enhance existing products or production processes. R&D costs also include the implementation of new knowledge through design, testing of product alternatives, or construction of prototypes. We expense all R&D costs as incurred, net of customer reimbursements for sales of prototypes and non-recurring engineering charges. We create prototypes and tools related to R&D projects. A prototype is defined as a constructed product not intended for production resulting in a commercial sale. We also incur engineering costs related to R&D activities. Such costs are incurred to support such activities to improve the reliability, performance and cost-effectiveness of our existing products and to design and develop innovative products that meet customer requirements for new applications. 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 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. Reimbursements received from customers are netted against such costs and included in our Consolidated Statements of Earnings if the amount received is in excess of the costs that we incur. The following is a summary of amounts to be received from customers as of December 31, 2020, and 2019: As of December 31, 2020 2019 Cost of molds, dies and other tools included in other current assets $ 4,895 $ 7,690 Financial Instruments: We use forward contracts to mitigate currency risk related to forecasted foreign currency revenue and costs. These forward contracts are designed as cash flow hedges. At least quarterly, we assess the effectiveness of these hedging relationships based on the total change in their fair value using regression analysis. In addition, we use interest rate swaps to convert a portion of our revolving credit facility's variable rate of interest into a fixed rate. As a result of the use of these derivative instruments, the Company is exposed to the risk that counterparties to derivative contracts will fail to meet their contractual obligations. To mitigate the counterparty credit risk, the Company has a policy of only entering into contracts with carefully selected major financial institutions based upon their credit ratings and other factors and by using netting agreements. Our established policies and procedures for mitigating credit risk on principal transactions include reviewing and establishing limits for credit exposure and continually assessing the creditworthiness of counterparties. We estimate the fair value of our financial instruments as follows: CTS CORPORATION 35 Instrument Method for determining fair value Cash, cash equivalents, accounts receivable and accounts payable Cost, approximates fair value due to the short-term nature of these instruments. Revolving credit facility 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 credit facility. Interest rate swaps and forward contracts The fair value of our interest rate swaps and forward contracts are measured using a market approach which uses current industry information. Debt Issuance Costs: 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. Stock-Based Compensation: We recognize expense related to the fair value of stock-based compensation awards, consisting of restricted stock units ("RSUs"), cash-settled restricted stock units, performance share units ("PSU's"), and stock options, in the Consolidated Statements of Earnings. We estimate the fair value of stock option awards on the date of grant using the Black-Scholes option pricing model. A number of assumptions are used by the Black-Scholes option pricing model to compute the grant date fair value of an award, including expected price volatility, option term, risk-free interest rate, and dividend yield. These assumptions are established at each grant date based upon current information at that time. Expected volatilities are based on historical volatilities of CTS' common stock. The expected option term is derived from historical data of exercise behavior. Actual option terms can differ from the expected option terms as a result of different groups of employees exhibiting different exercise behavior. The dividend yield is based on historical dividend payments. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve at the time of grant. The fair value of awards that are ultimately expected to vest is recognized as expense over the requisite service periods of the awards in the Consolidated Statements of Earnings. The grant date fair values of our service-based and performance-based RSUs are the closing price of our common stock on the date of grant. The grant date fair value of our market-based RSUs is determined by using a simulation, or Monte Carlo, approach. Under this approach, stock returns from a comparative group of companies are simulated over the performance period, considering both stock price volatility and the correlation of returns. The simulated results are then used to estimate the future payout based on the performance and payout relationship established by the conditions of the award. The future payout is discounted to the measurement date using the risk-free interest rate. Both our stock option and RSU awards primarily have a graded vesting schedule. We recognize expense on a straight-line basis over the requisite service period for each separately vesting portion of the award as if the award was, in substance, multiple awards. Compensation expense for PSUs is measured by determining the fair value of the award using the closing share price on the grant date and is recognized ratably from the grant date to the vesting date for the number of awards expected to vest. 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. Earnings Per Share: Basic earnings per share excludes any dilution and is computed by dividing net earnings available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share is calculated by dividing net earnings by the weighted average shares outstanding assuming dilution. Dilutive common shares outstanding is computed using the Treasury Stock Method and reflects the additional shares that would be outstanding if dilutive stock options were exercised and restricted stock units were settled for common shares during the period. In addition, dilutive shares include any shares issuable related to performance share units for which the performance conditions would have been met as of the end of the period and therefore would be considered contingently issuable. If the common stock equivalents have an anti-dilutive effect, they are excluded from the computation of diluted earnings per share. Our antidilutive securities consist of the following: Years Ended December 31, (units) 2020 2019 2018 Antidilutive securities 26,140 22,040 18,138 Foreign Currencies: The financial statements of our non-U.S. subsidiaries, except the United Kingdom ("U.K.") subsidiary, are remeasured into U.S. dollars using the U.S. dollar as the functional currency with all remeasurement adjustments included in the determination of net earnings. CTS CORPORATION 36 Table of Contents Foreign currency gains (losses) recorded in the Consolidated Statement of Earnings includes the following: Years Ended December 31, 2020 2019 2018 Foreign currency gains (losses) $ 5,316 $ ( 1,797 ) $ ( 2,619 ) The assets and liabilities of our U.K. subsidiary are translated into U.S. dollars at the current exchange rate at period end, with the resulting translation adjustments made directly to the "accumulated other comprehensive loss" component of shareholders' equity. Our Consolidated Statement of Earnings accounts are translated at the average rates during the period. Shipping and Handling: All fees billed to the customer for shipping and handling are classified as a component of net sales. All costs associated with shipping and handling are classified as a component of cost of goods sold or operating expenses, depending on the nature of the underlying purchase. Sales Taxes: When applicable, we classify sales taxes on a net basis in our consolidated financial statements. 