CTS CORP 10-K

Item 1. Business CTS Corporation ("CTS", "we", "our", "us" or the "Company") is a global manufacturer of sensors, connectivity components, and actuators. CTS was established in 1896 as a provider of high-quality telephone products and was incorporated as an Indiana corporation in February 1929. Our principal executive offices are located in Lisle, Illinois. We design, manufacture, and sell a broad line of sensors, connectivity components, and actuators primarily to original equipment manufacturers ("OEMs") and tier one suppliers for the aerospace and defense, industrial, medical, and transportation markets. 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, technologies, and talent within these categories. We operate manufacturing facilities in North America, Asia, and Europe. Sales and marketing are accomplished through our sales engineers, independent manufacturers' representatives, and distributors. See the Consolidated Financial Statements and Notes included in Part II, Item 8 of this Annual Report on Form 10-K for financial information regarding the Company. PRODUCTS BY MAJOR MARKETS Our products perform specific electronic functions for a given product family and are intended for use in customer assemblies. Our major products consist principally of sensors and actuators used in passenger or commercial vehicles, connectivity components used in telecommunications infrastructure, information technology and other high-speed applications, switches, temperature sensors, and potentiometers supplied to multiple markets, and fabricated piezoelectric materials and substrates used primarily in the medical, industrial, and aerospace and defense markets. The following table identifies major products by industry. Products are sold to several industry OEMs, tier one suppliers, and distributors. Product Description Transportation Industrial Medical Aerospace and Defense SENSE • • • • (Controls, Pedals, Piezo Sensing Products, Sensors, Switches, Transducers) CONNECT • • • (EMI/RFI Filters, Capacitors, Frequency Control, Resistors, RF filters) MOVE • • (Piezo Microactuators, Rotary Actuators) The following table provides a breakdown of net sales by industry as a percent of consolidated net sales: 2021 2020 2019 Industry Transportation 55% 57% 64% Industrial 27% 25% 20% Medical 9% 9% 9% Aerospace and Defense 9% 9% 7% % of consolidated net sales 100% 100% 100% In the above table, Telecommunications & IT are included in the Industrial end-market for all periods presented. MARKETING AND DISTRIBUTION Sales and marketing to customers is accomplished through our sales engineers, independent manufacturers' representatives, and distributors. We maintain sales offices in China, Czech Republic, Denmark, Germany, Japan, Singapore, Taiwan, and the United States. Approximately 92% of 2021 net sales were attributable to our sales engineers. CTS CORPORATION 4 Table of Contents Our sales engineers generally service our largest customers with application-specific products. A vast majority of our products are engineered solutions. The sales engineers work closely with major customers in designing and developing products to meet specific customer requirements. In 2021, independent distributors accounted for approximately 6% of net sales. We use distributors for a small portion of our product portfolio that are standard and require less design support, to service smaller customers, and to provide supply chain fulfillment for certain customers. Our key distribution partners include large global and regional distributors such as Avnet, Inc., Digi-Key Electronics, Master Electronics, Future Electronics, and TTI, Inc. In addition, we also utilize the services of independent manufacturers' representatives for customers not serviced directly by our sales engineers. Independent manufacturers' representatives receive commissions from us. During 2021, approximately 2% of net sales were attributable to independent manufacturers' representatives. RAW MATERIALS We utilize a wide variety of raw materials and purchased parts in our manufacturing processes. The following are the most significant raw materials and purchased components: Conductive inks and contactors, passive connectivity components, integrated circuits and semiconductors, certain rare earth elements ("REEs"), ceramic powders, plastic components, molding compounds, printed circuit boards and assemblies, quartz blanks and crystals, wire harness assemblies, copper, brass, silver, gold, platinum, lead, aluminum, and steel-based raw materials and components. These raw materials and parts are purchased from a number of suppliers, and we generally do not believe we are dependent upon one or a limited number of suppliers. Although we purchase all of our semiconductors, REEs, conductive inks, and silver pastes from a limited number of suppliers, alternative sources are generally available. Lead times between the placement of orders for certain raw materials and purchased parts and actual delivery to us may vary. Occasionally, we may need to order raw materials in greater quantities and at higher prices to compensate for the variability of lead times for delivery. The price and availability of raw materials and manufactured components is subject to change due to, among other things, new laws and regulations, global economic and political events including strikes, and public health and safety concerns. Because of the COVID-19 pandemic, we have experienced supply chain disruptions as well as supply inflationary pressures in fiscal 2021. In particular, semiconductor and resin shortages have impacted our OEM customers’ ability to finish assembly of vehicles, which in turn have adversely impacted our results of operations and cash flows. These pressures are expected to continue in fiscal 2022. PATENTS, TRADEMARKS, AND LICENSES We maintain a program of obtaining and protecting U.S. and non-U.S. patents relating to products that we have designed and manufactured, as well as processes and equipment used in our manufacturing technology. We were issued 7 new U.S. patents and 19 non-U.S. patents in 2021 and currently hold 134 U.S. patents and 126 non-U.S. patents. We have 10 registered U.S. trademarks, 24 registered foreign trademarks and 4 international trademark registrations. We have licensed the right to use several of our patents. In 2021, license and royalty income was less than 1% of net sales. MAJOR CUSTOMERS Our net sales to significant customers as a percentage of total net sales were as follows: Years Ended December 31, 2021 2020 2019 Cummins Inc. 15.0% 13.1% 16.1% Toyota Motor Corporation 12.4% 13.4% 11.6% We sell parts to these two transportation customers for certain vehicle platforms under purchase agreements that have program lifetime volume estimates and are subject to purchase orders issued from time to time. No other customer accounted for 10% or more of total net sales during these periods. We continue to focus on broadening our customer base to diversify our end market exposure. CTS CORPORATION 5 Changes in the level of our customers' orders have, in the past, had a significant impact on our operating results. If a major customer reduces the amount of business it transacts with us, or substantially changes the terms of that business, there could be an adverse impact on our operating results. ORDER BACKLOG Order backlog is comprised of firm open purchase orders we have received from our customers and generally represents one to two months of sales for certain products. Our business is a mix of purchase order-based business, shorter-term contracts, and multi-year awards, such as with customers who serve the automotive end market. As such, order backlog does not provide a meaningful indication of future sales. COMPETITION We compete with domestic and foreign manufacturers principally based on product features, technology, price, quality, reliability, delivery, and service. Most of our product lines encounter significant global competition. The number of competitors varies from product line to product line. No one competitor competes with us in every product line, but some competitors are larger and more diversified than we are. Some customers have reduced or plan to reduce their number of suppliers, while increasing their volume of purchases. Customers demand lower cost and higher quality, reliability, and delivery standards from us as well as from our competitors. These trends create opportunities for us, but also increase the risk of loss of business to competitors. We are subject to competitive risks that are typical in our end markets, including technical obsolescence. We believe we compete most successfully in custom engineered products manufactured to meet specific applications of major OEMs. NON-U.S. REVENUES AND OPERATIONS Our net sales to customers originating from our non-U.S. operations as a percentage of total net sales were as follows: Years Ended December 31, 2021 2020 2019 Net sales from non-U.S. operations 42.0% 43.0% 40.3% We believe the business risks to our non-U.S. operations, though substantial, are normal risks for global businesses. These risks include currency controls and changes in currency exchange rates, longer collection cycles, political and transportation risks, economic downturns and inflation, government regulations, and expropriation. Our non-U.S. manufacturing facilities are located in China, Czech Republic, Denmark, Mexico, Philippines, and Taiwan. Additional information regarding the Company’s sales by geographic area and long-lived tangible assets in different geographic areas is included in Note 20 - Geographic Data of this Annual Report on Form 10-K. CTS CORPORATION 6 Table of Contents HUMAN CAPITAL MANAGEMENT AND OUR CULTURE We employed 3,820 people as of December 31, 2021, with 86% of these employees located outside the U.S. We employed 3,786 people as of December 31, 2020, with 87% of these employees located outside the U.S. We are committed to building a diverse, inclusive and engaged workforce across our organization. We have a global business, and our employees reflect the diversity of our geographic footprint. We promote and maintain a culture of respect and appreciation of differences in our employees. Our management teams and all of our employees are expected to exhibit the principles of fairness, honesty and integrity in the actions we undertake. Our employees must adhere to a Code of Ethics that sets standards for appropriate behavior and includes required annual training on preventing, identifying, reporting and stopping any type of unlawful discrimination or unethical actions. A copy of our Code of Ethics is available for review on our Company’s website ctscorp.com. We have a global talent review and succession planning process designed to align our talent plans with the current and future strategies of the business. This includes the identification of key positions, assessment of internal talent and potential successors and plans for talent acquisition and development. We strive to align compensation with the external market and maintain equity within the organization. In addition, we offer a broad range of company-paid benefits, which we believe are competitive in our industry. The safety and well-being of our employees is a priority and vital to our success. Our health and safety activities are overseen by our corporate environmental, health and safety function and are managed by employees in our locations, who coordinate on-site safety programs, resources, reporting and training in our locations. Our employees are regularly trained on safety-related topics and we monitor and measure the effectiveness of our programs at all of our locations. Throughout the ongoing COVID-19 pandemic we have taken action to protect our employees’ safety and health, including equipping employees with personal protective equipment, establishing minimum staffing and social distancing policies, sanitizing workspaces more frequently, adopting alternate work schedules including remote work arrangements, and instituting other measures aimed at minimizing the transmission of COVID-19 while sustaining production and related services. In addition, we modified the way we conduct many aspects of our business to reduce the number of in-person interactions. For example, we significantly expanded the use of virtual interactions in many aspects of our business, including customer facing activities. We recognize that we have a responsibility to be a positive influence in the communities in which we do business around the world. In the past most of our community involvement and charitable programs has been organized by our locations, which has helped to ensure that our efforts are working in support of the local communities in which our employees live and work. However, in 2021, we further enhanced our commitment to community outreach and support through the launch of CTS CARES – our global program designed to support our charitable giving and community involvement initiatives. The CTS CARES platform advanced this past quarter as our employees across the globe participated in several community activities and contributed to community projects. EXECUTIVE OFFICERS OF THE COMPANY Executive Officers. The following serve as executive officers of CTS as of December 31, 2021. Name Age Positions and Offices Kieran O'Sullivan 59 President, Chief Executive Officer and Chairman of the Board Ashish Agrawal 51 Vice President and Chief Financial Officer Scott D’Angelo 51 Vice President, General Counsel and Secretary Kieran O’Sullivan – 59 – President, Chief Executive Officer and Chairman of the Board. Mr. O’Sullivan joined CTS on January 7, 2013. Before joining CTS, Mr. O’Sullivan served as Executive Vice President of Continental AG’s Global Infotainment and Connectivity Business and led the NAFTA Interior Division, having joined Continental AG, a global automotive supplier, in 2006. Mr. O’Sullivan is a member of the board of directors of LCI Industries, a supplier of engineered components for manufacturers of recreational vehicles, manufactured homes, marine applications, and for the related aftermarkets, serving as the chairperson of the risk committee, and as a member of the corporate governance, nominating and sustainability and audit committees. Ashish Agrawal - 51 - Vice President and Chief Financial Officer. On November 11, 2013, Mr. Agrawal was elected Vice President and Chief Financial Officer of CTS. Mr. Agrawal joined CTS in June 2011 as Vice President, Treasury and Corporate Development, and was elected as Treasurer on September 1, 2011. Before joining CTS, Mr. Agrawal was with Dometic Group AB, a manufacturer of refrigerators, awnings and air conditioners, as Senior Vice President and Chief Financial Officer, Americas, beginning in 2007. Prior to that, Mr. Agrawal was with General Electric Co. in various positions beginning in December 1994. CTS CORPORATION 7 Scott D’Angelo - 51 - Vice President, General Counsel and Secretary. Mr. D’Angelo joined CTS in February 2021 and was elected General Counsel and Secretary on February 11, 2021. Prior to joining the Company, Mr. D’Angelo was a member of the International Commercial and Trade Practice Group of Baker McKenzie, LLP from March 2019 , and served as Vice President, Deputy General Counsel & Chief Compliance Officer of Fortune Brands Home & Security, Inc. , a leading home and security products company, from May 2015 and, prior to that, served in several senior roles with McDonald’s Corporation. Information with respect to the Company’s Directors and corporate governance policies and practices may be found in our definitive proxy statement to be delivered to shareholders in connection with our 2022 Annual Meeting of Shareholders. Such information is incorporated herein by reference. ADDITIONAL INFORMATION We are incorporated in the State of Indiana. Our principal corporate office is located at 4925 Indiana Avenue Lisle, Illinois 60532. Our internet address is www.ctscorp.com. We make available free of charge through our website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission ("SEC"). Other than the documents that we file with or furnish to the SEC that are incorporated by reference herein, the information contained on or accessible through our website is not part of this or any other report we file or furnish to the SEC. Investors and others should note that we announce material financial information to our investors using the Investors section of our website ( ctscorp.com/investors ), SEC filings, press releases, public conference calls and webcasts. We use these channels as well as social media and blogs to communicate with our investors and the public about our company, our services and other issues. It is possible that the information we post on social media and blogs could be deemed to be material information.