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Item 1. Financial Statements

2022-04-28 compared with 2021-10-27 · 146 added, 309 removed, 415 unchanged (52% of the section changed)

1 unchanged sentence

CTS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF (LOSS) EARNINGS - UNAUDITED

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS - UNAUDITED

(In thousands of dollars, except per share amounts)

Three Months Ended

Nine Months Ended

September 30,

Cost of goods sold

6 unchanged sentences

Interest income

Other (expense) income, net

Total other (expense) income, net

(Loss) earnings before income taxes

Income tax (benefit) expense

Net (loss) earnings

Loss (earnings) per share:

Other income (expense), net

Total other expense, net

Earnings before income taxes

Income tax expense

Earnings per share:

Basic weighted – average common shares outstanding:

7 unchanged sentences

Three Months Ended

Nine Months Ended

September 30,

Net (loss) earnings

Other comprehensive earnings (loss):

8 unchanged sentences

(In thousands of dollars)

September 30,

Current Assets

36 unchanged sentences

(In thousands of dollars)

Nine Months Ended

September 30,

Three Months Ended

CASH FLOWS FROM OPERATING ACTIVITIES:

Net (loss) earnings

Adjustments to reconcile net (loss) earnings to net cash provided by operating

Adjustments to reconcile net earnings to net cash provided by operating

Depreciation and amortization

1 unchanged sentence

Stock-based compensation

Asset impairment charges

Restructuring non-cash charges

Deferred income taxes

11 unchanged sentences

Capital expenditures

Payments for acquisitions, net of cash acquired

Payments for acquisition, net of cash received

Net cash used in investing activities

4 unchanged sentences

Dividends paid

Payments of contingent consideration

Payment of contingent consideration

Taxes paid on behalf of equity award participants

1 unchanged sentence

Effect of exchange rate changes on cash and cash equivalents

Net increase in cash and cash equivalents

Net (decrease) increase in cash and cash equivalents

Cash and cash equivalents at beginning of period

9 unchanged sentences

(in thousands of dollars)

The following summarizes the changes in total equity for the three and nine months ended September 30, 2021:

The following summarizes the changes in total equity for the three months ended March 31, 2022:

Comprehensive

4 unchanged sentences

Cash dividends of $ 0.04 per share

Issued shares on vesting of restricted stock units

Stock compensation

Balances at March 31, 2021

Changes in fair market value of derivatives, net of tax

Changes in unrealized pension cost, net of tax

Cumulative translation adjustment, net of tax

Cash dividends of $ 0.04 per share

Issued shares on vesting of restricted stock units

Stock compensation

Balances at June 30, 2021

Changes in fair market value of derivatives, net of tax

Changes in unrealized pension cost, net of tax

Cumulative translation adjustment, net of tax

Cash dividends of $ 0.04 per share

Acquired 116,176 shares of treasury stock

1 unchanged sentence

Stock compensation

Balances at September 30, 2021

Balances at March 31, 2022

See notes to unaudited condensed consolidated financial statements.

2 unchanged sentences

(in thousands of dollars)

The following summarizes the changes in total equity for the three and nine months ended September 30, 2020:

The following summarizes the changes in total equity for the three months ended March 31, 2021:

Comprehensive

4 unchanged sentences

Cash dividends of $ 0.04 per share

Acquired 220,731 shares of treasury stock

Issued shares on vesting of restricted stock units

1 unchanged sentence

Balances at March 31, 2021

Changes in fair market value of derivatives, net of tax

Changes in unrealized pension cost, net of tax

Cumulative translation adjustment, net of tax

Cash dividends of $ 0.04 per share

Acquired 122,000 shares of treasury stock

Issued shares on vesting of restricted stock units

Stock compensation

Balances at June 30, 2020

Changes in fair market value of derivatives, net of tax

Changes in unrealized pension cost, net of tax

Cumulative translation adjustment, net of tax

Cash dividends of $ 0.04 per share

Issued shares on vesting of restricted stock units

Stock compensation

Balances at September 30, 2020

See notes to unaudited condensed consolidated financial statements.

1 unchanged sentence

(in thousands except for share and per share data)

September 30, 2021

NOTE 1 — Basis of Presentation and Summary of Significant Accounting Policies

March 31, 2022

NOTE 1 — Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared by CTS Corporation (“CTS”, "we", "our", "us" or the "Company”), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission.

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There have been no material changes in the Company’s significant accounting policies as compared to the significant accounting policies described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

Accounting Pronouncements Recently Adopted

In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2019-12, Simplifying the Accounting for Income Taxes , as part of its simplification initiative to reduce the cost and complexity in accounting for income taxes.

ASU 2019-12 removes certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences.

ASU 2019-12 also amends other aspects of the guidance to help simplify and promote consistent application of U.S.

The guidance is effective for interim and annual periods beginning after December 15, 2020, with early adoption permitted.

We adopted this ASU on January 1, 2021 and it did not have a material impact on our financial statements.

Recently Issued Accounting Pronouncements

In March 2020, the FASB issued ASU 2020-04, “ Reference Rate Reform (Topic 848):

Facilitation of the Effects of Reference Rate Reform on Financial Reporting ”, which provides temporary optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting as it relates to our LIBOR indexed instruments.

ASU 2020-04 provides optional expedients and exceptions for applying U.S.

GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met.

ASU 2020-04 is effective for all entities as of March 12, 2020 through December 31, 2022, and an entity may elect to apply ASU 2020-04 for contract modifications by Topic or Industry Subtopic as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued.

As a result of the reference rate reform, we have determined that we will modify our credit agreement and associated hedging relationships in order to effectively transition to an alternative reference rate prior to June 30, 2022.

We continue evaluating the impact of the transition from LIBOR to an alternative reference interest rate in our financial instruments including the potential election of certain practical expedients.

NOTE 2 – Revenue Recognition

The core principle of Accounting Standard Codification (“ASC”) 606 Revenue from Contracts with Customers is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

The core principle of Accounting Standard Codification (“ASC”) Topic 606 Revenue from Contracts with Customers is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

The guidance provides a five-step process to achieve that core principle:

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We usually expect payment within 30 to 90 days from the shipping date, depending on our terms with the customer.

None of our contracts as of March 31, 2022 contained a significant financing component.

Differences between the amount of revenue recognized and the amount invoiced, collected from, or paid to our customers are recognized as contract assets or liabilities.

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Three months ended

Nine Months Ended

September 30, 2021

September 30, 2020

September 30, 2021

September 30, 2020

March 31, 2022

March 31, 2021

Transportation

1 unchanged sentence

NOTE 3 – Business Acquisitions

On December 30, 2020, we acquired 100 % of the outstanding shares of Sensor Scientific, Inc.

SSI is a manufacturer of high-quality thermistors and temperature sensor assemblies serving original equipment manufacturers (“OEMs”) for applications that require precision and reliability in the medical, industrial and defense markets.

SSI has complementary capabilities with our existing temperature sensing platform and the acquisition expands our presence in the medical and industrial end markets.

It also provides high quality ceramic processing capabilities and valuable customer partnerships that expand our temperature sensing product portfolio and build on our strategy to focus on innovative products that sense, connect and move.

The final purchase price, which includes changes in working capital, of $ 10,221 has been allocated to the fair values of assets and liabilities acquired as of December 30, 2020.

The following table summarizes the consideration paid and the fair values of the assets acquired, and the liabilities assumed as of the date of acquisition of SSI:

Consideration

Cash paid, net of cash acquired of $ 470

Contingent consideration

Purchase price

TEWA Temperature Sensors SP.

On February 28, 2022, we acquired 100 % of the outstanding shares of TEWA Temperature Sensors SP.

TEWA is a designer and manufacturer of high-quality temperature sensors.

TEWA has complementary capabilities with our existing temperature sensing platform and the acquisition supports our end market diversification strategy by expanding our presence in Europe .

The purchase price, which includes assumed changes in working capital, of $ 24,484 , net of cash acquired of $ 2,945 , has been allocated to the fair values of assets and liabilities acquired as of February 28, 2022.

The allocation of the purchase price continues to be preliminary pending the completion of the valuation of intangible assets and finalization of management's estimates.

The final purchase price allocation may result in a materially different allocation than that recorded as of March 31, 2022.

The following table summarizes the consideration paid and the fair values of the assets acquired, and the liabilities assumed as of the date of acquisition:

Fair Values at

December 30, 2020

February 28, 2022

Current assets

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Goodwill related to the acquisition is expected to be deductible for tax purposes.

All contingent consideration is payable in cash and is based on success factors related to the integration process as well as upon the achievement of a revenue performance target through the year ending December 31, 2022, with the possibility of prorated interim payments.

The Company recorded $ 2,000 as the acquisition date fair value of the contingent consideration based on an estimate of the probability of achieving the performance targets.

This represents the maximum amount of contingent consideration payable by the Company.

This amount is also reflected as an addition to the purchase price and will be evaluated quarterly.

Refer to Note 17 for further information on contingent consideration.

The following table summarizes the carrying amounts and weighted average lives of the acquired intangible assets:

Customer lists/relationships

Technology and other intangibles

The Company recorded a $ 1,164 step-up of inventory to its fair value as of the acquisition date based on the preliminary valuation.

The step-up is being amortized as a non-cash charge to cost of goods sold as the acquired inventory was sold with $ 580 recognized in the first quarter of 2022.

Intangible assets acquired have been assigned a provisional value of $ 12,348 and an estimated weighted average amortization period of 12 years.

They are included as customer lists/relationships in our Condensed Consolidated Balance Sheets and subsequent notes.

Due to the timing of the acquisition, the identification and valuation of all intangible assets remains incomplete;

however, management used historical experience and projections to estimate the potential value at March 31, 2022.

