CTS CORP 10-Q

Item 1. Financial Statements CTS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS - UNAUDITED (In thousands, except per share amounts) Three Months Ended March 31, March 31, 2021 2020 Net sales $ 128,427 $ 103,075 Cost of goods sold 85,836 70,176 Gross margin 42,591 32,899 Selling, general and administrative expenses 18,325 16,759 Research and development expenses 5,687 7,408 Restructuring charges 81 240 Operating earnings 18,498 8,492 Other (expense) income: Interest expense ( 555 ) ( 851 ) Interest income 202 331 Other expense, net ( 3,356 ) ( 1,982 ) Total other expense, net ( 3,709 ) ( 2,502 ) Earnings before income taxes 14,789 5,990 Income tax expense 2,799 2,182 Net earnings $ 11,990 $ 3,808 Earnings per share: Basic $ 0.37 $ 0.12 Diluted $ 0.37 $ 0.12 Basic weighted – average common shares outstanding: 32,319 32,466 Effect of dilutive securities 301 327 Diluted weighted – average common shares outstanding: 32,620 32,793 Cash dividends declared per share $ 0.04 $ 0.04 See notes to unaudited condensed consolidated financial statements. 3 CTS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS ‑ UNAUDITED (In thousands of dollars) Three Months Ended March 31, March 31, 2021 2020 Net earnings $ 11,990 $ 3,808 Other comprehensive earnings (loss): Changes in fair market value of derivatives, net of tax 124 ( 4,414 ) Changes in unrealized pension cost, net of tax 1,422 1,285 Cumulative translation adjustment, net of tax 12 ( 139 ) Other comprehensive earnings (loss) $ 1,558 $ ( 3,268 ) Comprehensive earnings $ 13,548 $ 540 See notes to unaudited condensed consolidated financial statements. 4 CTS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands of dollars) (Unaudited) March 31, December 31, 2021 2020 ASSETS Current Assets Cash and cash equivalents $ 103,392 $ 91,773 Accounts receivable, net 81,571 80,981 Inventories, net 47,558 45,870 Other current assets 14,115 14,607 Total current assets 246,636 233,231 Property, plant and equipment, net 94,848 97,437 Operating lease assets, net 23,620 23,281 Other Assets Prepaid pension asset 56,502 56,642 Goodwill 109,468 109,497 Other intangible assets, net 76,931 79,121 Deferred income taxes 24,192 24,250 Other 2,468 2,590 Total other assets 269,561 272,100 Total Assets $ 634,665 $ 626,049 LIABILITIES AND SHAREHOLDERS’ EQUITY Current Liabilities Accounts payable $ 53,315 $ 50,489 Operating lease obligations 3,271 3,294 Accrued payroll and benefits 12,688 12,978 Accrued expenses and other liabilities 37,436 38,171 Total current liabilities 106,710 104,932 Long-term debt 50,000 54,600 Long-term operating lease obligations 23,510 23,163 Long-term pension obligations 7,290 7,466 Deferred income taxes 6,892 7,010 Other long-term obligations 4,547 5,196 Total Liabilities 198,949 202,367 Commitments and Contingencies (Note 11) Shareholders’ Equity Common stock 313,008 311,190 Additional contributed capital 39,616 41,654 Retained earnings 549,977 539,281 Accumulated other comprehensive loss ( 94,363 ) ( 95,921 ) Total shareholders’ equity before treasury stock 808,238 796,204 Treasury stock ( 372,522 ) ( 372,522 ) Total shareholders’ equity 435,716 423,682 Total Liabilities and Shareholders’ Equity $ 634,665 $ 626,049 See notes to unaudited condensed consolidated financial statements. 5 CTS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS ‑ UNAUDITED (In thousands of dollars) Three Months Ended March 31, March 31, 2021 2020 CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 11,990 $ 3,808 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 6,800 6,532 Pension and other post-retirement plan expense 1,980 673 Stock-based compensation 1,219 228 Asset impairment charges — 1,016 Deferred income taxes 63 333 (Gain) on foreign currency hedges, net of cash ( 42 ) ( 23 ) Changes in assets and liabilities, net of acquisition: Accounts receivable ( 1,121 ) 6,176 Inventories ( 2,052 ) ( 4,005 ) Operating lease assets ( 340 ) ( 473 ) Other assets 168 799 Accounts payable 2,864 1,252 Accrued payroll and benefits ( 210 ) ( 237 ) Operating lease liabilities 325 542 Accrued expenses and other liabilities ( 1,398 ) ( 4,627 ) Pension and other post-retirement plans ( 136 ) ( 67 ) Net cash provided by operating activities 20,110 11,927 CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures ( 1,638 ) ( 4,570 ) Net cash used in investing activities ( 1,638 ) ( 4,570 ) CASH FLOWS FROM FINANCING ACTIVITIES: Payments of long-term debt ( 241,600 ) ( 764,550 ) Proceeds from borrowings of long-term debt 237,000 816,050 Purchase of treasury stock — ( 5,304 ) Dividends paid ( 1,291 ) ( 1,299 ) Taxes paid on behalf of equity award participants ( 1,402 ) ( 1,903 ) Net cash (used in) provided by financing activities ( 7,293 ) 42,994 Effect of exchange rate changes on cash and cash equivalents 440 363 Net increase in cash and cash equivalents 11,619 50,714 Cash and cash equivalents at beginning of period 91,773 100,241 Cash and cash equivalents at end of period $ 103,392 $ 150,955 Supplemental cash flow information: Cash paid for interest $ 378 $ 678 Cash paid for income taxes, net $ 3,510 $ 1,183 Non-cash financing and investing activities: Capital expenditures incurred but not paid $ 1,019 $ 1,843 See notes to unaudited condensed consolidated financial statements. 6 CTS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - UNAUDITED (in thousands of dollars) The following summarizes the changes in total equity for the three months ended March 31, 2021: Common Stock Additional Contributed Capital Retained Earnings Accumulated Other Comprehensive Loss Treasury Stock Total Balances at December 31, 2020 $ 311,190 $ 41,654 $ 539,281 $ ( 95,921 ) $ ( 372,522 ) $ 423,682 Net earnings — — 11,990 — — 11,990 Changes in fair market value of derivatives, net of tax — — — 124 — 124 Changes in unrealized pension cost, net of tax — — — 1,422 — 1,422 Cumulative translation adjustment, net of tax — — — 12 — 12 Cash dividends of $ 0.04 per share — — ( 1,294 ) — — ( 1,294 ) Issued shares on vesting of restricted stock units 1,818 ( 3,218 ) — — — ( 1,400 ) Stock compensation — 1,180 — — — 1,180 Balances at March 31, 2021 $ 313,008 $ 39,616 $ 549,977 $ ( 94,363 ) $ ( 372,522 ) $ 435,716 See notes to unaudited condensed consolidated financial statements. 7 CTS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - UNAUDITED (in thousands of dollars) The following summarizes the changes in total equity for the three months ended March 31, 2020: Common Stock Additional Contributed Capital Retained Earnings Accumulated Other Comprehensive Loss Treasury Stock Total Balances at December 31, 2019 $ 307,932 $ 43,689 $ 509,766 $ ( 91,726 ) $ ( 364,442 ) $ 405,219 Net earnings — — 3,808 — — 3,808 Changes in fair market value of derivatives, net of tax — — — ( 4,414 ) — ( 4,414 ) Changes in unrealized pension cost, net of tax — — — 1,285 — 1,285 Cumulative translation adjustment, net of tax — — — ( 139 ) — ( 139 ) Cash dividends of $ 0.04 per share — — ( 1,298 ) — — ( 1,298 ) Acquired 220,731 shares of treasury stock — — — — ( 5,304 ) ( 5,304 ) Issued shares on vesting of restricted stock units 2,166 ( 4,069 ) — — — ( 1,903 ) Stock compensation — 212 — — — 212 Balances at March 31, 2020 $ 310,098 $ 39,832 $ 512,276 $ ( 94,994 ) $ ( 369,746 ) $ 397,466 See notes to unaudited condensed consolidated financial statements. 8 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (in thousands except for share and per share data) March 31, 2021 NOTE 1 — Basis of Presentation The accompanying condensed consolidated financial statements have been prepared by CTS Corporation (“CTS”, "we", "our", "us" or the "Company”), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations. The unaudited condensed consolidated financial statements should be read in conjunction with the financial statements, notes thereto, and other information included in the Company’s Annual Report on Form 10‑K for the year ended December 31, 2020. The accompanying unaudited condensed consolidated financial statements reflect, in the opinion of management, all adjustments (consisting of normal recurring items) necessary for a fair statement, in all material respects, of the financial position and results of operations for the periods presented. The preparation of financial statements in conformity with generally accepted accounting principles 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 reported period. Actual results could differ materially from those estimates. The results of operations for the interim periods are not necessarily indicative of the results for the entire year. 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. NOTE 2 – Revenue Recognition The core principle of Topic 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 March 31, 2021 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 requires significant judgment. Variable consideration is included in the transaction price if, in our judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. 9 Disaggregated Revenue The following table presents revenues disaggregated by the major markets we serve: Three months ended March 31, 2021 March 31, 2020 Transportation $ 75,854 $ 61,534 Industrial 26,625 20,843 Medical 11,276 9,370 Aerospace & Defense 11,670 9,005 Telecom & IT 3,002 2,323 Total $ 128,427 $ 103,075 NOTE 3 – Business Acquisitions 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 the acquisition 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 the purchase price continues to be preliminary pending the completion of the valuation of intangible assets and finalization of management's estimates, which are expected to occur in the second quarter. The information included below represents our current estimate of the purchase price allocation. The following table summarizes the consideration paid and the fair values of the assets acquired, and the liabilities assumed as of the date of acquisition of SSI: 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 $ 2,550 Property, plant and equipment 67 Other assets 12 Goodwill 3,412 Intangible assets 5,340 Fair value of assets acquired 11,381 Less fair value of liabilities acquired ( 1,072 ) 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, 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, with the possibility of prorated interim payments. The Company recorded $ 2,000 as the acquisition date fair value of the contingent consideration based on an estimate of the 10 probability of achieving the performance targets. This represents the maximum amount of contingent consideration payable by the Company. This amount is also reflected as an addition to the purchase price and will be evaluated quarterly. As of March 31, 2021, $ 150 of the contingent consideration became due based on revenue targets achieved and will be paid out in the second quarter. As of March 31, 2021, and December 31, 2020, $ 950 and $ 800 were recorded in accrued expenses and other liabilities and $ 1,050 and $ 1,200 in other long-term obligations, in each case, respectively. The following table summarizes the carrying amounts and weighted average lives of the acquired intangible assets: Carrying Value Weighted Average Amortization Period Customer lists/relationships $ 5,200 11.0 Technology and other intangibles 140 3.0 Total $ 5,340 The amounts and assumptions included above remain estimates that may be adjusted by the Company once purchase accounting is complete. NOTE 4 – Accounts Receivable, net The components of accounts receivable, net are as follows: As of March 31, December 31, 2021 2020 Accounts receivable, gross $ 82,334 $ 81,745 Less: Allowance for credit losses ( 763 ) ( 764 ) Accounts receivable, net $ 81,571 $ 80,981 NOTE 5 – Inventories, net Inventories, net consists of the following: As of March 31, December 31, 2021 2020 Finished goods $ 10,222 $ 10,647 Work-in-process 18,841 16,927 Raw materials 26,267 24,893 Less: Inventory reserves ( 7,772 ) ( 6,597 ) Inventories, net $ 47,558 $ 45,870 11 NOTE 6 – Property, Plant and Equipment, net Property, plant and equipment, net is comprised of the following: As of March 31, December 31, 2021 2020 Land and land improvements $ 1,095 $ 1,095 Buildings and improvements 69,346 69,360 Machinery and equipment 235,310 233,743 Less: Accumulated depreciation ( 210,903 ) ( 206,761 ) Property, plant and equipment, net $ 94,848 $ 97,437 Depreciation expense for the three months ended March 31, 2021 $ 4,431 Depreciation expense for the three months ended March 31, 2020 $ 4,237 NOTE 7 – Retirement Plans Pension Plans Net pension expense for our domestic and foreign plans included in other expense, net in the Condensed Consolidated Statement of Earnings is as follows: Three months ended March 31, March 31, 2021 2020 Net pension expense $ 1,957 $ 664 The components of net pension expense for our domestic and foreign plans include the following: Domestic Pension Plans Foreign Pension Plans Three Months Ended Three Months Ended March 31, March 31, March 31, March 31, 2021 2020 2021 2020 Service cost $ — $ — $ 6 $ 7 Interest cost 1,253 1,443 4 7 Expected return on plan assets ( 1) ( 1,113 ) ( 2,454 ) ( 3 ) ( 4 ) Amortization of loss 1,767 1,622 43 43 Total expense, net $ 1,907 $ 611 $ 50 $ 53 (1) Expected return on plan assets is net of expected investment expenses and certain administrative expenses. In February 2020, the CTS Board of Directors authorized management to explore termination of the U.S.-based pension plan ("Plan"), subject to certain conditions. On June 1, 2020, we entered the Fifth Amendment to the Plan whereby we set an effective termination date for the Plan 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 for the Plan. 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 lump sum payments. The distribution date is June 1, 2021. The completion of the Plan termination process, including the final purchase of annuities, is expected to occur in the second half of 2021. Upon settlement of the pension liability, we will reclassify the related pension losses, currently recorded in accumulated other comprehensive loss, to the Condensed Consolidated Statements of Earnings. 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 performance, we are currently unable to determine the ultimate cost of the settlement. However, we estimate non-cash settlement charges of approximately $ 10,000 to $ 20,000 will be 12 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 Plan assets significantly exceed estimated liabilities. Other Post-retirement Benefit Plan Net post-retirement expense for our other post-retirement plan includes the following components: Three Months Ended March 31, March 31, 2021 2020 Service cost $ — $ — Interest cost 23 30 Amortization of gain — ( 21 ) Total expense, net $ 23 $ 9 NOTE 8 – Goodwill and Other Intangible Assets Other Intangible Assets Other intangible assets, net consist of the following components: As of March 31, 2021 Gross Carrying Amount Accumulated Amortization Net Amount Customer lists/relationships $ 97,393 $ ( 45,447 ) $ 51,946 Technology and other intangibles 47,441 ( 22,456 ) 24,985 In process research and development 2,200 ( 2,200 ) — Other intangible assets, net $ 147,034 $ ( 70,103 ) $ 76,931 Amortization expense for the three months ended March 31, 2021 $ 2,369 As of December 31, 2020 Gross Carrying Amount Accumulated Amortization Net Amount Customer lists/relationships $ 97,355 $ ( 44,002 ) $ 53,353 Technology and other intangibles 47,301 ( 21,533 ) 25,768 In process research and development 2,200 ( 2,200 ) — Other intangible assets, net $ 146,856 $ ( 67,735 ) $ 79,121 Amortization expense for the three months ended March 31, 2020 $ 2,295 Remaining amortization expense for other intangible assets as of March 31, 2021 is as follows: Amortization expense 2021 $ 7,170 2022 9,173 2023 7,167 2024 7,005 2025 6,783 Thereafter 39,633 Total amortization expense $ 76,931 G oodwill 13 Changes in the net carrying amount of goodwill were as follows: Total Goodwill as of December 31, 2020 $ 109,497 Decrease from purchase accounting adjustments ( 29 ) Goodwill as of March 31, 2021 109,468 NOTE 9 – Costs Associated with Exit and Restructuring Activities Restructuring charges are reported as a separate line within operating earnings in the Condensed Consolidated Statement of Earnings. Total restructuring charges are as follows: Three Months Ended March 31, 2021 March 31, 2020 Restructuring charges $ 81 $ 240 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 (the "September 2020 Plan"). This plan includes transitioning certain administrative functions to a shared service center, realignment of manufacturing locations, and certain other efficiency improvement actions. The restructuring cost of the September 2020 Plan is estimated to be in the range of $ 4,600 and $ 6,000 , including workforce reduction charges, building and equipment relocation charges and 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 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 the September 2020 Plan were $( 17 ) during the three months ended March 31, 2021, consisting of $ 36 of workforce reduction costs and $( 53 ) of other contract termination and facility closure costs. The total restructuring liability related to the September 2020 Plan was $ 130 at March 31, 2021 and $ 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 (the "June 2016 Plan"). Additional organizational changes were also implemented in various other locations. In 2017, we revised the June 2016 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. These restructuring actions were completed as of March 31, 2021. Restructuring charges under the June 2016 Plan were $( 3 ) and $( 32 ) during the three months ended March 31, 2021 and March 31, 2020, respectively. The total restructuring liability related to the June 2016 Plan was $ 0 at March 31, 2021 and $ 3 at December 31, 2020. 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 (the “April 2014 Plan”). These restructuring actions were substantially completed during 2015. There were no restructuring charges incurred under the April 2014 Plan during the three months ended March 31, 2021 and March 31, 2020, respectively. The total restructuring liability related to the April 2014 Plan was $ 847 at March 31, 2021 and $ 839 at December 31, 2020. The remaining liability is expected to be settled in the second quarter of 2021. 14 Other Restructuring Activities From time to time we undertake other restructuring activities that are not part of a formal plan. During the three months ended March 31, 2021 and March 31, 2020, we incurred restructuring charges of $ 101 and $ 272 , respectively, primarily related to workforce reduction costs. The total restructuring liability associated with these actions was $ 83 at March 31, 2021 and $ 9 at December 31, 2020. The following table displays the restructuring liability activity included in accrued expenses and other liabilities for all plans for the three months ended March 31, 2021: Restructuring liability at January 1, 2021 $ 1,363 Restructuring charges 81 Cost paid ( 232 ) Other activity (1) ( 152 ) Restructuring liability at March 31, 2021 $ 1,060 (1) Other activity includes the effects of currency translation, non-cash asset write-downs and other charges that do not flow through restructuring expense. NOTE 10 – Accrued Expense and Other Liabilities The components of accrued expenses and other liabilities are as follows: As of March 31, December 31, 2021 2020 Accrued product related costs $ 4,013 $ 4,470 Accrued income taxes 6,461 7,320 Accrued property and other taxes 1,590 2,478 Accrued professional fees 1,199 1,663 Accrued customer related liabilities 4,536 3,815 Dividends payable 1,294 1,291 Remediation reserves 10,431 10,642 Derivative liabilities 673 671 Other accrued liabilities 7,239 5,821 Total accrued expenses and other liabilities $ 37,436 $ 38,171 NOTE 11 – Commitments and 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. 15 A roll-forward of remediation reserves included in accrued expenses and other liabilities on the Condensed Consolidated Balance Sheets is comprised of the following: As of March 31, December 31, 2021 2020 Balance at beginning of period $ 10,642 $ 11,444 Remediation expense 199 2,769 Net remediation payments ( 398 ) ( 3,639 ) Other activity (1) ( 12 ) 68 Balance at end of the period $ 10,431 $ 10,642 (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 or will be 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. Components of lease expense for the three months ended March 31, 2021 were as follows: Three Months Ended March 31, March 31, 2021 2020 Operating lease cost $ 1,232 $ 1,199 Short-term lease cost 278 167 Total lease cost $ 1,510 $ 1,366 Supplemental cash flow information related to leases was as follows: Three Months Ended March 31, March 31, 2021 2020 Cash paid for amounts included in the measurement of lease liabilities $ 1,221 $ 1,130 Leased assets obtained in exchange for new operating lease liabilities $ 1,157 $ 1,179 16 Supplemental balance sheet information related to leases was as follows: As of March 31, December 31, 2021 2020 Balance Sheet Classification: Operating lease obligations $ 3,271 $ 3,294 Long-term operating lease obligations 23,510 23,163 Total lease liabilities $ 26,781 $ 26,457 Weighted-average remaining lease terms (years) 7.75 7.88 Weighted-average discount rate 6.41 % 6.40 % Remaining maturity of our existing lease liabilities as of March 31, 2021 is as follows: Operating Leases ( 1) 2021 $ 3,653 2022 4,713 2023 4,423 2024 4,285 2025 3,731 Thereafter 14,297 Total $ 35,102 Less: interest ( 8,321 ) Present value of lease liabilities $ 26,781 (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 March 31, December 31, 2021 2020 Total credit facility $ 300,000 $ 300,000 Balance outstanding 50,000 54,600 Standby letters of credit 1,740 1,740 Amount available, subject to covenant restrictions $ 248,260 $ 243,660 Weighted-average interest rate 1.30 % 1.92 % Commitment fee percentage per annum 0.20 % 0.23 % On February 12, 2019, we entered 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. 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 Credit Agreement 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 compliant with all debt covenants at March 31, 2021. The Credit Agreement 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, it 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 17 repurchases and dividend payments. Interest rates on the 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 for three months ended March 31, 2021 and March 31, 2020 was approximately $ 42 and $ 42 , respectively. These costs are included in interest expense in our Condensed Consolidated Statement of Earnings. We use interest rate swaps to convert the revolving credit facility's variable rate of interest into a fixed rate on a portion of the debt as described more fully in Note 14 "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 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 expense, net. 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 Condensed Consolidated Statements of Earnings for the three months ended March 31, 2021. 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 Condensed 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 March 31, 2021, we had a net unrealized gain of $ 670 in accumulated other comprehensive (loss) income, of which $ 668 is expected to be reclassified to earnings within the next 12 months. At March 31, 2020, we had a net unrealized loss of $ 2,076 in accumulated other comprehensive (loss) income. The notional amount of foreign currency forward contracts outstanding was $ 16,445 at March 31, 2021. 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 March 31, 2021, 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. 18 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 $ 518 . The location and fair values of derivative instruments designated as hedging instruments in the Condensed Consolidated Balance Sheets as of March 31, 2021, are shown in the following table: As of March 31, December 31, 2021 2020 Interest rate swaps reported in accrued liabilities $ ( 673 ) $ ( 671 ) Interest rate swaps reported in other long-term obligations $ ( 1,072 ) $ ( 1,546 ) Foreign currency hedges reported in other current assets $ 856 $ 1,125 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 $ 856 and foreign currency derivative liabilities of $ 0 at March 31, 2021. The effect of derivative instruments on the Condensed Consolidated Statements of Earnings is as follows: Three Months Ended March 31, March 31, 2021 2020 Foreign Exchange Contracts: Amounts reclassified from AOCI to earnings: Cost of goods sold $ 221 $ 248 Selling, general and administrative expense — ( 5 ) Total gain reclassified from AOCI to earnings 221 243 Gain (loss) recognized in other expense for hedge ineffectiveness — — Total derivative gain on foreign exchange contracts recognized in earnings $ 221 $ 243 Interest Rate Swaps: (Expense) benefit recorded in Interest expense $ ( 176 ) $ 38 Total gains on derivatives $ 45 $ 281 NOTE 15 – Accumulated Other Comprehensive (Loss) Income Shareholders’ equity includes certain items classified as accumulated other comprehensive (loss) income (“AOCI”) in the Condensed 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 income 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 adjustments relate 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. 19 Changes in exchange rates between the functional currency and the currency in which a transaction is denominated are foreign exchange transaction gains or losses. Transaction losses for the three months ended March 31, 2021 and March 31, 2020 were $ 1,330 and $ 1,271 , respectively, which have been included in other (expense) income in the Condensed Consolidated Statements of Earnings. The components of accumulated other comprehensive (loss) income for the three months ended March 31, 2021 are as follows: (Gain) Loss As of Gain (Loss) Reclassified As of December 31, Recognized from AOCI March 31, 2020 in OCI to Earnings 2021 Changes in fair market value of derivatives: Gross $ ( 1,038 ) $ 206 $ ( 45 ) $ ( 877 ) Income tax benefit (expense) 240 ( 47 ) 10 203 Net ( 798 ) 159 ( 35 ) ( 674 ) Changes in unrealized pension cost: Gross ( 128,004 ) — 1,847 ( 126,157 ) Income tax benefit (expense) 34,917 — ( 425 ) 34,492 Net ( 93,087 ) — 1,422 ( 91,665 ) Cumulative translation adjustment: Gross ( 2,036 ) 12 — ( 2,024 ) Total accumulated other comprehensive (loss) income $ ( 95,921 ) $ 171 $ 1,387 $ ( 94,363 ) The components of accumulated other comprehensive (loss) income for the three months ended March 31, 2020, are as follows: (Gain) Loss As of (Loss) Gain Reclassified As of December 31, Recognized from AOCI March 31, 2019 in OCI to Earnings 2020 Changes in fair market value of derivatives: Gross $ 659 $ ( 5,422 ) $ ( 281 ) $ ( 5,044 ) Income tax (expense) benefit ( 150 ) 1,225 64 1,139 Net 509 ( 4,197 ) ( 217 ) ( 3,905 ) Changes in unrealized pension cost: Gross ( 124,140 ) — 1,660 ( 122,480 ) Income tax benefit (expense) 34,018 — ( 375 ) 33,643 Net ( 90,122 ) — 1,285 ( 88,837 ) Cumulative translation adjustment: Gross ( 2,211 ) ( 41 ) — ( 2,252 ) Income tax benefit (expense) 98 ( 98 ) — — Net ( 2,113 ) ( 139 ) — ( 2,252 ) Total accumulated other comprehensive (loss) income $ ( 91,726 ) $ ( 4,336 ) $ 1,068 $ ( 94,994 ) 20 NOTE 16 – Shareholders’ Equity Share count and par value data related to shareholders’ equity are as follows: As of March 31, December 31, 2021 2020 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 57,147,983 57,076,410 Shares outstanding 32,348,360 32,276,787 Treasury stock Shares held 24,799,623 24,799,623 On February 7, 2019, the Board of Directors authorized a stock repurchase program with a maximum dollar limit of $ 25,000 in stock repurchases. During the three months ended March 31, 2021, no shares of common stock were repurchased. During the three months ended March 31, 2020, 220,731 shares of common stock were repurchased for $ 5,304 . Approximately $ 5,740 is available for future purchases. A roll-forward of common shares outstanding is as follows: Three months ended March 31, March 31, 2021 2020 Balance at the beginning of the year 32,276,787 32,472,406 Repurchases — ( 220,731 ) Restricted share issuances 71,573 94,232 Balance at the end of the period 32,348,360 32,345,907 Certain potentially dilutive restricted stock units are excluded from diluted earnings per share because they are anti-dilutive. The number of outstanding awards that were anti-dilutive for the three months ended March 31, 2021 and March 31, 2020 were 35,167 and 38,839 , respectively. NOTE 17 - Stock-Based Compensation At March 31, 2021, we had five active stock-based compensation plans: the Non-Employee Directors’ Stock Retirement Plan (“Directors’ Plan”), the 2004 Omnibus Long-Term Incentive Plan (“2004 Plan”), the 2009 Omnibus Equity and Performance Incentive Plan (“2009 Plan”), the 2014 Performance and Incentive Compensation 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. 21 The following table summarizes the compensation expense included in selling, general and administrative expenses in the Condensed Consolidated Statements of Earnings related to stock-based compensation plans: Three months ended March 31, March 31, 2021 2020 Service-based RSUs $ 686 $ 580 Performance-based RSUs 494 ( 368 ) Cash-settled RSUs 39 16 Total $ 1,219 $ 228 Income tax benefit 281 51 Net expense $ 938 $ 177 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 Weighted- Expense at Average March 31, 2021 Period Service-based RSUs $ 3,394 1.54 Performance-based RSUs 3,881 2.24 Total $ 7,275 1.91 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 March 31, 2021: 2018 Plan 2014 Plan 2009 Plan 2004 Plan Directors' Plan Awards originally available 2,500,000 1,500,000 3,400,000 6,500,000 N/A Maximum potential RSU and cash settled awards outstanding 656,205 52,500 75,200 35,952 5,522 Maximum potential awards outstanding 656,205 52,500 75,200 35,952 5,522 RSUs and cash settled awards vested and released 96,136 — — — — Awards available for grant 1,747,659 — — — — Service-Based Restricted Stock Units The following table summarizes the service-based RSU activity for the three months ended March 31, 2021: Units Weighted Average Grant Date Fair Value Outstanding at December 31, 2020 367,428 $ 21.28 Granted 65,450 32.77 Vested and released ( 61,342 ) 28.48 Forfeited ( 3,789 ) 27.20 Outstanding at March 31, 2021 367,747 $ 22.07 Releasable at March 31, 2021 194,974 $ 15.22 22 Performance and Market-Based Restricted Stock Units The following table summarizes the performance and market-based RSU activity for the three months ended March 31, 2021: Units Weighted Average Grant Date Fair Value Outstanding at December 31, 2020 225,559 $ 28.97 Granted 69,872 33.98 Attained by performance 18,107 28.33 Released ( 53,137 ) 28.33 Forfeited ( 24,622 ) 27.02 Outstanding at March 31, 2021 235,779 $ 30.75 Releasable at March 31, 2021 — $ — The following table summarizes each grant of performance awards outstanding at March 31, 2021: Description Grant Date Vesting Year Vesting Dependency Target Units Outstanding Maximum Number of Units to be Granted 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 - 2022 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 2021 - 2023 Performance RSUs February 11, 2021 2023 25% RTSR, 40% sales growth, 35% operating cash flow 69,872 139,744 Focus 2025 Performance RSUs April 23, 2020 2024 Cumulative revenues of $750 million over a trailing four-quarter period 43,750 43,750 Total 235,779 427,808 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 March 31, 2021 and December 31, 2020 we had 29,824 and 30,009 cash-settled RSUs outstanding, respectively. At March 31, 2021 and December 31, 2020, liabilities of $ 177 and $ 396 , respectively, were included in accrued expenses and other liabilities on our Condensed Consolidated Balance Sheets. NOTE 18 — Fair Value Measurements The table below summarizes our financial liabilities that were measured at fair value on a recurring basis at March 31, 2021: Quoted Prices Liability in Active Significant Carrying Markets for Other Significant Value at Identical Observable Unobservable March 31, Instruments Inputs Inputs 2021 (Level 1) (Level 2) (Level 3) Interest rate swaps $ ( 1,745 ) $ — $ ( 1,745 ) $ — Foreign currency hedges $ 856 $ — $ 856 $ — Contingent consideration $ 1,850 $ — $ — $ 1,850 23 The table below summarizes the financial assets that were measured at fair value on a recurring basis as of December 31, 2020: Quoted Prices Asset in Active Significant Carrying Markets for Other Significant Value at Identical Observable Unobservable December 31, Instruments Inputs Inputs 2020 (Level 1) (Level 2) (Level 3) Interest rate swaps $ ( 2,217 ) $ — $ ( 2,217 ) $ — Foreign currency hedges $ 1,125 $ — $ 1,125 $ — Contingent consideration $ 2,000 $ — $ — $ 2,000 We use 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 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 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 that market is not active and therefore they are classified within Level 2 of the fair value hierarchy. 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 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. Refer to Note 3 for further discussion on contingent consideration. Our long-term debt consists of debt outstanding under 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 The effective tax rates for the three months ended March 31, 2021 and March 31, 2020 are as follows: Three months ended March 31, March 31, 2021 2020 Effective tax rate 18.9 % 36.4 % 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. The first quarter 2021 tax rate was lower than the U.S. statutory federal tax rate primarily due to foreign earnings that are taxed at lower rates and tax benefits recorded upon vesting of restricted stock units. The first quarter 2020 tax rate was higher than the U.S. statutory federal tax rate primarily due to the establishment of valuation allowances on certain tax credits and a one-time tax expense resulting from a company restructuring. 24 NOTE 20 — Recent Accounting Pronouncements Accounting Pronouncements Recently Adopted ASU No. 2019-12 "Simplifying the Accounting for Income Taxes" In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 U.S. GAAP. The guidance is effective for interim and annual periods beginning after December 15, 2020, with early adoption permitted. We adopted this ASU on January 1, 2021 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 an alternative reference interest rate in our financial instruments including the potential election of certain practical expedients. Our LIBOR based revolving 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.