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 Accounting Pronouncements Recently Adopted ASU No. 2018-14 "Compensation - Retirement Benefits - Defined Benefit Plans - General" 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. This ASU eliminates certain disclosures associated with accumulated other comprehensive income, plan assets, related parties, and the effects of interest rate basis point changes on assumed health care costs; while other disclosures have been added to address significant gains and losses related to changes in benefit obligations. This ASU also clarifies disclosure requirements for projected benefit and accumulated benefit obligations. The amendments in this ASU are effective for fiscal years ending after December 15, 2020 and for interim periods therein with early adoption permitted. Adoption on a retrospective basis for all periods presented is required. We have applied the requirements of this ASU to the financial statements. ASU No. 2018-13 "Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement" In August 2018, the FASB issued ASU No. 2018-13 " Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement ". This ASU modified the disclosures related to recurring and nonrecurring fair value measurements. Disclosures related to the transfer of assets between Level 1 and Level 2 hierarchies have been eliminated and various additional disclosures related to Level 3 fair value measurements have been added, modified or removed. This ASU is effective for annual periods beginning after December 15, 2019, and interim periods within those fiscal years. 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 adopted this ASU on January 1, 2020 and it did not have a material impact on our financial statements. ASU No. 2016-16 "Income Taxes (Topic 740) Intra-Entity Transfers of Assets Other Than Inventory" In October 2016, the FASB issued ASU No. 2016-16, " Intra-Entity Transfers of Assets Other Than Inventory ". This ASU is meant to improve the accounting for the income tax effect of intra-entity transfers of assets other than inventory. Currently, U.S. 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) 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 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): Measurement of Credit Losses on Financial Instruments " In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): 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 CTS CORPORATION 37 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 it did not have a material impact on our financial statements. Recently Issued Accounting Pronouncements ASU No. 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. ASU No. 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 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 do not expect the adoption of this ASU to have a material impact on our financial statements or results . NOTE 2 – Revenue Recognition The core principle of ASC 606 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance provides a five-step process to achieve that core principle: • Identify the contract(s) with a customer • Identify the performance obligations • Determine the transaction price • Allocate the transaction price • Recognize revenue when the performance obligations are met We recognize revenue when the performance obligations specified in our contracts have been satisfied, after considering the impact of variable consideration and other factors that may affect the transaction price. Our contracts normally contain a single performance obligation that is fulfilled on the date of delivery based on shipping terms stipulated in the contract. We usually expect payment within 30 to 90 days from the shipping date, depending on our terms with the customer. None of our contracts as of December 31, 2020 contained a significant financing component. Differences between the amount of revenue recognized and the amount invoiced, collected from, or paid to our customers are recognized as contract assets or liabilities. 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 may require 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. CTS CORPORATION 38 Table of Contents D isaggregated Revenue The following table presents revenues disaggregated by the major markets we serve: Twelve Months Ended December 31, 2020 2019 Transportation $ 241,445 $ 299,005 Industrial 92,784 78,369 Medical 39,070 41,901 Aerospace & Defense 39,327 32,569 Telecom & IT 11,440 17,155 Total $ 424,066 $ 468,999 NOTE 3 - Business Acquisitions Sensor Scientific, Inc. On December 30, 2020, we acquired 100 % of the outstanding shares of Sensor Scientific, Inc. (SSI). 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 $ 8,309 Contingent consideration 2,000 Purchase price $ 10,309 Fair Values at December 30, 2020 Current assets $ 2,618 Property, plant and equipment 129 Other assets 12 Goodwill 3,441 Intangible assets 5,161 Fair value of assets acquired 11,361 Less fair value of liabilities acquired ( 1,052 ) Purchase price $ 10,309 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 CTS CORPORATION 39 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 $ 72,850 Contingent consideration 1,056 Purchase price $ 73,906 Fair Values at July 31, 2019 Current assets $ 6,221 Property, plant and equipment 2,567 Other assets 29 Goodwill 34,999 Intangible assets 32,800 Fair value of assets acquired 76,616 Less fair value of liabilities acquired ( 2,710 ) Purchase price $ 73,906 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. 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: CTS CORPORATION 40 Table of Contents Carrying Value Weighted Average Amortization Period Customer lists/relationships $ 31,000 15.0 Trademarks, tradenames, and other intangibles 1,800 5.0 Total $ 32,800 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 Net sales $ 9,252 Net loss $ ( 465 ) NOTE 4 — Accounts Receivable, net The components of accounts receivable, net are as follows: As of December 31, 2020 2019 Accounts receivable, gross $ 81,745 $ 78,269 Less: Allowance for credit losses ( 764 ) ( 261 ) Accounts receivable, net $ 80,981 $ 78,008 NOTE 5 — Inventories, net Inventories, net consist of the following: As of December 31, 2020 2019 Finished goods $ 10,647 $ 9,447 Work-in-process 16,927 14,954 Raw materials 24,893 23,363 Less: Inventory reserves ( 6,597 ) ( 5,527 ) Inventories, net $ 45,870 $ 42,237 NOTE 6 — Property, Plant and Equipment, net Property, plant and equipment, net is comprised of the following: As of December 31, 2020 2019 Land and land improvements $ 1,095 $ 1,095 Buildings and improvements 69,360 68,350 Machinery and equipment 233,743 224,312 Less: Accumulated depreciation ( 206,761 ) ( 188,719 ) Property, plant and equipment, net $ 97,437 $ 105,038 Depreciation expense recorded in the Consolidated Statements of Earnings includes the following: For the Years Ended 2020 2019 2018 Depreciation expense $ 17,615 $ 16,849 $ 15,697 CTS CORPORATION 41 NOTE 7 — Retirement Plans We have a number of noncontributory defined benefit pension plans ("pension plans") covering approximately 2 % of our active employees. Pension plans covering salaried employees provide pension benefits that are based on the employees´ years of service and compensation prior to retirement. 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. Domestic employees who were hired prior to 1982 and certain former union employees are eligible for life insurance benefits upon retirement. We fund life insurance benefits through term life insurance policies and intend to continue funding all of the premiums on a pay-as-you-go basis. We recognize the funded status of a benefit plan in our consolidated balance sheets. The funded status is measured as the difference between plan assets at fair value and the projected benefit obligation. We also recognize, as a component of other comprehensive earnings, net of tax, 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. The measurement dates for the pension plans for our U.S. and non-U.S. locations were December 31, 2020, and 2019. 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. and non-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. CTS CORPORATION 42 Table of Contents U.S. Pension Plans Non-U.S. Pension Plans 2020 2019 2020 2019 Accumulated benefit obligation $ 230,205 $ 220,339 $ 1,983 $ 1,854 Change in projected benefit obligation: Projected benefit obligation at January 1 $ 220,339 $ 205,319 $ 2,633 $ 2,756 Service cost — — 31 37 Interest cost 5,773 7,724 28 31 Benefits paid ( 14,590 ) ( 14,834 ) ( 285 ) ( 408 ) Actuarial loss 18,683 22,130 95 153 Foreign exchange impact — — 184 64 Projected benefit obligation at December 31 $ 230,205 $ 220,339 $ 2,686 $ 2,633 Change in plan assets: Assets at fair value at January 1 $ 281,276 $ 258,327 $ 1,419 $ 1,425 Actual return on assets 18,886 37,680 95 73 Company contributions 103 103 268 295 Benefits paid ( 14,590 ) ( 14,834 ) ( 285 ) ( 408 ) Foreign exchange impact — — 98 34 Assets at fair value at December 31 $ 285,675 $ 281,276 $ 1,595 $ 1,419 Funded status (plan assets less projected benefit obligations) $ 55,470 $ 60,937 $ ( 1,091 ) $ ( 1,214 ) The measurement dates for the post-retirement life insurance plan were December 31, 2020, and 2019. The following table provides a reconciliation of benefit obligation, plan assets, and the funded status of the post-retirement life insurance plan at those measurement dates. Post-Retirement Life Insurance Plan 2020 2019 Accumulated benefit obligation $ 5,376 $ 4,766 Change in projected benefit obligation: Projected benefit obligation at January 1 $ 4,766 $ 4,595 Service cost 1 1 Interest cost 122 170 Benefits paid ( 154 ) ( 145 ) Actuarial loss 641 145 Projected benefit obligation at December 31 $ 5,376 $ 4,766 Change in plan assets: Assets at fair value at January 1 $ — $ — Actual return on assets — — Company contributions 154 145 Benefits paid ( 154 ) ( 145 ) Other — — Assets at fair value at December 31 $ — $ — Funded status (plan assets less projected benefit obligations) $ ( 5,376 ) $ ( 4,766 ) 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 Non-U.S. Pension Plans 2020 2019 2020 2019 Prepaid pension asset $ 56,642 $ 62,082 $ — $ — Accrued expenses and other liabilities ( 100 ) ( 100 ) — — Long-term pension obligations ( 1,072 ) ( 1,045 ) ( 1,091 ) ( 1,214 ) Net prepaid (accrued) cost $ 55,470 $ 60,937 $ ( 1,091 ) $ ( 1,214 ) 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: CTS CORPORATION 43 Post-Retirement Life Insurance Plan 2020 2019 Accrued expenses and other liabilities $ ( 451 ) $ ( 393 ) Long-term pension obligations ( 4,924 ) ( 4,373 ) Total accrued cost $ ( 5,375 ) $ ( 4,766 ) We have also recorded the following amounts to accumulated other comprehensive loss for the U.S. and non-U.S. pension plans, net of tax: U.S. Pension Plans Non-U.S. Pension Plans Unrecognized Loss Unrecognized Loss Balance at January 1, 2019 $ 95,494 $ 1,916 Amortization of retirement benefits, net of tax ( 4,060 ) ( 138 ) Net actuarial (loss) gain ( 2,604 ) 78 Foreign exchange impact — 44 Balance at January 1, 2020 $ 88,830 $ 1,900 Amortization of retirement benefits, net of tax ( 4,995 ) ( 146 ) Net actuarial gain (loss) 7,402 14 Foreign exchange impact — 133 Balance at December 31, 2020 $ 91,237 $ 1,901 We have recorded the following amounts to accumulated other comprehensive loss for the post-retirement life insurance plan, net of tax: Unrecognized Gain Balance at January 1, 2019 $ ( 849 ) Amortization of retirement benefits, net of tax 129 Net actuarial gain 112 Balance at January 1, 2020 $ ( 608 ) Amortization of retirement benefits, net of tax 64 Net actuarial gain 493 Balance at December 31, 2020 $ ( 51 ) The accumulated actuarial gains and losses included in other comprehensive earnings are amortized in the following manner: The component of unamortized net gains or losses related to our qualified pension plans is amortized based on the expected future life expectancy of the plan participants (estimated to be approximately 16 years at December 31, 2020), because substantially all of the participants in those plans are inactive. The component of unamortized net gains or losses related to our post-retirement life insurance plan is amortized based on the estimated remaining future service period of the plan participants (estimated to be approximately 3 years at December 31, 2020). The Company uses a market-related approach to value plan assets, reflecting changes in the fair value of plan assets over a five-year period. 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 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: CTS CORPORATION 44 Table of Contents As of December 31, 2020 2019 Projected benefit obligation $ 3,859 $ 3,778 Accumulated benefit obligation $ 3,155 $ 2,999 Fair value of plan assets $ 1,595 $ 1,419 Net pension expense (income) includes the following components: Years Ended December 31, Years Ended December 31, U.S. Pension Plans Non-U.S. Pension Plans 2020 2019 2018 2020 2019 2018 Service cost $ — $ — $ — $ 31 $ 37 $ 43 Interest cost 5,773 7,724 7,123 28 31 42 Expected return on plan assets (1) ( 9,817 ) ( 12,187 ) ( 12,898 ) ( 16 ) ( 17 ) ( 25 ) Amortization of unrecognized loss 6,488 5,246 5,863 174 170 162 Net expense $ 2,444 $ 783 $ 88 $ 217 $ 221 $ 222 Weighted-average actuarial assumptions (2) Benefit obligation assumptions: Discount rate 2.26 % 3.15 % 4.30 % 0.63 % 1.00 % 1.13 % Rate of compensation increase N/A N/A N/A 3.00 % 3.00 % 3.00 % Pension income/expense assumptions: Discount rate 3.15 % 4.30 % 3.63 % 0.63 % 1.13 % 1.38 % Expected return on plan assets (1) 3.76 % 4.61 % 4.72 % 0.63 % 1.13 % 1.38 % Rate of compensation increase N/A N/A N/A 3.00 % 3.00 % 2.00 % (1) Expected return on plan assets is net of expected investment expenses and certain administrative expenses. (2) 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: Post-Retirement Life Insurance Plan Years Ended December 31, 2020 2019 2018 Service cost $ 1 $ 1 $ 2 Interest cost 122 170 156 Amortization of unrecognized gain ( 84 ) ( 166 ) ( 46 ) Net expense $ 39 $ 5 $ 112 Weighted-average actuarial assumptions (1) Benefit obligation assumptions: Discount rate 2.27 % 3.09 % 4.26 % Rate of compensation increase N/A N/A N/A Pension income/post-retirement expense assumptions: Discount rate 3.09 % 4.26 % 3.59 % Rate of compensation increase N/A N/A N/A (1) 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. 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 at December 31, Asset Category 2021 2020 2019 Equity securities 0 % 13 % 13 % Fixed income/Debt securities 100 % 83 % 83 % Other 0 % 4 % 4 % Total 100 % 100 % 100 % CTS CORPORATION 45 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 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: As of December 31, 2020 2019 Equity securities - U.S. holdings (1) $ 7 $ 24,586 Bond funds - government (4) (7) 53,239 33,991 Bond funds - other (5) (7) 173,853 207,901 Real estate (6) (7) — 2,979 Cash and cash equivalents (2) 53,379 5,700 Partnerships (3) 6,792 7,539 Total fair value of plan assets $ 287,270 $ 282,696 The fair values at December 31, 2020, are classified within the following categories in the fair value hierarchy: Quoted Prices in Active Markets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Not Leveled Total Equity securities - U.S. holdings (1) $ 7 $ — $ — $ — $ 7 Bond funds - government (4) (7) — — — 53,239 53,239 Bond funds - other (5) (7) — — — 173,853 173,853 Cash and cash equivalents (2) 53,379 — — — 53,379 Partnerships (3) — — 6,792 — 6,792 Total $ 53,386 $ — $ 6,792 $ 227,092 $ 287,270 The fair values at December 31, 2019, are classified within the following categories in the fair value hierarchy: Quoted Prices in Active Markets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Not Leveled Total Equity securities - U.S. holdings (1) $ 24,586 $ — $ — $ — $ 24,586 Bond funds - government (4) (7) — — — 33,991 33,991 Bond funds - other (5) (7) — — — 207,901 207,901 Real estate (6) (7) — — — 2,979 2,979 Cash and cash equivalents (2) 5,700 — — — 5,700 Partnerships (3) — — 7,539 — 7,539 Total $ 30,286 $ — $ 7,539 $ 244,871 $ 282,696 (1) Comprised of common stocks of companies in various industries. The Pension Plan fund manager may shift investments from value to growth strategies or vice-versa, from small cap to large cap stocks or vice-versa, in order to meet the Pension Plan's investment objectives, which are to provide for a reasonable amount of long-term growth of capital without undue exposure to volatility, and protect the assets from erosion of purchasing power. (2) Comprised of investment grade short-term investment and money-market funds. (3) Comprised of partnerships that invest in various U.S. and international industries. (4) 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. CTS CORPORATION 46 Table of Contents (5) Comprised predominately of investment grade U.S. corporate bonds with maturities greater than 10 years and U.S. high-yield corporate bonds; emerging market debt (local currency sovereign bonds, U.S. dollar-denominated sovereign bonds and U.S. dollar-denominated corporate bonds); and U.S. bank loans. (6) Comprised of investments in securities of U.S. and non-U.S. real estate investment trusts (REITs), real estate operating companies and other companies that are principally engaged in the real estate industry and of investments in global private direct commercial real estate. Investments can be redeemed immediately following the valuation date with a notice of at least fifteen business days before valuation. (7) Comprised of investments that are measured at fair value using the NAV per share practical expedient. In accordance with the provisions of ASC 820-10, these investments have not been classified in the fair value hierarchy. The fair value amount not leveled is presented to allow reconciliation of the fair value hierarchy to total fund pension plan assets. The pension plan assets recorded at fair value are measured and classified in a hierarchy for disclosure purposes consisting of three levels based on the observability of inputs available in the marketplace used to measure fair value as discussed below: • Level 1: Fair value measurements that are based on quoted prices (unadjusted) in active markets that the pension plan trustees have the ability to access for identical assets or liabilities. Market price data generally is obtained from exchange or dealer markets. • Level 2: Fair value measurements based on inputs other than quoted prices included in Level 1 that are observable for the asset, either directly or indirectly. Level 2 inputs include quoted prices for similar assets in active or inactive markets, and inputs other than quoted prices that are observable for the asset, such as interest rates and yield curves that are observable at commonly quoted intervals. • Level 3: Fair value measurements based on valuation techniques that use significant inputs that are unobservable. The table below reconciles the Level 3 partnership assets within the fair value hierarchy: Amount Fair value of Level 3 partnership assets at January 1, 2019 $ 9,172 Capital contributions 120 Realized and unrealized gain ( 139 ) Capital distributions ( 1,614 ) Fair value of Level 3 partnership assets at December 31, 2019 $ 7,539 Capital contributions 44 Realized and unrealized gain ( 269 ) Capital distributions ( 522 ) Fair value of Level 3 partnership assets at December 31, 2020 $ 6,792 The partnership fund manager uses a market approach in estimating the fair value of the plan's Level 3 asset. The market approach estimates fair value by first determining the entity's earnings before interest, taxes, depreciation, and amortization and then multiplying that value by an estimated multiple. When establishing an appropriate multiple, the fund manager considers recent comparable private company transactions and multiples paid. The entity's net debt is then subtracted from the calculated amount to arrive at an estimated fair value for the entity. We expect to make $ 551 of contributions to the U.S. plans and $ 253 of contributions to the non-U.S. plans during 2021. 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: U.S. Pension Plans Non-U.S. Pension Plans Post- Retirement Life Insurance Plan 2021 $ 15,514 $ 54 $ 451 2022 15,397 86 426 2023 15,215 71 402 2024 14,979 87 380 2025 14,703 98 360 2026-2029 68,579 734 1,545 Total $ 144,387 $ 1,130 $ 3,564 CTS CORPORATION 47 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: Years Ended December 31, 2020 2019 2018 401(k) and other defined contribution plan expense $ 1,636 $ 3,125 $ 3,256 NOTE 8 — Goodwill and Other Intangible Assets Other Intangible Assets The following is a summary of the Company’s other intangible assets as of December 31: As of December 31, 2020 Gross Carrying Amount Accumulated Amortization Net Amount Weighted Average Remaining Amortization Period (in years) Other intangible assets: Customer lists / relationships $ 97,355 $ ( 44,002 ) $ 53,353 9.8 Technology and other intangibles 47,301 ( 21,533 ) 25,768 7.8 In process research and development 2,200 ( 2,200 ) — — Other intangible assets, net $ 146,856 $ ( 67,735 ) $ 79,121 9.2 Amortization expense for the year ended December 31, 2020 $ 9,055 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 Gross Carrying Amount Accumulated Amortization Net Amount Other intangible assets: Customer lists / relationships $ 92,194 $ ( 38,682 ) $ 53,512 Technology and other intangibles 47,925 ( 18,422 ) 29,503 In process research and development 2,200 — 2,200 Other intangible assets, net $ 142,319 $ ( 57,104 ) $ 85,215 Amortization expense for the year ended December 31, 2019 $ 7,770 Amortization expense for the year ended December 31, 2018 $ 6,817 CTS CORPORATION 48 Table of Contents The estimated amortization expense for the next five years and thereafter is as follows: Amortization expense 2021 $ 9,409 2022 9,173 2023 7,167 2024 7,005 2025 6,783 Thereafter 39,584 Total future amortization expense $ 79,121 Goodwill Changes in the net carrying value amount of goodwill were as follows: Total Goodwill as of December 31, 2018 $ 71,057 Increase from acquisition 34,999 Goodwill as of December 31, 2019 $ 106,056 Increase from acquisition 3,441 Goodwill as of December 31, 2020 $ 109,497 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. 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 Restructuring charges are reported as a separate line within operating earnings in the Consolidated Statements of Earnings. Total restructuring charges were: Years Ended December 31, 2020 2019 2018 Restructuring charges $ 1,830 $ 7,448 $ 5,062 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"). Additional organizational changes were also implemented in various other locations. 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 $( 32 ), $ 4,284 , and $ 4,559 during the CTS CORPORATION 49 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 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 Actual costs incurred through December 31, 2020 Workforce reduction $ 3,075 $ 3,312 Building and equipment relocation 9,025 10,530 Asset impairment charge — 1,168 Other charges (1) 1,300 988 Restructuring charges $ 13,400 $ 15,998 (1) 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"). These restructuring actions were substantially completed during 2015. Restructuring charges under this plan were $ 0 , $( 248 ), and $ 503 during the years ended December 31, 2020, 2019, and 2018, respectively. 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. 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: Restructuring liability at January 1, 2020 $ 1,993 Restructuring charges 1,830 Cost paid ( 1,823 ) Other activities (1) ( 637 ) Restructuring liability at December 31, 2020 $ 1,363 (1) Other charges include the effects of currency translation, non-cash asset write-downs, travel, legal and other charges. The total liability of $ 1,363 is included in Accrued expenses and other liabilities at December 31, 2020. CTS CORPORATION 50 Table of Contents NOTE 10 — Accrued Expenses and Other Liabilities The components of accrued expenses and other liabilities are as follows: As of December 31, 2020 2019 Accrued product-related costs $ 4,470 $ 2,950 Accrued income taxes 7,320 7,903 Accrued property and other taxes 2,478 1,574 Accrued professional fees 1,663 1,599 Accrued customer-related liabilities 3,815 4,391 Dividends payable 1,291 1,299 Remediation reserves 10,642 11,444 Derivative liabilities 671 — Other accrued liabilities 5,821 5,218 Total accrued expenses and other liabilities $ 38,171 $ 36,378 NOTE 11 — Contingencies Certain processes in the manufacture of our current and past products create by-products classified as hazardous waste. We have been notified by the U.S. Environmental Protection Agency, state environmental agencies, and in some cases, groups of potentially responsible parties, that we may be potentially liable for environmental contamination at several sites currently and formerly owned or operated by us. Two of those sites, Asheville, North Carolina and Mountain View, California, are designated National Priorities List sites under the U.S. Environmental Protection Agency’s Superfund program. We accrue a liability for probable remediation activities, claims and proceedings against us with respect to environmental matters if the amount can be reasonably estimated, and provide disclosures including the nature of a loss whenever it is probable or reasonably possible that a potentially material loss may have occurred but cannot be estimated. We record contingent loss accruals on an undiscounted basis. A roll-forward of remediation reserves included in accrued expenses and other liabilities in the Consolidated Balance Sheets is comprised of the following: Years Ended December 31, 2020 2019 2018 Balance at beginning of period $ 11,444 $ 11,274 $ 17,067 Remediation expense 2,769 2,602 1,182 Remediation payments ( 3,639 ) ( 2,455 ) ( 6,967 ) Other activity (1) 68 23 ( 8 ) Balance at end of the period $ 10,642 $ 11,444 $ 11,274 (1) Other activity includes currency translation adjustments not recorded through remediation expense Unrelated to the environmental claims described above, certain other legal claims are pending against us with respect to matters arising out of the ordinary conduct of our business. We provide product warranties when we sell our products and accrue for estimated liabilities at the time of sale. Warranty estimates are forecasts based on the best available information and historical claims experience. 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 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. NOTE 12 — Leases We lease certain land, buildings and equipment under non-cancellable operating leases used in our operations. Operating lease assets represent our right to use an underlying asset for the lease term. 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. CTS CORPORATION 51 The operating lease assets and liabilities are adjusted to include the impact of any lease incentives and non-lease components. We have elected not to separate lease and non-lease components, which include taxes and common area maintenance in some of our leases. Variable lease payments that depend on an index or a rate are included in lease payments using the prevailing index or rate in effect at lease commencement. 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 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. 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: Years Ended December 31, 2020 2019 Operating lease cost $ 4,763 $ 4,342 Short-term lease cost 1,015 1,013 Total lease cost $ 5,778 $ 5,355 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: Years Ended December 31, 2020 2019 Cash paid for amounts included in the measurement of lease obligations $ 4,654 $ 3,957 Leased assets obtained in exchange for new operating lease obligations $ 1,678 $ 5,000 Supplemental balance sheet information related to leases was as follows: As of December 31 Balance Sheet Classification: 2020 2019 Operating lease obligations $ 3,294 $ 2,787 Long-term operating lease obligations 23,163 24,926 Total lease liabilities $ 26,457 $ 27,713 Weighted-average remaining lease terms (years) 7.88 9.04 Weighted-average discount rate 6.40 % 6.54 % CTS CORPORATION 52 Table of Contents Remaining maturity of our existing lease liabilities as of December 31, 2020 is as follows: Operating Leases (1) 2021 $ 4,854 2022 4,691 2023 4,258 2024 4,119 2025 3,563 Thereafter 13,406 Total $ 34,891 Less: interest ( 8,434 ) Present value of lease payments $ 26,457 (1) 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 Long-term debt was comprised of the following: As of December 31 2020 2019 Total credit facility $ 300,000 $ 300,000 Balance outstanding $ 54,600 $ 99,700 Standby letters of credit $ 1,740 $ 1,800 Amount available, subject to covenant restrictions $ 243,660 $ 198,500 Weighted-average interest rate 1.92 % 3.25 % Commitment fee percentage per annum 0.23 % 0.23 % On February 12, 2019, we entered into an amended and restated five-year Credit Agreement with a group of banks (the "Credit Agreement") to extend the term of the facility. The Credit Agreement provides for a revolving credit facility of $ 300,000 , which may be increased by $ 150,000 at the request of the Company, subject to the administrative agent's approval. This new unsecured credit facility replaces the prior $ 300,000 unsecured credit facility, which would have expired August 10, 2020. Borrowings of $ 50,000 under the prior credit agreement were refinanced into the Credit Agreement. The prior agreement was terminated as of February 12, 2019. The Revolving Credit Facility includes a swing line sublimit of $ 15,000 and a letter of credit sublimit of $ 10,000 . Borrowings under the Revolving Credit Facility bear interest at the base rate defined in the Credit Agreement. We also pay a quarterly commitment fee on the unused portion of the Revolving Credit Facility. The commitment fee ranges from 0.20 % to 0.30 % based on our total leverage ratio. The Revolving Credit Facility requires, among other things, that we comply with a maximum total leverage ratio and a minimum fixed charge coverage ratio. Failure to comply with these covenants could reduce the borrowing availability under the Revolving Credit Facility. We were in compliance with all debt covenants at December 31, 2020. The Revolving Credit Facility requires that we deliver quarterly financial statements, annual financial statements, auditor certifications, and compliance certificates within a specified number of days after the end of a quarter and year. Additionally, the Revolving Credit Facility contains restrictions limiting our ability to: dispose of assets; incur certain additional debt; repay other debt or amend subordinated debt instruments; create liens on assets; make investments, loans or advances; make acquisitions or engage in mergers or consolidations; engage in certain transactions with our subsidiaries and affiliates; and make stock repurchases and dividend payments. Interest rates on the Revolving Credit Facility fluctuate based upon the LIBOR and the Company’s quarterly total leverage ratio. 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 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. CTS CORPORATION 53 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. We selectively use derivative financial instruments including foreign currency forward contracts and interest rate swaps to manage our exposure to these risks. The use of derivative financial instruments exposes the Company to credit risk, which relates to the risk of nonperformance by a counterparty to the derivative contracts. 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) income 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) income to other income (expense). 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. No recognition of ineffectiveness was recorded in our Consolidated Statement of Earnings for the twelve months ended December 31, 2020. Foreign Currency Hedges We use forward contracts to mitigate currency risk related to a portion of our forecasted foreign currency revenues and costs. The currency forward contracts are designed as cash flow hedges and are recorded in the Consolidated Balance Sheets at fair value. We continue to monitor the Company’s overall currency exposure and may elect to add cash flow hedges in the future. 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. Interest Rate Swaps We use interest rate swaps to convert a portion of our revolving credit facility's outstanding balance from a variable rate of interest to a fixed rate. As of December 31, 2020, we have agreements to fix interest rates on $ 50,000 of long-term debt through February 2024. 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) 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: As of December 31, 2020 2019 Interest rate swaps reported in Other current assets $ — $ 82 Interest rate swaps reported in Accrued liabilities $ ( 671 ) $ — Interest rate swaps reported in Other long-term obligations $ ( 1,546 ) $ ( 78 ) Foreign currency hedges reported in Other current assets $ 1,125 $ 580 The Company has elected to net its foreign currency derivative assets and liabilities in the balance sheet in accordance with ASC 210-20 ( Balance Sheet, Offsetting ). On a gross basis, there were foreign currency derivative assets of $ 1,176 and foreign currency derivative liabilities of $ 51 at December 31, 2020. CTS CORPORATION 54 Table of Contents The effect of derivative instruments on the Consolidated Statements of Earnings is as follows: Years Ended December 31, 2020 2019 2018 Foreign Exchange Contracts: Amounts reclassified from AOCI to earnings: Net sales $ ( 128 ) $ — $ 383 Cost of goods sold ( 754 ) 860 ( 6 ) Selling, general and administrative expense ( 5 ) 92 107 Total amounts reclassified from AOCI to earnings ( 887 ) 952 484 Gain recognized in other expense for hedge ineffectiveness 3 — — Total derivative (loss) gain on foreign exchange contracts recognized in earnings $ ( 884 ) $ 952 $ 484 Interest Rate Swaps: (Expense) benefit recorded in interest expense $ ( 432 ) $ 491 $ 421 Total (losses) gains on derivatives $ ( 1,316 ) $ 1,443 $ 905 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. Further information related to our derivative financial instruments is included in Note 14 - Derivative Financial Instruments and Note 18 – Fair Value Measurements. • Unrealized gains (losses) on pension obligations are deferred from income statement recognition until the gains or losses are realized. Amounts reclassified to earnings from AOCI are included in net periodic pension income (expense). Further information related to our pension obligations is included in Note 7 – Retirement Plans. • Cumulative translation adjustment relates to our non-U.S. subsidiary companies that have designated a functional currency other than the U.S. dollar. 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 income. The components of accumulated other comprehensive (loss) income for the twelve months ended December 31, 2020 are as follows: As of December 31, 2019 Loss Recognized in OCI Loss (gain) reclassified from AOCI to earnings As of December 31, 2020 Changes in fair market value of derivatives: Gross $ 659 $ ( 3,015 ) $ 1,318 $ ( 1,038 ) Income tax (expense) benefit ( 150 ) 684 ( 294 ) 240 Net 509 ( 2,331 ) 1,024 ( 798 ) Changes in unrealized pension cost: Gross ( 124,140 ) — ( 3,864 ) ( 128,004 ) Income tax benefit 34,018 — 899 34,917 Net ( 90,122 ) — ( 2,965 ) ( 93,087 ) Cumulative translation adjustment: Gross ( 2,211 ) 175 — ( 2,036 ) Income tax benefit (expense) 98 ( 98 ) — — Net ( 2,113 ) 77 — ( 2,036 ) Total accumulated other comprehensive loss $ ( 91,726 ) $ ( 2,254 ) $ ( 1,941 ) $ ( 95,921 ) CTS CORPORATION 55 The components of accumulated other comprehensive (loss) income for the twelve months ended December 31, 2019 are as follows: As of December 31, 2018 Gain (Loss) Recognized in OCI (Gain) Loss reclassified from AOCI to earnings As of December 31, 2019 Changes in fair market value of derivatives: Gross $ 1,316 $ 786 $ ( 1,443 ) $ 659 Income tax (expense) benefit ( 298 ) ( 178 ) 326 ( 150 ) Net 1,018 608 ( 1,117 ) 509 Changes in unrealized pension cost: Gross ( 132,454 ) — 8,314 ( 124,140 ) Income tax benefit (expense) 35,893 — ( 1,875 ) 34,018 Net ( 96,561 ) — 6,439 ( 90,122 ) Cumulative translation adjustment: Gross ( 2,291 ) 80 — ( 2,211 ) Income tax benefit 95 3 — 98 Net ( 2,196 ) 83 — ( 2,113 ) Total accumulated other comprehensive (loss) income $ ( 97,739 ) $ 691 $ 5,322 $ ( 91,726 ) NOTE 16 — Shareholders' Equity Share count and par value data related to shareholders' equity are as follows: As of December 31, 2020 2019 Preferred Stock Par value per share No par value No par value Shares authorized 25,000,000 25,000,000 Shares outstanding — — Common Stock Par value per share No par value No par value Shares authorized 75,000,000 75,000,000 Shares issued 57,076,410 56,929,298 Shares outstanding 32,276,787 32,472,406 Treasury stock Shares held 24,799,623 24,456,892 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, 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. A roll forward of common shares outstanding is as follows: As of December 31, 2020 2019 Balance at beginning of the year 32,472,406 32,750,727 Repurchases ( 342,731 ) ( 420,770 ) Restricted stock unit issuances 147,112 142,449 Balance at end of period 32,276,787 32,472,406 NOTE 17 — Stock-Based Compensation 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 CTS CORPORATION 56 Table of Contents 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. These plans allow for grants of stock options, stock appreciation rights, restricted stock, restricted stock units ("RSUs"), performance shares, performance units, and other stock awards subject to the terms of the specific plans under which the awards are granted. The following table summarizes the compensation expense included in selling, general and administrative expenses in the Consolidated Statements of Earnings related to stock-based compensation plans: Years Ended December 31, 2020 2019 2018 Service-Based RSUs $ 2,601 $ 2,207 $ 2,036 Performance-Based RSUs 539 2,553 3,089 Cash-settled awards 277 255 131 Total $ 3,417 $ 5,015 $ 5,256 Income tax benefit 786 1,133 1,188 Net $ 2,631 $ 3,882 $ 4,068 The fair value of all equity awards that vested during the periods ended December 31, 2020, 2019, and 2018 were $ 5,680 , $ 6,589 , and $ 5,805 , respectively. We recorded a tax deduction related to equity awards that vested during the year ended December 31, 2020, in the amount of $ 1,285 . 