What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-10-27 compared with 2021-07-27 · 109 added, 80 removed, 201 unchanged (48% of the section changed)

15 unchanged sentences

We are subject to challenges including periodic market softness, competition from other suppliers, changes in technology, and the ability to add new customers, launch new products or penetrate new markets.

Impact of COVID-19

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 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 these potential disruptions on our business.

COVID-19 Impact and Supply Chain Uncertainties

The COVID-19 pandemic and subsequent supply chain uncertainties have had a significant negative impact on the global economy in 2020 and 2021.

This has disrupted the financial markets, negatively impacted the global supply chain and increased the cost of materials and operations, particularly within the global automotive industry.

Key semiconductor chip and other critical part shortages continue to force original equipment manufacturers (“OEMs”) to shut down production, often on short notice.

With customers changing orders on short notice, we run the risk of carrying excess inventory in these situations.

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

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

We anticipate these challenges to continue to impact our results in 2021 and into 2022 and we remain cautious about the financial impact of these potential disruptions on our business.

Results of Operations:

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:

Third Quarter 202 1 versus Third Quarter 20 20

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

Three Months Ended

September 30,

Cost of goods sold

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Operating earnings

Total other expense, net

Earnings before income taxes

Total other (expense) income, net

(Loss) earnings before income taxes

Income tax (benefit) expense

Earnings per share:

Diluted net earnings per share

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 (loss) earnings

(Loss) earnings per share:

Diluted net (loss) earnings per share

Net sales were $122,382 in the third quarter of 2021, an increase of $8,605 or 7.6% from the third 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 transportation markets decreased $2,936 or 4.5%.

The impact of the supply chain shortages and OEM shutdowns are expected to continue to have an adverse effect on our operations, primarily in the transportation end market.

Net sales to other markets increased $11,541 or 23.8%.

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

The Sensor Scientific, Inc.

(“SSI”) acquisition, which was completed in December 2020, added $1,780 in net sales for the quarter.

Changes in foreign exchange rates increased net sales by $1,279 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 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.

Gross margin as a percent of net sales was 37.3% in the third quarter of 2021 compared to 32.4% in the third quarter of 2020.

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

The third quarter of 2020 was impacted by the COVID-19 pandemic.

Selling, general and administrative ("SG&A") expenses were $19,922 or 16.3% of net sales in the third quarter of 2021 versus $16,883 or 14.8% of net sales in the third quarter of 2020.

The 2020 SG&A expenses 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 $6,454 or 5.3% of net sales in the third quarter of 2021 compared to $5,723 or 5.0% 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.

Restructuring charges were $319 or 0.3% of net sales in the third quarter of 2021 compared to $1,041 or 0.9% of net sales in the third quarter of 2020.

Expenses were higher in the prior year due to the initiation of a restructuring plan in the third quarter of 2020.

Operating earnings were $18,967 or 15.5% of net sales in the third quarter of 2021 compared to operating earnings of $13,259 or 11.7% of net sales in the third quarter of 2020 driven by sales volume and mix.

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

Three Months Ended

September 30,

Interest expense

Interest income

Other expense, net

Total other expense, net

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

Other (expense) income, net

Total other (expense) income, net

Other (expense) income, net in the third quarter of 2021 was primarily driven by increased pension expense including $106,206 in settlement charge from our U.S.

pension plan termination process.

Three Months Ended

September 30,

Effective tax rate

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

Our effective income tax rate was 28.9% and 22.2% in the third 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.

pension plan settlement charge taken in the third 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

Nine Months ended September 30, 2021 versus Nine Months Ended September 30, 2020

The following table highlights changes in significant components of the Unaudited Condensed Consolidated Statements of (Loss) Earnings for the nine months ended September 30, 2021, and September 30, 2020:

Nine Months Ended

September 30,

Cost of goods sold

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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.

(Loss) earnings before income taxes

Income tax (benefit) expense

Net (loss) earnings

(Loss) earnings per share:

Diluted net (loss) earnings per share

Net sales were $380,394 in the nine months ended September 30, 2021, an increase of $79,345 or 26.4% from the nine months ended September 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 $44,812 or 27.2%.

Net sales to other markets increased $34,533 or 25.4%.

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

The SSI acquisition, which was completed in December 2020, added $5,226 in net sales for the nine months ended September 30, 2021.

Changes in foreign exchange rates increased net sales by $6,456 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.

Gross margin as a percent of net sales was 35.7% for the nine months ended September 30, 2021 compared to 32.0% for the nine months ended September 30, 2020.

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

The first nine months of 2020 were also impacted significantly by the COVID-19 pandemic, particularly in the second quarter of 2020.

We continue 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 shortage s 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.

SG&A expenses were $59,184 or 15.6% of net sales for the nine months ended September 30, 2021 versus $48,310 or 16.0% of net sales for the nine months ended September 30, 2020.

The 2020 year to date SG&A expenses 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 $18,170 or 4.8% of net sales for the nine months ended September 30, 2021 compared to $18,653 or 6.2% 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.

Restructuring charges were $551 or 0.1% of net sales for the nine months ended September 30, 2021 compared to $1,416 or 0.5% of net sales for the nine months ended September 30, 2020.

Expenses were higher in the prior year due to the initiation of a restructuring plan in the third quarter of 2020.

Operating earnings were $58,043 or 15.3% of net sales for the nine months ended September 30, 2021 compared to operating earnings of $27,993 or 9.3% of net sales for the nine months ended September 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

Nine Months Ended

September 30,

Interest expense

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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

Other expense, net in the first nine months of 2021 was primarily driven by increased pension expense including $126,269 in settlement charges from our U.S.

pension plan termination process in the second and third quarters of 2021.

Nine Months Ended

September 30,

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.

Our effective income tax rate was 32.5% and 24.4% in the nine months ended September 30, 2021 and 2020, respectively.

This increase is primarily attributable to the change in the mix of earnings by jurisdiction as well as $126,269 in settlement charges from our U.S.

pension plan termination process in the second and third quarters of 2021.

Liquidity and Capital Resources

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.

Cash and cash equivalents were $128,527 at September 30, 2021, and $91,773 at December 31, 2020, of which $123,430 and $90,051, respectively, were held outside the United States.

The increase in cash and cash equivalents of $36,754 was primarily driven by cash generated from operating activities of $60,117, which was partially offset by net payments on long-term debt of $4,600, capital expenditures of $8,140, dividends paid of $3,882, taxes paid on behalf of equity award participants of $1,490, payments of contingent consideration of $500, 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.

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

Working capital increased by $44,078 during the nine months ended September 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 $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.

Net cash provided by operating activities was $60,117 during the nine months ended September 30, 2021.

Components of net cash provided by operating activities included net loss of ($51,031), depreciation and amortization expense of $20,231, non-cash pension and other post-retirement plan expenses of $131,290, and other net non-cash items of ($30,068), and a net cash outflow from changes in assets and liabilities of $10,305.

Cash Flows from Investing Activities

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

Net cash used in investing activities for the nine months ended September 30, 2021 was $8,395, driven primarily by capital expenditures.

Cash Flows from Financing Activities

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.

Net cash used in financing activities for the nine months ended September 30, 2021 was $15,411.

The net cash outflow was the result of a decrease in borrowings of long-term debt of $4,600, dividends paid of $3,882, taxes paid on behalf of equity award participants in the amount of $1,490, repurchase of treasury stock of $4,939, and payments of contingent consideration of $500.

Capital Resources

Long‑term debt is comprised of the following:

September 30,

Total credit facility

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4) allocate the transaction price to the performance obligations in the contract;

5) recognize revenue when (or as) the entity satisfies a performance obligation.

and 5) recognize revenue when (or as) the entity satisfies a performance obligation.

Product Warranties

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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.

As required under U.S.

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.

Upon the partial settlement of the pension liability due to the lump sum offering in the second quarter of 2021, 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 (Loss) Earnings.

On July 29, 2021, the Plan purchased a group annuity contract that transferred our benefit obligations for approximately 2,700 CTS participants and beneficiaries in the United States (“Transferred Participants”).

As part of the purchase of the group annuity contract, Plan benefit obligations and related annuity administration services for Transferred Participants were irrevocably assumed and guaranteed by the insurance company effective as of August 3, 2021.

There will be no change to pension benefits for Transferred Participants.

The purchase of the group annuity contract was fully funded directly by Plan assets.

As a result of the final settlement of the pension liability with the purchase of annuities, we reclassified the remaining related unrecognized pension losses of $106,206 that were previously recorded in accumulated other comprehensive loss to the Condensed Consolidated Statements of (Loss) Earnings.

The Plan assets of $50,638 as of September 30, 2021, will remain in the Plan until final administrative tasks are completed.

This process is expected to be completed in the first quarter of 2022, whereby the Plan assets will liquidate and revert to CTS.

At that time the funds will be subject to income and excise taxes.

We continue to evaluate potential plans to optimize tax implications as well as the use of the surplus cash.

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.

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

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

Environmental and Legal Contingencies

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Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, which will result in taxable or deductible amounts in the future.

In evaluating our ability to recover our deferred tax assets in the jurisdiction from which they arise, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax-planning strategies, and results of recent operations.

In evaluating our ability to recover our deferred tax assets in the jurisdiction from which they arise, we consider all available positive and negative evidence, including

scheduled reversals of deferred tax liabilities, projected future taxable income, tax-planning strategies, and results of recent operations.

The assumptions about future taxable income require the use of significant judgment and are consistent with the plans and estimates we are using to manage our underlying businesses.

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Three months ended

Six Months Ended

Nine months ended

September 30,

Toyota Motor Corporation

6 unchanged sentences

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

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;

the ultimate impact of the COVID-19 pandemic on our business, results of operations or financial condition, including, without limitation, supply chain disruptions;

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

unanticipated issues in integrating acquisitions;

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis