What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-07-27 compared with 2021-04-29 · 104 added, 55 removed, 177 unchanged (47% of the section changed)

16 unchanged sentences

Impact of COVID-19

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.

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

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

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, 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.

These and other potential impacts of the COVID-19 pandemic, along with the recent increases in consumer demand continue to result 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.

We remain cautious about the financial impact of these potential disruptions on our business.

Results of Operations:

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:

Second Quarter 202 1 versus Second Quarter 20 20

The following table highlights changes in significant components of the Unaudited Condensed Consolidated Statements of Earnings for the quarters ended June 30, 2021, and June 30, 2020:

Three Months Ended

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Earnings before income taxes

Income tax expense

Income tax (benefit) expense

Earnings per share:

Diluted net earnings per share

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 were $129,585 in the second quarter of 2021, an increase of $45,388 or 53.9% from the second quarter of 2020.

Net sales growth was driven by the overall improvement in the economy;

however, we also continued to experience significant inflation in material and freight costs as well as interruptions in the supply chain particularly due to the global semiconductor chip and resin shortages impacting the operations of our business.

The impact of the supply chain shortages and OEM shutdowns are expected to continue to have an adverse effect on our operations, which we are currently unable to quantify.

Net sales to transportation markets increased $33,427 or 87.7%.

Net sales to other markets increased $11,961 or 26.0%.

The Sensor Scientific, Inc.

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

The SSI acquisition, which was completed in December 2020, added $1,639 in net sales for the quarter.

Changes in foreign exchange rates increased net sales by $2,681 year-over-year due to the U.S.

Dollar depreciating compared to the Chinese Renminbi and Euro.

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.

Gross margin as a percent of net sales was 36.8% in the second quarter of 2021 compared to 31.6% in the second quarter of 2020.

The increase in gross margin was driven primarily by sales volume.

The second quarter of 2020 was most significantly impacted by the COVID-19 pandemic.

Selling, general and administrative ("SG&A") expenses were $20,937 or 16.2% of net sales in the second quarter of 2021 versus $14,668 or 17.4% of net sales in the second quarter of 2020.

The 2020 SG&A costs included savings from cost reduction measures we had implemented while 2021 saw those measures fully restored as well as higher costs from incentive compensation.

Research and development (“R&D”) expenses were $6,029 or 4.7% of net sales in the second quarter of 2021 compared to $5,522 or 6.6% of net sales in the comparable quarter of 2020.

The increase in overall R&D expenses is primarily due to changes in timing and mix of certain projects as well as cost actions implemented in Q2 2020.

Restructuring charges were $151 or 0.1% of net sales in the second quarter of 2021 compared to $135 or 0.2% of net sales in the second quarter of 2020.

Operating earnings were $20,579 or 15.9% of net sales in the second quarter of 2021 compared to operating earnings of $6,242 or 7.4% of net sales in the second quarter of 2020.

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

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

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Total other expense, net

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.

Other expense, net in the second quarter of 2021 was primarily driven by $20,063 in settlement charges from our U.S.

Pension plan termination process.

Three Months Ended

Effective tax rate

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.

Our effective income tax rate was 245.6% and 17.6% in the second quarters of 2021 and 2020, respectively.

This increase is primarily attributable to the impact of the U.S.

Pension Plan settlement charge taken in the second quarter of 2021.

Results of Operations:

Six Months ended June 30, 2021 versus Six Months Ended June 30, 2020

The following table highlights changes in significant components of the Unaudited Condensed Consolidated Statements of Earnings for the six months ended June 30, 2021, and June 30, 2020:

Six Months Ended

Cost of goods sold

Selling, general and administrative expenses

Research and development expenses

Restructuring charges

Total operating expenses

Operating earnings

Total other (expense), net

Earnings before income taxes

Income tax expense

Earnings per share:

Diluted net earnings per share

Net sales were $258,012 in the six months ended June 30, 2021, an increase of $70,740 or 37.8% from the six months ended June 30, 2020.

Net sales growth was driven by the overall improvement in the economy;

The impact of the supply chain shortages and OEM shutdowns are expected to continue to have an adverse effect on our operations, which we are currently unable to quantify.

Net sales to transportation markets increased $47,748 or 47.9%.

Net sales to other markets increased $22,993 or 26.2%.

The SSI acquisition, which was completed in December 2020, added $3,487 in net sales for the six months ended June 30, 2021.

Changes in foreign exchange rates increased net sales by $5,177 year-over-year due to the U.S.

Dollar depreciating compared to the Chinese Renminbi and Euro.

Gross margin as a percent of net sales was 35.0% for the six months ended June 30, 2021 compared to 31.8% for the six months ended June 30, 2020 .

The increase in gross margin was driven primarily by sales volume .

The first six months of 2020 were impacted significantly by the COVID-19 pandemic, particularly in Q2 2020.

SG&A expenses were $39,262 or 15.2% of net sales for the six months ended June 30, 2021 versus $31,427 or 16.8% of net sales for the six months ended June 30, 2020.

The 2020 year to date SG&A costs include savings from cost reduction measures we had implemented while 2021 saw those measures fully restored as well as higher costs from incentive compensation.

R&D expenses were $11,716 or 4.5% of net sales for the six months ended June 30, 2021 compared to $12,930 or 6.9% of net sales in the comparable period of 2020.

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

Restructuring charges were $232 or 0.1% of net sales for the six months ended June 30, 2021 compared to $375 or 0.2% of net sales for the six months ended June 30, 2020.

Operating earnings were $39,077 or 15.1% of net sales for the six months ended June 30, 2021 compared to operating earnings of $14,734 or 7.9% of net sales for the six months ended June 30, 2020.

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

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

Six Months Ended

Interest expense

Interest income

Other expense, net

Total other expense, net

Other expense, net in the first six months of 2021 was primarily driven by $20,063 in settlement charges from our U.S.

Pension plan termination process in the second quarter of 2021.

Six Months Ended

Effective tax rate

Our effective income tax rate was 9.3% and 27.1% in the six months ended June 30, 2021 and 2020, respectively.

This decrease is primarily attributable to the change in the mix of earnings by jurisdiction as well as $20,063 in settlement charges from our U.S.

Pension plan termination process in the second quarter of 2021.

Liquidity and Capital Resources

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 and cash equivalents were $117,397 at June 30, 2021, and $91,773 at December 31, 2020, of which $113,719 and $90,051, respectively, were held outside the United States.

The increase in cash and cash equivalents of $25,624 was primarily driven by cash generated from operating activities of $38,785, which was partially offset by net payments on long-term debt of $4,600, capital expenditures of $3,970, dividends paid of $2,585, taxes paid on behalf of equity award participants of $1,480, payments of contingent consideration of $350, and payments for acquisitions of $255.

Total long-term debt was $50,000 as of June 30, 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 9.9% at June 30, 2021, compared to 11.4% at December 31, 2020.

Working capital increased by $32,734 during the six months ended June 30, 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 $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.

Net cash provided by operating activities was $38,785 during the six months ended June 30, 2021.

Components of net cash provided by operating activities included net earnings of $12,865, depreciation and amortization expense of $13,512, non-cash pension and other post-retirement plan expenses of $23,823, and other net non-cash items of ($1,779), and a net cash outflow from changes in assets and liabilities of $9,636.

Cash Flows from Investing Activities

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

Net cash used in investing activities for the six months ended June 30, 2021 was $4,225, driven primarily by capital expenditures.

Cash Flows from Financing Activities

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.

Net cash used in financing activities for the six months ended June 30, 2021 was $9,015.

The net cash outflow was the result of a decrease in borrowings of long-term debt of $4,600, dividends paid of $2,585, taxes paid on behalf of equity award participants in the amount of $1,480, and payments of contingent consideration of $350.

Capital Resources

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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.

Over the last three years, product warranty reserves have ranged from 0.5% to 2.7% 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 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.

the projected benefit obligation.

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.

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 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.

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 into 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 allowed us to proceed with the termination process for the Plan.

During the second quarter of 2021, the Company offered the option of receiving a lump sum payment to eligible participants with vested qualified Plan benefits in lieu of receiving monthly annuity payments.

Approximately 365 participants elected to receive the settlement, and lump sum payments of approximately $ 35,594 were made from Plan assets to these participants in June 2021.

As required under US GAAP, t he Company recognizes a settlement gain or loss when the aggregate amount of lump-sum distributions to participants equals or exceeds the sum of the service and interest cost components of the net periodic pension cost.

The amount of settlement gain or loss recognized is the pro rata amount of the existing unrealized gain or loss immediately prior to the settlement.

In general, both the projected benefit obligation and fair value of plan assets are required to be remeasured in order to determine the settlement gain or loss.

Upon the partial settlement of the pension liability due to the lump sum offering the Company recognized a non-cash and non-operating settlement charge of $20,063 related to pension losses, reclassified from accumulated other comprehensive loss to other (income) expense in the Company's Condensed Consolidated Statements of Earnings.

Upon final settlement of the pension liability with the purchase of annuities, expected to occur in the third quarter, we will reclassify the remaining related unrecognized pension losses, currently recorded in accumulated other comprehensive loss, to the Condensed Consolidated Statements of Earnings.

Since the final amount of the settlement depends on a number of factors determined as of the liquidation date, including the annuity pricing interest rate environment and asset performance, the unrecognized losses value may fluctuate from June 30, 2021.

As of June 30, 2021, we had gross unrecognized pension losses related to the Plan of $101,125.

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

Impairment of Goodwill

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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.

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.

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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 $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.

No indicators of impairment were identified during the quarter ended June 30, 2021.

Environmental and Legal Contingencies

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Three Months Ended

Six Months Ended

Toyota Motor Corporation

21 unchanged sentences

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