Cts Corp PRE 14A, filed Mar 19, 2020
Cts Corp (CTS)
PRE 14A
2020-03-19
For: 2020-05-14
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October 15, 2026
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
Filed by the Registrant ☒ | Filed by a Party other than the Registrant ¨ | ||
ý | Preliminary Proxy Statement | ||
¨ | Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)) | ||
¨ | Definitive Proxy Statement | ||
¨ | Definitive Additional Materials | ||
¨ | Soliciting Material Pursuant to §240.14a-12 | ||
CTS CORPORATION |
(Name of Registrant as Specified In Its Charter) |
(Name of Person(s) Filing Proxy Statement, if other than the Registrant) |
Payment of Filing Fee (Check the appropriate box) | |
ý | No fee required. |
¨ | Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11. |
1 | Title of each class of securities to which transaction applies: |
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¨ | Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. |
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Preliminary proxy statement in accordance with Rule 14a-6(d) under Regulation 14A of the Securities Exchange Act of 1934. Please be advised that CTS Corporation intends to release definitive copies of the proxy statement to security holders on or about April 2, 2020.
April 2, 2020 | |
 | Dear CTS Shareholder: You are cordially invited to attend the 2020 Annual Meeting of Shareholders of CTS Corporation. The meeting will be held on Thursday, May 14, 2020, at 9:30 a.m. Central Time, at the Hotel Arista located at 2139 City Gate Lane, Naperville, Illinois 60563. We are pleased to continue to take advantage of the Securities and Exchange Commission rules allowing us to furnish proxy materials to shareholders on the Internet. We believe that these rules provide you with proxy materials more quickly and reduce the environmental impact of our Annual Meeting. Accordingly, we are mailing to shareholders a Notice of Internet Availability of Proxy Materials containing instructions on how to access and review our 2020 Proxy Statement and Annual Report to Shareholders for the year ended December 31, 2019, and to vote online or by telephone. If you would like to receive a paper copy of our proxy materials, please follow the instructions for requesting these materials on page 33 of this 2020 Proxy Statement. We hope you will attend the meeting in person. Whether you plan to attend the meeting or not, we encourage you to read this proxy statement and to vote your shares. The vote of every shareholder is important. |
 | |
Kieran O’Sullivan | |
Chairman, President and Chief Executive Officer | |
Table of Contents
Preamble | |
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CTS Corporation, 4925 Indiana Avenue, Lisle, Illinois 60532
NOTICE OF THE 2020 ANNUAL MEETING OF SHAREHOLDERS
To Be Held On
May 14, 2020
To CTS Shareholders:
The 2020 Annual Meeting of Shareholders of CTS Corporation will be held on Thursday, May 14, 2020, at 9:30 a.m. Central Time, at the Hotel Arista located at 2139 City Gate Lane, Naperville, Illinois 60563. To obtain directions to the meeting location, please call (630) 577‑8800, or see the map on page 33 of the Proxy.
Only CTS shareholders of record at the close of business on March 16, 2020, may vote at this meeting or any adjournments that may take place. At the meeting, shareholders will vote on the following items:
PROPOSAL 1 | Election of seven directors for a one‑year term; |
PROPOSAL 2 | Approval, on an advisory basis, of the compensation of CTS’ named executive officers; |
PROPOSAL 3 | Ratification of the appointment of Grant Thornton LLP as CTS’ independent auditor for 2020; |
PROPOSAL 4 | Approval of Amendments to the CTS Articles of Incorporation principally to allow shareholders |
to amend CTS' By-Laws; and | |
Any other business properly presented at the meeting. | |
Your Board of Directors recommends that you vote in favor of the director nominees, in favor of the advisory approval of CTS’ named executive officer compensation, in favor of the ratification of the appointment of Grant Thornton LLP, and in favor of the amendment to the Articles of Incorporation.
By Order of the Board of Directors, | ||
 | ||
Luis F. Machado Corporate Secretary | ||
April 2, 2020
As part of our contingency planning regarding the coronavirus (or COVID-19), we are preparing for the possibility that the Annual Meeting may be held solely by means of remote communication. If we take this step, we will announce the decision to do so in advance through a public filing with the Securities and Exchange Commission, and details will be available at http://www.ctscorp.com.
IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON MAY 14, 2020. The Notice, 2020 Proxy Statement, Form of Proxy and 2019 Annual Report on Form 10-K are available at http://www.ctscorp.com/investors |
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This proxy statement is furnished in connection with the solicitation by the Board of Directors (“Board”) of CTS Corporation (“CTS”, “we”, “us”, “our” or the “Company”) of proxies to be voted at the 2020 Annual Meeting of Shareholders (“Annual Meeting”). CTS will bear the cost of this solicitation. On or about April 2, 2020, the Company mailed to its shareholders the Notice of Internet Availability of Proxy Materials, and made available this proxy statement, the accompanying proxy card, and its Annual Report.
PROPOSAL 1: ELECTION OF DIRECTORS
CTS’ Articles of Incorporation provide that the number of directors will be between three and fifteen, as fixed from time to time by the Board. As part of the succession planning and search process, the Nominating and Governance Committee and the Board regularly assesses the Board’s size. The Board has established the number of authorized directors at seven. Ms. Murphy has not been nominated for re-election and will be leaving the Board immediately following the 2020 Annual Meeting of Shareholders. On February 6, 2020, based on the recommendation of a non-management director, the Board nominated Ye Jane Li to run for election as a director. There are seven director nominees for election and the number of authorized directors will remain at seven effective immediately following the Annual Meeting. Detailed information on each is provided below. All directors are elected annually and serve one‑year terms, or until their successors are elected and qualified.
Nominees for the Board of Directors. Each director nominee named below, other than Ms. Li, is currently a director of CTS. The ages shown are as of April 2, 2020, the date of this proxy statement. Each director nominee has agreed to serve as a director if elected. If one or more of the nominees becomes unavailable for election, the remaining members of the Board will, in their sole discretion and pursuant to authority granted by the CTS Bylaws, nominate and vote for a replacement director or reduce the authorized number of directors.
PATRICIA K. COLLAWN Age 61 | Director since 2003 | |
 | Professional Experience: ▪ Chairman of PNM Resources, Inc. (2012 - Present) ▪ President and Chief Executive Officer of PNM Resources, Inc. (2010 - Present) ▪ Director of PNM Resources, Inc. (2010 - Present) ▪ President and Chief Operating Officer of PNM Resources, Inc. (2008 - 2010) ▪ Utilities President of PNM Resources, Inc. (2007 - 2008) ▪ President and Chief Executive Officer of Public Service Company of Colorado, an Excel Energy subsidiary (2005 - 2007) The Board believes that Ms. Collawn's experience as a sitting President and Chief Executive Officer of a publicly traded corporation, as well as substantial operations experience, make her well qualified to serve as a director. | |
GORDON HUNTER Age 68 | Director Since 2011 | |
 | Professional Experience: ▪ Director, Chairman of Littelfuse, Inc. (2002 - Present) ▪ Chairman, President, and Chief Executive Officer of Littelfuse, Inc. (2003 - 2017) ▪ Director, Executive Chairman of Littelfuse, Inc. (2017) Other Public Company Boards: ▪ Director of Veeco Instruments, Inc. (2010 - Present); Chairman of Compensation Committee and Member of the Nominating and Governance Committee ▪ Director of Shure, Inc. (2018 - Present); Chairman of the Compensation Committee and Member of the Audit Committee The Board believes that Mr. Hunter's experience as a President and Chief Executive Officer of a publicly traded corporation serving global markets, as well as substantial experience in the electronics industry, make him well qualified to serve as a director. | |
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WILLIAM S. JOHNSON Age 63 | Director since 2015 | |
 | Professional Experience: ▪ Retired Chief Financial Officer of Cabot Microelectronics Corporation ▪ Senior Advisor of Cabot Microelectronics Corporation (2018) ▪ Executive Vice President and Chief Financial Officer of Cabot Microelectronics Corporation (2013 - 2018) ▪ Vice President and Chief Financial Officer of Cabot Microelectronics Corporation (2003 - 2013) ▪ Executive Vice President and Chief Financial Officer of Budget Group, Inc. (2000 - 2003) ▪ Various Management and Financial Positions held at BP Amoco (1984 - 2000) The Board believes that Mr. Johnson’s experience as a Chief Financial Officer of a publicly traded corporation serving global markets, in addition to his financial expertise in a range of industries, substantial risk management skills, and broad international business experience make him well qualified to serve as a director. | |
YE JANE LI Age 52 | Director Nominee | |
 | Professional Experience: ▪ Strategic Advisor, Diversis Capital LLC (2013 - Present) ▪ Chief Operating Officer, Huawei Enterprise USA, Inc. (2012-2015) ▪ General Manager, Huawei Symantec USA, Inc. (2010 - 2012) Other Public Company Boards: ▪ Director of Knowles Corporation (2018 - Present); Member of the Audit Committee and the Governance & Nominating Committee ▪ Director of Semtech Corporation (2016 - Present); Member of the Compensation Committee The Board believes that Ms. Li's executive-level experience in a wide range of technology companies in several market segments that CTS serves, and her background and experience in Asian markets, make her well qualified to serve as a director. | |
KIERAN O’SULLIVAN Age 58 | Director since 2013 | |
 | Professional Experience: ▪ Chairman, President and Chief Executive Officer of CTS Corporation (2013 - Present) ▪ Executive Vice President of Continental AG's Global Infotainment & Connectivity Business (2006 - 2013) Other Public Company Boards: ▪ Director of LCI Industries (2015 - Present); Member of the Audit Committee, the Risk Committee, and the Corporate Governance and Nominating Committee The Board believes that Mr. O’Sullivan’s more than twenty‑seven years of leadership experience in operations, strategy, mergers and acquisitions, and finance roles in the manufacturing services, electronics and automotive business segments make him well qualified to serve as a director. | |
ROBERT A. PROFUSEK Age 70 | Director since 1998 | |
 | Professional Experience: ▪ Partner and Global Chairman of the Mergers and Acquisitions Practice of Jones Day (1975 - Present) Other Public Company Boards: ▪ Lead Director of Valero Energy Corporation (2005 - Present); Member of the Compensation Committee ▪ Lead Director of Kodiak Sciences, Inc. (2018 - Present); Chairman of the Nominating and Governance Committee The Board believes that Mr. Profusek’s substantial experience in mergers and acquisitions, corporate governance and experience serving as a director of other publicly traded companies make him well qualified to serve as a director. | |
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ALFONSO G. ZULUETA Age 57 | Director since 2018 | |
 | Professional Experience: ▪ Senior Vice President of Eli Lilly and Company (2014 - Present) ▪ President of Lilly International (2017 - Present) ▪ Member of the Executive Committee and Officer of Eli Lilly and Company (2013 - Present) ▪ President of Emerging Markets and various roles of Eli Lilly and Company (1988 - 2014) The Board believes that Mr. Zulueta’s broad global management experience, his exposure to a range of cultures, and his deep experience in medical markets make him well qualified to serve as a director. | |
Your Board recommends a vote FOR each of these director nominees.
COMMITTEES OF THE BOARD OF DIRECTORS
Directors are assigned to committees by the full Board each year following their election at the Annual Meeting.
Committee Membership in 2019
Director | Audit Committee | Compensation Committee | Nominating & Governance Committee | Technology & Transactions Committee |
Patricia K. Collawn | C | ü | ||
Gordon Hunter | ü | ü | C | |
William S. Johnson | C | ü | ||
Diana M. Murphy | ü | C | ||
Kieran O'Sullivan | ü | |||
Robert Profusek | ü | |||
Alfonso G. Zulueta | ü | ü | ||
ü Member C Chairman
Audit Committee
The Audit Committee is a standing committee of the Board. Directors Johnson, Hunter and Zulueta are the current members of the Audit Committee and each is financially literate and meets the independence standards applicable to audit committee members under the NYSE Corporate Governance Listing Standards, as well as the CTS Corporation Corporate Governance Guidelines and the Audit Committee Charter. Mr. Johnson is the Chairman of the Audit Committee. The Board has determined that Mr. Johnson, Mr. Hunter, and Mr. Zulueta each qualifies as an audit committee financial expert under the criteria set forth in Item 407(d)(5)(ii) of Regulation S-K.
The Audit Committee held eight meetings in 2019. A copy of the Audit Committee Charter may be obtained free of charge from CTS’ website at http://www.ctscorp.com/wp-content/uploads/ACC.pdf.
The Audit Committee is responsible for appointing the independent auditor, approving engagement fees and non‑audit engagements, and reviewing the independence and quality of the independent auditor. The Audit Committee reviews audit plans, audit reports, systems of internal accounting controls, audit results, and recommendations of the independent auditor and the internal audit department. The Audit Committee also reviews and discusses with management CTS’ financial statements, earnings releases and earnings guidance. In addition, the Audit Committee reviews CTS’ compliance with public‑company regulatory requirements and with the CTS Code of Ethics.
Compensation Committee
The Compensation Committee is a standing committee of the Board. Directors Collawn, Hunter, and Murphy are the current members of the Compensation Committee and each is an independent director as defined by the NYSE Corporate Governance Listing Standards and the CTS Corporation Corporate Governance Guidelines. Ms. Collawn is the Chairman of the Compensation Committee. The Compensation Committee held three meetings in 2019. A copy of the Compensation Committee Charter may be obtained free of charge from CTS’ website at http://www.ctscorp.com/wp-content/uploads/CC.pdf.
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The Compensation Committee establishes executive compensation policies and reviews and approves senior executive compensation, as further described in the Compensation Discussion and Analysis section of this Proxy Statement. The Chief Executive Officer recommends the form and level of compensation for each named executive officer other than himself to the Compensation Committee. The Compensation Committee reviews and approves corporate goals and objectives relevant to the named executive officers, including the Chief Executive Officer's, compensation, evaluates the Chief Executive Officer’s performance against those objectives, and makes recommendations to the Board regarding the Chief Executive Officer’s compensation. The Compensation Committee does not delegate authority to perform any of the foregoing functions with respect to the compensation of any named executive officer. The Compensation Committee also administers the CTS Corporation 2018 Equity and Incentive Compensation Plan and the 2014 Performance and Incentive Compensation Plan, including the annual equity and non‑equity performance programs, and has delegated to management the oversight of those programs for participants who are not named executive officers. In addition, the Compensation Committee reviews director compensation annually and makes recommendations regarding director compensation to the Board for approval. The Compensation Committee also conducts an annual evaluation of its own performance.
The Compensation Committee may, from time to time, direct senior functionaries of the Company’s human resources department to research specific issues and make recommendations to the Compensation Committee. In addition, for 2019 and currently 2020, the Compensation Committee engaged Compensation Strategies, Inc. as its compensation consultant. The Compensation Committee has assessed the independence of Compensation Strategies, as required under stock exchange listing requirements. The Compensation Committee has also considered and assessed all relevant factors, including those required by the SEC, that could give rise to a potential conflict of interest with respect to Compensation Strategies. Based on this review, the Compensation Committee did not identify any conflict of interest raised by the work performed by Compensation Strategies.
Compensation Committee Interlocks and Insider Participation. Directors Collawn, Hunter, and Murphy were appointed to the Compensation Committee following their election to the Board at CTS’ 2019 Annual Meeting of Shareholders. During 2019, no executive officer of CTS served as a director of any other entity for which any CTS director was an executive officer.
Nominating and Governance Committee
The Nominating and Governance Committee is a standing committee of the Board. Directors Murphy, Collawn, and Johnson are the current members of the Nominating and Governance Committee and each is an independent director as defined by the NYSE Corporate Governance Listing Standards and the CTS Corporation Corporate Governance Guidelines. Ms. Murphy is the Chairman of the Nominating and Governance Committee.
The Nominating and Governance Committee held two meetings in 2019. A copy of the Nominating and Governance Committee Charter may be obtained free of charge from CTS’ website at http://www.ctscorp.com/wp-content/uploads/NGCC.pdf.
The Nominating and Governance Committee reviews and makes recommendations to the Board concerning committee assignments and director nominees for election at the Annual Meeting and oversees director recruitment efforts. The Nominating and Governance Committee reviews and makes recommendations to the full Board regarding CTS officers for election and succession, including succession planning for the Chief Executive Officer. The Nominating and Governance Committee also develops the CTS Corporation Corporate Governance Guidelines for the approval of the Board, makes recommendations on matters of corporate governance and oversees CTS' ESG initiatives and performance. CTS does not have a formal policy concerning whether the Nominating and Governance Committee will consider director nominees submitted by shareholders. CTS did not receive any shareholder director nominees for election at the 2020 Annual Meeting. At this time, the Board does not believe a formal policy regarding shareholder director nominees is necessary since CTS’ Bylaws provide a process for nomination of directors and no shareholder nominations for director have been received in past years.
The Nominating and Governance Committee reviews with the Board, on an annual basis, the requisite skills and director characteristics of any new members as well as the composition of the Board as a whole. This review includes an assessment of whether each non‑management director qualifies as independent and an assessment of the diversity, age, skills, and experience of the directors in the context of the needs of the Board. Although the Nominating and Governance Committee has not established any specific minimum criteria or qualifications that a candidate must possess, the Nominating and Governance Committee seeks a diverse selection of candidates who possess the experience necessary to make a valuable contribution to the Board. The Board does not have a formal diversity policy; it construes the notion of diversity broadly, considering differences in viewpoint, professional experience, education, skills, and other individual qualities, in addition to race, gender, and national origin. The Board believes that its efforts to foster a diverse board have been effective; while all directors are skilled in business, a variety of points of view, educational backgrounds, and experiences are represented on the Board. The Nominating and Governance Committee may retain and pay search firms for the purpose of identifying and evaluating director candidates.
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Technology and Transactions Committee
The Technology and Transactions Committee reviews and makes recommendations to management regarding CTS’ technology strategy, new product development programs, and performance in the context of targeted market segments and strategic goals, as well as the Company’s organic development of technology and opportunities to acquire technology directly or through business acquisition or combination transactions. The Technology and Transactions Committee also reviews, on a preliminary basis, possible acquisitions, divestitures or other transactions identified by management for possible consideration by the full Board, assesses existing and future trends and threats in technology that may impact the Company’s strategy, and reports activities of the Committee to the full Board.
Directors Hunter, O’Sullivan, Profusek, and Zulueta are the current members of the Technology and Transactions Committee with Mr. Hunter as the Chairman. The Technology and Transactions Committee held two meetings in 2019. A copy of the Technology and Transactions Committee Charter may be obtained free of charge from CTS’ website at http://www.ctscorp.com/wp-content/uploads/TTC.pdf.
FURTHER INFORMATION CONCERNING THE BOARD OF DIRECTORS
Attendance
During 2019, the Board held four meetings and took action by unanimous written consent once. In 2019, all of the directors attended at least 75% of the regular meetings of the Board and the standing committees of which they were then members, either in person or by phone. It is the policy of the Board that each director endeavor to attend each Annual Meeting of Shareholders, unless exigent circumstances arise. Each director standing for re‑election at the 2019 Annual Meeting of Shareholders attended that meeting.
Director Independence
In addition to the NYSE Corporate Governance Listing Standards, the CTS Corporation Corporate Governance Guidelines govern the determination whether a director is independent. A copy of the CTS Corporation Corporate Governance Guidelines may be obtained free of charge from CTS’ website at http://www.ctscorp.com/wp-content/uploads/CGG.pdf.
The Board has determined that each non-management director and director nominee is or was an independent director and has or had no material relationship with CTS, apart from his or her service as a director. For purposes of determining whether a director has a material relationship with CTS apart from his or her service as a director, the Board has determined that CTS’ purchase of regulated electric and gas service from a utility company does not constitute a material relationship and that any transaction that is not required to be disclosed pursuant to Item 404(a) of Regulation S-K shall be deemed categorically immaterial.
The CTS Corporation Corporate Governance Guidelines provide that the Nominating and Governance Committee shall review any transaction that might be construed to disqualify a director as independent (including any transactions that are required to be reported under Item 404(a) of Regulation S-K) and, if appropriate, make a recommendation that the Board approve such transaction. The Board would then review and, if appropriate, approve such transaction. The Nominating and Governance Committee Charter further provides that the Nominating and Governance Committee shall review any potential director conflict of interest and recommend appropriate action to the Board.
Meetings of Non‑Management Directors
It is the policy of the Board to hold an independent session excluding management directors at each regularly scheduled Board meeting. In 2019, an independent session was held at each regular Board meeting. The Lead Independent Director of the Board presides over the independent sessions.
Board Leadership Structure
CTS does not have a policy as to whether the role of Chief Executive Officer and Chairman of the Board should be separate or combined, or whether the Chairman should be a management or non‑management director. In the recent past, the Board has been structured with an independent or non‑management director as Chairman and alternatively structured with a combined Chairman/Chief Executive or Executive Chairman and Chief Executive Officer. Currently, Mr. O’Sullivan serves as Chairman of the Board, President and Chief Executive Officer and Mr. Profusek serves as Lead Independent Director. Mr. O’Sullivan is the only CTS director who is not independent. He does not receive any additional compensation for his service on the Board.
The Lead Independent Director is the leader of the independent directors, and leads all sessions of independent directors, which normally occur at the end of each Board meeting. A full description of his duties is as follows:
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• | Preside at all meetings of the Board at which the Chairman is not present, including executive sessions of the independent directors; |
• | Approve meeting agendas and schedules for the Board; |
• | Review key strategic initiatives presented to the Board; |
• | Serve as a liaison between the Chairman and the independent directors. To that end, ensure personal availability for consultation and communication with independent directors and with the Chief Executive Officer, as appropriate; |
• | Call special meetings of the independent directors, as the Lead Independent Director may deem to be appropriate; |
• | Be available, at the request of major shareholders, for consultation and direct communication. Respond directly to shareholder and other stakeholder questions and comments that are directed to the Lead Independent Director or to the independent directors as a group, consulting on such with the Chief Executive Officer or other directors as the Lead Independent Director may deem appropriate; |
• | Act as a sounding board for the Chief Executive Officer and/or independent directors with respect to strategies, plans, organization, relationships, accountabilities, and other issues; |
• | Between regularly scheduled Board meetings discuss with the Chief Executive Officer key corporate risks and current issues and plans for presentations on such to the full Board or its committees; |
• | Lead the independent directors in appraising the Chief Executive Officer’s performance at least annually; and |
• | Lead the directors in appraising the Board’s performance at least annually. |
The General Counsel and Corporate Secretary’s Office provides support to the Lead Independent Director in fulfilling his role. The Lead Independent Director receives an annual retainer of $20,000 in addition to his ordinary director compensation, for the additional services the Lead Independent Director provides. The Board has established this leadership structure because the Board believes it is effective, efficient, appropriate to CTS’ size and complexity, and represents a cost‑effective allocation of responsibilities.
Contrasting with the cost and efficiency benefits is the desire to ensure that control over both management and corporate governance is not overly invested in one person. The Board is confident that, as currently constituted, it will provide ample counterbalance to a combined Chairman and Chief Executive Officer and that it continues to provide suitable independent oversight of management. The independent directors on the Board are all accomplished professionals possessing substantial business and business‑related experience as set forth in the chart below. Additionally, most have served on the Board for a number of years. As discussed above, the independent directors meet in separate session excluding management at each regular meeting of the Board. Further, any director has the right to submit items to be heard at any Board meeting. Lastly, the independent directors outnumber the one non‑independent director, the combined Chairman and Chief Executive Officer, by a large supermajority.
Summary of Director Qualifications and Experience | Patricia K. Collawn | Gordon Hunter | William S. Johnson | Ye Jane Li | Kieran O'Sullivan | Robert A. Profusek | Alfonso G. Zulueta |
Years Served on the Board | 16 | 9 | 4 | - | 6 | 21 | 2 |
Leadership and Strategy | ü | ü | ü | ü | ü | ü | ü |
Financial Expertise/Literacy | ü | ü | ü | ||||
Risk Management | ü | ü | ü | ü | |||
International Business | ü | ü | ü | ü | ü | ü | |
Corporate Governance | ü | ü | ü | ü | ü | ||
Industry Experience | ü | ü | ü | ü | ü | ü | ü |
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Board of Directors’ Role in Risk Oversight
As a part of its oversight function, the Board monitors how management operates the Company. Risk is an important part of deliberations at the Board and committee levels throughout the year. Committees consider risks associated with their particular areas of responsibility. The Board conducts periodic reviews of corporate risk management policies and procedures and annually reviews risk assessments prepared by management as a part of CTS' enterprise risk management process. The enterprise risk management process evaluates CTS' major risk exposures and the steps management has taken to monitor and mitigate these exposures. Therefore, the Board and its committees consider among other items, the relevant risks to CTS when granting authority to management and approving business strategies. The Board has utilized this risk management structure for a number of years. Although the Board retains the right to make changes in risk oversight responsibilities from time-to-time, the Board anticipates that the risk management responsibilities will continue in a substantially similar manner as described above, whether or not the Board's leadership structure changes.
Director Education
The CTS Corporation Corporate Governance Guidelines encourage all directors to participate in director continuing education programs. CTS reimburses directors for attendance at such programs. In addition, management monitors and reports to the directors regarding significant corporate governance initiatives. The directors also receive a presentation on new developments in corporate governance at least annually.
Stock Ownership Guidelines for Executives and Directors
The Board has adopted stock ownership guidelines that apply to non‑employee directors and executives in order to increase the alignment of their interests with those of shareholders and promote enduring shareholder value. The guidelines are administered by the Compensation Committee. A copy of the guidelines may be obtained free of charge from CTS’ website at http://www.ctscorp.com/wp-content/uploads/SOG.pdf.
Director Resignation Policy
The CTS Corporate Governance Guidelines designate the circumstances under which a director must offer his or her resignation to the Board in connection with a change of employment or a majority "against" or "withheld" vote by the Shareholders. The Guidelines also require that a director tender his or her resignation effective as of the next occurring Annual Meeting of Shareholders after the date on which he or she reaches the age of 75. The Nominating and Governance Committee may recommend to the full Board that an exception be made to this policy. The Board will evaluate the best interest of CTS and its shareholders and may consider any factors it deems relevant in deciding whether to accept a director's resignation.
Code of Ethics
CTS has adopted a Code of Ethics that applies to all CTS employees, including the principal executive officer, the principal financial officer, the principal accounting officer and/or controller, and all other executive officers and non‑employee directors. The Code of Ethics includes ethical standards concerning conflicts of interest and potential conflicts of interest. With respect to executive officers and other employees, potential conflicts of interest must be reported to management. The Audit Committee is responsible for reviewing compliance with the Code of Ethics and reviews any potential conflict of interest involving an executive officer. A copy of the Code of Ethics may be obtained free of charge from the Corporate Secretary upon request or from CTS’ website at http://www.ctscorp.com/wp-content/uploads/CE.pdf.
Additional Information Regarding Company Policies
CTS collects and reports information regarding Environmental, Social and Governance matters under "Corporate Governance" on the CTS website. In addition to overall governance and policies, the Nominating and Governance Committee oversees CTS' Environmental, Health and Safety performance metrics. The General Counsel's office collects information relating to these metrics and reviews such information with the Nominating and Governance Committee. Additional information regarding CTS' policies and guidelines with respect to Environmental, Social and Governance matters can be found on the CTS website at https://www.ctscorp.com/investors/corporate-governance/.
Communications to Directors
Shareholders and other interested parties may address written communications to individual directors, including non‑management directors, or to the Board, by writing to the Corporate Secretary at CTS’ executive offices located at 4925 Indiana Avenue, Lisle, Illinois 60532. All communications from shareholders must include the name and address of the shareholder as it appears on the record books of CTS and the name and address of the beneficial owner, if any, on whose behalf the communication is submitted. The Corporate Secretary will compile such communications and forward them to the directors on a periodic basis. However, the Corporate Secretary
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has authority to disregard any communication that is primarily an advertisement or solicitation or is threatening, obscene, or similarly inappropriate in nature. Communications that have been disregarded for these reasons may be reviewed by any non‑management director upon request.
STOCK OWNERSHIP INFORMATION
Five Percent Owners of CTS Common Stock
The table below lists information about the persons known by CTS to beneficially own at least 5% of the outstanding shares of CTS common stock as of December 31, 2019. There were 32,472,406 shares of CTS common stock issued and outstanding as of December 31, 2019. The shareholding information below is derived solely from the most recent Schedules 13F or 13G, and amendments thereto, filed with the Securities and Exchange Commission and the percentage ownership is based on the number of shares outstanding as reported herein and may vary from the percentage reported in the applicable Schedules13F or 13G.
NAME AND ADDRESS | NUMBER OF SHARES | PERCENT OF CLASS | ||||
BlackRock, Inc. 55 East 52nd Street New York, New York 10022 | 5,105,919(1) | 15.70% | ||||
T. Rowe Price Associates, Inc. 100 E. Pratt Street Baltimore, MD 21202 | 2,889,690(2) | 8.80% | ||||
GAMCO Investors, Inc. One Corporate Center Rye, New York 10581 | 2,817,232(3) | 8.69% | ||||
Wellington Management Group LLP 280 Congress Street Boston, Massachusetts 02210 | 2,779,453(4) | 8.53% | ||||
The Vanguard Group 100 Vanguard Blvd. Malvern, Pennsylvania 19355 | 2,036,482(5) | 6.24% | ||||
Dimensional Fund Advisors LP Building One 6300 Bee Cave Road Austin, Texas 78746 | 1,904,831(6) | 5.84% | ||||
(1) | As reported on Schedule 13G/A dated February 3, 2020. |
(2) | As reported on Schedule 13G/A dated February 14, 2020. |
(3) | As reported on Schedule 13F dated February 7, 2020. |
(4) | As reported on Schedule 13G/A dated February 14, 2020. |
(5) | As reported on Schedule 13G/A dated February 10, 2020. |
(6) | As reported on Schedule 13G/A dated February 12, 2020. |
Directors’ and Officers’ Stock Ownership
The following table shows the number of shares of CTS common stock each named executive officer, director, and director nominee beneficially owned as of March 16, 2020, including shares of CTS common stock covered by stock options exercisable within 60 days of March 16, 2020. Please note that, as reported in this table, beneficial ownership includes those shares of CTS common stock a director or officer has the power to vote or transfer, as well as shares of CTS common stock owned by immediate family members that reside in the same household with the director or officer.
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Name | Beneficially Owned Shares(1) | Options Exercisable within 60 days | Shares Held in 401(k) | Directors’ Deferred Common Stock Units(2) | Total(3) | % of Shares Outstanding(4) | ||||||||
Ashish Agrawal | 87,391 | — | — | — | 87,391 | * | ||||||||
Patricia K. Collawn | 73,820 | — | — | 800 | 74,620 | * | ||||||||
Gordon Hunter | 42,100 | — | — | — | 42,100 | * | ||||||||
William S. Johnson | 21,900 | — | — | — | 21,900 | * | ||||||||
Ye Jane Li | 0 | — | — | — | 0 | * | ||||||||
Luis F. Machado | 36,909 | — | — | — | 36,909 | * | ||||||||
Diana Murphy | 45,100 | — | — | — | 45,100 | * | ||||||||
Kieran O’Sullivan | 333,144 | — | — | — | 333,144 | 1.03% | ||||||||
Robert A. Profusek(5) | 76,942 | — | — | 4,722 | 81,664 | * | ||||||||
Alfonso G. Zulueta | 6,700 | — | — | — | 6,700 | * | ||||||||
All Current Directors and Officers as a Group | 724,006 | — | — | 5,522 | 729,528 | 2.25% | ||||||||
* Represents less than 1% of the outstanding shares of CTS common stock
(1) Includes shares of CTS common stock which will vest within 60 days of March 16, 2020.
(2) Includes Restricted Stock Units that are distributable upon the director’s separation from service and convert
on a one‑to‑one basis to shares of CTS common stock upon distribution.
(3) No director or executive officer has pledged his or her shares of CTS common stock.
(4) Based on 32,455,711 shares of CTS common stock outstanding as of the record date.
(5) Excludes 1,800 shares held by Mr. Profusek’s spouse. Mr. Profusek disclaims any beneficial interest with
respect to these shares.
PROPOSAL 2: APPROVAL, ON AN ADVISORY BASIS, OF THE COMPENSATION OF
CTS’ NAMED EXECUTIVE OFFICERS
As required under the Dodd‑Frank Wall Street Reform and Consumer Protection Act and Section 14A of the Securities Exchange Act of 1934 (“Exchange Act”), our Board of Directors is submitting a “Say‑on‑Pay” proposal for shareholder consideration. The Compensation Discussion and Analysis section of this proxy statement describes CTS’ executive compensation program and the compensation decisions made by the Compensation Committee and the Board in 2019 with respect to our named executive officers. CTS is asking shareholders to cast an annual advisory shareholder vote approving the compensation of CTS' named executive officers (commonly referred to as a "say-on-pay" vote). Our next say-on-pay vote will be held at the 2021 Annual Meeting of Shareholders.
CTS’ executive compensation program is designed to attract, retain, and motivate high‑quality executive talent, to provide executives with strong incentives to maximize CTS’ performance, and to align executives’ interests with those of shareholders.
CTS remains committed to the use of broad‑based metrics such as earnings per share, operating earnings, sales growth, and relative total shareholder return in measuring corporate performance.
For these reasons, the Board is asking shareholders to vote FOR the following resolution:
“RESOLVED, that the compensation of the named executive officers as disclosed pursuant to the compensation disclosure rules of the Securities and Exchange Commission, including the Compensation Discussion and Analysis, the compensation tables, and any related material disclosed in the CTS 2020 proxy statement, is hereby approved.”
While the advisory vote we are asking you to cast is non‑binding, the Compensation Committee and the Board value the views of our shareholders and expect to take into account the outcome of the vote when considering future compensation decisions for our named executive officers.
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Your Board recommends a vote FOR the advisory approval of CTS’ named
executive officer compensation.
COMPENSATION DISCUSSION AND ANALYSIS
This Compensation Discussion and Analysis provides details about CTS’ compensation practices for its named executive officers. The information provided in this section should be read together with the tables and narratives that accompany the information presented.
The following executives are CTS’ named executive officers for 2019, as that term is defined by the Securities and Exchange Commission:
• | Mr. Kieran O’Sullivan, Chairman, President and Chief Executive Officer; |
• | Mr. Ashish Agrawal, Vice President and Chief Financial Officer; and |
• | Mr. Luis F. Machado, Vice President, General Counsel and Secretary. |
Executive Summary
CTS’ executive compensation program is designed to attract, retain, and motivate high‑quality executive talent, to provide executives with strong incentives to maximize CTS’ performance, and to align executives’ interests with those of our shareholders. Our executive compensation structure consists of base salary, annual cash incentives, performance‑based equity compensation, service‑based equity compensation, health and welfare benefits, limited perquisites, and retirement benefits. Our named executive officers are required to comply with various good governance policies, such as CTS’ stock ownership guidelines, insider trading restrictions, and an anti‑hedging/pledging policy. Additionally, various compensation elements contain “clawback” features, which permit CTS to recoup compensation paid for improperly earned incentives. CTS believes that our executive compensation program provides the best means of attracting, retaining, and motivating executives with the skills and experience necessary to achieve our business goals and maximize shareholder value. CTS has remained committed to its fundamental compensation structure and philosophy over a period of many years, including recent periods of economic volatility.
Recent Governance Activity. We hold “Say‑on‑Pay” votes every year. At our 2019 annual meeting of shareholders, we received approximately 97.9% approval, based on the total votes cast, for our advisory “Say‑on‑Pay” proposal to approve the compensation of our named executive officers. The Compensation Committee believes the voting results demonstrate significant continuing support for our overall executive pay program. After reviewing the 2019 Say‑on‑Pay vote results, the Committee did not make any changes as a direct result of the vote and decided to continue to apply the same general philosophy, compensation objectives, and governing principles that it used in 2018 regarding named executive officer compensation decisions and policies. The Committee remains dedicated to aligning executive pay with Company performance both in the existing executive pay programs and the governance environment surrounding the overall program.
2019 Performance. We experienced market softness in the second half of 2019 which had an unfavorable impact on sales and earnings for the year. Sales declined 0.3% to $469.0 million in 2019. GAAP earnings per diluted share were $1.09 in 2019 compared to $1.39 in 2018. Adjusted earnings per diluted share, which is used as a target for compensation as described below, was $1.45 in 2019, down 5% from $1.53 in 2018. Cash flow from operations was $64.4 million in 2019 versus $58.2 million in 2018.
Implications of 2019 Results for Compensation. For the 2019 Management Incentive Plan (or MIP), which is our annual performance‑based cash incentive plan, our named executive officers were each granted award opportunities weighted 60% on adjusted EPS performance goals, 30% on sales and 10% on individual personal goals relating to talent retention and development. CTS’ actual performance during 2019 is calculated and 2019 MIP awards are paid in 2020 and included in 2019 compensation in this proxy statement. The threshold EPS performance goal was not achieved and no award was paid in respect of 2019 performance.
The Compensation Committee also continued the 2017‑2019 Performance Restricted Stock Unit Plan, which is a three‑year performance‑based equity award program that is operated under the CTS Corporation 2014 Performance and Incentive Compensation Plan. This program measures three‑year performance based on the following weighted criteria: 35% for achievement under a relative total shareholder return metric (or RTSR); 35% for achievement under a sales growth metric; and 30% for achievement under an operating cash flow metric (calculated as operating cash flow less capital expenditures). As a result of the Company’s three-year performance based on these metrics, Messrs. O’Sullivan , Agrawal, and Machado received resulting payments of 52,372, 17,246, and 13,237 restricted stock units, respectively, in 2020. Awards under the 2017-2019
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Performance Restricted Stock Unit Plan were paid in 2020 and were reported in the named executive officer’s compensation when granted in 2017.
In each of February 2018 and 2019, the Compensation Committee established a new three-year performance-based equity compensation program for the 2018-2020 and 2019-2021 periods respectively. Each program is essentially the same as the 2017-2019 program described above, with the same applicable performance metrics and relative weightings as used for the 2016-2018 program described above, and using the same peer group which is listed on page 17. Grants made to named executive officers under each of these programs are reported in compensation at grant date fair value in the year the grant is made.
Compensation Objectives
CTS designs its named executive officer compensation program to achieve three main objectives:
• | Offer Competitive Compensation; |
• | Link Compensation to Performance; and |
• | Align Compensation with Shareholder Interests. |
Additionally, the elements of total compensation are designed to reward the named executive officers for: (1) their core competencies, skills, experience, and contributions to CTS (in the form of base salary, retirement benefits, health and welfare benefits and limited perquisites); (2) achievement of annual corporate goals (in the form of annual performance‑based cash incentives); and (3) achievement of long‑term objectives that are beneficial to CTS and its shareholders (in the form of performance‑based and service‑based equity awards). The first compensation element helps CTS offer competitive compensation, while the second and third compensation elements help CTS link compensation to performance and align compensation with shareholder interests. Decisions on specific elements of compensation do not generally affect the Committee’s decisions regarding the other elements of compensation except to the extent that these categories of compensation are structured to provide a substantial portion of total compensation that is based on performance and at‑risk each year.
Compensation Philosophy
CTS’ executive compensation philosophy is to initially target potential total compensation for each named executive officer at approximately the fiftieth percentile of the compensation for similar positions at similarly situated companies based on market survey data provided by Compensation Strategies, the Compensation Committee’s independent compensation consultant (discussed in more detail below). This philosophy operates as only an initial, general guideline for CTS’ compensation decisions, rather than as a fixed rule or final determining factor. By initially targeting median compensation levels for its named executive officers, CTS believes it strikes the right balance between motivating named executive officers with market‑competitive factors and providing the compensation necessary to recruit and retain top executive talent.
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Elements of Total Compensation | Purpose | ||||
● Base Salary ● Retirement Benefits ● Health and Welfare Benefits ● Limited Perquisites | ● | Fixed cash and other customary compensation to attract and retain high‑quality executive talent. | |||
● Annual Performance‑Based Cash Incentives | ● | At‑risk, variable incentive compensation to promote the achievement of specific financial and operational performance objectives; and | |||
● | Attraction, retention, and motivation of high‑quality executive talent. | ||||
● Performance‑Based Equity Awards | ● | At‑risk, variable incentive compensation to promote the achievement of specific goals; | |||
● | Align executives’ interests with shareholder interests; and | ||||
● | Attraction, retention, and motivation of high‑quality executive talent. | ||||
● Service‑Based Equity Awards | ● | Fixed equity awards for long‑term retention of executive talent; and | |||
● | Align executives’ interests with shareholder interests. | ||||
CTS does not use a specific formula for allocating total compensation between current and long term compensation or between cash and non‑cash compensation. The amount allocated to each element of compensation generally reflects allocation percentages in Compensation Strategies’ market survey data for comparable positions, based on the analysis described below. Additionally, relevant factors such as an executive’s specific level of experience, responsibilities, demonstrated performance, length of service with the Company, achievement of individual and corporate goals, risk, and retention considerations also may affect compensation structure for a particular named executive officer.
Our named executive officers have a substantial percentage of their total compensation opportunities based on at-risk, variable elements of compensation. CTS believes that this practice is appropriate because CTS' named executive officers have the greatest ability to drive performance and, therefore, should have the most to gain or lose in terms of compensation opportunities based on performance. It is possible for CTS' named executives officers to earn above-market compensation in any year, but they may earn below-market compensation as well, depending on individual and corporate performance for that year.
CTS believes that named executive officers will consider the impact of decisions in both the short term and long term and will exercise careful judgment, so that while attempting to enhance shareholder value they will not take actions that pose unnecessary risk to the overall long term well‑being of the Company. As a result, CTS has determined that, for the named executive officers and for all of its other employees, CTS’ compensation policies and practices do not create risks that are reasonably likely to have a material adverse effect on CTS.
The amount of total compensation realized or potentially realizable from prior compensation awards does not directly influence the level of compensation paid in the current year or future pay opportunities.
How Final 2019 Named Executive Officer Compensation was Determined
Mr. O’Sullivan recommended a total 2019 compensation package to the Compensation Committee for each named executive officer other than himself using, among other factors, data provided by Compensation Strategies that aligned each named executive officer's total compensation opportunity at approximately the fiftieth percentile of similarly situated executives based upon the peer group of selected companies listed on page 17.
At its February 2019 meeting, the Compensation Committee reviewed the data provided by Compensation Strategies and considered the recommendations of Mr. O'Sullivan, ultimately deciding on a total compensation package for each of the named executive officers. For named executive officers other than Mr. O'Sullivan, total compensation packages for the year were finalized when approved by the Compensation Committee. The Compensation Committee also reviewed information provided by Compensation Strategies based
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on the same peer group information as described above to assess and recommend a total compensation package for Mr. O'Sullivan to the Board, which was discussed by the Board in Independent Session at its February 2019 meeting, and became final upon its ratification.
Elements of 2019 Named Executive Officer Compensation
Base Salary. Base salary is included as an element of total compensation to ensure that each named executive officer receives a base level of cash compensation and is rewarded for his service to the Company. A sufficient base salary also helps to ensure that named executive officers do not become unduly focused on achievement of shorter‑term incentive awards that may be to the detriment of the overall long‑term health of CTS.
The base salaries for the named executive officers that were set in 2019 were as follows: Mr. O’Sullivan, $758,000; Mr. Agrawal, $368,750; and Mr. Machado, $327,283. Messrs. O’Sullivan, Agrawal and Machado received a 4.0%, 4.0% and 2.5% increase, respectively, to move their base salaries closer to the fiftieth percentile of the market. The 2019 base salary levels described in this paragraph are not directly comparable to the amounts listed in the “Salary” column for 2019 in the Summary Compensation Table because they were implemented in April 2019.
Annual Performance‑Based Cash Incentive Plan (MIP). The MIP provides for annual cash payments to named executive officers based on CTS' financial performance and achievement of individual goals. A named executive officer's ultimate award is determined under a formula that provides for payment of zero to 200% of a target award based on CTS's actual performance versus the established quantitative financial performance goals. In addition, the Compensation Committee reserves the right to adjust awards guided by the named executive officer's actual performance.
In February 2019, the Compensation Committee established a target award opportunity as a percentage of base salary and quantitative financial performance goals for each named executive officer. In setting target award opportunities, the Compensation Committee took into consideration the median percentile target awards in the Compensation Strategies reports described above, as well as internal parity.
The quantitative financial performance goals were based on CTS’ established business plan for 2019. Each year, the Board reviews a business plan prepared by members of management that includes projections for revenues, earnings, key balance sheet metrics, and cash flow for each business unit. The Compensation Committee generally may use any of the metrics set out in the business plan to establish quantitative financial performance goals for the annual MIP.
In 2019, the Compensation Committee set quantitative financial performance goals for participants who are named executive officers using targets for earnings per share (or EPS) adjusted for planned restructuring expenses as defined in the MIP, CTS’ annual sales and an individual personal goal relating to talent retention and development. CTS chose earnings per share as a metric because it is a direct measurement of overall corporate performance that takes into consideration market conditions and provides a quantitative measurement from which CTS is able to assess the performance of its named executive officers. CTS chose sales as a metric because it places an emphasis on CTS’ annual sales growth goals. Each of the EPS and sales metrics are set forth in the table below. An individual personal goal relating to talent development and retention was chosen as a measure of the individual's impact on the organization. As shown on the table below, the Compensation Committee set the performance levels for each metric and established a minimum performance level that had to be reached before MIP awards were paid. The MIP also includes a minimum threshold for adjusted EPS to achieve any award. Failure to reach the MIP’s threshold on this metric results in no payment for the entire award.
Determination of Actual Awards. Actual MIP award payments are based on a formula and can vary from zero to 200% of the target award opportunity based on achievement of the performance goals. If actual performance fails to meet the minimum or required threshold, the payout under the plan is zero. On the upside, payout increases linearly up to 200% as performance exceeds the threshold performance goals. One consequence of this cliff threshold and payout performance formula is that a named executive officer’s risk of receiving no award is greater than the named executive officer’s opportunity to obtain an award that is substantially above target. Another consequence is that payouts above target represent a fraction of the expected return to the Company from “better than plan” performance. Since payments are capped, a named executive officer cannot increase MIP awards beyond a fixed amount, counterbalancing the incentive to pursue outsized short‑term rewards at the expense of the long‑term health of the Company. While actual awards will vary above and below target from year to year, CTS expects that over a period of several years, payouts under the MIP will average about 100% of target. Over the past five years, payouts under the MIP based on corporate metrics averaged 96.8% of target.
How 2019 Awards Were Calculated. For CTS’ named executive officers, performance measurements were weighted 60% for the adjusted EPS objective, 30% on sales, and 10% on an individual personal objective relating to talent retention and development and was set as a stretch goal. The target award opportunity which was based on base salary and unchanged from the prior year, was 100% for Mr. O’Sullivan, 65% for Mr. Agrawal, and 55% for Mr. Machado. For this purpose, base salary is calculated as actual salary received during the calendar year. These target award opportunities were derived in part from the data obtained from the Compensation Strategies
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report and in part by the Compensation Committee’s judgment on internal equity of the positions, their relative value to CTS, and the desire to maintain a consistent annual target award incentive for named executive officers of CTS and the business units.
For 2019, the threshold for the adjusted EPS metric was $1.50 and the maximum was $1.84. The threshold for Company sales was $460 million with a maximum of $535 million. Actual results are shown in the table below. The adjusted EPS threshold was not achieved resulting in no payment under the MIP for 2019. Individual personal objective targets were set based on percentage of achievement, were achieved at 150% by the named executive officers, and are not shown on the table below.
2019 Management Incentive Plan Performance Goals at Target | 2019 Management Incentive Plan Performance Results | ||||||||||
Executive | 2019 Base Salary ($) | 2019 Annual Target Award (%) | Adjusted EPS ($) | Sales (000s) ($) | Adjusted EPS ($) | Sales (000s) ($) | 2019 Annual Incentive Earned (%) | 2019 Annual Incentive Earned ($) | |||
Kieran O’Sullivan | 758,000 | 100 | 1.67 | 495,000 | 1.45 | 469,000 | 0% | 0 | |||
Ashish Agrawal | 368,750 | 65 | 1.67 | 495,000 | 1.45 | 469,000 | 0% | 0 | |||
Luis Machado | 327,283 | 55 | 1.67 | 495,000 | 1.45 | 469,000 | 0% | 0 | |||
Performance‑Based Equity Compensation. Named executive officers may earn restricted stock unit (“RSU”) awards based upon, and thus are rewarded for, achievement of financial objectives that CTS believes are beneficial to the Company and its shareholders, or based upon CTS’ overall performance relative to peers over a longer term.
2017‑2019 Performance Restricted Stock Unit Plan. In February 2017, the Compensation Committee established the 2017‑2019 Performance Restricted Stock Unit Plan. Depending upon CTS’ achievement of sales growth, operating cash flow, and CTS’ RTSR compared to the peer group described below over a three‑year performance period (through December 31, 2019), a named executive officer is eligible to earn an RSU award of zero to 200% of a target award opportunity established for his position. Awards are weighted 35% for achievement of the RTSR metric, 35% for achievement of the sales growth metric and 30% for achievement of the operating cash flow metric. Awards are settled on the basis of one share of CTS common stock for each earned RSU on the settlement date.
In 2017, the Compensation Committee established a target award opportunity for each named executive officer in the form of a specific number of RSUs. The target RSU award opportunities for Messrs. O’Sullivan, Agrawal, and Machado were 36,420; 11,993; and 9,205 respectively.
The Compensation Committee selected RTSR, a comparison of the increase of CTS’ stock price against the stock price appreciation of the peer group described below (including aggregated dividends adjusted for stock splits over the period) as a performance goal because it is a meaningful measure of CTS’ overall relative performance in comparison to its peers. Three‑year sales growth was selected to reinforce senior management’s focus on increasing sales over the long‑term. Three‑year operating cash flow was selected to focus management’s attention on operational efficiency. The Compensation Committee selected a three‑year performance measurement period to encourage sustained performance beneficial to shareholders over more than just an annual period.
The Compensation Committee also determined the various performance levels that had to be achieved in order to earn an RSU award which are shown in the graphs below.
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With the advice of Compensation Strategies, the Compensation Committee selected a peer group consisting of the following companies whose performance is compared to CTS’ performance over the three‑year performance period for RTSR measurement. A peer company may be removed from the list if delisted from its exchange for certain reasons not involving poor performance, including a merger or, in the case of Electro Scientific Industries, Inc. and Maxwell Technologies, Inc, an acquisition.
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AVX Corporation | II-VI, Inc. | Rogers Corporation |
Cabot Microelectronics Corporation | KEMET Corporation | Silicon Laboratories, Inc. |
Dorman Products, Inc. | Littelfuse, Inc. | Stoneridge, Inc. |
Fabrinet | Materion Corporation | Strattec Security Corporation |
Gentex Corporation | Mercury Systems, Inc. | Vishay Precision Group, Inc. |
Gentherm Inc. | Methode Electronics, Inc. | |
Haynes International, Inc. | MTS Systems Corporation | |
Participants must remain continuously employed by CTS through the end of the three‑year performance period to receive an award, subject to limited exceptions. The Compensation Committee can, in its discretion, adjust a participant’s payout of an award after consideration of other factors, including overall CTS performance and the individual participant’s contribution to CTS performance. The Compensation Committee can also adjust a payout of an award in its discretion to prevent the enlargement or dilution of the award because of extraordinary events or circumstances as determined by the Compensation Committee.
Three-year Performance Restricted Stock Unit Plans. In each of February 2018 and February 2019, the Compensation Committee established a new three-year performance-based equity compensation program in which named executive officers participate. The plans are the same as the 2017-2019 plan described above.
The Compensation Committee established a target award opportunity for each participating named executive officer in the form of a specific number of RSUs for each three-year performance plan targeting consistent value based on the compensation targets described above while accounting for changes in grant date share value. The target RSU award opportunities under the 2018-2020 Performance Restricted Stock Unit Plan are: Mr. O’Sullivan, 31,820; Mr. Agrawal, 11,377 and Mr. Machado, 9,316; and under the 2019-2021 Performance Restricted Stock Unit Plan are: Mr. O'Sullivan, 27,782; Mr. Agrawal, 11,048; and Mr. Machado 9,958. In February of 2019, the Board granted Mr. O'Sullivan a Supplemental Performance Restricted Stock Unit grant of 6,945 RSUs which qualify for award based on relative attainment of performance goals over the 2019-2021 period relating to succession planning.
Performance Vesting Stock Option Plan. In May 2015, the Compensation Committee established a special five‑year performance‑based equity compensation program called the Performance Vesting Stock Option Plan in which all of the named executive officers participate. The plan employs achievement of $600 million in revenue in any trailing four quarters within the five-year window as a performance vesting trigger. The Compensation Committee established a target award opportunity for Mr. O'Sullivan of 100,000 options; Mr. Agrawal of 35,000 options; and Mr. Machado of 30,000 options, each with a strike price of $18.37, in the form of performance stock options. This metric has not yet been achieved. If the performance metric is not met within the 5-year performance period, the Options will not vest and will be forfeited.
Service‑Based Equity Compensation. CTS believes that stock ownership and equity‑based compensation are valuable tools for motivating employees to improve, and rewarding them for improvements in, CTS’ long‑term performance. In February 2019, the Compensation Committee awarded RSUs vesting over a three-year period to Messrs. Agrawal (7,368) and Machado (4,267) based on the recommendation of Mr. O'Sullivan. In making his recommendation, Mr. O'Sullivan analyzed the third party market information provided by Compensation Strategies and subjectively considered retention and performance factors. Mr. O'Sullivan's 2019 RSU award was recommended by the Compensation Committee and approved by the entire Board (other than Mr. O'Sullivan, who abstained in discussions and votes related to his own awards). Mr. O'Sullivan's 2019 grant was for 23,258 RSUs based on benchmarking, retention, and performance factors. Each service-based RSU award is settled on a one-for-one basis with shares of CTS common stock upon vesting. Grants of equity awards made in 2019 are reported in the "Summary Compensation Table" and the "2019 Grants of Plan-Based Awards" table.
Defined Contribution Plan. Substantially all U.S.‑based CTS employees are eligible to participate in the CTS Corporation Retirement Savings Plan, referred to as the CTS 401(k) Plan. CTS matches an employee’s contributions dollar for dollar up to the first 3% of eligible pay, and thereafter at $0.50 for every dollar up to the next 2% of eligible pay, for a maximum matching contribution of 4%, subject to limitations under the Internal Revenue Code. All of the named executive officers participate in the 401(k) Plan.
Other Compensation. CTS provides a limited set of perquisites and other compensation in order to attract, retain, and motivate the named executive officers. For 2019, compensation for named executive officers included reimbursements for tax preparation services, financial planning services, and an annual executive physical. The reimbursement for tax preparation services is capped at $2,500 for the named executive officers. The reimbursement for financial planning services is capped at $5,000 for each named executive officer. The reimbursement for executive physicals is capped at $2,000 for each of the named executive officers and their respective spouses. The notes to the 2019 "Summary Compensation" table delineate the various perquisites named executive officers received for 2019.
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Health and Welfare Benefits. Named executive officers are also eligible to participate in a standard set of health and welfare benefits, including medical insurance, dental insurance, vision insurance, life insurance, accidental death and dismemberment insurance, disability insurance, dependent life insurance, an employee assistance plan, and health care and dependent care reimbursement accounts. The same terms of participation that apply to salaried employees generally govern the participation of named executive officers in these benefits.
Agreements and Arrangements with Named Executive Officers
Executive Severance Policy. In 2009, CTS enacted an Executive Severance Policy. This policy formalized and standardized CTS’ severance practices for certain officers and key employees. For more on the executive severance policy, please see the section of this proxy statement titled “Potential Payments Upon Termination or Change‑in‑Control” below.
Change‑In‑Control Severance Agreements. CTS has entered into change‑in‑control severance agreements with the named executive officers, the purpose of which is to help CTS retain named executive officers and encourage them to focus on corporate interests during times of change and uncertainty. As discussed in the “Potential Payments Upon Termination or Change‑in‑Control” section, these agreements reduced or eliminated certain payments, including an excise tax gross‑up, and placed a cap on the total severance benefit. For more on the severance agreements, please see the section of this proxy statement titled “Potential Payments Upon Termination or Change‑in‑Control” below.
Stock Ownership Guidelines
See the section titled "Stock Ownership Guidelines for Executives and Directors" of this Proxy for a discussion of CTS’ Stock Ownership Guidelines.
CTS Securities Hedging/Pledging Policy
CTS has adopted a policy prohibiting officers, directors and certain other employees who receive CTS securities from engaging in any transaction in which they may profit from short‑term speculative swings in the value of those securities or from pledging CTS’ securities in lending transactions. These individuals may not trade in options, warrants, puts and calls or similar instruments relating to CTS securities, and may not engage in hedging or monetization transactions designed to minimize the risk in owning CTS securities, such as zero-cost collars and forward sale contracts. These individuals also may not pledge CTS’ securities as collateral for a loan, including, without limitation, in a margin account. The prohibitions described above do not apply to the exercise of stock options granted as a part of a CTS incentive plan.
Policy on Recovery of Awards
The CTS Corporation 2014 Performance and Incentive Compensation Plan under which various performance-based and service-based equity grants have been made includes a provision to address recoupment of incentive awards in the event of financial restatements. If the Board learns of any intentional misconduct by a plan participant that contributes to CTS' having to restate its financial statements, the Board may require that individual to reimburse CTS for the difference between any award he or she received and the amount of the award he or she would have received based on the financial results as restated. The CTS Corporation 2018 Equity and Incentive Compensation Plan provides that any award agreement under the plan may reference a clawback policy of the Company or provide for the cancellation or forfeiture of an award or the forfeiture and repayment to the Company of any gain related to an Award, or other similar provisions, upon such terms and conditions as may be determined by the Compensation Committee, if a participant engages in detrimental activity. Further, any award agreement under the 2018 Equity and Incentive Compensation Plan or a clawback policy may also provide for the cancellation or forfeiture of an award or the forfeiture and repayment to the Company of any benefit related to an award, or other similar provisions, upon such terms and conditions as may be required by the Compensation Committee or under Section 10D of the Exchange Act. In addition, the Compensation Committee Charter provides that the Committee may adopt a claw-back policy as may be required or advisable under any law or regulation. The Compensation Committee reviews its Charter and policies at least annually to ensure appropriate recoupment of compensation is available to the Company.
COMPENSATION COMMITTEE REPORT
The Compensation Committee has reviewed and discussed the foregoing Compensation Discussion and Analysis with management and approved its inclusion in this proxy statement. Based on this review and discussion, the Compensation Committee recommended to the Board that the Compensation Discussion and Analysis be included in this proxy statement and in CTS’ Annual Report on Form 10‑K for the year ended December 31, 2019.
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CTS Corporation 2019 Compensation Committee
Patricia K. Collawn, Chairman | Gordon Hunter |
Diana M. Murphy | |
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EXECUTIVE COMPENSATION
2019 Summary Compensation Table
Name and Principal Position | Year | Salary(1) ($) | Bonus ($) | Stock Awards (2) ($) | Option Awards ($) | Non- Equity Incentive Plan Compensation (3) ($) | Change in Pension Value and Non- Qualified Deferred Compensation Earnings ($) | All Other Compensation (4) ($) | Total ($) |
Kieran M. O'Sullivan | 2019 | 750,146 | - | 1,669,389 | - | - | - | 18,700 | 2,438,235 |
President and | 2018 | 723,113 | - | 1,399,106 | - | 1,300,958 | - | 18,500 | 3,441,677 |
Chief Executive Officer | 2017 | 707,600 | - | 1,462,301 | - | 1,016,704 | - | 31,911 | 3,218,516 |
Ashish Agrawal | 2019 | 364,932 | - | 530,247 | - | - | - | 16,364 | 911,543 |
Vice President and | 2018 | 350,896 | - | 500,315 | - | 411,386 | - | 16,129 | 1,278,726 |
Chief Financial Officer | 2017 | 338,256 | - | 495,914 | - | 318,409 | - | 14,536 | 1,167,115 |
Luis F. Machado | 2019 | 325,133 | - | 409,538 | - | - | - | 18,630 | 753,301 |
Vice President and | 2018 | 316,796 | - | 409,584 | - | 313,596 | - | 12,394 | 1,052,370 |
General Counsel & Secretary | 2017 | 303,000 | - | 378,013 | - | 244,890 | - | 16,934 | 942,837 |
(1) | Salary shown reflects regular base earnings for each calendar year which varies from the base salary rates referenced elsewhere in this disclosure. |
(2) | The amounts reported in the “Stock Awards” column represent the aggregate grant date fair value computed in accordance with the Financial Accounting Standards Board Accounting Standards Codification Topic 718 of stock awards granted during the year. Amounts reflected consist of service‑based and performance‑based awards. For the performance‑based awards reported in this column, such amounts are based on the probable outcome of the relevant performance conditions as of the grant date and therefore are at target. Assuming that the highest level of performance is achieved for these awards, the grant date fair value of all reported awards for 2019 would be: Mr. O'Sullivan, $2,669,178; Mr. Agrawal, $848,269; and Mr. Machado, $696,229. |
(3) | Amounts represent payments earned under the MIP in respect of that year's performance and paid in the subsequent year. |
(4) | Amounts in this column for 2019 reflect values for financial planning, tax preparation services and a CTS match under the 401(k) Plan of $11,200 each. |
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2019 Grants of Plan‑Based Awards
Estimated Possible Payouts Under Non-Equity Incentive Plan Awards | Estimated Future Payouts Under Equity Incentive Plan Awards | All Other Stock Awards: Number of Shares of Stock or Units (#) | All Other Option Awards: Number of Securities Underlying Options (#) | Exercise or Base Price Of Option Awards ($/Sh) | Grant Date Fair Value of Stock and Option Awards ($) | ||||||
Name | Grant Date | Threshold ($) | Target ($) | Maximum ($) | Threshold (#) | Target (#) | Maximum (#) | ||||
Kieran M. O'Sullivan | |||||||||||
2019 Management Incentive Plan | 379,000 | 758,000 | 1,516,000 | ||||||||
2019-2021 Performance Restricted Stock Unit Plan(1) | 2/7/2019 | 13,891 | 27,782 | 55,564 | 799,844 | ||||||
2019 Service-based Restricted Stock Unit Plan(3) | 2/7/2019 | 23,258 | 669,598 | ||||||||
Supplemental 2019-2021 Performance Restricted Stock Unit Grant(2) | 2/7/2019 | 3,472 | 6,945 | 13,890 | 199,947 | ||||||
Ashish Agrawal | |||||||||||
2019 Management Incentive Plan | 119,844 | 239,688 | 479,376 | ||||||||
2019-2021 Performance Restricted Stock Unit Plan(1) | 2/7/2019 | 5,524 | 11,048 | 22,096 | 318,072 | ||||||
2019 Service-based Restricted Stock Unit Plan(3) | 2/7/2019 | 7,368 | 212,175 | ||||||||
Luis F. Machado | |||||||||||
2019 Management Incentive Plan | 90,003 | 180,006 | 360,012 | ||||||||
2019-2021 Performance Restricted Stock Unit Plan(1) | 2/7/2019 | 4,979 | 9,958 | 19,916 | 286,691 | ||||||
2019 Service-based Restricted Stock Unit Plan(3) | 2/7/2019 | 4,267 | 122,847 | ||||||||
(1) | In February of 2019, the Compensation Committee established terms applicable to performance‑based equity compensation awards for fiscal years 2019‑2021 under the CTS Corporation 2018 Equity and Incentive Compensation Plan. Restricted stock units for achievement of the performance goals will be issued in 2022 following certification of 2021 fiscal year results by CTS’ independent auditor. |
(2) | The Board granted Mr. O'Sullivan a Supplemental Performance Restricted Stock Unit Grant which qualify for award based on the relative attainment of performance goals relating to succession planning over 2019-2021 period. |
(3) | Service-based Restricted Stock Units under the 2018 Equity and Incentive Compensation Plan vest 1/3 annually on the anniversary of the grant date. |
Compensation Arrangements. CTS did not have employment agreements with any named executive officers for 2019. In an effort to formalize and standardize CTS’ severance practices for other officers and key employees, CTS enacted an Executive Severance Policy in 2009, and CTS maintains change‑in‑control severance agreements with the named executive officers. For more on the executive change‑in‑control severance agreements and the Executive Severance Policy, please see the section of this proxy statement titled “Potential Payments upon Termination or Change‑ in‑Control” below.
Annual base salary for each named executive officer, other than Mr. O’Sullivan, is determined by the Compensation Committee. Mr. O’Sullivan’s annual base salary is determined by the Board based on recommendations by the Compensation Committee. Mr. O’Sullivan does not receive any compensation for his service as a director.
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Outstanding Equity Awards at 2019 Fiscal Year‑End
Option Awards | Stock Awards | ||||||||||||||
Name | Number of Securities Underlying Unexercised Options Exercisable (#) | Number of Securities Underlying Unexercised Options Unexercisable (#)(1) | Option Exercise Price ($) | Option Expiration Date | Number of Shares or Units of Stock That Have Not Vested (#) | Market Value of Shares or Units of Stock That Have Not Vested ($) | Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#)(2) | Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($) | |||||||
Kieran M. O’Sullivan | — | 100,000 | 18.37 | 5/26/2020 | 46,005 (3) | 1,380,610 | 102,967 | 3,090,040 | |||||||
Ashish Agrawal | — | 35,000 | 18.37 | 5/26/2020 | 15,475 (4) | 464,405 | 34,418 | 1,032,884 | |||||||
Luis F. Machado | — | 30,000 | 18.37 | 5/26/2020 | 10,713 (5) | 321,497 | 28,479 | 854,655 | |||||||
(1) | In May of 2015, the Compensation Committee established terms applicable to the Performance Vesting Stock Option Plan under the CTS Corporation 2014 Performance and Incentive Compensation Plan. These Performance Options will vest only upon achievement of $600 million in revenue in any trailing four quarters within the five year performance period. If the performance metric is not met within the five year performance period, the Options will not vest and be forfeited. |
(2) | Any award issued under the three-year performance program will vest following certification of the Company’s financial results for the last year of the measurement period. Mr. O'Sullivan's awards are comprised of 36,420 shares under the 2017-2019 Plan, 31,820 shares under the 2018-2020 Plan, and 34,727 shares under the 2019-2021 Plan. Mr. Agrawal's awards are comprised of 11,993 shares under the 2017-2019 Plan, 11,377 shares under the 2018-2020 Plan, and 11,048 shares under the 2019-2021 Plan. Mr. Machado's awards are comprised of 9,205 shares under the 2017-2019 Plan, 9,316 shares under the 2018-2020 Plan, and 9,958 shares under the 2019-2021 Plan. |
(3) | Mr. O’Sullivan’s 46,005 service‑based Restricted Stock Units have vested or will vest as follows: 7,753 on February 7, 2020; 8,360 on February 9, 2020; 7,193 on February 16, 2020; 7,752 on February 7, 2021; 7,194 on February 16, 2021; and 7,753 on February 7, 2022. |
(4) | Mr. Agrawal’s 15,475 service‑based Restricted Stock Units have vested or will vest as follows: 2,456 on February 7, 2020; 2,573 on February 8, 2020; 2,961 on February 9, 2020; 2,456 on February 7, 2021; 2,573 on February 8, 2021; and 2,456 on February 7, 2022. |
(5) | Mr. Machado’s 10,713 service‑based Restricted Stock Units have vested or will vest as follows: 1,422 on February 7, 2020; 2,105 on February 8, 2020; 2,235 on February 9, 2020; 1,423 on February 7, 2021; 2,106 on February 8, 2021; and 1,422 on February 7, 2022. |
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2019 Option Exercises and Stock Vested
Option Awards | Stock Awards | |||||||||
Name | Number of Shares Acquired on Exercise (#) | Value Realized on Exercise ($) | Number of Shares Acquired on Vesting (#) | Value Realized on Vesting ($)(1) | ||||||
Kieran M. O’Sullivan | — | — | 105,923 | 3,099,816 | ||||||
Ashish Agrawal | — | — | 34,181 | 994,006 | ||||||
Luis F. Machado | — | — | 29,313 | 852,181 | ||||||
(1) Gross value prior to withholding.
Potential Payments Upon Termination or Change‑in‑Control
Change‑In‑Control Severance Agreements. CTS has entered into change‑in‑control severance agreements with the named executive officers, the form of which is disclosed as Exhibit 10(x) to the Company’s Annual Report on Form 10-K for the year ended December 31, 2011. Under these agreements, a change‑in‑control is defined generally as: (1) the acquisition by any person of 25% or more of CTS’ voting stock, subject to certain exceptions; (2) the incumbent board members ceasing to constitute a majority of the Board; (3) a reorganization, merger, consolidation, or sale of all or substantially all of CTS’ assets, subject to certain exceptions; or (4) the approval by the shareholders of a complete liquidation or dissolution of CTS, subject to certain exceptions.
An eligible named executive officer is entitled to severance compensation if, within three years after a change‑in‑control, the named executive officer terminates his or her employment for good reason or his or her employment is terminated by CTS or its successor for any reason other than cause, disability, or death. Good reason is defined generally as: (1) the failure to maintain the named executive officer in his or her office or position or an equivalent or better office or position; (2) a significant adverse change in the nature of the named executive officer’s duties; (3) a reduction in the named executive officer’s base or incentive pay or an adverse change in any employee benefits; (4) the named executive officer’s good faith determination that, as a result of a change in circumstances following the change‑in‑control, he or she is unable to carry out or has suffered a substantial reduction in the duties he or she had prior to the change‑in‑control; (5) a successor entity’s failure to assume all obligations of CTS under the severance agreement; (6) CTS or its successor moves the named executive officer’s principal work location by more than 35 miles or requires him or her to travel at least 20% more; (7) CTS or its successor commits any material breach of the severance agreement; or (8) CTS’ common stock ceases to be publicly traded or listed on the New York Stock Exchange. Cause is defined generally as a separation from service resulting from the executive: (a) being convicted of a crime involving fraud, embezzlement or theft in connection with work duties or responsibilities; (b) intentionally and wrongfully damaging CTS property; (c) intentionally and wrongfully disclosing CTS’ confidential information; or (d) intentionally and wrongfully competing with CTS without CTS’ consent, subject to certain exceptions.
If the change‑in‑control severance agreement is triggered, the severance compensation to which the named executive officer is entitled includes: (1) a lump sum payment equal to two times the sum of the greater of the executive’s base salary at the time of the change‑in‑control or his average base salary over the three years prior to termination, plus the greater of his average incentive pay over the three years prior to the change‑in‑control and his target incentive pay for the year in which the change‑in‑control occurred; (2) continued availability of medical and dental benefits for 24 months following termination at the executive’s expense, with CTS reimbursing the executive for the portion of the premium in excess of the employee share for such coverage, provided that the obligation to provide these benefits will be reduced to the extent medical and dental benefits are provided by another employer; (3) reimbursement of up to $30,000 for outplacement services; and (4) only in the case of Mr. O’Sullivan, in consideration of the non‑compete provision contained in his severance agreement, a lump sum payment equal to one times the sum of the greater of his base salary at the time of the change‑in‑control or his average base salary over the three years prior to termination plus the greater of his average incentive pay over the three years prior to the change‑in‑control and his target incentive pay for the year in which the change‑in‑control occurred.
In addition, if any payments made to the named executive officer would be subject to excise tax under the “golden parachute” rules of Sections 280G and 4999 of the Internal Revenue Code, those payments will be reduced so that no portion will exceed the “excess parachute payment” threshold that would trigger the excise tax.
The payment scheme is designed to comply with Section 409A of the Code; lump sum payments of severance compensation are generally to be made as soon as practicable but not more than ninety days after the named executive officer separates from service, provided however, that if the named executive officer is a “Specified Employee” within the meaning of Section 409A of the Code, then the payment shall be made on the earlier of the first day of the seventh month following the date of the named executive officer’s separation
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from service or the named executive officer’s death. Payment of severance compensation under the change‑in‑control severance agreement will be reduced to the extent of any corresponding payments under any other agreement.
To the extent that a named executive officer receives severance benefits under the change-in-control severance agreement, the named executive officer may not, for a period of one year following his termination date, participate in the management of any business which engages in substantial and direct competition with CTS or its successor. In addition, for a period of four years after separation from service, the named executive officer may not solicit any corporate employee to leave employment with CTS or any of its subsidiaries, may not hire or engage any person who was employed with CTS or any of its subsidiaries and may not assist any organization with whom the named executive officer is associated in taking such actions. The named executive officer is generally entitled to be reimbursed by CTS for legal fees incurred to enforce his rights under the severance agreement.
Change‑in‑Control Severance Table
Assuming that a change‑in‑control event occurred and (unless otherwise indicated) that the named executive officer was terminated without cause on December 31, 2019, the estimated severance compensation provided to each named executive officer is as follows:
Name | Severance: Base Salary & Incentive Pay ($) | Welfare Benefits Equivalent ($) | Perquisites: Outplacement ($) | Accelerated Vesting & Exercise Rights/Lapse of Restriction On Equity Awards(1) ($) | 280G Reduction ($) | Total ($) | |||||||
Kieran M. O’Sullivan | 5,381,349 | 38,404 | 30,000 | 5,634,650 | 0 | 11,084,403 | |||||||
Ashish Agrawal | 1,372,623 | 33,622 | 30,000 | 1,904,689 | 0 | 3,340,933 | |||||||
Luis F. Machado | 1,146,108 | 35,834 | 30,000 | 1,528,452 | (235,952) | 2,504,411 | |||||||
(1) | Assuming that only a change‑in‑control event occurred on December 31, 2019, in terms of their equity awards, our named executive officers would have received the following value for the "single trigger" acceleration at target of their outstanding time-based Restricted Stock Units, performance-based RSUs and performance options, respectively: Mr. O'Sullivan, $1,380,610, $3,090,040 and $1,164,000; Mr. Agrawal, $464,405, $1,032,884, and $407,400; and Mr. Machado, $321,492, $854,655, and $352,300. |
Executive Severance Policy
As discussed above, to formalize and standardize the Company’s severance practices for officers and key employees, CTS enacted an Executive Severance Policy in 2009. An eligible named executive officer whose employment with the Company is terminated will be eligible for severance benefits under the policy unless the termination is: (1) for cause or resulting from gross or willful misconduct; (2) a resignation, other than a resignation that qualifies as an “involuntary separation from service” within the meaning of Section 409A of the Internal Revenue Code; (3) a layoff or furlough, unless the layoff or furlough is subsequently converted to a termination; (4) due to death or transfer to a disability status; (5) due to retirement, except in the case of the President and Chief Executive Officer; (6) due to inability to return from a medical leave even though unable to meet disability status requirements, unless the cause for the medical leave was covered by worker’s compensation; (7) due to the sale of a CTS facility, division, or operation when the named executive officer has been offered employment in a comparable position by the successor organization as a part of the sale; or (8) due to a change in control and the named executive officer is the beneficiary of a change‑in‑control severance agreement and eligible for payment under that agreement.
There are three levels of severance benefits specified in the Policy: Tier 2; Tier 1; and the President and Chief Executive Officer level. CTS’ President and Chief Executive Officer may recommend, and the Board will designate from time to time, which officers are eligible for Tier 2 and Tier 1 benefit levels. Mr. O’Sullivan is eligible for the President and Chief Executive Officer specified benefit level. Messrs. Agrawal and Machado are eligible for Tier 1 severance benefits.
Under the Policy, an eligible, terminated Tier 2 named executive officer will receive the following severance benefits: (1) severance pay in installments equal to 9 months of his or her base salary in effect immediately prior to termination; (2) for 9 months following the date of the named executive officer’s termination, the continuing availability of the medical and dental benefits (but not long‑term or short‑term disability benefits) that the named executive officer had elected and was eligible to receive as of the date of the
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named executive officer’s termination, with the cost of such coverage to be shared by the Company and the named executive officer on the same basis as in effect prior to the named executive officer’s termination, with the named executive officer required to make monthly premium payments, provided that, if the medical and dental coverage is not or cannot be paid or provided under any policy, plan, program or arrangement by the Company or any subsidiary, then the Company will itself pay or provide for such equivalent coverage to the named executive officer, and his or her dependents and beneficiaries; and (3) reimbursement of an amount up to $15,000 for outplacement services that are obtained until December 31st of the second year following the named executive officer’s termination, from a firm selected by the named executive officer.
Under the Policy, an eligible, terminated Tier 1 named executive officer will receive the following severance benefits: (1) severance pay in installments equal to 12 months of his or her base salary in effect immediately prior to termination; (2) for 12 months following the date of the named executive officer’s termination, the continuing availability of the medical and dental benefits (but not long‑term or short‑term disability benefits) that the named executive officer had elected and was eligible to receive as of the date of the named executive officer’s termination, with the cost of such coverage to be shared by the Company and the named executive officer on the same basis as in effect prior to the named executive officer’s termination, with the named executive officer required to make monthly premium payments, provided that, if the medical and dental coverage is not or cannot be paid or provided under any policy, plan, program or arrangement by the Company or any subsidiary, then the Company will itself pay or provide for such equivalent coverage to the named executive officer, and his or her dependents and beneficiaries; and (3) reimbursement of an amount up to $30,000 for outplacement services that are obtained until December 31 of the second year following the named executive officer’s termination, from a firm selected by the named executive officer.
Also pursuant to the policy, if the President and Chief Executive Officer were to be terminated in an eligible manner, he will receive the following severance benefits: (1) severance pay in installments equal to two times the sum of (a) his base salary in effect at the time of termination of employment, and (b) an amount equal to his target annual incentive compensation for the calendar year ending prior to the date of termination of employment; (2) the continuing availability of medical and dental benefits for a period of 24 months following the date of his termination, otherwise on the same terms as Tier 1 and Tier 2 executives; (3) to the extent permitted by CTS’ equity plans, the vesting of any outstanding unvested service‑based restricted stock units or other equity awards granted to him under CTS’ equity plans will be accelerated and such equity awards will be fully vested as of the date of his termination of employment and payable in accordance with their existing terms; (4) for any outstanding unvested performance‑based restricted stock units, outstanding unvested performance shares, or any other outstanding unvested equity incentive available under any then‑current performance‑based equity program, to the extent permitted by CTS’ equity plans, such awards will become non‑forfeitable as of the date of his termination of employment. At the end of the applicable performance period, CTS shall calculate the degree to which the awards were earned based on actual performance, and then settle any earned awards on a pro‑rata basis, in accordance with the portion of the actual performance period that elapsed prior to his termination, in accordance with the existing terms of such awards; and (5) reimbursement of an amount up to $30,000 for outplacement services that are obtained following his termination, on the same terms as the Tier 1 and Tier 2 executives. In addition, if the President and Chief Executive Officer gives the Board at least 12 months formal notice of his intent to terminate his employment voluntarily due to his retirement and maintains continuous employment through such 12‑month period, upon retirement, he will be entitled to the severance benefits described in sections (2), (3), and (4) of this paragraph.
It is intended that the severance benefits not duplicate substantially similar benefits payable under any change‑in‑control severance agreement. Further, named executive officers shall not be eligible to receive benefits under any other CTS severance policy applicable to exempt salaried employees. In order to receive the severance benefits under the policy, the named executive officer must execute a release of all claims in favor of the Company, its employees, officers and directors within a specified time, must not compete with the Company for a period of 12 months following termination unless the Company consents, and for a period of 12 months following termination must not solicit any employee to leave employment with the Company or any of its subsidiaries, may not hire or engage any person who was employed with CTS or any of its subsidiaries, and may not assist any organization with whom the named executive officer is associated in taking such actions.
Payments are designed to comply with Section 409A of the Internal Revenue Code. In addition, if any payment under the policy would constitute an excess parachute payment within the meaning of Section 280G of the Internal Revenue Code, the payments will be reduced to the minimum extent necessary so that no portion of any payment or benefit will constitute an excess parachute payment, provided however, that the reduction will be made only if and to the extent that such reduction would result in an increase in the aggregate payment and benefits to be provided, determined on an after‑tax basis (taking into account the excise tax imposed pursuant to Section 4999 of the Internal Revenue Code, or any successor provision, or any other tax).
The Board has the right in its sole and absolute discretion to amend the policy or terminate it prospectively, provided that the policy may not be amended by the Board in any manner which is materially adverse to any named executive officer without that named executive officer’s written consent. Notwithstanding the foregoing, the Board may amend the policy at any time to reflect changes required by the Internal Revenue Code and the policy will remain in effect until terminated by the Board.
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The table below shows the estimated severance compensation for each named executive officer, assuming that executive was terminated in a manner making him eligible for severance under the Executive Severance Policy on December 31, 2019.
Executive Severance Policy
Name | Severance ($) | Health and Dental Benefits ($) | Vesting of Stock Options ($) | Vesting of Unvested Time-Based Equity Awards ($) | Vesting and Pro-Rata Settlement of Performance- Based Equity Awards at Target ($) | Outplacement ($) | Total ($) | ||
Kieran M. O'Sullivan | 2,973,656 | 38,404 | 1,164,000 | 1,380,610 | 2,076,962 | 30,000 | 7,663,632 | ||
Ashish Agrawal | 368,750 | 16,811 | — | — | — | 30,000 | 415,561 | ||
Luis F. Machado | 327,283 | 17,917 | — | — | — | 30,000 | 375,200 | ||
CEO Pay Ratio
For the 2019 fiscal year, the ratio of the annual total compensation of Mr. O’Sullivan, our Chief Executive Officer (“CEO Compensation”), to the median of the annual total compensation of all of our employees other than our Chief Executive Officer (“Median Annual Compensation”) was 189 to 1. This ratio is a reasonable estimate calculated in a manner consistent with Item 402(u) of Regulation S-K using the data and assumptions summarized below. In this summary, we refer to the employee who received such Median Annual Compensation as the “Median Employee.” For purposes of this disclosure, the date used to identify the Median Employee remains October 6, 2017 (the “Determination Date”) as there has not been a meaningful change in CTS' employee population or employee compensation arrangements since the Determination Date that we reasonably believe would significantly affect the Pay Ratio disclosure.
As discussed above, Mr. O’Sullivan served as our Chief Executive Officer during the 2019 fiscal year. CEO Compensation for purposes of this disclosure is $2,438,235, which is the total compensation reported for Mr. O’Sullivan in the Fiscal 2019 Summary Compensation table for the 2019 fiscal year.
For purposes of this disclosure, Median Annual Compensation was $12,920 in 2019, and was calculated by totaling for our Median Employee all applicable elements of compensation for the 2019 fiscal year in accordance with Item 402(c)(2)(x) of Regulation S-K.
To identify the Median Employee, we first determined our employee population as of the Determination Date. We had 3,251 employees, representing all full-time, part-time, seasonal and temporary employees of us and our consolidated subsidiaries as of the Determination Date of which 694 were based in the United States. We excluded a total of 95 employees, representing less than 5% of the total, based in small offices in Singapore (20), Japan (12), India (6), Denmark (33), Scotland (22) and Germany (2), yielding a total number of 3,156 employees. We then measured total compensation for the nine-month period ending on the Determination Date, and annualized each result. We did not make any cost-of-living adjustments in calculating compensation for the Median Employee.
As discussed under the Compensation Discussion and Analysis section of this Proxy Statement, CTS sets named executive officer pay based on a number of factors including competitive market analysis and benchmarking against peers, and targets a significant proportion of executive compensation as performance based. The pay ratio and Median Annual Compensation disclosed above reflect that a substantial percentage of CTS’ employees are engaged in manufacturing in “best cost” countries and CTS pays a competitive wage in those locations aimed at attracting and retaining qualified employees using local benchmarks. The pay ratio between disparate locations and functions is not considered a relevant factor and does not inform individual compensation decisions. The pay ratio may vary significantly over time, as a large percentage of the Chief Executive Officer’s compensation is performance based while our Median Employee’s compensation is primarily based on an hourly wage and does not reflect company performance. The assumptions used in the calculation of our estimated pay ratio are specific to our company and our employee population; therefore, our pay ratio may not be comparable to the pay ratios of other companies, including the companies in our compensation peer group.
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2019 Director Compensation
Name | Fees Earned or Paid in Cash ($) | Stock Awards(1) ($) | Total ($) | |||||
Patricia K. Collawn | 80,000 | 122,364 | 202,364 | |||||
Gordon Hunter | 70,000 | 122,364 | 192,364 | |||||
William S. Johnson | 80,000 | 122,364 | 202,364 | |||||
Diana M. Murphy | 70,000 | 122,364 | 192,364 | |||||
Robert A. Profusek | 80,000 | 122,364 | 202,364 | |||||
Alfonso G. Zulueta | 60,000 | 122,364 | 182,364 | |||||
(1) | On November 7, 2019, 4,400 Restricted Stock Units were awarded to each then serving non‑employee director for 2019 service based on an average closing price of CTS common stock of $27.81 per share. The dollar amounts reported in this column represent the grant date fair value of such awards as computed in accordance with FASB ASC Topic 718, equal to the number of units awarded multiplied by the $27.81 closing price of CTS’ common stock on the date of grant. These awards will vest on the first anniversary of the grant date and will be distributed upon vesting absent a deferral election by the director. The non‑employee directors had no other unvested stock option awards outstanding at 2019 fiscal year‑end. |
Director Compensation. Employee directors receive no compensation for serving on the Board or Committees of the Board. Compensation for non-employee directors is determined by the Board based on recommendations by the Compensation Committee. In addition, CTS reimburses non‑employee directors for reasonable travel expenses related to their performance of services and for director education programs. Director compensation is divided into two components: a cash component and a stock‑based component.
Each director is entitled to receive a base annual retainer at the rate of $60,000 in cash. In addition to the base annual retainer, for 2019 service, the Lead Independent Director retainer is $20,000 per year, the Audit Committee Chairman and Compensation Committee Chairman retainer is $20,000 per year each, and the Nominating and Governance Committee and Technology and Transactions Committee Chairmen retainer is $10,000 per year each.
The Board has established an annual stock‑based compensation target for each non‑employee director that may be amended from time to time. The annual stock‑based compensation target for 2019 service was targeted at $120,000 per non‑employee director, with the number of shares rounded to the next hundred. Since 2005, the stock‑based compensation target compensation has been paid with grants of RSUs. The RSUs for 2019 service were granted and vest after one year. The grants provide directors with the opportunity to defer distribution of some or all of the RSUs until separation from service with the Board, a date certain, or a series of dates according to a schedule. Non‑employee directors do not receive dividends or other earnings on deferred RSUs.
CTS does not currently have a retirement plan for non‑employee directors. In 1990, CTS adopted the Stock Retirement Plan for Non‑Employee Directors. Under that plan, a deferred common stock unit account was established for each non‑employee director. Through January 2004, 800 common stock units and additional units representing dividends on CTS common stock paid were credited annually to each non‑employee director’s account. When a non‑employee director retires from the Board, he or she receives one share of CTS common stock for each deferred common stock unit credited to his or her account. On December 1, 2004, the Board amended the plan to terminate the crediting of additional units to the deferred common stock unit accounts. The number of deferred common stock units credited to each director’s account is shown in the Directors’ and Officers’ Stock Ownership table.
PROPOSAL 3: RATIFICATION OF APPOINTMENT OF GRANT THORNTON LLP
AS INDEPENDENT AUDITOR FOR 2020
Grant Thornton LLP has served as CTS’ independent auditor since June 2005 and has been appointed by the Audit Committee to continue as CTS’ independent auditor for 2020. In the event that ratification of the appointment of Grant Thornton LLP as independent auditor for 2020 is not approved by the shareholders at the Annual Meeting, the Board will review the Audit Committee’s future selection of independent auditors.
Representatives of Grant Thornton LLP will be present at the Annual Meeting. The representatives will be available to respond to appropriate questions and will be afforded an opportunity to make such statements as they desire.
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Your Board recommends a vote FOR ratification of the appointment of
Grant Thornton LLP as independent auditor for 2020.
REPORT OF THE AUDIT COMMITTEE
The Audit Committee acts pursuant to its written charter adopted by the Board, a copy of which may be obtained from CTS’ website at http://www.ctscorp.com/wp-content/uploads/ACC.pdf. All members of the Audit Committee are financially literate and independent as defined in the NYSE Corporate Governance Listing Standards.
The Audit Committee has reviewed and discussed with CTS management and Grant Thornton LLP, CTS’ independent auditor, the audited consolidated financial statements of the Company for 2019; has discussed with the independent auditor the matters required to be discussed by the applicable requirements of the Public Company Accounting Oversight Board and the SEC has received from the independent auditor the written disclosures and letter required by applicable requirements of the Public Company Accounting Oversight Board regarding independent auditor’s communications with the Audit Committee concerning independence; and has discussed with the independent auditor its independence. Based on the review and discussions described above, the Audit Committee recommended to the Board that the financial statements be included in CTS’ Annual Report on Form 10‑K for the fiscal year ended December 31, 2019, for filing with the Securities and Exchange Commission.
CTS Corporation 2019 Audit Committee
William S. Johnson, Chairman; Gordon Hunter; and Alfonso G. Zulueta
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Independent Auditor
Grant Thornton LLP has served as CTS’ independent auditor since 2005. Grant Thornton LLP representatives plan to attend the Annual Meeting, make a statement if they desire to do so, and will be available to respond to appropriate questions from shareholders. The following table presents fees for professional audit and other services provided by Grant Thornton LLP to CTS for the years ended December 31, 2019 and December 31, 2018.
Audit Fees | Audit‑Related Fees(1) | Tax Fees(2) | All Other Fees(3) | |
2019 | $1,362,423 | $37,800 | $66,888 | $30,370 |
2018 | $1,511,655 | $37,800 | $20,190 | $24,966 |
(1) Pension Plan and 401(k) Plan audits and transaction due diligence.
(2) Tax compliance fees related to certain of CTS’ subsidiaries.
(3) Environmental agreed upon procedures and foreign social security contribution review, and other non-audit
procedures relating to the 2018 Equity and Incentive Compensation Plan.
The Audit Committee’s policy is to pre‑approve all audit and non‑audit services provided by the independent auditors. The Audit Committee annually reviews audit and non‑audit services proposed to be rendered by Grant Thornton LLP during the fiscal year.
The Audit Committee has delegated authority to (1) the Audit Committee Chairman to grant pre‑approval of services by the independent auditors, provided that the Chairman reports on any such pre‑approval decisions at the next scheduled meeting of the Audit Committee, and (2) the Company to grant pre-approval of services by the independent auditors in an aggregate amount not to exceed $50,000 in one year, provided that the Company reports any such pre-approval decisions at the next scheduled meeting of the Audit Committee. All of the services rendered by Grant Thornton LLP were approved by the Audit Committee or were rendered pursuant to the de minimis exception established under the rules of the Securities and Exchange Commission.
PROPOSAL 4: APPROVAL OF AMENDMENTS TO THE CTS ARTICLES OF INCORPORATION PRINCIPALLY TO ALLOW SHAREHOLDERS TO AMEND CTS' BY-LAWS
We are seeking approval of Amended and Restated Articles of Incorporation. The principal amendment to the Amended and Restated Articles of Incorporation will provide shareholders the right to amend our By-Laws. The other amendments are purely ministerial changes or corrections. The proposed Amended and Restated Articles of Incorporation are attached as Exhibit A (the “Proposed Articles”). Indiana law provides that, unless otherwise specified by the articles of incorporation, only a corporation's board of directors may amend or repeal the by-laws. The CTS Articles of Incorporation are currently silent as to amendment of the By-laws, defaulting to the Indiana Law provision. The Proposed Articles add Article XII, which allows a majority of the holders of the outstanding shares of common stock of the Company to amend, alter, repeal, or add to the By-Laws, in addition to the Board's power to do so. In addition to the foregoing, we have made a few ministerial changes and corrections to update the Registered and Principal Office locations of the Company and to add or correct internal references.
Our Board is committed to good corporate governance and has carefully considered the advantages and disadvantages of adopting the Proposed Articles to allow shareholders to unilaterally amend the By-Laws. The By-Laws establish a number of fundamental corporate governance principles, including rules for meetings of directors and shareholders and the election and duties of directors and officers, among other provisions. In the past, the Board believed that the default position under Indiana law provided an effective means for the Board to ensure that any amendments to the By-Laws were prudent and designed to protect and maximize long-term value for shareholders. More recently, and in light of the fact that the many publicly traded companies provide shareholders with the right to amend the by-laws, the Nominating and Governance Committee considered the various positions for and against allowing shareholders to amend the By-Laws. After careful deliberation, and upon the recommendation of the Nominating and Governance Committee, the Board unanimously approved the Proposed Articles, subject to shareholder approval. The Board believes that the Proposed Articles will enhance CTS’ governance practices by giving shareholders a say in important governance principles.
This general description of the Proposed Articles is qualified in its entirety by reference to the text of the Proposed Articles, which is set forth in its entirety in Exhibit A to this Proxy Statement and is marked to reflect the changes contemplated by this Proposal 4. If the Proposed Articles are approved by the shareholders, we will file the approved Amended and Restated Articles of Incorporation with the Indiana Secretary of State shortly following the 2020 Annual Meeting. The Amended and Restated Articles of Incorporation will become effective upon the acceptance of the filing by the Secretary of State of Indiana. If the Proposed Articles are not approved, the
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CTS Amended and Restated Articles of Incorporation will remain unchanged and the Board will retain the exclusive authority to amend the By-Laws.
Your Board recommends a vote FOR the approval of the amendments to the CTS
Articles of Incorporation principally to allow
shareholders to amend CTS' By-Laws.
2019 ANNUAL REPORT ON FORM 10‑K
Upon receipt of the written request of a shareholder owning shares of CTS common stock on the Record Date addressed to the Corporate Secretary of CTS Corporation, 4925 Indiana Avenue, Lisle, Illinois 60532, CTS will provide to such shareholder, without charge, a copy of its 2019 Annual Report on Form 10‑ K, including the financial statements and financial statement schedule. You may also call investor relations at (630) 577‑8800, email at shareholder.services@ctscorp.com, or obtain the report on CTS’ website at http://www.ctscorp.com.
Important Notice Regarding the Availability of Proxy Materials for
the 2020 Annual Meeting of Shareholders to be held on May 14, 2020.
This proxy statement, along with our Annual Report on Form 10‑K for the fiscal year ended December 31, 2019, are available free of charge on the Investor Relations section of our website at http://www.ctscorp.com/investors.
By Order of the Board of Directors, | |
| |
Luis F. Machado Corporate Secretary | |
Lisle, Illinois
April 2, 2020
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FREQUENTLY ASKED QUESTIONS ABOUT THE |
2020 ANNUAL MEETING OF SHAREHOLDERS AND VOTING |
The following is important information in a question‑and‑answer format regarding the Annual Meeting and voting.
Q: | Upon what may I vote? |
A: | (1) Election of director nominees to serve on the Board; |
(2) | Approval, on an advisory basis, of the compensation of CTS’ named executive officers; |
(3) | Ratification of the appointment of Grant Thornton LLP as CTS’ independent auditor for 2020; and |
(4) | Approval of amendments to the Articles of Incorporation principally to allow shareholders to amend CTS' By-Laws. |
Q: | How does the Board recommend that I vote? |
A: | The Board recommends that you vote: |
(1) | FOR each of the director nominees identified in this proxy statement; |
(2) | FOR advisory approval of CTS’ named executive officer compensation; |
(3) | FOR ratification of the appointment of Grant Thornton LLP as CTS’ independent auditor for 2020; and |
(4) | FOR approval of amendments to the CTS Articles of Incorporation principally to allow shareholders to amend CTS' By-Laws. |
Q: | How will voting on any other business be conducted? |
A: | We are not aware of any other business to be brought before the shareholders at the Annual Meeting. However, if any other business is properly presented for shareholder consideration, your signed proxy card gives authority to Kieran O’Sullivan, Chairman, President and Chief Executive Officer, and Luis F. Machado, Vice President, General Counsel and Corporate Secretary, to vote on those matters at their discretion. |
Q: | How many votes are needed for approval of each proposal presented in this proxy statement? |
A: | Assuming that at least a majority of the shares of CTS common stock are represented at the Annual Meeting, either in person or by proxy: |
(1) | The seven director nominees receiving the most votes will be elected. Only votes cast for a nominee will have an impact on the election of directors. Abstentions, broker non‑votes and instructions on your proxy to withhold authority to vote for one or more of the nominees will have no impact as they will only result in those nominees receiving fewer votes; |
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(2) | An affirmative vote of a majority of votes cast is necessary to approve, on an advisory basis, the compensation of CTS’ named executive officers, although such vote will not be binding on CTS. Abstentions and broker non‑votes will have no impact on the outcome of this proposal; |
(3) | The Audit Committee’s appointment of Grant Thornton LLP as CTS’ independent auditor for 2020 will be ratified if a majority of the votes cast support the appointment. Your broker or other nominee will be able to vote your shares with respect to this proposal without your instructions because the proposal to ratify the appointment of Grant Thornton LLP is considered “routine.” Abstentions will have no impact on the outcome of this proposal; and |
(4) | The amendments to the Articles of Incorporation will be approved if a majority of the votes are cast in support of the amendments. Abstentions and broker non-votes will have no impact on the outcome of this proposal. |
Q: | Who is entitled to vote? |
A: | Shareholders of record at the close of business on March 16, 2020, which is referred to in this proxy statement as the Record Date, are entitled to vote at the Annual Meeting. As of close of business on the Record Date, there were 32,455,711 shares of CTS common stock issued and outstanding. Every shareholder is entitled to one vote for each share of CTS common stock held on the Record Date. |
Q: | How do I vote? |
A: | Please follow the instructions on your Notice of Internet Availability of Proxy Materials to vote online or by telephone up until 11:59 p.m. Eastern Time on May 13, 2020. Of course, you may always vote in person at the meeting. You may revoke your proxy at any time before it is exercised by giving us written notice, sent to our principal executive offices, by submitting a duly executed proxy card to us bearing a later date, or by giving notice to us at the Annual Meeting. |
Q: | How can I vote shares of CTS common stock that I hold under the CTS Corporation Retirement Savings Plan? |
A: | The CTS Corporation Retirement Savings Plan is CTS’ 401(k) plan. Vanguard Fiduciary Trust Company ("Vanguard"), the plan trustee, will vote the shares of CTS common stock in your account according to your instructions. You may use the proxy card provided or go online at www.proxyvote.com to instruct Vanguard. You must provide instructions or make changes to your instructions on how to vote shares of CTS common stock in your CTS Corporation Retirement Savings Plan on or before 11:59 p.m. Eastern Time on May 12, 2020. After that time, your instructions will be transmitted to the plan trustee and cannot be changed. If Vanguard does not receive your instructions to vote your shares of CTS common stock, they will not be voted. |
Q: | Who is entitled to attend the Annual Meeting? |
A: | Attendance at the Annual Meeting will be limited to our shareholders as of the Record Date and to pre‑approved guests of CTS. All shareholder guests must be pre‑approved by CTS and will be limited to spouses, persons required for medical assistance and properly authorized representatives of our shareholders as of the Record Date. Additionally, if you are not the record holder of your shares, to attend the Annual Meeting you must first obtain a legal proxy form from your broker or other organization that holds your shares. Please contact your broker or organization for instructions regarding obtaining a legal proxy. If you do obtain a legal proxy and plan to attend the Annual Meeting, you will be required to present a valid form of identification. |
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Below is a map reflecting the location of CTS’ Annual Meeting.
Q: | Who solicits proxies on behalf of the Board and how much will this proxy solicitation cost? |
A: | Broadridge, Inc. distributes proxy materials on CTS’ behalf and is compensated by CTS for mailing and distribution expenses. Proxies may also be solicited by executive officers of CTS, for which no additional compensation is paid. |
Q: | How can I receive paper or email copies of the proxy materials? |
A: | Shareholders wishing to receive paper or email copies of the proxy materials for the Annual Meeting and for future annual meetings of shareholders may request to receive proxy materials in printed form by mail, or electronically by email, by directing written or oral requests to CTS Corporation, Corporate Secretary, 4925 Indiana Avenue, Lisle, Illinois 60532, by calling (630) 577‑8800 and leaving a message for our Corporate Secretary, by sending an email to shareholder.services@ctscorp.com by May 1, 2020, or by following the directions on your proxy card. |
Q: | How may a shareholder nominate a candidate for election to the Board? |
A: | Director nominees for the 2021 Annual Meeting of Shareholders may be nominated by shareholders by sending a written notice to the corporate office to the attention of the Corporate Secretary for CTS. Pursuant to the CTS Corporation Bylaws, all nominations must be received no earlier than January 1, 2021, and no later than February 5, 2021. The notice of nomination is required to contain certain representations and information about the nominee, which are described in CTS’ Bylaws. Copies of the Bylaws may be obtained free of charge from CTS’ Corporate Secretary, or from CTS’ website at http://www.ctscorp.com/wp-content/uploads/BL.pdf. |
Q: | When are shareholder proposals for the 2021 Annual Meeting of Shareholders due? |
A: | CTS’ advance notice Bylaw provisions require that in order to be presented at the 2021 Annual Meeting of Shareholders, any shareholder proposal, including the nomination of a candidate for director, must be in writing and mailed to the corporate office to the attention of the Corporate Secretary for CTS, and must be received no earlier than January 1, 2021 and no later than February 5, 2021. Certain information is required to be included with shareholder proposals, which is described in CTS’ Bylaws. Copies of the Bylaws may be obtained free of charge from CTS’ Corporate Secretary, or from CTS’ website at http://www.ctscorp.com/wp-content/uploads/BL.pdf. To be included in our proxy materials relating to the 2021 Annual Meeting of Shareholders proposals must be received by us on or before December 3, 2020, (or, if the date of the 2021 Annual Meeting of Shareholders is more than 30 days before or after the date of the 2020 Annual Meeting of Shareholders, a reasonable time before we begin to print and send our proxy materials). |
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PROPOSALS UPON WHICH YOU MAY VOTE | |
PROPOSAL 1 | ELECTION OF DIRECTORS; |
PROPOSAL 2 | APPROVAL, ON AN ADVISORY BASIS, OF THE COMPENSATION OF CTS’ NAMED EXECUTIVE OFFICERS; |
PROPOSAL 3 | RATIFICATION OF THE APPOINTMENT OF GRANT THORNTON LLP AS CTS’ INDEPENDENT AUDITOR FOR 2020; AND |
PROPOSAL 4 | APPROVAL OF AMENDMENTS TO THE CTS ARTICLES OF INCORPORATION PRINCIPALLY TO ALLOW SHAREHOLDERS TO AMEND CTS' BY-LAWS |
Your Board recommends a vote FOR the director nominees, FOR advisory approval of CTS’ named executive officer compensation, FOR the ratification of the appointment of Grant Thornton LLP, and FOR the Amendments to the CTS Articles of Incorporation. | |
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EXHIBIT A
Amended and Restated
ARTICLES OF INCORPORATION
OF
CTS CORPORATION
ARTICLE I.
Name
The name of the corporation is CTS Corporation (the "Corporation").
ARTICLE II.
Purposes
The purpose for which the Corporation is formed is to engage in any lawful business or activity for which corporations may be organized under the Indiana Business Corporation Law, as amended (the "IBCL").
ARTICLE III.
Term of Existence
The period during which the Corporation shall continue is perpetually.
ARTICLE IV.
Registered Office and Agent; Principal Office
The street address of the Corporation’s registered office at the time of adoption of these Articles of Incorporation is 1657 Commerce Drive #9B, South Bend, Indiana 46628, and the name of its registered agent at such office at the time of adoption of these Articles of Incorporation is Corporate Creations Network Inc. The post-office address of the principal office of the Corporation is 905 West Blvd. North, Elkhart, Indiana; and the name and post-office address of its Resident Agent in charge of such office is Jeannine M. Davis, 3819 Augusta Lane, Elkhart, Indiana4975 Indiana Avenue, Lisle, Illinois 60532, or such other place as shall be determined by resolution of the Board of Directors.
ARTICLE V.
Amount of Capital Stock
The Corporation is authorized to issue two classes of capital stock, designated Common Stock and Preferred Stock. The total number of shares of capital stock that the Corporation is authorized to issue is 100,000,000 shares, consisting of 75,000,000 shares of Common Stock, without par value, and 25,000,000 shares of Preferred Stock, without par value.
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ARTICLE VI.
Terms of Capital Stock
(a) Preferred Stock. The Preferred Stock may be issued in one or more series. The Board of Directors of the Corporation is authorized to fix the designations, powers, preferences, rights, qualifications, limitations or restrictions of each such series by the adoption and filing in accordance with the Indiana Business Corporation Law, before the issuance of any Preferred Shares of such series, of an amendment or amendments to these Articles of Incorporation determining the terms of such series (an "Article IVVI Amendment"). The authority of the Board of Directors with respect to each such series will include, without limiting the generality of the foregoing, the determination of any or all of the following:
(i) the number of shares of any series and the designation to distinguish the shares of such series from the shares of all other series;
(ii) the voting powers, if any, and whether such voting powers are full or limited in such series;
(iii) the redemption provisions, if any, applicable to such series, including the redemption price or prices to be paid;
(iv) whether dividends, if any, will be cumulative or noncumulative, the dividend rate of such series and the dates and preferences of dividends on such series;
(v) the rights of such series upon the voluntary or involuntary dissolution of, or upon any distribution of the assets of, the Corporation;
(vi) the provisions, if any, pursuant to which the shares of such series are convertible into, or exchangeable for, shares of any other class or classes or of any other series of the same or any other class or classes of stock, or any other security, of the Corporation or any other corporation or other entity and the rates or other determinants of conversion or exchange applicable thereto;
(vii) the right, if any, to subscribe for or to purchase any securities of the Corporation or any other corporation or other entity;
(viii) the provisions, if any, of a sinking fund for such series; and
(vixix) any other relative, participating, optional or other special powers, preferences or rights and qualifications, limitations or restrictions thereof;
all as may be determined from time to time by the Board of Directors and stated or expressed in the Article IVVI Amendment for such shares of Preferred Stock (collectively, a "Preferred Stock Designation").
(a-1) SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
Section 1. There is established hereby a series of Serial Preferred Stock that shall be designated Series A Junior Participating Preferred Stock (hereinafter sometimes called this "Series" or the "Series A Junior Participating Preferred Shares") and that shall have the terms set forth in this paragraph (a‑1).
Section 2. The number of shares of this Series shall be 750,000.
Section 3. (a) The holders of record of Series A Junior Participating Preferred Shares shall be entitled to receive, when and as declared by the Directors in accordance with the terms hereof, out of funds legally available for the purpose, cumulative quarterly dividends payable in cash on the first day of January, April, July and October in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a Series A Junior Participating Preferred Share or fraction of a Series A Junior Participating Preferred Share in an amount per share (rounded to the nearest cent) equal to the greater of (i) $1.00 per share or (ii) subject to the provision for adjustment hereinafter set forth, 100 times the aggregate per share amount of all cash dividends, and 100 times the aggregate per share amount (payable in kind) of all non‑cash dividends or other distributions (other than a dividend payable in shares or Common Stock, or a subdivision of the outstanding Common Stock (by reclassification or otherwise)), declared on the Common Stock since the immediately preceding Quarterly Dividend Payment Date, or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any Series A Junior Participating Preferred Share or fraction of a Series A Junior Participating Preferred Share. In the event the Company shall at any time declare or pay any dividend on
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the Common Stock payable in Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the amount to which holders of Series A Junior Participating Preferred Shares were entitled immediately prior to such event under clause (ii) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event.
(b) Dividends shall begin to accrue and be cumulative on outstanding Series A Junior Participating Preferred Shares from the Quarterly Dividend Payment Date next preceding the date of issue of such Series A Junior Participating Preferred Shares, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issues is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Series A Junior Participating Preferred Shares entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. No dividends shall be paid upon or declared and set apart for any Series A Junior Participating Preferred Shares for any dividend period unless at the same time a dividend for the same dividend period, ratably in proportion to the respective annual dividend rates fixed therefor, shall be paid upon or declared and set apart for all Serial Preferred Stock of all series then outstanding and entitled to receive such dividend. The Directors may fix a record date for the determination of holders of Series A Junior Participating Preferred Shares entitled to receive payment of a dividend or distribution declared thereon, which record date shall be no more than 40 days prior to the date fixed for the payment thereof.
Section 4. The Series A Junior Participating Preferred Shares are not redeemable.
Section 5. (a) In the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company (hereinafter referred to as a "Liquidation"), no distribution shall be made to the holders of shares of stock ranking junior (either as to dividends or upon Liquidation) to the Series A Junior Participating Preferred Shares, unless, prior thereto, the holders of Series A Junior Participating Preferred Shares shall have received at least an amount per share equal to one hundred times the then applicable Purchase Price as defined in the Rights Agreement, as the same may be from time to time amended in accordance with its terms (which Purchase Price is $125.00 (one hundred twenty five dollars) as of August 28, 1998), subject to adjustment from time to time as provided in the Rights Agreement, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not earned or declared, to the date of such payment, provided that the holders of shares of Series A Junior Participating Preferred Shares shall be entitled to receive at least an aggregate amount per share, subject to the provision for adjustment hereinafter set forth, equal to 100 times the aggregate amount to be distributed per share to holders of Common Stock (the "Series A Junior Participating Preferred Shares Liquidation Preference").
(b) In the event, however, that the net assets of the Company are not sufficient to pay in full the amount of the Series A Junior Participating Preferred Shares Liquidation Preference and the liquidation preferences of all other series of Serial Preferred Stock, if any, which rank on a parity with the Series A Junior Participating Preferred Shares as to distribution of assets in Liquidation, all shares of this Series and of such other series of Serial Preferred Stock shall share ratably in the distribution of assets (or proceeds thereof) in Liquidation in proportion to the full amounts to which they are respectively entitled.
(c) In the event the Company shall at any time declare or pay any dividend on the Common Stock payable in consolidation of the outstanding Common Stock (by reclassification or otherwise than by payment of a dividend in Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the amount to which holders of Series A Junior Participating Preferred Shares were entitled immediately prior to such event pursuant to the proviso set forth in paragraph (a) above, shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event.
(d) The merger or consolidation of the Company into or with any other corporation, or the merger of any other corporation into it, or the sale, lease or conveyance of all or substantially all the property or business of the Company, shall not be deemed to be a Liquidation for the purpose of this Section 5.
Section 6. The Series A Junior Participating Preferred Shares shall not be convertible into Common Stock.
(b) Preemptive Rights. Except as may be specified in a Preferred Stock Designation, no holder of any share or shares of any class of stock of the Corporation shall have any preemptive right to subscribe for any shares of stock of any class of the Corporation now or hereafter authorized or for any securities, warrants or options convertible into or carrying any rights to purchase any shares of stock of any class of the Corporation now or hereafter authorized, provided, however, that no provision of these Articles of Incorporation shall be deemed to deny to the Board of Directors the right, in its discretion, to grant to the holders of shares of any class of stock at the time
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outstanding the right to purchase or subscribe for shares of stock of any class or any other securities of the Corporation now or hereafter authorized, at such prices and upon such other terms and conditions as the Board of Directors, in its discretion, may fix.
ARTICLE VII.
Voting Rights of Capital Stock
Subject to the rights, if any, of the holders of any series of Preferred Stock to vote under circumstances specified in a Preferred Stock designation, the holders of the Common Stock, without par value, shall be entitled to vote at all meetings of the shareholders and shall be entitled to cast one vote for each share of stock held by them respectively and standing in their respective names on the books of the Corporation.
ARTICLE VIII.
Data Respecting Directors
Section 1. Number. Subject to the rights, if any, of the holders of any series of Preferred Stock to elect additional directors of the Board of Directors under circumstances specified in a Preferred Stock Designation, the number of the directors of the Corporation will not be less than three nor more than fifteen and will be fixed from time to time in the manner provided in the Bylaws of the Corporation (the “Bylaws”).
Section 2. Qualifications. Directors need not be shareholders of the Corporation. A majority of the Directors at any time shall be citizens of the United States.
ARTICLE IX.
Provisions for Regulation of Business
and Conduct of Affairs of Corporation
(a)Section 1. Issuance of Shares. The Board of Directors is hereby authorized to direct the issuance by the Corporation of shares of Common Stock and Preferred Stock at such times, in such amounts, to such persons, for such consideration and upon such terms and conditions as it may, from time to time, determine, subject only to the restrictions, limitations, conditions and requirements imposed by the Indiana Business Corporation Law, other applicable laws and these Articles of Incorporation.
(b)Section 2. Conduct of Business. The Corporation shall have power to carry on and conduct its said business, or any part thereof, and to have one or more officers in the State of Indiana, and in the various other states, territories, colonies and dependencies of the United States, in the District of Columbia, and in all or any foreign countries;.
(c)Section 3. Amendments to Law. The Corporation reserves the right to take advantage of the provisions of any amendment to The Indiana Business Corporation Law, or of any new law applicable or relating to corporations formed, organized under, or which have accepted the provisions of, the law now in force, which may hereafter be enacted, and all rights granted to, and conferred on, the shareholders of the Corporation, are granted and conferred, subject to this reservation;.
(d) Section 4. Place of Shareholders Meetings. Annual or special meetings of the shareholders of the Corporation may be held at the place, either within or without the State of Indiana, which may be stated in the notice of said meeting;.
(e) Section 5. Amended and Restated Articles of Incorporation. These Amended and Restated Articles of Incorporation shall amend and supersede and take the place of all heretofore existing Articles of Incorporation or Articles of Acceptance (and amendments thereto) of the Corporation.
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ARTICLE X.
Liability
To the fullest extent permitted by applicable law as then in effect, no director or officer shall be personally liable to the Corporation or any of its shareholders for damages for breach of fiduciary duty as a director or officer, except for liability (a) for breach of duty if such breach constitutes willful misconduct or recklessness or (b) for the payment of distributions to shareholders in violation of Section 23-1-28-3 of the Indiana Business Corporation Law. Any amendment or repeal of, or adoption of any provision inconsistent with, this Article X will not adversely affect any right or protection existing hereunder, or arising out of facts occurring, prior to such amendment, repeal or adoption and no such amendment, repeal or adoption will affect the legality, validity or enforceability of any contract entered into or right granted prior to the effective date of such amendment, repeal or adoption.
ARTICLE XI.
Indemnification
Each person who was or is involved in any manner (including without limitation as a party or a witness), or is threatened to be made so involved, in any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative and whether formal or informal, by reason of the fact that such person is or was a director or officer of the Corporation, or who is or was serving at the request of the Board of Directors as a director, officer, partner, trustee, employee or agent of another corporation or a partnership, joint venture, trust, employee benefit plan or other entity, whether for profit or not for profit, whether or not the basis of such proceeding is alleged action in an official capacity while serving as a director, officer, employee or agent, will be indemnified by the Corporation to the fullest extent to which it is empowered to do so by the Indiana Business Corporation Law, or any other applicable laws, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than such law permitted the Corporation to provide prior to such amendment) against all expense, liability and loss (including attorneys' fees and expenses, judgments, settlements, penalties, fines, and excise taxes assessed with respect to employee benefit plans) actually and reasonably incurred or suffered by such person in connection therewith. The right of indemnification provided in this Article XI (a) will not be exclusive of any other rights to which any person seeking indemnification may otherwise be entitled, including without limitation pursuant to any contract approved by a majority of the Board of Directors (whether or not the directors approving such contract are or are to be parties to such contract or similar contracts), and (b) will be applicable to matters otherwise within its scope (with each reference in the first sentence of this Article XI to "the Corporation" being deemed for purposes of this sentence to include any domestic or foreign predecessor entity of the Corporation in a merger or other transaction in which the predecessor's existence ceased upon consummation of the transaction) whether or not such matters arose or arise before or after the adoption of this Article XI. Without limiting the generality or the effect of the foregoing, the Corporation may adopt Bylaws, or enter into one or more agreements with any person, which provide for indemnification greater or different than that provided in this Article XI or the Indiana Business Corporation Law. Any amendment or repeal of, or adoption of any provision inconsistent with, this Article XI will not adversely affect any right or protection existing hereunder, or arising out of facts occurring, prior to such amendment, repeal or adoption and no such amendment, repeal or adoption will affect the legality, validity or enforceability of any contract entered into or right granted prior to the effective date of such amendment, repeal or adoption.
ARTICLE XII.
Amendments
Section 1. Amendment of Bylaws. Except as otherwise expressly provided in these Articles of Incorporation or the Indiana Business Corporation Law, the Bylaws of the Corporation may be amended, altered, repealed, or added to at (a) any annual or regular meeting of the directors, or at any special meeting thereof; or (b) at any annual or special meeting of the shareholders by the affirmative vote of the holders of at least a majority of the then-outstanding shares of Common Stock of the Corporation.
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