The amount and assumptions included above remain an estimate that will be adjusted once purchase accounting is complete.

Ferroperm Piezoceramics A/S Announced Acquisition

On April 12, 2022, we entered into a Share Sale and Purchase Agreement (“SPA”) with Meggitt International, Ltd., a private limited company incorporated in England and Wales (“Seller”), and Meggitt International Holdings, Ltd., a private limited company incorporated in England and Wales (“Guarantor”), to acquire (the “Ferroperm Acquisition”) Meggitt A/S (a/k/a Ferroperm Piezoceramics A/S), a company incorporated in Denmark (“Ferroperm”).

Seller and Guarantor are wholly-owned subsidiaries of Meggitt PLC, a public limited company incorporated in England and Wales.

Ferroperm is a wholly-owned subsidiary of Seller, and a leading provider of advanced materials focused on high performance piezoelectric ceramics with a majority of its sales in the medical end-market.

Pursuant to the SPA, the Company has agreed to purchase all of the issued and outstanding shares of Ferroperm from Seller for DKK 525 million in cash (approximately $ 76,800 based on the exchange rate between DKK and USD of 6.836 as of April 12, 2022), subject to customary net debt and working capital adjustments.

The Ferroperm Acquisition is subject to the receipt of certain governmental approvals and the satisfaction of other closing conditions.

The SPA contains customary conditions, representations, warranties, indemnities and covenants by, among, and for the benefit of the parties.

At the time of the SPA, we hedged approximately DKK 400 million of the purchase price in order to manage the Company’s foreign currency risk.

The hedge does not qualify for hedge accounting.

NOTE 4 – Accounts Receivable, net

The components of accounts receivable, net are as follows:

September 30,

Accounts receivable, gross

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Inventories, net consists of the following:

September 30,

Finished goods

5 unchanged sentences

Property, plant and equipment, net is comprised of the following:

September 30,

Land and land improvements

3 unchanged sentences

Property, plant and equipment, net

Depreciation expense for the nine months ended September 30, 2021 and September 30, 2020 was $ 13,166 and $ 13,003 , respectively.

Depreciation expense for the three months ended March 31, 2022 and March 31, 2021 was $ 4,368 and $ 4,431 , respectively.

NOTE 7 – Retirement Plans

Pension Plans

Net pension expense for our domestic and foreign plans included in other (expense) income, net in the Condensed Consolidated Statements of (Loss) Earnings is as follows:

Net pension expense for our domestic and foreign plans included in other income (expense), net in the Condensed Consolidated Statement of Earnings is as follows:

Three months ended

Nine months ended

September 30,

Net pension expense

4 unchanged sentences

Three Months Ended

September 30,

Interest cost

1 unchanged sentence

Amortization of loss

Settlement charges

Total expense, net

Expected return on plan assets is net of expected investment expenses and certain administrative expenses.

Domestic Pension Plans

Foreign Pension Plans

Nine Months Ended

September 30,

Interest cost

Expected return on plan assets (1)

Amortization of loss

Settlement charges

Total expense, net

Expected return on plan assets is net of expected investment expenses and certain administrative expenses.

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.

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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.

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 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”).

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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.

In January 2022, we transferred approximately $ 17,500 of funds from Plan assets to a qualified replacement plan (“QRP”) managed by the Company.

The QRP requires that these assets be used to fund future annual Company contributions to our U.S.

401(k) program.

The Plan assets of $ 31,882 as of March 31, 2022, will remain in the Plan until final administrative tasks are completed.

process is expected to be completed in the second quarter of 2022, whereby the remaining 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.

Other Post-retirement Benefit Plan

1 unchanged sentence

Three Months Ended

Nine Months Ended

September 30,

Interest cost

4 unchanged sentences

Other intangible assets, net consist of the following components:

September 30, 2021

March 31, 2022

Customer lists/relationships

1 unchanged sentence

Other intangible assets, net

Amortization expense for the three months ended

September 30, 2021

Amortization expense for the nine months ended

September 30, 2021

Amortization expense for the three months ended March 31, 2022

December 31, 2021

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Other intangible assets, net

Amortization expense for the three months ended

September 30, 2020

Amortization expense for the nine months ended

September 30, 2020

Remaining amortization expense for other intangible assets as of September 30, 2021 is as follows:

Amortization expense for the three months ended March 31, 2021

Remaining amortization expense for other intangible assets as of March 31, 2022 is as follows:

Total amortization expense

1 unchanged sentence

Goodwill as of December 31, 2021

Decrease from purchase accounting adjustments

Increase due to acquisition

Goodwill as of September 30, 2021

In addition to the purchase accounting adjustments from the SSI transaction, goodwill increased due to an acquisition completed during the second quarter.

The purchase price was approximately $ 510 , with $ 255 paid in the second quarter of 2021 and an additional $ 255 to be paid in the second quarter of 2022.

Increase from acquisition

Goodwill as of March 31, 2022

NOTE 9 – Costs Associated with Exit and Restructuring Activities

Restructuring charges are reported as a separate line within operating earnings in the Condensed Consolidated Statements of (Loss) Earnings.

Restructuring charges are reported as a separate line within operating earnings in the Condensed Consolidated Statement of Earnings.

Total restructuring charges are as follows:

Three Months Ended

September 30, 2021

September 30, 2020

Restructuring charges

Nine Months Ended

September 30, 2021

September 30, 2020

March 31, 2022

March 31, 2021

Restructuring charges

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This plan includes transitioning certain administrative functions to a shared service center, realignment of manufacturing locations, and certain other efficiency improvement actions.

The restructuring cost of the September 2020 Plan is now estimated to be in the range of $ 3,500 to $ 4,500 , including workforce reduction charges, building and equipment relocation charges and other contract and asset-related costs.

We have incurred $ 1,397 program to date.

There were no substantial restructuring charges under the September 2020 Plan during the three and nine months ended September 30, 2021.

There was no restructuring liability related to the September 2020 Plan as of September 30, 2021.

As of December 31, 2020 the liability related to the September 2020 Plan was $ 512 .

June 2016 Plan

In June 2016, we announced plans to restructure operations by phasing out production at our Elkhart, Indiana facility and transitioning it into a research and development center supporting our global operations (the "June 2016 Plan").

Additional organizational changes were also implemented in various other locations.

In 2017, we revised the June 2016 Plan to include an additional $ 1,100 in planned costs related to the relocation of our corporate headquarters in Lisle, Illinois and our plant in Bolingbrook, Illinois, both of which have now been consolidated into a single facility.

These restructuring actions were completed as of March 31, 2021.

April 2014 Plan

In April 2014, we announced plans to restructure our operations and consolidate our Canadian operations into other existing facilities as part of our overall plan to simplify our business model and rationalize our global footprint (the “April 2014 Plan”).

These restructuring actions were substantially completed during 2015 and the remaining liability was settled in the second quarter of 2021.

The restructuring cost of the September 2020 Plan is now estimated to be in the range of $ 3,500 and $ 4,500 , including workforce reduction charges, building and equipment relocation charges and other contract and asset-related costs.

We have incurred $ 1,397 in program costs to date.

There were no substantial restructuring charges under the September 2020 Plan during the three months ended March 31, 2022.

Due to the robust market demand and COVID-19 limitations, some projects are delayed.

As of March 31, 2022 there was no liability related to the September 2020 Plan.

Other Restructuring Activities

From time to time we undertake other restructuring activities that are not part of a formal plan.

Charges associated with these restructuring activities primarily relate to workforce reduction costs.

During the three and nine months ended September 30, 2021, we incurred restructuring charges of $ 319 and $ 582 , respectively.

During the three and nine months ended September 30, 2020, we incurred restructuring charges of $ 33 and $ 440 , respectively.

The total restructuring liability associated with these actions was $ 263 at September 30, 2021 and $ 9 at December 31, 2020.

The following table displays the restructuring liability activity included in accrued expenses and other liabilities for all plans for the nine months ended September 30, 2021:

During the three months ended March 31, 2022 and March 31, 2021, we incurred restructuring charges of $ 312 and $ 81 , respectively, primarily related to workforce reduction costs.

The total restructuring liability associated with these actions was $ 816 at March 31, 2022 and $ 962 at December 31, 2021.

The following table displays the restructuring liability activity included in accrued expenses and other liabilities for all plans for the three months ended March 31, 2022:

Restructuring liability at January 1, 2022

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Other activity (1)

Restructuring liability at September 30, 2021

Restructuring liability at March 31, 2022

Other activity includes the effects of currency translation, non-cash asset write-downs and other charges that do not flow through restructuring expense.

1 unchanged sentence

The components of accrued expenses and other liabilities are as follows:

September 30,

Accrued product related costs

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A roll-forward of remediation reserves included in accrued expenses and other liabilities on the Condensed Consolidated Balance Sheets is comprised of the following:

September 30,

Balance at beginning of period

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NOTE 12 - Debt

Long-term debt was comprised of the following:

September 30,

Long-term debt is comprised of the following:

Total credit facility

3 unchanged sentences

Weighted-average interest rate

Commitment fee percentage per annum

On February 12, 2019, we entered into an amended and restated five-year Credit Agreement with a group of banks (the "Credit Agreement") to extend the term of the facility.

The 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.

On December 15, 2021, we entered into a second amended and restated five-year credit agreement with a group of banks (the “Revolving Credit Facility”) to (i) increase the total credit facility to $ 400,000 which may be increased by $ 200,000 at the request of the Company, subject to the administrative agent's approval, (ii) extend the maturity of the Revolving Credit Facility from February 12, 2024 to December 15, 2026 , (iii) replace LIBOR with SOFR as the primary reference rate used to calculate interest on the loans under the Revolving Credit Facility, (iv) increase available sublimits for letters of credit, and swingline loans as well as providing for additional alternative currency borrowing capabilities, and (v) modify the financial and non-financial covenants to provide the Company additional flexibility.

Borrowings in U.S.

dollars under the Revolving Credit Facility bear interest, at a per annum rate equal to the applicable Term SOFR rate (but not less than 0.0 %), plus the Term SOFR adjustment, and plus an applicable margin, which ranges from 1.00 % to 1.75 %, based on our net leverage ratio.

Similarly, borrowings of alternative currencies under the Revolving Credit Facility bear interest equal to a defined risk-free reference rate, plus the applicable risk-free rate adjustment and plus an applicable margin, which ranges from 1.00 % to 1.75 %, based on our net leverage ratio .

The Revolving Credit Facility includes a swing line sublimit of $ 20,000 and a letter of credit sublimit of $ 20,000 .

Borrowings under the revolving credit facility bear interest at the base rate defined in the Credit Agreement.

We also pay a quarterly commitment fee on the unused portion of the Revolving Credit Facility.

The commitment fee ranges from 0.20 % to 0.30 % based on our total leverage ratio.

The Credit Agreement requires, among other things, that we comply with a maximum total leverage ratio and a minimum fixed charge coverage ratio.

The commitment fee ranges from 0.175 % to 0.25 % based on our net leverage ratio.

The Revolving Credit Facility requires, in addition to customary representations and warranties, that we comply with a maximum net leverage ratio and a minimum interest coverage ratio.

Failure to comply with these covenants could reduce the borrowing availability under the Revolving Credit Facility.

We were compliant with all debt covenants at September 30, 2021.

The Credit Agreement requires that we deliver quarterly financial statements, annual financial statements, auditor certifications, and compliance certificates within a specified number of days after the end of a quarter and year.

Additionally, it contains restrictions limiting our ability to:

We were in compliance with all debt covenants at March 31, 2022.

The Revolving Credit Facility requires that we deliver quarterly financial statements, annual financial statements, auditor certifications, and compliance certificates within a specified number of days after the end of a quarter and year.

Additionally, the Revolving Credit Facility contains restrictions limiting our ability to:

dispose of assets;

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and make stock repurchases and dividend payments.

Interest rates on the credit facility fluctuate based upon LIBOR and the Company’s quarterly total leverage ratio.

We have debt issuance costs related to our long-term debt that are being amortized using the straight-line method over the life of the debt.

Amortization expense for the three and nine months ended September 30, 2021 and 2020 was approximately $ 42 and $ 42 and $ 126 and $ 126 , respectively.

These costs are included in interest expense in our Condensed Consolidated Statements of (Loss) Earnings.

We use interest rate swaps to convert the revolving credit facility's variable rate of interest into a fixed rate on a portion of the debt as described more fully in Note 13 "Derivative Financial Instruments".

These swaps are treated as cash flow hedges and consequently, the changes in fair value were recorded in other comprehensive earnings.

We have debt issuance costs related to our long-term debt that are being amortized using the straight-line method over the life of the debt, which approximates the effective interest method.

Amortization expense for the three months ended March 31, 2022 and March 31, 2021 was approximately $ 48 and $ 42 , respectively.

These costs are included in interest expense in our Consolidated Statements of Earnings.

Note 13 - Derivative Financial Instruments

3 unchanged sentences

We manage our credit risk by entering into derivative contracts with only highly rated financial institutions and by using netting agreements.

The effective portion of derivative gains and losses are recorded in accumulated other comprehensive (loss) income until the hedged transaction affects earnings upon settlement, at which time they are reclassified to cost of goods sold or net sales.

If it is probable that

an anticipated hedged transaction will not occur by the end of the originally specified time period, we reclassify the gains or losses related to that hedge from accumulated other comprehensive (loss) income to o ther expense , net .

The effective portion of derivative gains and losses are recorded in a ccumulated other comprehensive loss until the hedged transaction affects earnings upon settlement, at which time they are reclassified to cost of goods sold or net sales.

If it is probable that an anticipated hedged transaction will not occur by the end of the originally specified time period, we reclassify the gains or losses related to that hedge from accumulated other comprehensive loss to o ther income ( expense ) , net .

We assess hedge effectiveness qualitatively by verifying that the critical terms of the hedging instrument and the forecasted transaction continue to match, and that there have been no adverse developments that have increased the risk that the counterparty will default.

No recognition of ineffectiveness was recorded in our Condensed Consolidated Statements of (Loss) Earnings for the three and nine months ended September 30, 2021.

No recognition of ineffectiveness was recorded in our Condensed Consolidated Statements of Earnings for the three months ended March 31, 2022.

Foreign Currency Hedges

2 unchanged sentences

We continue to monitor the Company’s overall currency exposure and may elect to add cash flow hedges in the future.

At September 30, 2021, we had a net unrealized gain of $ 388 in accumulated other comprehensive (loss) income, of which $ 385 is expected to be reclassified to earnings within the next 12 months.

At September 30, 2020, we had a net unrealized loss of $ 458 in accumulated other comprehensive (loss) income.

The notional amount of foreign currency forward contracts outstanding was $ 6,282 at September 30, 2021.

At March 31, 2022, we had a net unrealized gain of $ 514 in accumulated other comprehensive loss, of which $ 511 is expected to be reclassified to earnings within the next 12 months.

At March 31, 2021, we had a net unrealized gain of $ 670 in accumulated other comprehensive loss.

The notional amount of foreign currency forward contracts outstanding was $ 13,734 at March 31, 2022.

Interest Rate Swaps

We use interest rate swaps to convert a portion of our revolving credit facility’s outstanding balance from a variable rate of interest to a fixed rate.

As of September 30, 2021, we have agreements to fix interest rates on $ 50,000 of long-term debt through February 2024.

As of March 31, 2022, we have agreements to fix interest rates on $ 50,000 of long-term debt until December 2026.

The difference to be paid or received under the terms of the swap agreements will be recognized as an adjustment to interest expense when settled.

These swaps are treated as cash flow hedges and consequently, the changes in fair value are recorded in other comprehensive (loss) income.

The estimated net amount of the existing losses that are reported in accumulated other comprehensive (loss) income that are expected to be reclassified into earnings within the next twelve months is approximately $ 527 .

The location and fair values of derivative instruments designated as hedging instruments in the Condensed Consolidated Balance Sheets as of September 30, 2021, are shown in the following table:

September 30,

The estimated net amount of the existing gains that are reported in accumulated other comprehensive (loss) income that are expected to be reclassified into earnings within the next twelve months is approximately $ 33 .

The location and fair values of derivative instruments designated as hedging instruments in the Condensed Consolidated Balance Sheets as of March 31, 2022, are shown in the following table:

Interest rate swaps reported in Other current assets

Interest rate swaps reported in Other assets

Interest rate swaps reported in Accrued expenses and other liabilities

2 unchanged sentences

The Company has elected to net its foreign currency derivative assets and liabilities in the balance sheet in accordance with ASC 210-20 ( Balance Sheet, Offsetting ).

On a gross basis, there were foreign currency derivative assets of $ 474 and foreign currency derivative liabilities of $ 0 at September 30, 2021.

The effect of derivative instruments on the Condensed Consolidated Statements of (Loss) Earnings is as follows:

On a gross basis, there were foreign currency derivative assets of $ 660 and foreign currency derivative liabilities of $ 0 at March 31, 2022.

The effect of derivative instruments on the Condensed Consolidated Statements of Earnings is as follows:

Three Months Ended

Nine Months Ended

September 30,

Foreign Exchange Contracts:

2 unchanged sentences

Selling, general and administrative expense

Total gain (loss) reclassified from AOCI to earnings

Gain recognized in other expense for hedge ineffectiveness

Total derivative gain (loss) on foreign exchange contracts recognized in earnings

Total gain reclassified from AOCI to earnings

Total derivative gain on foreign exchange contracts recognized in earnings

Interest Rate Swaps:

(Expense) recorded in Interest expense

Total gains (losses) on derivatives

NOTE 14 – Accumulated Other Comprehensive (Loss) Income

Shareholders’ equity includes certain items classified as accumulated other comprehensive (loss) income (“AOCI”) in the Condensed Consolidated Balance Sheets, including:

Benefit (expense) recorded in Interest expense

Total net gains on derivatives

NOTE 14 – Accumulated Other Comprehensive Loss

Shareholders’ equity includes certain items classified as accumulated other comprehensive loss (“AOCI”) in the Condensed Consolidated Balance Sheets, including:

Unrealized gains (losses) on hedges relate to interest rate swaps to convert a portion of our Revolving Credit Facility's outstanding balance from a variable rate of interest into a fixed rate and foreign currency forward contracts used to hedge our exposure to changes in exchange rates affecting certain revenues and costs denominated in foreign currencies.

9 unchanged sentences

Changes in exchange rates between the functional currency and the currency in which a transaction is denominated are foreign exchange transaction gains or losses.

Transaction losses for the three and nine months ended September 30, 2021 were $( 1,011 ) and $( 1,412 ), respectively, and transaction gains for the three and nine months ended September 30, 2020 were $ 2,326 and $ 1,947 , respectively, which have been included in other (expense) income in the Condensed Consolidated Statements of (Loss) Earnings.

The components of accumulated other comprehensive (loss) income for the three months ended September 30, 2021 are as follows:

September 30,

Changes in fair market value of derivatives:

Income tax benefit (expense)

Changes in unrealized pension cost:

Income tax benefit (expense)

Cumulative translation adjustment:

Total accumulated other comprehensive (loss) income

The components of accumulated other comprehensive (loss) income for the three months ended September 30, 2020, are as follows:

September 30,

Changes in fair market value of derivatives:

Income tax benefit (expense)

Changes in unrealized pension cost:

Income tax benefit (expense)

Cumulative translation adjustment:

Total accumulated other comprehensive (loss) income

The components of accumulated other comprehensive (loss) income for the nine months ended September 30, 2021, are as follows:

September 30,

Transaction losses for the three months ended March 31, 2022 and March 31, 2021 were $ 288 and $ 1,330 , respectively, which have been included in other income (expense) in the Condensed Consolidated Statements of Earnings.

The components of accumulated other comprehensive loss for the three months ended March 31, 2022 are as follows:

Changes in fair market value of derivatives:

3 unchanged sentences

Cumulative translation adjustment:

Income tax benefit

Total accumulated other comprehensive (loss) income

The components of accumulated other comprehensive (loss) income for the nine months ended September 30, 2020, are as follows:

September 30,

The components of accumulated other comprehensive loss for the three months ended March 31, 2021, are as follows:

Changes in fair market value of derivatives:

7 unchanged sentences

Share count and par value data related to shareholders’ equity are as follows:

September 30,

Preferred Stock

9 unchanged sentences

The repurchase program has no set expiration date and replaces the repurchase program approved by the Board of Directors on February 7, 2019.

During the nine months ended September 30, 2021, 148,035 shares of common stock were repurchased for $ 4,939 .

During the nine months ended September 30, 2020, 342,731 shares of common stock were repurchased for $ 8,080 .

Approximately $ 45,061 is available for future purchases.

During the three months ended March 31, 2022, 116,176 shares of common stock were repurchased for $ 3,920 .

During the three months ended March 31, 2021, there were no shares of common stock that were repurchased.

As of March 31, 2022, approximately $ 37,295 remains available for future purchases.

A roll-forward of common shares outstanding is as follows:

Nine months ended

September 30,

Three months ended

Balance at the beginning of the year

1 unchanged sentence

Balance at the end of the period

Certain potentially dilutive restricted stock units are excluded from diluted (loss) earnings per share because they are anti-dilutive.

The number of outstanding awards that were anti-dilutive for the nine months ended September 30, 2021 and 2020 were 1,029 and 68,198 , respectively.

There were 462 anti-dilutive awards outstanding for the three months ended September 30, 2021 and no anti-dilutive awards outstanding the three months ended September 30, 2020.

Certain potentially dilutive restricted stock units are excluded from diluted earnings per share because they are anti-dilutive.

The number of outstanding awards that were anti-dilutive for the three months ended March 31, 2022 and 2021 were 38,384 and 35,167 , respectively.

NOTE 16- Stock-Based Compensation

At September 30, 2021, we had five active stock-based compensation plans:

At March 31, 2022, we had five active stock-based compensation plans:

the Non-Employee Directors’ Stock Retirement Plan (“Directors’ Plan”), the 2004 Omnibus Long-Term Incentive Plan (“2004 Plan”), the 2009 Omnibus Equity and Performance Incentive Plan (“2009 Plan”), the 2014 Performance and Incentive Compensation Plan (“2014 Plan”), and the 2018 Equity and Incentive Compensation Plan ("2018 Plan").

1 unchanged sentence

These plans allow for grants of stock options, stock appreciation rights, restricted stock, restricted stock units ("RSUs"), performance shares, performance units, and other stock awards subject to the terms of the specific plans under which the awards are granted.

The following table summarizes the compensation expense included in selling, general and administrative expenses in the Condensed Consolidated Statements of (Loss) Earnings related to stock-based compensation plans:

The following table summarizes the compensation expense included in selling, general and administrative expenses in the Condensed Consolidated Statements of Earnings related to stock-based compensation plans:

Three months ended

Nine months ended

September 30,

Service-based RSUs

3 unchanged sentences

The following table summarizes the unrecognized compensation expense related to non-vested RSUs by type and the weighted-average period in which the expense is to be recognized:

September 30, 2021

Period (years)

March 31, 2022

Service-based RSUs

1 unchanged sentence

We recognize expense on a straight-line basis over the requisite service period for each separately vesting portion of the award as if the award was, in substance, multiple awards.

The following table summarizes the status of these plans as of September 30, 2021:

The following table summarizes the status of these plans as of March 31, 2022:

Awards originally available

Maximum potential RSU and cash settled awards outstanding

Maximum potential RSU and cash settled

awards outstanding

Maximum potential awards outstanding

2 unchanged sentences

Service-Based Restricted Stock Units

The following table summarizes the service-based RSU activity for the nine months ended September 30, 2021:

The following table summarizes the service-based RSU activity for the three months ended March 31, 2022:

Outstanding at December 31, 2021

Vested and released

Outstanding at September 30, 2021

Releasable at September 30, 2021

Outstanding at March 31, 2022

Releasable at March 31, 2022

Performance and Market-Based Restricted Stock Units

The following table summarizes the performance and market-based RSU activity for the nine months ended September 30, 2021:

The following table summarizes the performance and market-based RSU activity for the three months ended March 31, 2022:

Outstanding at December 31, 2021

Attained by performance

Outstanding at September 30, 2021

Releasable at September 30, 2021

Outstanding at March 31, 2022

Releasable at March 31, 2022

Cash-Settled Restricted Stock Units

3 unchanged sentences

Cash-Settled RSUs are classified as liabilities and are remeasured at each reporting date until settled.

At September 30, 2021 and December 31, 2020 we had 32,085 and 30,009 cash-settled RSUs outstanding, respectively.

At September 30, 2021 and December 31, 2020, liabilities of $ 276 and $ 396 , respectively, were included in accrued expenses and other liabilities on our Condensed Consolidated Balance Sheets.

At March 31, 2022 and December 31, 2021 we had 44,430 and 32,085 cash-settled RSUs outstanding, respectively.

At March 31, 2022 and December 31, 2021, liabilities of $ 212 and $ 400 , respectively, were included in accrued expenses and other liabilities on our Condensed Consolidated Balance Sheets.

NOTE 17 — Fair Value Measurements

The table below summarizes our financial liabilities that were measured at fair value on a recurring basis at September 30, 2021:

(Liability) Asset

September 30,

The table below summarizes our financial assets and liabilities that were measured at fair value on a recurring basis at March 31, 2022:

Asset (Liability)

Interest rate swaps

1 unchanged sentence

Contingent consideration

The table below summarizes the financial assets that were measured at fair value on a recurring basis as of December 31, 2020:

(Liability) Asset

Qualified replacement plan assets

The table below summarizes the financial assets and liabilities that were measured at fair value on a recurring basis as of December 31, 2021:

Asset (Liability)

Interest rate swaps

8 unchanged sentences

The fair value estimates were based on assumptions management believes to be reasonable, but that are inherently uncertain, including estimates of future revenues and timing of events and activities that are expected to take place.

Refer to Note 3 for further discussion on contingent consideration.

A roll-forward of the contingent consideration is as follows:

2 unchanged sentences

Settled in cash

Reclassified to payable in accrued expenses and other liabilities

Balance at September 30, 2021

Less current portion in accrued expenses and other liabilities

Total long-term portion in other long-term obligations

Our long-term debt consists of debt outstanding under the revolving credit facility which is recorded at its carrying value.

Balance at March 31, 2022 in accrued expenses and other liabilities

Our long-term debt consists of the Revolving Credit Facility which is recorded at its carrying value.

There is a readily determinable market for our long-term debt and it is classified within Level 2 of the fair value hierarchy as the market is not deemed to be active.

The fair value of long-term debt approximates carrying value and was determined by valuing a similar hypothetical coupon bond and attributing that value to our long-term debt under the Revolving Credit Facility.

The QRP assets consist of investment funds maintained for future contributions to the Company’s U.S.

401(k) program .

See Note 7 for further information on the QRP.

The investments are Level 1 marketable securities and are recorded in Other assets on our Condensed Consolidated Balance Sheets.

NOTE 18 — Income Taxes

The effective tax rates for the three and nine months ended September 30, 2021 and 2020 are as follows:

The effective tax rates for the three months ended March 31, 2022 and 2021 are as follows:

Three months ended

Nine Months Ended

September 30,

Effective tax rate

Our effective income tax rate was 28.9 % and 22.2 % in the third quarters of 2021 and 2020, respectively.

This increase is primarily attributed to a one-time settlement expense related to the final annuity purchase made for the CTS Corporation U.S.

pension plan.

The third quarter 2021 tax rate was higher than the U.S.

statutory federal tax rate for the same reason noted above.

The third quarter 2020 tax rate was higher than the U.S.

statutory federal tax rate due to foreign withholding taxes, state taxes, and foreign earnings that are taxed at higher rates.

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 attributed to the settlement expenses related to lump sum payments made for the CTS Corporation U.S.

Pension Plan termination process in the second and third quarters of 2021.

The tax rate in the first nine months of 2021 was higher than the U.S.

statutory federal tax rate for the same reason noted above.

The tax rate in the first nine months of 2020 was higher than the U.S.

statutory federal tax rate primarily due to the establishment of valuation allowances on certain U.S.

tax credits and the Company’s decision to no longer reinvest the earnings of its Taiwan subsidiary.

Our effective income tax rate was 21.4 % and 18.9 % in the first quarters of 2022 and 2021, respectively.

The increase in effective income tax is primarily attributed to an increase in foreign withholding taxes.

The first quarter 2022 effective income tax rate was higher than the U.S.

statutory federal tax rate primarily due to the impact of foreign withholding taxes and state taxes.

The first quarter 2021 effective tax rate was lower than the U.S.

statutory federal tax rate primarily due to foreign earnings that are taxed at lower rates and tax benefits recorded upon vesting of restricted stock units.

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 1. Financial Statements