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: Unrecognized compensation expense at December 31, 2020 Weighted- average period Service-Based RSUs $ 2,039 1.27 years Performance-Based RSUs 1,893 1.76 years Total $ 3,932 1.50 years We recognize expense on a straight-line basis over the requisite service period for each separately vesting portion of the award as if the award was, in substance, multiple awards. The following table summarizes the status of these plans as of December 31, 2020: 2018 Plan 2014 Plan 2009 Plan 2004 Plan Directors' Plan Awards originally available to be granted 2,500,000 1,500,000 3,400,000 6,500,000 N/A Performance stock options outstanding — — — — — Maximum potential RSU and cash settled awards outstanding 503,481 178,900 92,600 35,952 5,522 Maximum potential awards outstanding 503,481 178,900 92,600 35,952 5,522 RSUs and cash settled awards vested and released 45,539 — — — — Awards available to be granted 1,950,980 — — — — Service-Based Restricted Stock Units Service-based RSUs entitle the holder to receive one share of common stock for each unit when the unit vests. RSUs are issued to officers, key employees, and non-employee directors as compensation. Generally, the RSUs vest over a three-year period. RSUs granted to non-employee directors vest one year after being granted. Upon vesting, the non-employee directors elect to either receive the stock associated with the RSU immediately or defer receipt of the stock to a future date. The fair value of the RSUs is equivalent to the trading value of our common stock on the grant date. CTS CORPORATION 57 A summary of RSU activity for the year ended December 31, 2020 is presented below: Units Weighted Average Grant Date Fair Value Weighted Average Remaining Contractual Term Aggregate Intrinsic Value Outstanding at January 1, 2020 364,396 $ 19.87 Granted 120,546 27.94 Released ( 100,830 ) 22.90 Forfeited ( 16,684 ) 28.75 Outstanding at December 31, 2020 367,428 $ 21.28 19.69 $ 12,614 Releasable at December 31, 2020 203,574 $ 15.77 30.66 $ 6,989 Years Ended December 31, 2020 2019 2018 Weighted-average grant date fair value $ 27.94 $ 28.61 $ 26.95 Intrinsic value of RSUs released $ 2,503 $ 2,155 $ 4,015 A summary of non-vested RSU activity for the year ended December 31, 2020 is presented below: RSUs Weighted Average Grant Date Fair Value Nonvested at January 1, 2020 136,922 $ 27.66 Granted 120,546 27.94 Vested ( 76,930 ) 26.86 Forfeited ( 16,684 ) 28.75 Nonvested at December 31, 2020 163,854 $ 28.13 Performance-Based Restricted Stock Units We grant performance-based restricted stock unit awards ("PSUs") to certain executives and key employees. Units are usually awarded in the range from zero percent to 200 % of a targeted number of shares. 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. 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: Units Weighted Average Grant Date Fair Value Weighted Average Remaining Contractual Term Aggregate Intrinsic Value Outstanding at January 1, 2020 217,229 $ 27.73 Granted 126,521 28.37 Added by performance factor 38,820 23.84 Released ( 111,838 ) 23.74 Forfeited ( 45,173 ) 28.69 Outstanding at December 31, 2020 225,559 $ 29.07 1.90 $ 7,743 Releasable at December 31, 2020 — $ — $ — CTS CORPORATION 58 Table of Contents The following table summarizes each grant of performance awards outstanding at December 31, 2020: Description Grant Date Vesting Year Vesting Dependency Target Units Outstanding Maximum Number of Units to be Granted 2018 - 2020 Performance RSUs February 8, 2018 2020 35% RTSR, 35% sales growth, 30% operating cash flow 22,082 44,164 2018 - 2020 Performance RSUs February 16, 2018 2020 35% RTSR, 35% sales growth, 30% operating cash flow 31,820 63,640 2019-2021 Performance RSUs February 7, 2019 2021 35% RTSR, 35% sales growth, 30% operating cash flow 50,456 100,912 2019 Supplemental Performance RSUs February 7, 2019 2021 Succession Planning Targets 6,945 13,890 2020 - 2020 QTI Performance RSUs September 24, 2019 2022 50% EBITDA growth, 50% Sales growth 1,750 3,500 2020 - 2022 Performance RSUs February 6, 2020 2022 25% RTSR, 40% sales growth, 35% operating cash flow 63,006 126,012 Focus 2025 Performance RSUs April 23, 2020 2024 Cumulative revenues of $750 million over a trailing four-quarter period 49,500 49,500 Total 225,559 401,618 Cash-Settled Restricted Stock Units Cash-Settled RSUs entitle the holder to receive the cash equivalent of one share of common stock for each unit when the unit vests. These RSUs are issued to key employees residing in foreign locations as direct compensation. Generally, these RSUs vest over a three-year period. Cash-settled RSUs are classified as liabilities and are remeasured at each reporting date until settled. At December 31, 2020, and 2019, we had 30,009 and 17,271 cash-settled RSUs outstanding, respectively. At December 31, 2020, and 2019, liabilities of $ 396 and $ 353 , respectively were included in Accrued expenses and other liabilities on our Consolidated Balance Sheets. NOTE 18 — Fair Value Measurements We use interest rates swaps to convert a portion of our Revolving Credit Facility's outstanding balance from a variable rate of interest to a fixed rate and foreign currency forward contracts to hedge the effect of foreign currency changes on certain revenues and costs denominated in foreign currencies. These derivative financial instruments are measured at fair value on a recurring basis. 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 Value at December 31, 2020 Quoted Prices in Active Markets for Identical (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Loss for Year Ended December 31, 2020 Interest rate swap $ ( 2,217 ) $ — $ ( 2,217 ) $ — $ 432 Foreign currency hedges $ 1,125 $ — $ 1,125 $ — $ 887 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 Value at December 31, 2019 Quoted Prices in Active Markets for Identical (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) (Gain) for Year Ended December 31, 2019 Interest rate swap $ 4 $ — $ 4 $ — $ ( 491 ) Foreign currency hedges $ 580 $ — $ 580 $ — $ ( 952 ) The fair value of our interest rate swaps and foreign currency hedges were measured using standard valuation models using market-based observable inputs over the contractual terms, including forward yield curves, among others. There is a readily determinable market for these derivative instruments, but the market is not active and therefore they are classified within level 2 of the fair value hierarchy. Our long-term debt consists of the Revolving credit facility which is recorded at its carrying value. 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. 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. NOTE 19 — Income Taxes Earnings before income taxes consist of the following: Years Ended December 31, 2020 2019 2018 U.S. $ ( 7,101 ) $ 15,103 $ 30,815 Non-U.S. 52,580 35,163 27,288 Total $ 45,479 $ 50,266 $ 58,103 Significant components of income tax provision/(benefit) are as follows: Years Ended December 31, 2020 2019 2018 Current: U.S. $ 211 $ ( 391 ) $ ( 397 ) Non-U.S. 11,275 10,666 12,538 Total Current 11,486 10,275 12,141 Deferred: U.S. ( 2,815 ) 558 ( 330 ) Non-U.S. 2,122 3,287 ( 240 ) Total Deferred ( 693 ) 3,845 ( 570 ) Total provision for income taxes $ 10,793 $ 14,120 $ 11,571 CTS CORPORATION 60 Table of Contents Significant components of our deferred tax assets and liabilities are as follows: As of December 31, 2020 2019 Post-retirement benefits $ 1,259 $ 1,100 Inventory reserves 477 708 Loss carry-forwards 5,128 4,724 Credit carry-forwards 17,401 15,964 Accrued expenses 5,693 4,932 Research expenditures 18,893 17,953 Operating lease liabilities 6,012 6,211 Stock compensation 1,969 2,232 Foreign exchange loss 2,166 1,986 Other 872 230 Gross deferred tax assets 59,870 56,040 Depreciation and amortization 13,004 12,453 Pensions 12,557 13,552 Operating lease assets 5,703 5,963 Subsidiaries' unremitted earnings 3,046 1,903 Gross deferred tax liabilities 34,310 33,871 Net deferred tax assets 25,560 22,169 Deferred tax asset valuation allowance ( 8,320 ) ( 8,011 ) Total net deferred tax assets $ 17,240 $ 14,158 The long-term deferred tax assets and long-term deferred tax liabilities are as follows below: As of December 31, 2020 2019 Non-current deferred tax assets $ 24,250 $ 19,795 Non-current deferred tax liabilities $ ( 7,010 ) $ ( 5,637 ) Total net deferred tax assets $ 17,240 $ 14,158 At each reporting date, we weigh all available positive and negative evidence to assess whether it is more-likely-than-not that the Company's deferred tax assets, including deferred tax assets associated with accumulated loss carryforwards and tax credits in the various jurisdictions in which it operates, will be realized. As of December 31, 2020, and 2019, we recorded deferred tax assets related to certain U.S. state and non-U.S. income tax loss carryforwards of $ 5,128 and $ 4,724 , respectively, and U.S. and non-U.S. tax credits of $ 17,401 and $ 15,964 , respectively. The deferred tax assets expire in various years primarily between 2021 and 2040 . Generally, we assess if it is more-likely-than-not that our net deferred tax assets will be realized during the available carry-forward periods. As a result, we have determined that valuation allowances of $ 8,320 and $ 8,011 should be provided for certain deferred tax assets at December 31, 2020, and 2019, respectively. As of December 31, 2020, the valuation allowances relate to certain U.S. state and non-U.S. loss carry-forwards and certain U.S. 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 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. CTS CORPORATION 61 The following table reconciles taxes at the U.S. federal statutory rate to the effective income tax rate: Years Ended December 31, 2020 2019 2018 Taxes at the U.S. statutory rate 21.0 % 21.0 % 21.0 % State income taxes, net of federal income tax benefit ( 0.1 )% 0.4 % 1.2 % Non-U.S. earnings taxed at rates different than the U.S. statutory rate ( 0.9 )% 1.3 % 0.8 % Foreign source earnings, net of associated foreign tax credits ( 0.7 )% 0.3 % 4.1 % Benefit of tax credits ( 0.7 )% ( 1.5 )% ( 0.9 )% Non-deductible expenses ( 0.5 )% 4.1 % 1.3 % Stock compensation - excess tax benefits ( 0.1 )% ( 1.1 )% ( 0.9 )% Adjustment to valuation allowances 1.6 % ( 0.4 )% ( 0.6 )% Other changes in tax laws and rates — 0.1 % ( 6.1 )% Change in unrecognized tax benefits ( 0.7 )% 3.3 % ( 1.7 )% Impacts of unremitted foreign earnings 5.2 % 1.3 % 1.1 % Impacts related to the 2017 Tax Cuts and Jobs Act — — % ( 0.6 )% Other ( 0.4 )% ( 0.7 )% 1.2 % Effective income tax rate 23.7 % 28.1 % 19.9 % On December 22, 2017, Staff Accounting Bulletin No. 118 ("SAB 118") was issued to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. 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. 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. Tax. 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. We elected to recognize the tax on GILTI as an expense in the period the tax is incurred. We recognize the financial statement benefit of a tax position when it is more-likely-than-not, based on its technical merits, that the position will be sustained upon examination. A tax position that meets the more-likely-than-not threshold is then measured to determine the amount of benefit to be recognized in the financial statements. As of December 31, 2020, we have approximately $ 3,128 of unrecognized tax benefits, which if recognized, would impact the effective tax rate. 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: As of December 31, 2020 2019 Balance at January 1 $ 5,016 $ 3,649 Increase related to current year tax positions 880 2,834 Decrease related to prior year tax positions ( 1,156 ) ( 10 ) Decrease related to lapse in statute of limitation — ( 1,457 ) Decrease related to settlements with taxing authorities ( 1,612 ) — Balance at December 31 $ 3,128 $ 5,016 Our continuing practice is to recognize interest and/or penalties related to unrecognized tax benefits as income tax expense. As of December 31, 2020, and 2019, $ 301 and $ 707 , respectively, of interest and penalties were accrued. CTS CORPORATION 62 Table of Contents We are subject to taxation in the U.S., various states, and in non-U.S. jurisdictions. Our U.S. income tax returns are primarily subject to examination from 2017 through 2019 ; however, U.S. tax authorities also have the ability to review prior tax years to the extent loss carryforwards and tax credit carryforwards are utilized. The open years for the non-U.S. tax returns range from 2008 through 2019 based on local statutes. NOTE 20 — Geographic Data Financial information relating to our operations by geographic area were as follows: Years Ended December 31, Net Sales 2020 2019 2018 United States $ 241,823 $ 279,904 $ 313,489 China 88,129 87,342 79,380 Singapore 31,985 32,957 6,724 Czech Republic 27,143 33,214 36,528 Taiwan 21,849 19,810 20,802 Other non-U.S. 13,137 15,772 13,560 Consolidated net sales $ 424,066 $ 468,999 $ 470,483 Sales are attributed to countries based upon the origin of the sale. Years Ended December 31, Long-Lived Tangible Assets 2020 2019 United States $ 39,368 $ 41,993 China 30,240 32,751 Mexico 12,441 14,149 Czech Republic 9,856 10,946 Taiwan 5,071 4,593 Other non-U.S 461 606 Consolidated long-lived assets $ 97,437 $ 105,038 NOTE 21 — Quarterly Financial Data Quarterly Results of Operations (Unaudited) First Second Third Fourth 2020 Net sales $ 103,075 $ 84,197 $ 113,777 $ 123,018 Gross margin $ 32,899 $ 26,567 $ 36,906 $ 42,691 Operating earnings $ 8,492 $ 6,242 $ 13,259 $ 17,137 Net earnings $ 3,808 $ 4,857 $ 11,073 $ 14,947 Basic earnings per share $ 0.12 $ 0.15 $ 0.34 $ 0.46 Diluted earnings per share $ 0.12 $ 0.15 $ 0.34 $ 0.46 2019 Net sales $ 117,625 $ 120,684 $ 115,651 $ 115,040 Gross margin $ 40,615 $ 41,204 $ 37,057 $ 38,700 Operating earnings $ 14,218 $ 17,083 $ 10,124 $ 12,391 Net earnings $ 11,419 $ 11,943 $ 2,722 $ 10,062 Basic earnings per share $ 0.35 $ 0.36 $ 0.08 $ 0.31 Diluted earnings per share $ 0.34 $ 0.36 $ 0.08 $ 0.31 CTS CORPORATION 63 CTS CORPORATION SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS (in thousands) Balance at Beginning of Period Charged to Expense Charged to Other Accounts (Write-offs) / Recoveries Balance at End of Period Year ended December 31, 2020 Allowance for credit losses $ 261 $ 513 $ 152 $ ( 162 ) $ 764 Year ended December 31, 2019 Allowance for credit losses $ 384 $ 141 $ ( 9 ) $ ( 255 ) $ 261 Year ended December 31, 2018 Allowance for credit losses $ 357 $ 56 $ ( 8 ) $ ( 21 ) $ 384 CTS CORPORATION 64 Table of Contents Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable.