CTS CORP 10-K

Item 7A. Quantitative and Qualitative Disclosures About Market Risk (in thousands) Our cash flows and earnings are subject to fluctuations resulting from changes in foreign currency exchange rates, interest rates and commodity prices. We manage our exposure to these market risks through internally established policies and procedures and, when deemed appropriate, through the use of derivative financial instruments. Our policies do not allow speculation in derivative instruments for profit or execution of derivative instrument contracts for which there are no underlying exposures. We do not use financial instruments for trading purposes, and we are not a party to any leveraged derivatives. We monitor our underlying market risk exposures on an ongoing basis and believe that we can modify or adapt our hedging strategies as needed. Interest Rate Risk We are exposed to risk of changes in interest rates on our Revolving Credit Facility. There was $50,000 and $54,600 outstanding under our revolving credit facility at December 31, 2021 and 2020, respectively. As of December 31, 2021, we had interest rate swaps that fix interest costs on $50,000 of our long-term debt through February 2024. A 100bps change in interest rates would not impact our total interest expense. Foreign Currency Risk We are exposed to foreign currency exchange rate risks. Our significant foreign subsidiaries are located in China, Czech Republic, Mexico, and Taiwan. During 2021, net sales from outside the U.S. were approximately 42% of total net sales. During 2020, net sales to customers from outside the U.S. were approximately 43% of total net sales. The company’s foreign exchange exposures result primarily from, sale of products in foreign currencies, foreign currency denominated purchases, and employee-related and other costs of running operations in foreign countries. Changes in foreign exchange rates could affect the company’s sales, costs, balance sheet values and earnings. As of December 31, 2021, we had foreign currency forward contracts outstanding with a notional value of $18,017 to hedge our exposure against the Mexican Peso. Commodity Price Risk Many of our products require the use of raw materials that are produced in only a limited number of regions around the world or are available from only a limited number of suppliers. Our results of operations may be materially and adversely affected if we have difficulty obtaining these raw materials, the quality of available raw materials deteriorates, or there are significant price increases for these raw materials. For periods in which the prices of these raw materials are rising, we may be unable to pass on the increased cost to our customers, which would result in decreased margins for the products in which they are used. For periods in which the prices are declining, we may be required to write down our inventory carrying cost of these raw materials, since we record our inventory at the lower of cost or net realizable value. Due to the impact from the COVID-19 pandemic, freight costs increased significantly in 2021. While the Company is exposed to significant changes in certain commodity prices and expects higher freight costs for most of 2022, the Company actively monitors these exposures and may take various actions from time to time to mitigate any negative impacts relating thereto. CTS CORPORATION 25