What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-04-29 compared with 2020-10-29 · 76 added, 147 removed, 156 unchanged (59% of the section changed)

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The following discussion should be read in conjunction with our unaudited Condensed Consolidated Financial Statements and notes included under Item 1, as well as our Consolidated Financial Statements and notes and related Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2020.

CTS Corporation is a leading designer and manufacturer of products that Sense, Connect and Move.

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

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

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Move products ensure required movements are effectively and accurately executed.

We are committed to achieving our vision by continuing to invest in the development of products and technologies within these categories.

We manufacture sensors, actuators, and electronic components in North America, Europe, and Asia.

We are committed to achieving our vision by continuing to invest in the development of products and technologies, and talent within these categories.

We manufacture sensors, actuators, and connectivity components in North America, Europe, and Asia.

CTS provides engineered products to OEMs and tier one suppliers in the aerospace and defense, industrial, information technology, medical, telecommunications, and transportation markets.

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The COVID-19 pandemic has resulted in a significant disruption to the global economy that has and is likely to have continued adverse impact on our business.

We have experienced reductions in customer demand in several of our end markets.

We expect that social distancing measures, high employee absenteeism, and reductions in production due to mandated labor capacity restrictions at some of our plants in Europe and North America, as well as the reduced operational capacity of our customers and suppliers, could impact our business in the fourth quarter and into 2021.

As a result of these economic headwinds, we have implemented cost savings measures, some of which are temporary in nature.

We continue to evaluate market conditions to determine the extent and duration of the temporary measures.

The pandemic could lead to an extended disruption of economic activity and the impact on our consolidated results of operations, financial position and cash flows could be material.

In the third quarter of 2020, we saw a significant recovery in revenue from the levels in the second quarter of 2020.

However, we remain cautious about the revenue impact in the next several quarters.

The extent of the impact of the COVID-19 pandemic on our business, financial results and liquidity will depend largely on future developments, including the duration of the spread of the COVID-19 outbreak within the U.S.

and globally, the impact on capital and financial markets and the related impact on our suppliers and customers, especially in the transportation end-market.

These future developments are outside of our control, are highly uncertain and cannot be predicted.

These and other potential impacts of the COVID-19 pandemic, along with the recent increases in consumer demand are resulting in critical raw material and semiconductor chip shortages as well as associated cost increases, that may adversely impact our results for the remainder of 2021, and that impact could be material.

We continue to actively monitor the ongoing potential impacts of COVID-19 and the supply chain issues and will seek to mitigate and minimize their impact on our business.

We remain cautious about the financial impact of COVID-19 on our business for the remainder of 2021.

Results of Operations:

Third Quarter 2020 versus Third Quarter 2019

The following table highlights changes in significant components of the Unaudited Condensed Consolidated Statements of Earnings for the quarters ended September 30, 2020, and September 30, 2019:

First Quarter 2021 versus First Quarter 2020

The following table highlights changes in significant components of the Unaudited Condensed Consolidated Statements of Earnings for the quarters ended March 31, 2021, and March 31, 2020:

Three Months Ended

September 30,

Cost of goods sold

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Restructuring charges

Loss on sale of assets

Total operating expenses

Operating earnings

Total other income (expense), net

Total other expense, net

Earnings before income taxes

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Diluted net earnings per share

Sales were $113,777 in the third quarter of 2020, a decrease of $1,874 or 2.0% from the third quarter of 2019.

Sales were negatively impacted as a result of the COVID-19 pandemic and government activities to control its spread.

In the third quarter of 2020 we continued to see negative impacts from labor restrictions, as well as challenges from supply chain disruptions and weaker demand from certain customers, primarily in the transportation end market.

These economic impacts are ongoing and continue to have an effect on our operations, which we are currently unable to quantify.

Sales to transportation markets decreased $6,282 or 8.8%.

Sales to other markets increased $4,408 or 10.0%.

The QTI acquisition, which was completed in July 2019, added $6,560 in sales for the quarter compared to $3,670 in the third quarter of 2019.

Changes in foreign exchange rates increased sales by $718 year-over-year due to the U.S.

Net sales were $128,427 in the first quarter of 2021, an increase of $25,352 or 24.6% from the first quarter of 2020.

Net s ales momentum continued in the first quarter of 2021 as a result of overall improvement in the economy;

however, we also experienced significant material inflationary pressures and interruptions in the supply chain particularly due to the global semiconductor chip shortage impacting the operations of our business.

The impact of the pandemic and supply chain impacts are ongoing and are expected to continue to have an effect on our operations.

We are currently unable to quantify these future impacts.

Net sales to transportation markets increased $14,320 or 23.3%.

Net sales to other markets increased $11,032 or 26.6%.

The Sensor Scientific, Inc.

(“SSI”) acquisition, which was completed in December 2020, added $1,847 in net sales for the quarter.

Changes in foreign exchange rates increased net sales by $2,496 year-over-year due to the U.S.

Dollar depreciating compared to the Chinese Renminbi and Euro.

Gross margin as a percent of sales was 32.4% in the third quarter of 2020 compared to 32.0% in the third quarter of 2019.

The increase in gross margin was driven primarily by various cost reduction measures.

Selling, general and administrative ("SG&A") expenses were $16,883 or 14.8% of sales in the third quarter of 2020 versus $17,774 or 15.4% of sales in the third quarter of 2019.

The 2020 SG&A costs include savings from cost reduction measures we implemented during the third quarter, partially offset by amortization of intangibles and other operating costs associated with the QTI acquisition.

Research and development expenses were $ 5,723 or 5.0% of sales in the third quarter of 2020 compared to $ 6,806 or 5.9% of sales in the comparable quarter of 2019 .

Restructuring charges were $1,041 or 0.9% of sales in the third quarter of 2020 and were as a result of certain initiatives initiated in the third quarter of 2020 to better align our cost structure with lower end-market demand.

The restructuring actions are focused on optimizing our manufacturing footprint and improving operational efficiency by better utilizing our systems capabilities.

Restructuring charges were $2,342 or 2.0% of sales in the third quarter of 2019.

Operating earnings were $13,259 or 11.7% of sales in the third quarter of 2020 compared to operating earnings of $10,124 or 8.8% of sales in the third quarter of 2019.

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

Three Months Ended

September 30,

Interest expense

Interest income

Other income (expense), net

Total income other (expense), net

Interest income declined as a result of lower interest rates and foreign cash balances.

Other income in the third quarter of 2020 was principally driven by foreign currency translation gains, mainly due to the depreciation of the U.S.

Dollar compared to the Chinese Renminbi and Euro during the quarter, which were partially offset by pension expense.

Gross margin as a percent of net sales was 33.2% in the first quarter of 2021 compared to 31.9% in the first quarter of 2020.

The increase in gross margin was driven primarily by sales volume with raw material price increases adversely impacting the results.

Selling, general and administrative ("SG&A") expenses were $18,325 or 14.3% of net sales in the first quarter of 2021 versus $16,759 or 16.3% of net sales in the first quarter of 2020.

Increased net sales drove the overall decrease in SG&A expenses as a percentage of net sales.

Research and development (“R&D” ) expenses were $ 5,687 or 4.4% of net sales in the first quarter of 2021 compared to $ 7,408 or 7.2 % of net sales in the comparable quarter of 2020 .

The reduction in overall R&D expenses is primarily due to changes in timing and mix of certain projects.

Restructuring charges were $81 or 0.1% of net sales in the first quarter of 2021 compared to $240 or 0.2% of net sales in the first quarter of 2020.

Operating earnings were $18,498 or 14.4% of net sales in the first quarter of 2021 compared to operating earnings of $8,492 or 8.2% of net sales in the first quarter of 2020.

The change in operating earnings were driven by the items discussed above.

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

Three Months Ended

September 30,

Effective tax rate

Our effective income tax rate was 22.2% and 62.2% in the third quarters of 2020 and 2019, respectively.

This decrease is primarily attributed to the change in the mix of earnings by jurisdiction and the 2019 increase to reserves for uncertain tax position associated with the company’s operations in China.

Results of Operations:

Nine Months ended September 30, 2020 versus Nine Months Ended September 30, 2019

The following table highlights changes in significant components of the Unaudited Condensed Consolidated Statements of Earnings for the nine months ended September 30, 2020 and 2019:

Nine Months Ended

September 30,

Cost of goods sold

Selling, general and administrative expenses

Research and development expenses

Restructuring charges

Gain on sale of assets

Total operating expenses

Operating earnings

Total other (expense), net

Earnings before income taxes

Income tax expense

Earnings per share:

Diluted net earnings per share

Sales were $301,049 in the nine months ended September 30, 2020, a decrease of $52,910 or 15.0% from the nine months ended September 30, 2019.

Sales were negatively impacted as a result of the COVID-19 pandemic and government activities to control its spread.

In the first three quarters of the year, we were impacted by:

(1) successively mandated closures of or labor restrictions at our plants in China, Europe and North America, (2) supply chain disruptions resulting from the closure of a number of our suppliers in China and in North America, and (3) weak demand from certain customers as a result of their mandated or elective plant closures.

We remain cautious about the impact of these disruptions on our operations in the next several quarters, which we are currently unable to quantify.

Sales to transportation markets decreased $65,803 or 28.5%.

Sales to other markets increased $12,893 or 10.5%.

The QTI acquisition, which was completed in July 2019, added $17,555 in sales for the nine months ended September 30, 2020 compared to $3,670 for the nine months ended September 30, 2019.

Changes in foreign exchange rates decreased sales by $599 year-over-year due to the U.S.

Dollar appreciating compared to the Chinese Renminbi.

Gross margin as a percent of sales was 32.0% for the nine months ended September 30, 2020 compared to 33.6% for nine months ended September 30, 2019.

The decrease in gross margin was driven primarily by lower sales volumes, which was partially offset by various cost reduction measures.

Selling, general and administrative ("SG&A") expenses were $48,310 or 16.0% of sales for the nine months ended September 30, 2020 versus $52,371 or 14.8% of sales for the nine months ended September 30, 2019.

The 2020 SG&A costs include savings from cost reduction measures we implemented during the second and third quarters, partially offset by amortization of intangibles and other operating costs associated with the QTI acquisition.

Research and development expenses were $18,653 or 6.2% of sales for the nine months ended September 30, 2020 compared to $19,854 or 5.6% of sales for the nine months ended September 30, 2019.

Restructuring charges were $1,416 or 0.5% of sales for the nine months ended September 30, 2020 and were primarily as a result of certain initiatives initiated in the third quarter of 2020 to better align our cost structure with lower end-market demand.

The restructuring actions are focused on optimizing our manufacturing footprint and improving operational efficiency by better utilizing our systems capabilities.

Restructuring charges were $5,337 or 1.5% of sales for nine months ended September 30, 2019.

Operating earnings were $27,993 or 9.3% of sales for the nine months ended September 30, 2020 compared to operating earnings of $41,424 or 11.7% of sales for the nine months ended September 30, 2019.

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

Nine Months Ended

September 30,

Interest expense

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Total other expense, net

Interest expense increased mainly as a result of an increase in debt related to the QTI acquisition and additional borrowings at the end of the first quarter to ensure adequate liquidity for the next several quarters.

Interest income declined as a result of lower interest rates and foreign cash balances.

The Other (expense) income, net for the nine months ended September 30, 2020 was principally driven by foreign currency translation gains, mainly due to the depreciation of the U.S.

Dollar compared to the Chinese Renminbi and Euro, which were partially offset by pension expense.

Nine months ended

September 30,

Other expense in the first quarter of 2021 was principally driven by increased pension expense as well as unfavorable foreign exchange impact primarily from the U.S.

Dollar depreciating compared to the Chinese Renminbi and Euro.

Three months ended

Effective tax rate

Our effective income tax rate was 24.4% and 30.3% in the nine months ended September 30, 2020 and 2019, respectively.

This decrease is primarily attributed to the change in the mix of earnings by jurisdiction, decreases in uncertain tax position offset by the establishment of valuation allowances on certain U.S.

tax credits and the company's decision to no longer permanently reinvest the earnings of its Taiwan subsidiary.

Our effective income tax rate was 18.9% and 36.4% in the first quarters of 2021 and 2020, respectively.

This decrease is primarily attributed to the change in the mix of earnings by jurisdiction and the establishment of valuation allowance on certain tax credits in the first quarter of 2020.

Liquidity and Capital Resources

Cash and cash equivalents were $131,740 at September 30, 2020, and $100,241 at December 31, 2019, of which $89,621 and $98,309, respectively, were held outside the United States.

The increase in cash and cash equivalents of $31,499 was primarily driven by cash generated from operating activities of $49,297 and net proceeds from an increase in borrowings of long-term debt of $6,600, which were partially offset by treasury stock purchases of $8,080, capital expenditures of $10,441, dividends paid of $3,888, and taxes paid on behalf of equity award participants of $1,911.

Total long-term debt was $106,300 as of September 30, 2020 and $99,700 as of December 31, 2019.

Total debt as a percentage of total capitalization, defined as long-term debt as a percentage of total debt and shareholders' equity, was 20.4% at September 30, 2020, compared to 19.7% at December 31, 2019.

We increased our cash position during the first quarter to improve liquidity given the current economic environment.

Our net debt, defined as long-term debt less cash and cash equivalents, was $(25,440) at September 30, 2020.

We currently have $191,960 available for additional borrowings under our credit facility.

Working capital increased by $28,034 during the nine months ended September 30, 2020, primarily due to the increase in cash and cash equivalents from borrowings under our credit facility.

Cash and cash equivalents were $103,392 at March 31, 2021, and $91,773 at December 31, 2020, of which $101,883 and $90,051, respectively, were held outside the United States.

The increase in cash and cash equivalents of $11,619 was primarily driven by cash generated from operating activities of $20,110, which was partially offset by net payments on long-term debt of $4,600, capital expenditures of $1,638, dividends paid of $1,291, and taxes paid on behalf of equity award participants of $1,402.

Total long-term debt was $50,000 as of March 31, 2021 and $54,600 as of December 31, 2020.

Total debt as a percentage of total capitalization, defined as long-term debt as a percentage of total debt and shareholders' equity, was 10.3% at March 31, 2021, compared to 11.4% at December 31, 2020.

Working capital increased by $11,627 during the three months ended March 31, 2021, primarily due to the increase in cash and cash equivalents from strong operating cash flows.

Cash Flows from Operating Activities

Net cash provided by operating activities was $49,297 during the nine months ended September 30, 2020.

Components of net cash provided by operating activities included net earnings of $19,738, depreciation and amortization expense of $19,819, other net non-cash items of $4,818, and a net cash inflow from changes in assets and liabilities of $4,922.

Net cash provided by operating activities was $20,110 during the three months ended March 31, 2021.

Components of net cash provided by operating activities included net earnings of $11,990, depreciation and amortization expense of $6,800, other net non-cash items of $3,220, and a net cash outflow from changes in assets and liabilities of $1,900.

Cash Flows from Investing Activities

Net cash used in investing activities for the nine months ended September 30, 2020 was $10,441, driven entirely by capital expenditures.

Net cash used in investing activities for the three months ended March 31, 2021 was $1,638, driven entirely by capital expenditures.

Cash Flows from Financing Activities

Net cash used in financing activities for the nine months ended September 30, 2020 was $7,279.

The net cash outflow was the result of treasury stock purchases of $8,080, dividends paid of $3,888, and taxes paid on behalf of equity award participants in the amount of $1,911, which was partially offset by net proceeds from an increase in borrowings of long-term debt of $6,600.

Net cash used in financing activities for the three months ended March 31, 2021 was $7,293.

The net cash outflow was the result of a decrease in borrowings of long-term debt of $4,600, dividends paid of $1,291 and taxes paid on behalf of equity award participants in the amount of $1,402.

Capital Resources

Long‑term debt is comprised of the following:

September 30,

Total credit facility

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We have historically funded our capital and operating needs primarily through cash flows from operating activities, supported by available credit under our revolving credit facility.

We believe that cash flows from operating activities and available borrowings under our credit facility will be adequate to fund our working capital needs, capital expenditures, and debt service requirements for at least the next twelve months.

We believe that cash flows from operating activities and available borrowings under our revolving credit facility will be adequate to fund our working capital needs, capital expenditures, debt service and dividend requirements for at least the next twelve months.

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

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We adjust our warranty reserve for any known or anticipated warranty claims as new information becomes available.

We evaluate our warranty obligations at least quarterly and adjust our accruals if it is

probable that future costs will be different than our current reserve.

Over the last three years, product warranty reserves have ranged from 2.0% to 3.2% of total sales.

We evaluate our warranty obligations at least quarterly and adjust our accruals if it is probable that future costs will be different than our current reserve.

Over the last three years, product warranty reserves have ranged from 0.5%

7 % of total sales.

We believe our reserve level is appropriate considering all facts and circumstances surrounding any outstanding quality claims and our historical experience selling our products to our customers.

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We value our inventories at the lower of the actual cost to purchase or manufacture using the first-in, first-out ("FIFO") method, or net realizable value.

We review inventory quantities on hand and record a provision for excess and obsolete inventory based on forecasts of product demand and production requirements.

We review inventory quantities on hand and record a provision for excess and obsolete inventory based on historical usage, forecasts of product demand and related production requirements.

Over the last three years, our reserves for excess and obsolete inventories have ranged from 10.2% to 14.0% of gross inventory.

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Retirement Plans

Actuarial assumptions are used in determining pension income and expense and our pension benefit obligation.

We utilize actuaries from consulting companies in each applicable country to develop our discount rates that match high-quality bonds currently available and expected to be available during the period to maturity of the pension benefit in order to provide the necessary future cash flows to pay the accumulated benefits when due.

Actuarial assumptions are used in determining pension income and expense and our defined benefit obligations.

We utilize actuaries from consulting companies in each applicable country to develop our discount rates, matching high-quality bonds currently available and expected to be available during the period to maturity of the pension benefit in order to provide the necessary future cash flows to pay the accumulated benefits when due.

After considering the recommendations of our actuaries, we have assumed a discount rate, expected rate of return on plan assets, and a rate of compensation increase in determining our annual pension income and expense and the projected benefit obligation.

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Changes in the actuarial assumptions could have a material effect on our results of operations.

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

based pension plan ("Plan") at management's discretion, subject to certain conditions.

On June 1, 2020, we entered into the Fifth Amendment to the Plan whereby we set an effective termination date of July 31, 2020.

The Plan termination process is expected to take twelve to eighteen months and requires certain approvals from both the Internal Revenue Service and Pension Benefit Guaranty Corporation.

Once we receive such approvals, an insurance company will be selected to purchase annuities and fulfill the obligations of the Plan including administering payments to participants.

Upon settlement of the pension liabilities, we will reclassify the related pension losses currently recorded in accumulated other comprehensive loss into earnings.

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

In February 2020, the CTS Board of Directors authorized management to explore termination of our 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 a determination letter from the Internal Revenue Service that allows us to proceed with the termination process.

In connection with the termination, the Plan has offered a window extending from March 29, 2021 through May 7, 2021 to certain eligible participants to elect to receive a lump sum payment.

The distribution date is June 1, 2021.

The completion of the Plan termination process, including the final purchases of annuities, is expected to occur in the second half of 2021.

As of March 31, 2021, we had gross unrecognized losses related to the Plan of $ 123,238 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, we expect non-cash settlement charges of approximately $10,000 to $20,000 will be recognized in the second quarter of 2021 with the remaining amount of the gross accumulated other comprehensive loss balance to be recognized upon final settlement .

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

Impairment of Goodwill

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If a quantitative assessment is required, we estimate the fair value of each reporting unit using a combination of discounted cash flow analysis and market-based valuation methodologies.

Determining fair value using a quantitative approach requires significant judgment, including judgments about projected revenues, operating expenses, working capital investment, capital expenditures, and cash flows over a multi-year period.

Determining fair value using a quantitative approach requires significant judgment, including judgments about projected revenues, cash flows over a multi-year period, discount rates and estimated valuation multiples.

The discount rate applied to our forecasts of future cash flows is based on our estimated weighted average cost of capital.

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Changes in these estimates and assumptions could materially affect the determination of fair value and impact the goodwill impairment assessment.

Our latest assessment was performed using a qualitative approach as of October 1, 2019, and we determined that it was likely that the fair values of our reporting units were more than their carrying amounts, and therefore no impairment charges were recorded.

Our latest assessment was performed using a quantitative approach as of October 1, 2020, and we determined that it was likely that the fair values of our reporting units were more than their carrying amounts, and therefore no impairment charges were recorded.

We will monitor future results and will perform a test if indicators trigger an impairment review.

At this time, we have not deemed the impact that the current economic environment has or is expected to have on our business to be a triggering event for impairment purposes.

Impairment of Other Intangible and Long-Lived Assets

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Significant under performance relative to expected historical or projected future operating results,

Significant changes in the manner of use of the acquired assets or the strategy for the overall business,

Significant changes in the manner of use of the acquired assets or the strategy for the overall business, and

Significant negative industry or economic trends.

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

We recorded a charge of $ 2,200 during the third quarter due to the impairment of a specific asset group as a result of the restructuring actions being taken .

We recorded a charge of $1,016 during the first quarter of 2020 due to the impairment of a specific asset group .

No indicators of impairment were identified during the quarter ended March 31, 2021.

Environmental and Legal Contingencies

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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.

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

Significant Customers

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Three months ended

Nine months ended

September 30,

Toyota Motor Corporation

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Examples of factors that may affect future operating results and financial condition include, but are not limited to:

changes in the economy generally and in respect to the business in which CTS operates;

the ultimate impact of the COVID-19 pandemic on our business, results of operations or financial condition, changes in the economy generally and in respect to the business in which CTS operates;

unanticipated issues in integrating acquisitions;

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rapid technological change;

general market conditions in the automotive, communications, and computer industries, as well as conditions in the industrial, defense and aerospace, and medical markets;

general market conditions in the transportation, telecommunications, and information technology industries, as well as conditions in the industrial, aerospace and defense, and medical markets;

reliance on key customers;

unanticipated natural disasters or other events;

unanticipated public health crises, natural disasters or other events;

environmental compliance and remediation expenses;

the ability to protect our intellectual property;

pricing pressures and demand for our products;

unanticipated developments that could occur with respect to contingencies such as litigation and environmental matters as well as any product liability claims;

and risks associated with our international operations, including trade and tariff barriers, exchange rates and political and geopolitical risks.

Many of these, and other risks and uncertainties, are discussed in further detail in Item 1A.

of CTS' Annual Report on Form 10‑K for the fiscal year ended December 31, 2019.

of our Annual Report on Form 10-K.

We undertake no obligation to publicly update our forward-looking statements to reflect new information or events or circumstances that arise after the date hereof, including market or industry changes.

Quantitative and Qualitative Disclosures About Market Risk

For a discussion of current market conditions resulting from the COVID-19 pandemic, refer to Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations” and to Part II, Item 1A, "Risk Factors”.

There have been no other material changes in our market risk since December 31, 2019.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis