CTS CORP 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) (in thousands, except percentages and per share amounts) The following discussion should be read in conjunction with our unaudited Condensed Consolidated Financial Statements and notes included under Item 1, as well as our Consolidated Financial Statements and notes and related Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2020. Overview CTS Corporation ("CTS", "we", "our" or "us") is a leading designer and manufacturer of products that Sense, Connect and Move. Our vision is to be a leading provider of sensing and motion devices as well as connectivity components, enabling an intelligent and seamless world. These devices are categorized by their ability to Sense, Connect or Move. Sense products provide vital inputs to electronic systems. Connect products allow systems to function in synchronization with other systems. Move products ensure required movements are effectively and accurately executed. We are committed to achieving our vision by continuing to invest in the development of products and technologies, and talent within these categories. We manufacture sensors, actuators, and connectivity components in North America, Europe, and Asia. CTS provides engineered products to OEMs and tier one suppliers in the aerospace and defense, industrial, information technology, medical, telecommunications, and transportation markets. There is an increasing proliferation of sensing and motion applications within various markets we serve. In addition, the increasing connectivity of various devices to the internet results in greater demand for communication bandwidth and data storage, increasing the need for our connectivity products. Our success is dependent on the ability to execute our strategy to support these trends. 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. 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. 27 Results of Operations: 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 Percent of Percent of September 30, September 30, Percent Net Sales – Net Sales – 2021 2020 Change 2021 2020 Net sales $ 122,382 $ 113,777 7.6 % 100.0 % 100.0 % Cost of goods sold 76,720 76,871 (0.2 ) 62.7 67.6 Gross margin 45,662 36,906 23.7 37.3 32.4 Selling, general and administrative expenses 19,922 16,883 18.0 16.3 14.8 Research and development expenses 6,454 5,723 12.8 5.3 5.0 Restructuring charges 319 1,041 (69.4 ) 0.3 0.9 Total operating expenses 26,695 23,647 12.9 21.9 20.7 Operating earnings 18,967 13,259 43.1 15.5 11.7 Total other (expense) income, net (108,786 ) 977 (11,234.7 ) (88.9 ) 0.9 (Loss) earnings before income taxes (89,819 ) 14,236 (730.9 ) (73.4 ) 12.5 Income tax (benefit) expense (25,923 ) 3,163 (919.6 ) (21.2 ) 2.8 Net (loss) earnings $ (63,896 ) $ 11,073 (677.0 )% (52.2 )% 9.7 % (Loss) earnings per share: Diluted net (loss) earnings per share $ (1.97 ) $ 0.34 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. 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 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 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 $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. 28 Other expense and income items are summarized in the following table: Three Months Ended September 30, September 30, 2021 2020 Interest expense $ (514 ) $ (857 ) Interest income 230 217 Other (expense) income, net (108,502 ) 1,617 Total other (expense) income, net $ (108,786 ) $ 977 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, September 30, 2021 2020 Effective tax rate 28.9 % 22.2 % 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 third quarter of 2021. Results of Operations: 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 Percent of Percent of September 30, September 30, Percent Net Sales – Net Sales – 2021 2020 Change 2021 2020 Net sales $ 380,394 $ 301,049 26.4 % 100.0 % 100.0 % Cost of goods sold 244,446 204,677 19.4 64.3 68.0 Gross margin 135,948 96,372 41.1 35.7 32.0 Selling, general and administrative expenses 59,184 48,310 22.5 15.6 16.0 Research and development expenses 18,170 18,653 (2.6 ) 4.8 6.2 Restructuring charges 551 1,416 (61.1 ) 0.1 0.5 Total operating expenses 77,905 68,379 13.9 20.5 22.7 Operating earnings 58,043 27,993 107.3 15.3 9.3 Total other expense, net (133,674 ) (1,874 ) 7033.1 (35.1 ) (0.6 ) (Loss) earnings before income taxes (75,631 ) 26,119 (389.6 ) (19.8 ) 8.7 Income tax (benefit) expense (24,600 ) 6,381 (485.5 ) (6.5 ) 2.1 Net (loss) earnings $ (51,031 ) $ 19,738 (358.5 )% (13.4 )% 6.6 % (Loss) earnings per share: Diluted net (loss) earnings per share $ (1.58 ) $ 0.61 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. 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 $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 35.7% 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 29 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 $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: Nine Months Ended September 30, September 30, 2021 2020 Interest expense $ (1,577 ) $ (2,617 ) Interest income 689 852 Other expense, net (132,786 ) (109 ) Total other expense, net $ (133,674 ) $ (1,874 ) 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, September 30, 2021 2020 Effective tax rate 32.5 % 24.4 % 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 $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 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. 30 Cash Flows from Operating Activities 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 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 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: As of September 30, 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 1.18 % 1.92 % Commitment fee percentage per annum 0.20 % 0.23 % Our 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. We have entered into interest rate swap 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 is recognized as an adjustment to interest expense when settled. We have historically funded our capital and operating needs primarily through cash flows from operating activities, supported by available credit under our revolving credit facility. We believe that cash flows from operating activities and available borrowings under our revolving credit facility will be adequate to fund our working capital needs, capital expenditures, debt service and dividend requirements for at least the next twelve months. However, we may choose to pursue additional equity and debt financing to provide additional liquidity or to fund acquisitions. Critical Accounting Policies and Estimates Management prepared the Condensed Consolidated Financial Statements under accounting principles generally accepted in the United States of America. These principles require the use of estimates, judgments, and assumptions. We believe that the estimates, judgments, and assumptions we used are reasonable, based upon the information available. Our estimates and assumptions affect the reported amounts in our financial statements. The following accounting policies comprise those that we believe are the most critical in understanding and evaluating our reported financial results. 31 Revenue Recognition Product revenue is recognized when the transfer of promised goods to a customer occurs in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods. We follow the five-step model to determine when this transfer has occurred: 1) identify the contract(s) with the customer; 2) identify the performance obligations in the contract; 3) determine the transaction price; 4) allocate the transaction price to the performance obligations in the contract; and 5) recognize revenue when (or as) the entity satisfies a performance obligation. Product Warranties Provisions for estimated warranty expenses primarily related to our automotive products are made at the time products are sold. These estimates are established using a quoted industry rate. We adjust our warranty reserve for any known or anticipated warranty claims as new information becomes available. We evaluate our warranty obligations at least quarterly and adjust our accruals if it is probable that future costs will be different than our current reserve. Over the last three years, product warranty reserves have ranged from 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. Accounts Receivable We have standardized credit granting and review policies and procedures for all customer accounts, including: • Credit reviews of all new customer accounts, • Ongoing credit evaluations of current customers, • Credit limits and payment terms based on available credit information, • Adjustments to credit limits based upon payment history and the customer's current credit worthiness, • An active collection effort by regional credit functions, reporting directly to the corporate financial officers, and • Limited credit insurance on the majority of our international receivables. We reserve for estimated credit losses based on historical experience, specific customer collection issues, current conditions and reasonable and supportable forecasts that affect the collectability of the remaining cash flows over the contractual terms of our receivables and other financial assets . Over the last three years, accounts receivable reserves have been approximately 0.1% to 1.8% of total accounts receivable. We believe our reserve level is appropriate considering the quality of the portfolio. While credit losses have historically been within expectations of the reserves established, we cannot guarantee that our credit loss experience will continue to be consistent with historical experience or our current forecasts. Inventories We value our inventories at the lower of the actual cost to purchase or manufacture using the first-in, first-out ("FIFO") method, or net realizable value. We review inventory quantities on hand and record a provision for excess and obsolete inventory based on historical usage, forecasts of product demand and related production requirements. Over the last three years, our reserves for excess and obsolete inventories have ranged from 10.2% to 16.0% of gross inventory. We believe our reserve level is appropriate considering the quantities and quality of the inventories. Retirement Plans Actuarial assumptions are used in determining pension income and expense and our defined benefit obligations. We utilize actuaries from consulting companies in each applicable country to develop our discount rates, matching high-quality bonds currently available and expected to be available during the period to maturity of the pension benefit in order to provide the necessary future cash flows to pay the accumulated benefits when due. After considering the recommendations of our actuaries, we have assumed a discount rate, expected rate of return on plan assets, and a rate of compensation increase in determining our annual pension income and expense and 32 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 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 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 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 Goodwill of a reporting unit is tested for impairment annually, or more frequently if an event occurs or circumstances change that would more-likely-than-not reduce the fair value of a reporting unit below its carrying amount. Examples of such events or circumstances include, but are not limited to, the following: • Significant decline in market capitalization relative to net book value, • Significant adverse change in regulatory factors or in the business climate, • Unanticipated competition, • More-likely-than-not expectation that a reporting unit or a significant portion of a reporting unit will be sold or otherwise disposed of, • Testing for recoverability of a significant asset group within a reporting unit, and • Allocation of a portion of goodwill to a business to be disposed. 33 If we believe that one or more of the above indicators of impairment have occurred, we perform an impairment test. We have the option to perform a qualitative assessment (commonly referred to as "step zero" test) to determine whether further quantitative analysis for impairment of goodwill and indefinite-lived intangible assets is necessary. The qualitative assessment includes a review of macroeconomic conditions, industry and market considerations, internal cost factors, and our own overall financial and share price performance, among other factors. If, after assessing the totality of events or circumstances we determine that it is not more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, we do not need to perform a quantitative analysis. If a quantitative assessment is required, we estimate the fair value of each reporting unit using a combination of discounted cash flow analysis and market-based valuation methodologies. Determining fair value using a quantitative approach requires significant judgment, including judgments about projected revenues, cash flows over a multi-year period, discount rates and estimated valuation multiples. The discount rate applied to our forecasts of future cash flows is based on our estimated weighted average cost of capital. In assessing the reasonableness of our determined fair values, we evaluate our results against our market capitalization. Changes in these estimates and assumptions could materially affect the determination of fair value and impact the goodwill impairment assessment. Our latest assessment was performed using a quantitative approach as of October 1, 2020, and we determined that it was likely that the fair values of our reporting units were more than their carrying amounts, and therefore no impairment charges were recorded. We will monitor future results and will perform a test if indicators trigger an impairment review. Impairment of Other Intangible and Long-Lived Assets We evaluate the impairment of identifiable intangibles and other long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors considered that may trigger an impairment review consist of, but are not limited to, the following: • Significant decline in market capitalization relative to net book value, • Significant under performance relative to expected historical or projected future operating results, • Significant changes in the manner of use of the acquired assets or the strategy for the overall business, and • Significant negative industry or economic trends. If we believe that one or more indicators of impairment have occurred, we perform a recoverability test by comparing the carrying amount of an asset or asset group to the sum of the undiscounted cash flows expected to result from the use and the eventual disposition of the asset or asset group. 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 September 30, 2021. Environmental and Legal Contingencies U.S. GAAP requires a liability to be recorded for contingencies when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated. Significant judgment is required to determine the existence and amounts of our environmental, legal and other contingent liabilities. We regularly consult with attorneys and consultants to determine the relevant facts and circumstances before we record a liability. Changes in laws, regulatory orders, cost estimates, participation of other parties, timing of payments, input of attorneys and consultants, or other circumstances may have a material impact on the recorded liability. Income Taxes Our income tax expense, deferred tax assets and liabilities, and liabilities for unrecognized tax benefits reflect management’s best estimate of current and future taxes to be paid. We are subject to income taxes in the United States and numerous foreign jurisdictions. Significant judgments and estimates are required in the determination of consolidated income tax expense. 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 34 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. The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in a multitude of jurisdictions across our global operations. Accounting Standards Codification (“ASC”) No. 740 states that a tax benefit from an uncertain tax position may be recognized when it is more-likely-than-not that the position will be sustained upon examination, including resolution of any related appeals or litigation processes, on the basis of its technical merits. We record unrecognized tax benefits as liabilities in accordance with ASC 740 and adjust these liabilities when our judgment changes as a result of the evaluation of new information not previously available. Because of the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the unrecognized tax benefit liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which new information is available. Our practice is to recognize interest and penalties related to income tax matters as part of income tax expense. Following the enactment of the 2017 Tax Cut and Jobs Act and the associated one-time transition tax, in general, repatriation of foreign earnings to the U.S. can be completed with no incremental U.S. tax. However, there are limited other taxes that continue to apply such as foreign withholding and certain state taxes. The Company records a deferred liability for the estimated foreign earnings and state tax cost associated with the undistributed foreign earnings that are not permanently reinvested. Significant Customers Our net sales to customers representing at least 10% of total net sales is as follows: Three months ended Nine months ended September 30, September 30, September 30, September 30, 2021 2020 2021 2020 Cummins Inc. 14.3 % 11.8 % 14.8 % 12.8 % Toyota Motor Corporation 10.0 % 14.4 % 12.3 % 12.7 % Forward‑Looking Statements This document contains statements that are, or may be deemed to be, forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, any financial or other guidance, statements that reflect our current expectations concerning future results and events, and any other statements that are not based solely on historical fact. Forward-looking statements are based on management's expectations, certain assumptions and currently available information. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof and are based on various assumptions as to future events, the occurrence of which necessarily are subject to uncertainties. These forward-looking statements are made subject to certain risks, uncertainties and other factors, which could cause our actual results, performance or achievements to differ materially from those presented in the forward-looking statements. 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, 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; the results of actions to reposition our business; rapid technological change; general market conditions in the transportation, telecommunications, and information technology industries, as well as conditions in the industrial, aerospace and defense, and medical markets; reliance on key customers; unanticipated public health crises, natural disasters or other events; environmental compliance and remediation expenses; the ability to protect our intellectual property; pricing pressures and demand for our products; and risks associated with our international operations, including trade and tariff barriers, exchange rates and political and geopolitical risks. Many of these, and other risks and uncertainties, are discussed in further detail in Item 1A. of our Annual Report on Form 10-K. We undertake no obligation to publicly update our forward-looking statements to reflect new information or events or circumstances that arise after the date hereof, including market or industry changes. 35