Cts Corp 10-Q for FY2024 Q3
Cts Corp (CTS)
About this 10-Q
Cts Corp filed this 10-Q on October 29, 2024, covering the quarter ended September 30, 2024 (FY2024 Q3).
Headline figures
Quarter ended September 30, 2024, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $132.42M
- down 1.6% from $134.55M a year earlier
- Net income
- $18.68M
- up 33.7% from net income of $13.97M a year earlier
- Diluted EPS
- $0.61
- up 38.6% from $0.44 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For The Quarterly Period Ended
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period from to
Commission File Number:
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of incorporation or organization) |
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(IRS Employer Identification Number) |
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(Address of principal executive offices) |
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(Zip Code) |
Registrant’s telephone number, including area code: (
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class |
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Trading Symbol(s) |
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Name of Each Exchange on Which Registered |
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Accelerated filer |
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Non-accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13 (a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of October 22, 2024:
CTS CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
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Item 1. |
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3 |
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Condensed Consolidated Balance Sheets As of September 30, 2024 (Unaudited) and December 31, 2023 |
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Notes to Condensed Consolidated Financial Statements ‑ (Unaudited) |
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Item 2. |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. |
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Item 4. |
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35 |
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Item 1. |
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Item 1A. |
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Item 2. |
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Item 5. |
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Item 6. |
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38 |
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2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CTS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS - UNAUDITED
(In thousands, except per share amounts)
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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September 30, |
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September 30, |
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2024 |
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2023 |
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2024 |
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2023 |
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Net sales |
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$ |
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$ |
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$ |
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Cost of goods sold |
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Gross margin |
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Selling, general and administrative expenses |
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Research and development expenses |
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Restructuring charges |
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Operating earnings |
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Other income (expense): |
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Interest expense |
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Interest income |
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Other income (expense), net |
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Total other income (expense), net |
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Earnings before income taxes |
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Income tax expense |
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Net earnings |
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$ |
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$ |
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$ |
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Earnings per share: |
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Basic |
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$ |
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$ |
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Diluted |
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$ |
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Basic weighted – average common shares outstanding: |
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Effect of dilutive securities |
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Diluted weighted – average common shares outstanding: |
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Cash dividends declared per share |
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$ |
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$ |
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$ |
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$ |
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See notes to unaudited condensed consolidated financial statements.
3
CTS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS ‑ UNAUDITED
(In thousands)
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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September 30, |
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September 30, |
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2024 |
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2023 |
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2024 |
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2023 |
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Net earnings |
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$ |
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$ |
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$ |
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$ |
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Other comprehensive earnings (loss): |
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Changes in fair market value of derivatives, net of tax |
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Changes in unrealized pension cost, net of tax |
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Cumulative translation adjustment, net of tax |
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Other comprehensive earnings (loss) |
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$ |
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$ |
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$ |
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$ |
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Comprehensive earnings |
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$ |
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$ |
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$ |
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$ |
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See notes to unaudited condensed consolidated financial statements.
4
CTS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
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(Unaudited) |
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September 30, |
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December 31, |
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2024 |
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2023 |
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ASSETS |
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Current Assets |
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Cash and cash equivalents |
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$ |
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$ |
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Accounts receivable, net |
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Inventories, net |
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Other current assets |
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Total current assets |
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Property, plant and equipment, net |
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Operating lease assets, net |
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Other Assets |
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Goodwill |
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Other intangible assets, net |
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Deferred income taxes |
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Other |
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Total other assets |
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Total Assets |
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$ |
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$ |
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LIABILITIES AND SHAREHOLDERS’ EQUITY |
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Current Liabilities |
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Accounts payable |
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$ |
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$ |
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Operating lease obligations |
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Accrued payroll and benefits |
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Accrued expenses and other liabilities |
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Total current liabilities |
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Long-term debt |
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Long-term operating lease obligations |
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Long-term pension obligations |
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Deferred income taxes |
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Other long-term obligations |
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Total Liabilities |
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Shareholders’ Equity |
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Common stock |
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Additional contributed capital |
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Retained earnings |
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Accumulated other comprehensive income (loss) |
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Total shareholders’ equity before treasury stock |
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Treasury stock |
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Total shareholders’ equity |
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Total Liabilities and Shareholders’ Equity |
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$ |
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$ |
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See notes to unaudited condensed consolidated financial statements.
5
CTS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS ‑ UNAUDITED
(In thousands)
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Nine Months Ended |
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September 30, |
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September 30, |
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2024 |
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2023 |
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CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net earnings |
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$ |
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$ |
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Adjustments to reconcile net earnings to net cash provided by operating |
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Depreciation and amortization |
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Pension and other post-retirement plan expense |
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Stock-based compensation |
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Asset impairment charges |
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Deferred income taxes |
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Change in fair value of contingent consideration liability |
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(Loss) gain on foreign currency hedges, net of cash |
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Changes in assets and liabilities, net of acquisitions: |
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Accounts receivable |
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Inventories |
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Operating lease assets |
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Other assets |
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( |
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Accounts payable |
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( |
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( |
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Accrued payroll and benefits |
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Operating lease liabilities |
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Accrued expenses and other liabilities |
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( |
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Pension and other post-retirement plans |
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( |
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Net cash provided by operating activities |
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Capital expenditures |
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Payments for acquisitions, net of cash acquired |
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Net cash used in investing activities |
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CASH FLOWS FROM FINANCING ACTIVITIES: |
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Payments of long-term debt |
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Proceeds from borrowings of long-term debt |
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Purchases of treasury stock |
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( |
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Dividends paid |
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( |
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( |
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Payment of contingent consideration |
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( |
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Taxes paid on behalf of equity award participants |
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( |
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Net cash used in financing activities |
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( |
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( |
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Effect of exchange rate changes on cash and cash equivalents |
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( |
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Net (decrease) increase in cash and cash equivalents |
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Cash and cash equivalents at beginning of period |
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Cash and cash equivalents at end of period |
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$ |
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$ |
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Supplemental cash flow information: |
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Cash paid for interest |
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$ |
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$ |
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Cash paid for income taxes, net |
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$ |
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$ |
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Non-cash financing and investing activities: |
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Capital expenditures incurred but not paid |
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$ |
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$ |
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Excise taxes on purchase of treasury stock incurred not paid |
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$ |
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$ |
— |
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See notes to unaudited condensed consolidated financial statements.
6
CTS CORPORATION AND SUBSIDIARIES
(in thousands, except shares and per share amounts)
The following summarizes the changes in total equity for the three and nine months ended September 30, 2024:
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Common |
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Additional |
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Retained |
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Accumulated |
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Treasury |
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Total |
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Balances at December 31, 2023 |
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$ |
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$ |
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$ |
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$ |
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$ |
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$ |
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Net earnings |
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— |
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— |
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— |
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— |
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Changes in fair market value of derivatives, net of tax |
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— |
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— |
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— |
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— |
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Changes in unrealized pension cost, net of tax |
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— |
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— |
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— |
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— |
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Cumulative translation adjustment, net of tax |
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— |
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— |
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— |
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( |
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— |
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( |
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Cash dividends of $ |
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— |
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— |
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( |
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— |
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— |
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( |
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Acquired |
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— |
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— |
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— |
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— |
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( |
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( |
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Issued shares on vesting of restricted stock units |
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( |
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— |
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— |
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— |
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( |
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Stock compensation |
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— |
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— |
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— |
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— |
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Balances at March 31, 2024 |
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$ |
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$ |
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$ |
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$ |
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$ |
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$ |
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Net earnings |
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— |
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— |
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— |
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— |
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Changes in fair market value of derivatives, net of tax |
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— |
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— |
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— |
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( |
) |
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— |
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( |
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Changes in unrealized pension cost, net of tax |
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— |
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— |
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— |
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— |
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Cumulative translation adjustment, net of tax |
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— |
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— |
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— |
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( |
) |
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— |
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( |
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Cash dividends of $ |
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— |
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— |
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( |
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— |
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— |
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( |
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Acquired |
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— |
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— |
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— |
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— |
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( |
) |
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( |
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Issued shares on vesting of restricted stock units |
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( |
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— |
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— |
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— |
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( |
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Stock compensation |
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— |
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— |
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— |
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— |
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|
||
Balances at June 30, 2024 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||||
Net earnings |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Changes in fair market value of derivatives, net of tax |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Changes in unrealized pension cost, net of tax |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Cumulative translation adjustment, net of tax |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Cash dividends of $ |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
Acquired |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Issued shares on vesting of restricted stock units |
|
|
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
Stock compensation |
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Balances at September 30, 2024 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||||
See notes to unaudited condensed consolidated financial statements.
7
CTS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - UNAUDITED
(in thousands, except shares and per share amounts)
The following summarizes the changes in total equity for the three and nine months ended September 30, 2023:
|
|
Common |
|
|
Additional |
|
|
Retained |
|
|
Accumulated |
|
|
Treasury |
|
|
Total |
|
||||||
Balances at December 31, 2022 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
||||
Net earnings |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Changes in fair market value of derivatives, net of tax |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Changes in unrealized pension cost, net of tax |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Cumulative translation adjustment, net of tax |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Cash dividends of $ |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
Acquired |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Issued shares on vesting of restricted stock units |
|
|
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
Stock compensation |
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Balances at March 31, 2023 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||||
Net earnings |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Changes in fair market value of derivatives, net of tax |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Changes in unrealized pension cost, net of tax |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Cumulative translation adjustment, net of tax |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Cash dividends of $ |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
Acquired |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Issued shares on vesting of restricted stock units |
|
|
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
Stock compensation |
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Balances at June 30, 2023 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||||
Net earnings |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Changes in fair market value of derivatives, net of tax |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Changes in unrealized pension cost, net of tax |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Cumulative translation adjustment, net of tax |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Cash dividends of $ |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
Acquired |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Issued shares on vesting of restricted stock units |
|
|
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
Stock compensation |
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Balances at September 30, 2023 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
||||
See notes to unaudited condensed consolidated financial statements.
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(in thousands, except for share and per share data)
September 30, 2024
NOTE 1 — Basis of Presentation
The accompanying condensed consolidated financial statements have been prepared by CTS Corporation (“CTS”, “we”, “our”, “us” or the “Company”), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations. The unaudited condensed consolidated financial statements should be read in conjunction with the financial statements, notes thereto, and other information included in the Company’s Annual Report on Form 10‑K for the year ended December 31, 2023.
The accompanying unaudited condensed consolidated financial statements reflect, in the opinion of management, all adjustments (consisting of normal recurring items) necessary for a fair statement, in all material respects, of the financial position and results of operations for the periods presented. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ materially from those estimates. The results of operations for the interim periods are not necessarily indicative of the results for the entire year.
There have been no material changes in the Company’s significant accounting policies as compared to the significant accounting policies described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.
Recently issued accounting pronouncements not yet adopted
ASU No. 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosure”
In November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which requires public entities to disclose information about their reportable segments' significant expenses and other segment items on an interim and annual basis. Public entities with a single reportable segment are required to apply the disclosure requirements in ASU 2023-07, as well as existing segment disclosures and reconciliation required under Accounting Standard Codification (“ASC”) 280 on an interim and annual basis. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023, and for the interim periods beginning after December 15, 2024, with early adoption permitted. The Company is currently evaluating the impact of adopting ASU 2023-07 and intends to adopt and report on this topic within the Company’s Annual Report on Form 10-K for the year ending December 31, 2024.
ASU No. 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures”
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which requires public entities, on an annual basis, to provide disclosure of specific categories in the reconciliation of the effective tax rate, as well as disclosure of income taxes paid, disaggregated by jurisdiction. ASU 2023-09 is effective for fiscal years beginning after December 15, 2024, with early adoption permitted. The Company is currently evaluating the impact of adopting ASU 2023-09.
NOTE 2 – Revenue Recognition
The core principle of ASC (Topic 606) Revenue from Contracts with Customers (Topic 606) is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance provides a five-step process to achieve that core principle:
9
We recognize revenue when the performance obligations specified in our contracts have been satisfied, after considering the impact of variable consideration and other factors that may affect the transaction price. Our contracts normally contain a single performance obligation that is fulfilled on the date of delivery or shipment based on shipping terms stipulated in the contract. We usually expect payment within 30 to 90 days from the shipping date, depending on our terms with the customer. None of our contracts as of September 30, 2024 contained a significant financing component. Differences between the amount of revenue recognized and the amount invoiced, collected from, or paid to our customers are recognized as contract assets or liabilities. Contract assets will be reviewed for impairment when events or circumstances indicate that they may not be recoverable.
To the extent the transaction price includes variable consideration, we estimate the amount of variable consideration that should be included in the transaction price utilizing the most likely amount method based on an analysis of historical experience and current facts and circumstances, which requires significant judgment. Variable consideration is included in the transaction price if, in our judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur.
Contract Assets and Liabilities
Contract assets and liabilities included in our Condensed Consolidated Balance Sheets are as follows:
|
|
As of |
|
|||||
|
|
September 30, |
|
|
December 31, |
|
||
|
|
2024 |
|
|
2023 |
|
||
Contract Assets |
|
|
|
|
|
|
||
Unbilled customer receivables included in Other current assets |
|
$ |
|
|
$ |
— |
|
|
Total Contract Assets |
|
$ |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
||
Contract Liabilities |
|
|
|
|
|
|
||
Customer advance payments included in Accrued expenses and other liabilities |
|
$ |
( |
) |
|
$ |
— |
|
Total Contract Liabilities |
|
$ |
( |
) |
|
$ |
— |
|
During the nine months ended September 30, 2024, our acquisition of SyQwest, LLC. (“SyQwest”) increased our contract assets and liabilities by $
Disaggregated Revenue
The following table presents revenues disaggregated by the major markets we serve:
|
|
Three months ended |
|
|
Nine months ended |
|
||||||||||
|
|
September 30, 2024 |
|
|
September 30, 2023 |
|
|
September 30, 2024 |
|
|
September 30, 2023 |
|
||||
Transportation |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Industrial |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Medical |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Aerospace & Defense |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
The end-market sales for 2023 were adjusted by immaterial amounts to align the classification of certain customers in connection with our most recent acquisitions with our enterprise-level end market information.
NOTE 3 – Business Acquisitions
Maglab AG Acquisition
10
On February 6, 2023, we acquired
The final purchase price of $
|
|
Consideration Paid |
|
|
Cash paid, net of cash acquired of $ |
|
$ |
|
|
Contingent consideration |
|
|
|
|
Purchase price |
|
$ |
|
|
Goodwill represents value the Company expects to be created by combining the operations of the acquired business with the Company's operations, including the expansion of customer relationships, access to new customers, and potential cost savings and synergies. Goodwill related to the acquisition is expected to be deductible for tax purposes.
The following table summarizes the carrying amounts and weighted average lives of the acquired intangible assets:
|
|
Carrying |
|
|
Weighted |
|
||
Customer lists/relationships |
|
$ |
|
|
|
|
||
Technology and other intangibles |
|
|
|
|
|
|
||
Total |
|
$ |
|
|
|
|
||
All contingent consideration is payable in cash and is based on success factors related to the integration process as well as upon the achievement of annual revenue and customer order targets through the fiscal year ending December 31, 2025. The Company recorded $
Supplemental pro forma disclosures are not included as the amounts are deemed to be immaterial.
SyQwest, LLC Acquisition
On July 29, 2024, we acquired 100% of the outstanding membership interests of SyQwest a leading designer and manufacturer of a broad set of sonar and acoustic sensing solutions primarily for naval applications. The SyQwest acquisition will strengthen our strategy and scale in the defense end market.
The purchase price, which includes estimated changes in working capital, of $
The following tables summarize the purchase price, the fair values of the assets acquired and the liabilities assumed as of the date of the acquisition of SyQwest:
|
|
Consideration Paid |
|
|
Cash paid, net of cash acquired of $ |
|
$ |
|
|
Contingent consideration |
|
|
|
|
Purchase price |
|
$ |
|
|
11
|
|
Fair Values at |
|
|
Accounts receivable |
|
$ |
|
|
Inventory |
|
|
|
|
Other current assets |
|
|
|
|
Property, plant and equipment |
|
|
|
|
Other assets |
|
|
|
|
Goodwill |
|
|
|
|
Intangible assets |
|
|
|
|
Fair value of assets acquired |
|
|
|
|
Less fair value of liabilities acquired |
|
|
( |
) |
Purchase price |
|
$ |
|
|
Goodwill represents the value the Company expects to be created by combining the operations of the acquired business with the Company’s operations, including the expansion of customer relationships, access to new customers, and potential cost savings and synergies. Goodwill related to the acquisition is expected to be deductible for tax purposes.
The Company recorded a $
Intangible assets acquired have been assigned a provisional value of $
All contingent consideration is payable in cash and is based on the achievement of certain project and earnings metrics through the fiscal year ending December 31, 2026. The Company recorded $
Supplemental pro forma disclosures are not included as the amounts are deemed to be immaterial.
NOTE 4 – Accounts Receivable, net
The components of accounts receivable, net are as follows:
|
|
As of |
|
|||||
|
|
September 30, |
|
|
December 31, |
|
||
|
|
2024 |
|
|
2023 |
|
||
Accounts receivable, gross |
|
$ |
|
|
$ |
|
||
Less: Allowance for credit losses |
|
|
( |
) |
|
|
( |
) |
Accounts receivable, net |
|
$ |
|
|
$ |
|
||
12
NOTE 5 – Inventories, net
Inventories, net consists of the following:
|
|
As of |
|
|||||
|
|
September 30, |
|
|
December 31, |
|
||
|
|
2024 |
|
|
2023 |
|
||
Finished goods |
|
$ |
|
|
$ |
|
||
Work-in-process |
|
|
|
|
|
|
||
Raw materials |
|
|
|
|
|
|
||
Less: Inventory reserves |
|
|
( |
) |
|
|
( |
) |
Inventories, net |
|
$ |
|
|
$ |
|
||
NOTE 6 – Property, Plant and Equipment, net
Property, plant and equipment, net is comprised of the following:
|
|
As of |
|
|||||
|
|
September 30, |
|
|
December 31, |
|
||
|
|
2024 |
|
|
2023 |
|
||
Land and land improvements |
|
$ |
|
|
$ |
|
||
Buildings and improvements |
|
|
|
|
|
|
||
Machinery and equipment |
|
|
|
|
|
|
||
Less: Accumulated depreciation |
|
|
( |
) |
|
|
( |
) |
Property, plant and equipment, net |
|
$ |
|
|
$ |
|
||
Depreciation expense for the three months ended September 30, 2024 and September 30, 2023 was $
NOTE 7 – Retirement Plans
Pension Plans
Net pension expense for our domestic and foreign plans included in other expense, net in the Condensed Consolidated Statements of Earnings is as follows:
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Net pension expense |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
The components of net pension expense for our domestic and foreign plans include the following:
|
|
Domestic Pension Plans |
|
|
Foreign Pension Plans |
|
||||||||||
|
|
Three Months Ended |
|
|
Three Months Ended |
|
||||||||||
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Service cost |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Interest cost |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Expected return on plan assets(1) |
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
||
Amortization of loss |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total expense, net |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
13
|
|
Domestic Pension Plans |
|
|
Foreign Pension Plans |
|
||||||||||
|
|
Nine Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Service cost |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Interest cost |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Expected return on plan assets(1) |
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
||
Amortization of loss |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total expense, net |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Other Post-retirement Benefit Plan
Net post-retirement expense for our other post-retirement plan includes the following components:
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Service cost |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Interest cost |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Amortization of gain |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Total expense (income), net |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
||
NOTE 8 – Goodwill and Other Intangible Assets
Goodwill
Changes in the net carrying amount of goodwill were as follows:
|
|
Total |
|
|
Goodwill as of December 31, 2023 |
|
$ |
|
|
Increase due to acquisitions |
|
|
|
|
Foreign exchange impact |
|
|
|
|
Goodwill as of September 30, 2024 |
|
$ |
|
|
Other Intangible Assets
Other intangible assets, net consist of the following components:
|
|
As of |
|
|||||||||
|
|
September 30, 2024 |
|
|||||||||
|
|
Gross |
|
|
Accumulated |
|
|
Net Amount |
|
|||
Customer lists/relationships |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||
Technology and other intangibles |
|
|
|
|
|
( |
) |
|
|
|
||
Other intangible assets, net |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||
|
|
As of |
|
|||||||||
|
|
December 31, 2023 |
|
|||||||||
|
|
Gross |
|
|
Accumulated |
|
|
Net Amount |
|
|||
Customer lists/relationships |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||
Technology and other intangibles |
|
|
|
|
|
( |
) |
|
|
|
||
Other intangible assets, net |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||
14
Amortization expense for the three months ended September 30, 2024 and September 30, 2023 was $
The changes in the gross carrying amounts of intangible assets are due to the SyQwest acquisition and foreign exchange impacts in the quarter.
Future amortization expense for other intangible assets as of September 30, 2024 is as follows:
|
|
Amortization |
|
|
Remaining 2024 |
|
$ |
|
|
2025 |
|
|
|
|
2026 |
|
|
|
|
2027 |
|
|
|
|
2028 |
|
|
|
|
Thereafter |
|
|
|
|
Total amortization expense |
|
$ |
|
|
NOTE 9 – Costs Associated with Exit and Restructuring Activities
Restructuring charges are reported as a separate line within operating earnings in the Condensed Consolidated Statements of Earnings.
Total restructuring charges are as follows:
|
|
Three Months Ended |
|
|||||
|
|
September 30, 2024 |
|
|
September 30, 2023 |
|
||
Restructuring charges |
|
$ |
|
|
$ |
|
||
|
|
Nine Months Ended |
|
|||||
|
|
September 30, 2024 |
|
|
September 30, 2023 |
|
||
Restructuring charges |
|
$ |
|
|
$ |
|
||
September 2020 Plan
In September 2020, we initiated a restructuring plan focused on optimizing our manufacturing footprint and improving operational efficiency by better utilizing our systems capabilities (the “September 2020 Plan”). This plan includes transitioning certain administrative functions to a shared service center, realignment of manufacturing locations, and certain other efficiency improvement actions. The restructuring cost of the September 2020 Plan is estimated to be in the range of $
Closure and Consolidation of Juarez Manufacturing Facility and Operations
During the first quarter of 2023, we announced the shutdown of our Juarez manufacturing facility. As a part of this activity, operations from the Juarez plant are being consolidated into our expanded Matamoros facility (collectively, the “Matamoros Consolidation”). The Matamoros Consolidation is substantially complete as of September 30, 2024 with remaining activity expected to be completed later
15
this year. The total restructuring cost of the Matamoros Consolidation is now estimated to be in the range of $
During the three months ended September 30, 2024, we incurred $
In addition to these charges, we have incurred an additional $
Other Restructuring Activities
During the three month period ended September 30, 2024, we incurred total other restructuring charges of $
The following table displays the restructuring liability activity included in accrued expenses and other liabilities for all plans for the nine months ended September 30, 2024:
Restructuring liability at January 1, 2024 |
|
$ |
|
|
Restructuring charges |
|
|
|
|
Costs paid |
|
|
( |
) |
Other activity(1) |
|
|
( |
) |
Restructuring liability at September 30, 2024 |
|
$ |
|
16
NOTE 10 – Accrued Expenses and Other Liabilities
The components of accrued expenses and other liabilities are as follows:
|
|
As of |
|
|||||
|
|
September 30, |
|
|
December 31, |
|
||
|
|
2024 |
|
|
2023 |
|
||
Accrued product-related costs |
|
$ |
|
|
$ |
|
||
Accrued income taxes |
|
|
|
|
|
|
||
Accrued property and other taxes |
|
|
|
|
|
|
||
Accrued professional fees |
|
|
|
|
|
|
||
Accrued customer-related liabilities |
|
|
|
|
|
|
||
Dividends payable |
|
|
|
|
|
|
||
Remediation reserves |
|
|
|
|
|
|
||
Derivative liabilities |
|
|
|
|
|
|
||
Other accrued liabilities |
|
|
|
|
|
|
||
Total accrued expenses and other liabilities |
|
$ |
|
|
$ |
|
||
NOTE 11 – Commitments and Contingencies
Certain processes in the manufacture of our current and past products may create by-products classified as hazardous waste. As a result, we have been notified by the U.S. Environmental Protection Agency (“EPA”), state environmental agencies and in some cases, groups of potentially responsible parties, that we may be potentially liable for environmental contamination at several sites currently or formerly owned or operated by us. Currently, none of these costs and accruals relate to sites that provide revenue generating activities for the Company.
A roll-forward of remediation reserves included in accrued expenses and other liabilities on the Condensed Consolidated Balance Sheets is comprised of the following:
|
|
As of |
|
|||||
|
|
September 30, |
|
|
December 31, |
|
||
|
|
2024 |
|
|
2023 |
|
||
Balance at beginning of period |
|
$ |
|
|
$ |
|
||
Remediation expense(1) |
|
|
( |
) |
|
|
|
|
Net remediation payments |
|
|
( |
) |
|
|
( |
) |
Other activity(2) |
|
|
|
|
|
( |
) |
|
Balance at end of the period |
|
$ |
|
|
$ |
|
||
The Company operates under and in accordance with a federal consent decree, dated March 7, 2017, with the EPA for the Asheville Site. On February 8, 2023, the Company received a pre-litigation letter from the EPA (the “EPA Letter”) seeking reimbursement of its past response costs and interest thereon relating to any release or threatened release of hazardous substances at the Asheville Site in the aggregate amount of $
Unrelated to the environmental claims described above, certain other legal claims are pending against us with respect to matters arising out of the ordinary conduct of our business.
17
We provide product warranties when we sell our products and accrue for estimated liabilities at the time of sale. Warranty estimates are forecasts based on the best available information and historical claims experience. We accrue for specific warranty claims if we believe that the facts of a specific claim make it probable that a liability in excess of our historical experience has been incurred, and provide disclosures for specific claims whenever it is reasonably possible that a material loss may be incurred which cannot be estimated.
We cannot provide assurance that the ultimate disposition of environmental, legal, and product warranty claims will not materially exceed the amount of our accrued losses and adversely impact our consolidated financial position, results of operations, or cash flows. Our accrued liabilities and disclosures will be adjusted accordingly if additional information becomes available in the future.
NOTE 12 - Debt
Long-term debt is comprised of the following:
|
|
As of |
|
|||||
|
|
September 30, |
|
|
December 31, |
|
||
|
|
2024 |
|
|
2023 |
|
||
Total credit facility |
|
$ |
|
|
$ |
|
||
Balance outstanding |
|
|
|
|
|
|
||
Standby letters of credit |
|
|
|
|
|
|
||
Amount available, subject to covenant restrictions |
|
$ |
|
|
$ |
|
||
Weighted-average interest rate |
|
|
% |
|
|
% |
||
On December 15, 2021, we entered into a second amended and restated
Borrowings in U.S. dollars under the Revolving Credit Facility bear interest, at a per annum rate equal to the applicable Term SOFR rate (but not less than
The Revolving Credit Facility includes a swing line sublimit of $
The Revolving Credit Facility requires, in addition to customary representations and warranties, that we comply with a maximum net leverage ratio and a minimum interest coverage ratio. Failure to comply with these covenants could reduce the borrowing availability under the Revolving Credit Facility. We were in compliance with all debt covenants at September 30, 2024. The Revolving Credit Facility requires that we deliver quarterly financial statements, annual financial statements, auditor certifications, and compliance certificates within a specified number of days after the end of a quarter and year. Additionally, the Revolving Credit Facility contains restrictions limiting our ability to: dispose of assets; incur certain additional debt; repay other debt or amend subordinated debt instruments; create liens on assets; make investments, loans or advances; make acquisitions or engage in mergers or consolidations; engage in certain transactions with our subsidiaries and affiliates; and make stock repurchases and dividend payments.
18
We have debt issuance costs related to our long-term debt that are being amortized using the straight-line method over the life of the debt, which approximates the effective interest method. Amortization expense for the three and nine months ended September 30, 2024 was $
Note 13 - Derivative Financial Instruments
Our earnings and cash flows are subject to fluctuations due to changes in foreign currency exchange rates and interest rates. We selectively use derivative financial instruments including foreign currency forward contracts as well as interest rate and cross-currency swaps to manage our exposure to these risks.
The use of derivative financial instruments exposes the Company to credit risk, which relates to the risk of nonperformance by a counterparty to the derivative contracts. We manage our credit risk by entering into derivative contracts with only highly rated financial institutions and by using netting agreements.
The effective portion of derivative gains and losses are recorded in accumulated other comprehensive income (loss) until the hedged transaction affects earnings upon settlement, at which time they are reclassified to cost of goods sold or net sales. If it is probable that an anticipated hedged transaction will not occur by the end of the originally specified time period, we reclassify the gains or losses related to that hedge from accumulated other comprehensive income (loss) to other income (expense), net.
We assess hedge effectiveness qualitatively by verifying that the critical terms of the hedging instrument and the forecasted transaction continue to match, and that there have been no adverse developments that have increased the risk that the counterparty will default.
Foreign Currency Hedges
We use forward contracts to mitigate currency risk related to a portion of our forecasted foreign currency revenues and costs. The currency forward contracts are designed as cash flow hedges and are recorded in the Condensed Consolidated Balance Sheets at fair value.
We continue to monitor the Company’s overall currency exposure and may elect to add cash flow hedges in the future. At September 30, 2024, we had a net unrealized loss of $
Interest Rate Swaps
We use interest rate swaps to convert a portion of our Revolving Credit Facility’s outstanding balance from a variable rate of interest to a fixed rate. As of September 30, 2024, we have agreements to fix interest rates on $
These swaps are treated as cash flow hedges and consequently, the changes in fair value are recorded in other comprehensive (loss) income. The estimated net amount of the existing gains that are reported in accumulated other comprehensive income (loss) that are expected to be reclassified into earnings within the next twelve months is approximately $
Cross-Currency Swap
The Company has operations and investments in various international locations and is subject to risks associated with changing foreign exchange rates. In order to hedge the Krone-based purchase price for the acquisition of Ferroperm Piezoceramics, A.S. (“Ferroperm”),
19
the Company entered into a cross-currency interest rate swap agreement on June 27, 2022 that synthetically swapped $
Accordingly, any gains or losses on this derivative instrument are included in the foreign currency translation component of other comprehensive income (loss) until the net investment is sold, diluted or liquidated. At September 30, 2024, we had a net unrealized loss of $
The location and fair values of derivative instruments designated as hedging instruments in the Condensed Consolidated Balance Sheets as of September 30, 2024, are shown in the following table:
|
|
As of |
|
|||||
|
|
September 30, |
|
|
December 31, |
|
||
|
|
2024 |
|
|
2023 |
|
||
Interest rate swaps reported in |
|
$ |
|
|
$ |
|
||
Interest rate swaps reported in |
|
$ |
|
|
$ |
|
||
|
$ |
( |
) |
|
$ |
( |
) |
|
|
$ |
|
|
$ |
|
|||
|
$ |
( |
) |
|
$ |
|
||
The Company has elected to net its foreign currency derivative assets and liabilities in the balance sheet in accordance with ASC 210-20 (Balance Sheet, Offsetting). On a gross basis, there were
The effect of derivative instruments on the Condensed Consolidated Statements of Earnings is as follows:
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Foreign Exchange Contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Amounts reclassified from AOCI to earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Total net gain reclassified from AOCI to earnings |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total derivative gain on foreign exchange contracts recognized in earnings |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Interest Rate Swaps: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||
Cross-Currency Swap: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||
Total net gains on derivatives |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
20
NOTE 14 – Accumulated Other Comprehensive Income (Loss)
Shareholders’ equity includes certain items classified as accumulated other comprehensive income (loss) (“AOCI”) in the Condensed Consolidated Balance Sheets, including:
Changes in exchange rates between the functional currency and the currency in which a transaction is denominated are foreign exchange transaction gains or losses. Transaction gains (losses) for the three and nine months ended September 30, 2024 were $
The components of accumulated other comprehensive income (loss) for the three months ended September 30, 2024, are as follows:
|
|
|
|
|
|
|
|
(Gain) Loss |
|
|
|
|
||||
|
|
As of |
|
|
Gain (Loss) |
|
|
Reclassified |
|
|
As of |
|
||||
|
|
June 30, |
|
|
Recognized |
|
|
from AOCI |
|
|
September 30, |
|
||||
|
|
2024 |
|
|
in OCI |
|
|
to Earnings |
|
|
2024 |
|
||||
Changes in fair market value of derivatives: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Gross |
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
Income tax benefit (expense) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|||
Net |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Changes in unrealized pension cost: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Gross |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
Income tax benefit (expense) |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Net |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
Cumulative translation adjustment: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Gross |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|||
Income tax benefit (expense) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|||
Total accumulated other comprehensive income (loss) |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||
21
The components of accumulated other comprehensive income (loss) for the three months ended September 30, 2023 are as follows:
|
|
|
|
|
|
|
|
(Gain) Loss |
|
|
|
|
||||
|
|
As of |
|
|
Gain (Loss) |
|
|
Reclassified |
|
|
As of |
|
||||
|
|
June 30, |
|
|
Recognized |
|
|
from AOCI |
|
|
September 30, |
|
||||
|
|
2023 |
|
|
in OCI |
|
|
to Earnings |
|
|
2023 |
|
||||
Changes in fair market value of derivatives: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Gross |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||
Income tax benefit (expense) |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
Net |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Changes in unrealized pension cost: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Gross |
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
||
Income tax benefit (expense) |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Net |
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
||
Cumulative translation adjustment: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Gross |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
||
Income tax benefit (expense) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
||
Total accumulated other comprehensive income (loss) |
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
The components of accumulated other comprehensive income (loss) for the nine months ended September 30, 2024 are as follows:
|
|
|
|
|
|
|
|
(Gain) Loss |
|
|
|
|
||||
|
|
As of |
|
|
Gain (Loss) |
|
|
Reclassified |
|
|
As of |
|
||||
|
|
December 31, |
|
|
Recognized |
|
|
from AOCI |
|
|
September 30, |
|
||||
|
|
2023 |
|
|
in OCI |
|
|
to Earnings |
|
|
2024 |
|
||||
Changes in fair market value of derivatives: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Gross |
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
Income tax benefit (expense) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|||
Net |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Changes in unrealized pension cost: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Gross |
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
||
Income tax benefit (expense) |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Net |
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
||
Cumulative translation adjustment: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Gross |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Income tax benefit (expense) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total accumulated other comprehensive (loss) income |
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
||
22
The components of accumulated other comprehensive income (loss) for the nine months ended September 30, 2023 are as follows:
|
|
|
|
|
|
|
|
(Gain) Loss |
|
|
|
|
||||
|
|
As of |
|
|
Gain (Loss) |
|
|
Reclassified |
|
|
As of |
|
||||
|
|
December 31, |
|
|
Recognized |
|
|
from AOCI |
|
|
September 30, |
|
||||
|
|
2022 |
|
|
in OCI |
|
|
to Earnings |
|
|
2023 |
|
||||
Changes in fair market value of derivatives: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Gross |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||
Income tax benefit (expense) |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
Net |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Changes in unrealized pension cost: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Gross |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
Income tax benefit (expense) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
Cumulative translation adjustment: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Gross |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
Income tax benefit (expense) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
Total accumulated other comprehensive (loss) income |
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
NOTE 15 – Shareholders’ Equity
Share count and par value data related to shareholders’ equity are as follows:
|
|
As of |
|
|||||
|
|
September 30, |
|
|
December 31, |
|
||
|
|
2024 |
|
|
2023 |
|
||
Preferred Stock |
|
|
|
|
|
|
||
Par value per share |
|
par value |
|
|
par value |
|
||
Shares authorized |
|
|
|
|
|
|
||
Shares outstanding |
|
|
|
|
|
|
||
Common Stock |
|
|
|
|
|
|
||
Par value per share |
|
par value |
|
|
par value |
|
||
Shares authorized |
|
|
|
|
|
|
||
Shares issued |
|
|
|
|
|
|
||
Shares outstanding |
|
|
|
|
|
|
||
Treasury stock |
|
|
|
|
|
|
||
Shares held |
|
|
|
|
|
|
||
On February 9, 2023, the Board of Directors approved a share repurchase program that authorized the Company to repurchase up to $
On February 2, 2024, our Board of Directors approved a new share repurchase program that authorizes the Company to repurchase up to $
During the three and nine months ended September 30, 2024,
23
As of 2023, we are subject to a 1% excise tax on stock repurchases under the United States Inflation Reduction Act of 2022 which we include in the cost of stock repurchases as a reduction of shareholders’ equity. As of September 30, 2024 and December 31, 2023, we had $
A roll-forward of common shares outstanding is as follows:
|
|
Nine Months Ended |
|
|||||
|
|
September 30, |
|
|
September 30, |
|
||
|
|
2024 |
|
|
2023 |
|
||
Balance at the beginning of the year |
|
|
|
|
|
|
||
Repurchases |
|
|
( |
) |
|
|
( |
) |
Restricted share issuances |
|
|
|
|
|
|
||
Balance at the end of the period |
|
|
|
|
|
|
||
Certain potentially dilutive restricted stock units are excluded from diluted earnings per share because they are anti-dilutive. The number of outstanding awards that were anti-dilutive for the nine months ended September 30, 2024 was
NOTE 16- Stock-Based Compensation
At September 30, 2024, we had
These plans allow or allowed (as applicable) for grants of stock options, stock appreciation rights, restricted stock, restricted stock units (“RSUs”), performance shares, performance units, and other stock awards subject to the terms of the specific plans under which the awards are granted.
The following table summarizes the compensation expense included in selling, general and administrative expenses in the Condensed Consolidated Statements of Earnings related to stock-based compensation plans:
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Service-based RSUs |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Performance and Market-based RSUs |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Cash-settled RSUs |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Income tax benefit |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net expense |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
The following table summarizes the unrecognized compensation expense related to unvested RSUs by type and the weighted-average period in which the expense is to be recognized:
|
|
Unrecognized |
|
|
|
|
||
|
|
Compensation |
|
|
Weighted- |
|
||
|
|
Expense at |
|
|
Average |
|
||
|
|
September 30, 2024 |
|
|
Period (years) |
|
||
Service-based RSUs |
|
$ |
|
|
|
|
||
Performance and Market-based RSUs |
|
|
|
|
|
|
||
Total |
|
$ |
|
|
|
|
||
24
We recognize expense on a straight-line basis over the requisite service period for each separately vesting portion of the award as if the award was, in substance, multiple awards.
The following table summarizes the status of these plans as of September 30, 2024:
|
|
2018 Plan |
|
|
2014 Plan |
|
|
2009 Plan |
|
|
2004 Plan |
|
|
Directors' |
|
|||||
Awards originally available |
|
|
|
|
|
|
|
|
|
|
|
|
|
N/A |
|
|||||
Maximum potential awards outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
RSUs and cash-settled awards vested and released |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Awards available for grant |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Service-Based Restricted Stock Units
The following table summarizes the service-based RSU activity for the nine months ended September 30, 2024:
|
|
Units |
|
|
Weighted |
|
||
Outstanding at December 31, 2023 |
|
|
|
|
$ |
|
||
Granted |
|
|
|
|
|
|
||
Vested and released |
|
|
( |
) |
|
|
|
|
Forfeited |
|
|
( |
) |
|
|
|
|
Outstanding at September 30, 2024 |
|
|
|
|
$ |
|
||
Releasable at September 30, 2024 |
|
|
|
|
$ |
|
||
Performance and Market-Based Restricted Stock Units
The following table summarizes the performance and market-based RSU activity for the nine months ended September 30, 2024:
|
|
Units |
|
|
Weighted |
|
||
Outstanding at December 31, 2023 |
|
|
|
|
$ |
|
||
Granted |
|
|
|
|
|
|
||
Attained by performance |
|
|
|
|
|
|
||
Released |
|
|
( |
) |
|
|
|
|
Forfeited |
|
|
( |
) |
|
|
|
|
Outstanding at September 30, 2024 |
|
|
|
|
$ |
|
||
Releasable at September 30, 2024 |
|
|
|
|
$ |
|
||
Cash-Settled Restricted Stock Units
Cash-Settled RSUs entitle the holder to receive the cash equivalent of one share of common stock for each unit when the unit vests. These RSUs are issued to key employees residing in foreign locations as direct compensation. Generally, these RSUs vest over a three-year period. Cash-Settled RSUs are classified as liabilities and are remeasured at each reporting date until settled. At September 30, 2024 and December 31, 2023, we had
25
NOTE 17 — Fair Value Measurements
The table below summarizes our financial assets and liabilities that were measured at fair value on a recurring basis as of September 30, 2024:
|
|
Asset (Liability) Carrying |
|
|
Quoted Prices |
|
|
Significant |
|
|
Significant |
|
||||
Interest rate swaps |
|
$ |
|
|
$ |
— |
|
|
$ |
|
|
$ |
— |
|
||
Foreign currency hedges |
|
$ |
( |
) |
|
$ |
— |
|
|
$ |
( |
) |
|
$ |
— |
|
Cross-currency swap |
|
$ |
( |
) |
|
$ |
— |
|
|
$ |
( |
) |
|
$ |
— |
|
Qualified replacement plan assets |
|
$ |
|
|
$ |
|
|
$ |
— |
|
|
$ |
— |
|
||
Contingent consideration |
|
$ |
( |
) |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
( |
) |
The table below summarizes the financial assets and liabilities that were measured at fair value on a recurring basis as of December 31, 2023:
|
|
Asset (Liability) Carrying |
|
|
Quoted Prices |
|
|
Significant |
|
|
Significant |
|
||||
Interest rate swaps |
|
$ |
|
|
$ |
— |
|
|
$ |
|
|
$ |
— |
|
||
Foreign currency hedges |
|
$ |
|
|
$ |
— |
|
|
$ |
|
|
$ |
— |
|
||
Cross-currency swap |
|
$ |
( |
) |
|
$ |
— |
|
|
$ |
( |
) |
|
$ |
— |
|
Qualified replacement plan assets |
|
$ |
|
|
$ |
|
|
$ |
— |
|
|
$ |
— |
|
||
Contingent consideration |
|
$ |
( |
) |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
( |
) |
We use interest rate swaps to convert a portion of our Revolving Credit Facility’s outstanding balance from a variable rate of interest into a fixed rate and foreign currency forward contracts to hedge the effect of foreign currency changes on certain revenues and costs denominated in foreign currencies. The Company entered into a cross-currency swap agreement in order to manage its exposure to changes in interest rates related to foreign debt. These derivative financial instruments are measured at fair value on a recurring basis. The fair value of our interest rate swaps and foreign currency hedges were measured using standard valuation models using market-based observable inputs over the contractual terms, including forward yield curves, among others. There is a readily determinable market for these derivative instruments, but that market is not active and therefore they are classified within Level 2 of the fair value hierarchy.
The fair value of the contingent consideration requires significant judgment. The Company's fair value estimates used in the contingent consideration valuation are considered Level 3 fair value measurements. The fair value estimates were based on assumptions management believes to be reasonable, but that are inherently uncertain, including estimates of future revenues and timing of events and activities that are expected to take place. Refer to Note 3 “Business Acquisitions” for further discussion on contingent consideration.
A roll-forward of the contingent consideration is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Contingent |
|
|
Balance at December 31, 2023 |
|
$ |
|
|
Acquisition date fair value of contingent consideration |
|
|
|
|
Change in fair value |
|
|
( |
) |
Cash paid |
|
|
( |
) |
Balance at September 30, 2024 |
|
$ |
|
|
As of September 30, 2024, approximately $
26
Our long-term debt consists of the Revolving Credit Facility, which is recorded at its carrying value. There is a readily determinable market for our long-term debt and it is classified within Level 2 of the fair value hierarchy as the market is not deemed to be active. The fair value of long-term debt approximates its carrying value and was determined by valuing a similar hypothetical coupon bond and attributing that value to our long-term debt under the Revolving Credit Facility.
The qualified replacement plan assets consist of investment funds maintained for future contributions to the Company’s U.S. 401(k) program. The investments are Level 1 marketable securities and are recorded in Other Assets on our Condensed Consolidated Balance Sheets.
NOTE 18 — Income Taxes
The effective income tax rates for the three and nine months ended September 30, 2024 and 2023 are as follows:
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Effective tax rate |
|
|
% |
|
|
% |
|
|
% |
|
|
% |
||||
Our effective income tax rate was
Our effective income tax rate was
27
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”)
(in thousands, except percentages and per share amounts)
The following discussion should be read in conjunction with our unaudited Condensed Consolidated Financial Statements and notes included under Item 1, as well as our Consolidated Financial Statements and notes and related Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2023.
Overview
CTS Corporation (“CTS”, “we”, “our” or “us”) is a leading designer and manufacturer of products that Sense, Connect and Move. Our vision is to be a leading provider of sensing and motion devices as well as connectivity components, enabling an intelligent and seamless world. These devices are categorized by their ability to Sense, Connect or Move. Sense products provide vital inputs to electronic systems. Connect products allow systems to function in synchronization with other systems. Move products ensure required movements are effectively and accurately executed. We are committed to achieving our vision by continuing to invest in the development of products, technologies and talent within these categories.
We manufacture sensors, actuators, and connectivity components in North America, Europe, and Asia. CTS provides engineered products to OEMs and tier one suppliers in the aerospace and defense, industrial, medical, and transportation markets.
There is an increasing proliferation of sensing and motion applications within various markets we serve. In addition, the increasing connectivity of various devices to the internet results in greater demand for communication bandwidth and data storage, increasing the need for our connectivity products. Our success is dependent on the ability to execute our strategy to support these trends. We are subject to a number of challenges including, without limitation, periodic market softness, competition from other suppliers, changes in technology, and the ability to add new customers, launch new products or penetrate new markets. Many of these, and other risks and uncertainties relating to the Company and our business, are discussed in further detail in Item 1A. of our Annual Report on Form 10-K and other filings made with the SEC.
On July 29, 2024, we acquired 100% of the outstanding membership interests of SyQwest, LLC (“SyQwest”), a leading designer and manufacturer of a broad set of sonar and acoustic sensing solutions primarily for naval applications, for $121.9 million, net of cash and up to $15 million in future contingent consideration. The SyQwest acquisition strengthens our strategy and scale in the defense end market. The acquisition was funded from both cash on hand and borrowings on our Revolving Credit Facility.
28
Results of Operations: Third Quarter 2024 versus Third Quarter 2023
The following table highlights changes in significant components of the Unaudited Condensed Consolidated Statements of Earnings for the quarters ended September 30, 2024 and September 30, 2023:
|
|
Three Months Ended |
|
|
|
|
|
|
|
|
|
|
||||||||
|
|
September 30, 2024 |
|
|
September 30, 2023 |
|
|
Percent |
|
|
Percentage of Net Sales – |
|
|
Percentage of Net Sales – |
|
|||||
Net sales |
|
$ |
132,424 |
|
|
$ |
134,552 |
|
|
|
(1.6 |
)% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of goods sold |
|
|
82,636 |
|
|
|
88,151 |
|
|
|
(6.3 |
) |
|
|
62.4 |
|
|
|
65.5 |
|
Gross margin |
|
|
49,788 |
|
|
|
46,401 |
|
|
|
7.3 |
|
|
|
37.6 |
|
|
|
34.5 |
|
Selling, general and administrative expenses |
|
|
22,509 |
|
|
|
18,666 |
|
|
|
20.6 |
|
|
|
17.0 |
|
|
|
13.9 |
|
Research and development expenses |
|
|
5,031 |
|
|
|
6,321 |
|
|
|
(20.4 |
) |
|
|
3.8 |
|
|
|
4.7 |
|
Restructuring charges |
|
|
773 |
|
|
|
3,226 |
|
|
|
(76.0 |
) |
|
|
0.6 |
|
|
|
2.4 |
|
Total operating expenses |
|
|
28,313 |
|
|
|
28,213 |
|
|
|
0.4 |
|
|
|
21.4 |
|
|
|
21.0 |
|
Operating earnings |
|
|
21,475 |
|
|
|
18,188 |
|
|
|
18.1 |
|
|
|
16.2 |
|
|
|
13.5 |
|
Total other income (expense), net |
|
|
972 |
|
|
|
549 |
|
|
|
77.0 |
|
|
|
0.7 |
|
|
|
0.4 |
|
Earnings before income taxes |
|
|
22,447 |
|
|
|
18,737 |
|
|
|
19.8 |
|
|
|
17.0 |
|
|
|
13.9 |
|
Income tax expense |
|
|
3,764 |
|
|
|
4,766 |
|
|
|
(21.0 |
) |
|
|
2.8 |
|
|
|
3.5 |
|
Net earnings |
|
$ |
18,683 |
|
|
$ |
13,971 |
|
|
|
33.7 |
% |
|
|
14.1 |
% |
|
|
10.4 |
% |
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Diluted net earnings per share |
|
$ |
0.61 |
|
|
$ |
0.44 |
|
|
|
|
|
|
|
|
|
|
|||
Net sales were $132,424 in the third quarter of 2024, a decrease of $2,128 or 1.6% from the third quarter of 2023. Net sales to the transportation market decreased $12,959 or 17.1% while net sales to other diversified end-markets increased $10,831 or 18.5%. The overall decline in net sales was primarily driven by decreased volumes from our commercial vehicle related products and lower sales to transportation customers in China. Partially offsetting the sales decline were sales from our acquisition of SyQwest of $3,615, as well as changes in foreign exchange rates. Net sales increased $508 year-over-year related to changes in foreign exchange rates primarily due to the U.S. Dollar depreciating compared to the Chinese Renminbi and Euro.
Gross margin was $49,788 in the third quarter of 2024, an increase of $3,387 or 7.3% from the third quarter of 2023. Our gross margin percentage increased from 34.5% for the third quarter of 2023 to 37.6% for the third quarter of 2024 primarily due to improved end-market mix, operational improvements, and the impact of certain cost saving actions previously taken as discussed in Note 9 “Costs Associated with Exit and Restructuring Activities” in the Notes to the Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q. Additionally, changes in foreign exchange rates had a net benefit on our gross margin of approximately $1,464 primarily due to rate changes between the U.S. Dollar and the Mexican Peso.
Selling, general and administrative (“SG&A”) expenses were $22,509 or 17.0% of net sales in the third quarter of 2024 versus $18,666 or 13.9% of net sales in the third quarter of 2023. This increase is primarily related to the reduction of incentive and equity-based compensation expense that occurred in the third quarter of 2023. Research and development (“R&D”) expenses were $5,031 or 3.8% of net sales in the third quarter of 2024 compared to $6,321 or 4.7% of net sales in the comparable quarter of 2023. This decrease is primarily related to the timing of non-recurring engineering expense reimbursement during the quarter.
Restructuring charges were $773 or 0.7% of net sales in the third quarter of 2024 compared to $3,226 or 2.4% of net sales in the third quarter of 2023. The restructuring charges in the quarter ended September 30, 2024 were primarily related to actions undertaken to better align our cost structure with lower end-market demand. See Note 9 “Costs Associated with Exit and Restructuring Activities” in the Notes to the Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q for further information.
29
Other income and expense items are summarized in the following table:
|
|
Three Months Ended |
|
|||||
|
|
September 30, |
|
|
September 30, |
|
||
|
|
2024 |
|
|
2023 |
|
||
Interest expense |
|
$ |
(1,307 |
) |
|
$ |
(997 |
) |
Interest income |
|
|
973 |
|
|
|
952 |
|
Other income (expense), net |
|
|
1,306 |
|
|
|
594 |
|
Total other income (expense), net |
|
$ |
972 |
|
|
$ |
549 |
|
Total other income (expense), net for the quarter ended September 30, 2024 is primarily driven by foreign currency gains, particularly related to the Chinese Renminbi, Euro and Mexican Peso, partially offset by higher interest expense from our increased debt position as a result of our recent acquisition of SyQwest during the quarter ended September 30, 2024.
|
|
Three Months Ended |
|
|||||
|
|
September 30, |
|
|
September 30, |
|
||
|
|
2024 |
|
|
2023 |
|
||
Effective tax rate |
|
|
16.8 |
% |
|
|
25.4 |
% |
Our effective income tax rate was 16.8% and 25.4% in the third quarters of 2024 and 2023, respectively. The decrease in the effective income tax rate is primarily attributable to a mix of earnings taxed at lower rates and tax benefits from the filing of the US federal income tax return..
Results of Operations: Nine Months ended September 30, 2024 versus Nine Months Ended September 30, 2023
The following table highlights changes in significant components of the Unaudited Condensed Consolidated Statements of Earnings for the nine months ended September 30, 2024, and September 30, 2023:
|
|
Nine Months Ended |
|
|
|
|
|
|
|
|
|
|
||||||||
|
|
September 30, 2024 |
|
|
September 30, 2023 |
|
|
Percent |
|
|
Percentage of Net Sales – |
|
|
Percentage of Net Sales – |
|
|||||
Net sales |
|
$ |
388,336 |
|
|
$ |
425,728 |
|
|
|
(8.8 |
)% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of goods sold |
|
|
247,086 |
|
|
|
276,933 |
|
|
|
(10.8 |
) |
|
|
63.6 |
|
|
|
65.0 |
|
Gross margin |
|
|
141,250 |
|
|
|
148,795 |
|
|
|
(5.1 |
) |
|
|
36.4 |
|
|
|
35.0 |
|
Selling, general and administrative expenses |
|
|
66,100 |
|
|
|
64,339 |
|
|
|
2.7 |
|
|
|
17.0 |
|
|
|
15.1 |
|
Research and development expenses |
|
|
17,718 |
|
|
|
19,628 |
|
|
|
(9.7 |
) |
|
|
4.6 |
|
|
|
4.6 |
|
Restructuring charges |
|
|
3,657 |
|
|
|
6,033 |
|
|
|
(39.4 |
) |
|
|
0.9 |
|
|
|
1.4 |
|
Total operating expenses |
|
|
87,475 |
|
|
|
90,000 |
|
|
|
(2.8 |
) |
|
|
22.5 |
|
|
|
21.1 |
|
Operating earnings |
|
|
53,775 |
|
|
|
58,795 |
|
|
|
(8.5 |
) |
|
|
13.8 |
|
|
|
13.8 |
|
Total other income (expense), net |
|
|
97 |
|
|
|
(1,269 |
) |
|
|
(107.6 |
) |
|
|
— |
|
|
|
(0.3 |
) |
Earnings before income taxes |
|
|
53,872 |
|
|
|
57,526 |
|
|
|
(6.4 |
) |
|
|
13.9 |
|
|
|
13.5 |
|
Income tax expense |
|
|
9,364 |
|
|
|
12,314 |
|
|
|
(24.0 |
) |
|
|
2.4 |
|
|
|
2.9 |
|
Net earnings |
|
$ |
44,508 |
|
|
$ |
45,212 |
|
|
|
(1.6 |
)% |
|
|
11.5 |
% |
|
|
10.6 |
% |
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Diluted net earnings per share |
|
$ |
1.45 |
|
|
$ |
1.43 |
|
|
|
|
|
|
|
|
|
|
|||
Net sales were $388,336 in the nine months ended September 30, 2024, a decrease of $37,392 or 8.8% from the nine months ended September 30, 2023. Net sales to the transportation market decreased $38,530 or 16.6% while net sales to other diversified end-markets increased $1,138 or 0.5%. The decline in overall net sales was primarily driven by lower volumes of commercial vehicle related products, lower sales to transportation customers in China and decreased sales in the industrial end market. Changes in foreign exchange rates decreased net sales for the nine months ended September 30, 2024 by $674 due to the U.S. Dollar appreciating compared to the Chinese Renminbi and Euro.
30
Gross margin was $141,250 for the nine months ended September 30, 2024, a decrease of $7,545 or 5.1% from the nine months ended September 30, 2023. The year over year decrease in gross margin was primarily driven by lower sales volumes.
Our gross margin percentage was 36.4% for the first nine months of 2024, an increase from 35.0% in the first nine months of 2023 primarily due to improved end-market mix, operational improvements, and the impact of certain cost saving actions previously taken as discussed in Note 9 “Costs Associated with Exit and Restructuring Activities” in the Notes to the Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q. Additionally, changes in foreign exchange rates had a net benefit on our gross margin of approximately $627. See Note 13 “Derivative Financial Instruments” in the Notes to the Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q for further information.
SG&A expenses were $66,100 or 17.0% of net sales for the nine months ended September 30, 2024 versus $64,339 or 15.1% of net sales for the nine months ended September 30, 2023. R&D expenses were $17,718 or 4.6% of net sales for the nine months ended September 30, 2024 compared to $19,628 or 4.6% of net sales for the nine months ended September 30, 2023.
Restructuring charges were $3,657 or 0.9% of net sales for the nine months ended September 30, 2024 compared to $6,033 or 1.4% of net sales for the nine months ended September 30, 2023. The restructuring charges were primarily related to actions undertaken to better align our cost structure with lower end-market demand. See Note 9 “Costs Associated with Exit and Restructuring Activities” in the Notes to the Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q for further information.
Other income and expense items are summarized in the following table:
|
|
Nine Months Ended |
|
|||||
|
|
September 30, |
|
|
September 30, |
|
||
|
|
2024 |
|
|
2023 |
|
||
Interest expense |
|
$ |
(2,942 |
) |
|
$ |
(2,509 |
) |
Interest income |
|
|
3,800 |
|
|
|
3,087 |
|
Other income (expense), net |
|
|
(761 |
) |
|
|
(1,847 |
) |
Total other income (expense), net |
|
$ |
97 |
|
|
$ |
(1,269 |
) |
The reduction in total other income (expense), net was primarily driven by higher interest income from our short-term investments classified as cash equivalents and lower expense related to foreign exchange losses.
|
|
Nine Months Ended |
|
|||||
|
|
September 30, |
|
|
September 30, |
|
||
|
|
2024 |
|
|
2023 |
|
||
Effective tax rate |
|
|
17.4 |
% |
|
|
21.4 |
% |
Our effective income tax rate was 17.4% and 21.4% for the nine months ended September 30, 2024 and 2023, respectively. The decrease in the effective income tax rate is primarily attributable to a mix of earnings taxed at lower rates and tax benefits from the filing of the US federal income tax return.
Liquidity and Capital Resources
We have historically funded our capital and operating needs primarily through cash flows from operating activities, supported by available credit under our Revolving Credit Facility (as defined below). We believe that cash flows from operating activities and available borrowings under our Revolving Credit Facility will be adequate to fund our working capital needs, capital expenditures, investments, and debt service requirements for at least the next twelve months and for the foreseeable future thereafter. However, we may choose to pursue additional equity and debt financing to provide additional liquidity or to fund acquisitions.
Cash and cash equivalents were $94,875 at September 30, 2024, and $163,876 at December 31, 2023, of which $86,181 and $99,940, respectively, were held outside the United States. Total long-term debt was $102,700 as of September 30, 2024 and $67,500 as of December 31, 2023.
31
Cash Flow Overview
Cash Flows from Operating Activities
Net cash provided by operating activities was $73,335 during the nine months ended September 30, 2024. Components of net cash provided by operating activities included net earnings of $44,508, depreciation and amortization expense of $22,644, other net non-cash items of $1,246, and a net cash inflow from changes in assets and liabilities of $4,940.
Net cash provided by operating activities was $56,742 during the nine months ended September 30, 2023. Components of net cash provided by operating activities included net earnings of $45,212, depreciation and amortization expense of $21,425, other net non-cash items of $5,055, and a net cash outflow from changes in assets and liabilities of $14,950 primarily driven by 2022’s annual bonus payout and an increase in inventory primarily from pre-determined inventory builds, associated with plant closure and consolidation activities. See Note 9 “Costs Associated with Exit and Restructuring Activities” in the Notes to the Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q for further information.
Cash Flows from Investing Activities
Net cash used in investing activities for the nine months ended September 30, 2024 was $(134,456), driven by payments for the SyQwest acquisition of $(121,913) and for payments on capital expenditures of $(12,543).
Net cash used in investing activities for the nine months ended September 30, 2023 was $(14,595), driven by payments for the Maglab acquisition, finalization of the TEWA Temperature Sensors SP. Zo.o. (“TEWA”) net working capital adjustment of $3,359 and capital expenditures of $11,236. See Note 3 "Business Acquisitions" in the Notes to the Condensed Consolidated Financial Statements.
Cash Flows from Financing Activities
Net cash used in financing activities for the nine months ended September 30, 2024 was $(7,494). The net cash outflow was the result of treasury stock purchases of $(34,787), net cash cash borrowings of long-term debt of $35,200, taxes paid on behalf of equity award participants of $(3,154), payments of contingent consideration of $(1,076) and dividends paid of $(3,677).
Net cash used in financing activities for the nine months ended September 30, 2023 was $(39,937). The net cash outflow was the result of treasury stock purchases of $(25,890), net cash used in the paydown of long-term debt of $(7,006), taxes paid on behalf of equity award participants of $(3,249), and dividends paid of $(3,792).
Capital Resources
Revolving Credit Facility
Long‑term debt is comprised of the following:
|
|
As of |
|
|||||
|
|
September 30, |
|
|
December 31, |
|
||
|
|
2024 |
|
|
2023 |
|
||
Total credit facility |
|
$ |
400,000 |
|
|
$ |
400,000 |
|
Balance outstanding |
|
|
102,700 |
|
|
|
67,500 |
|
Standby letters of credit |
|
|
1,640 |
|
|
|
1,640 |
|
Amount available, subject to covenant restrictions |
|
$ |
295,660 |
|
|
$ |
330,860 |
|
On December 15, 2021, we entered into a second amended and restated five-year credit agreement with a group of banks (the “Revolving Credit Facility”) to (i) increase the total credit facility availability to $400,000, which may be increased by $200,000 at the request of the Company, subject to the administrative agent's approval, (ii) extend the maturity of the Revolving Credit Facility from February 12, 2024 to December 15, 2026, (iii) replace LIBOR with SOFR as the primary reference rate used to calculate interest on the loans under the Revolving Credit Facility, (iv) increase available sublimits for letters of credit, and swing line loans as well as providing for additional alternative currency borrowing capabilities, and (v) modify the financial and non-financial covenants to provide the Company additional flexibility. This new unsecured credit facility replaced the prior $300,000 unsecured credit facility, which would have expired February 12, 2024.
32
Borrowings in U.S. Dollars under the Revolving Credit Facility bear interest, at a per annum rate equal to the applicable Term SOFR rate (but not less than 0.0%), plus the Term SOFR adjustment, and plus an applicable margin, which ranges from 1.00% to 1.75%, based on our net leverage ratio. Similarly, borrowings of alternative currencies under the Revolving Credit Facility bear interest equal to a defined risk-free reference rate, plus the applicable risk-free rate adjustment and plus an applicable margin, which ranges from 1.00% to 1.75%, based on our net leverage ratio. We use interest rate swaps to convert a portion of our revolving credit facility's outstanding balance from a variable rate of interest to a fixed rate. The contractual rate of these arrangements ranges from 1.49% to 2.49%.
The Revolving Credit Facility includes a swing-line sublimit of $20,000 and a letter of credit sublimit of $20,000. We also pay a quarterly commitment fee on the unused portion of the Revolving Credit Facility. The commitment fee ranges from 0.175% to 0.25% based on our net leverage ratio. We were in compliance with all debt covenants at September 30, 2024.
Acquisition
On July 29, 2024, we acquired 100% of the outstanding membership interests of SyQwest a leading designer and manufacturer of a broad set of sonar and acoustic sensing solutions primarily for naval applications, for $121.9 million, net of cash and up to $15 million in future contingent consideration. The SyQwest acquisition will strengthen our strategy and scale in the defense end market. The acquisition was funded from both cash on hand and borrowings on our Revolving Credit Facility.
Critical Accounting Policies and Estimates
The Company’s Condensed Consolidated Financial Statements are prepared in accordance with U.S. GAAP. In connection with the preparation of the Condensed Consolidated Financial Statements, the Company uses estimates and makes judgments and assumptions about future events that affect the reported amounts of assets, liabilities, revenue, expenses, and the related disclosures. The assumptions, estimates, and judgments are based on historical experience, current trends, and other factors the Company believes are relevant at the time it prepares the Condensed Consolidated Financial Statements.
The critical accounting policies and estimates are consistent with those discussed in Note 1, Summary of Significant Accounting Policies, to the Consolidated Financial Statements and the MD&A section of the Company’s Annual Report on Form 10-K for the year ended December 31, 2023. During and as of the three and nine months ended September 30, 2024, there were no significant changes in the application of critical accounting policies or estimates.
Significant Customers
Our net sales to customers representing at least 10% of total net sales is as follows:
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
September 30, 2024 |
|
|
September 30, 2023 |
|
|
September 30, 2024 |
|
|
September 30, 2023 |
|
||||
Cummins Inc. |
|
|
12.4 |
% |
|
|
16.9 |
% |
|
|
13.0 |
% |
|
|
16.5 |
% |
Toyota Motor Corporation |
|
|
11.2 |
% |
|
|
12.2 |
% |
|
|
12.1 |
% |
|
|
11.8 |
% |
No other customer accounted for 10% or more of total net sales during these periods. We continue to focus on broadening our customer base to diversify our non-transportation end market exposure.
Forward‑Looking Statements
Readers are cautioned that the statements contained in this document regarding expectations of our performance or other matters that may affect our business, results of operations, or financial condition are, or may be deemed to be, “forward-looking statements” as defined by the “safe harbor” provisions in the Private Securities Litigation Reform Act of 1995. Such statements are made in reliance on the safe harbor provisions of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements, other than statements of historical fact, included or incorporated in this document, including statements regarding our strategy, financial position, guidance, funding for continued operations, cash reserves, liquidity, projected costs, plans, projects, awards and contracts, and objectives of management, among others, are forward-looking statements. Words such as “expect,” “anticipate,”
33
“should,” “believe,” “hope,” “target,” “continued,” “project,” “plan,” “goals,” “opportunity,” “appeal,” “estimate,” “potential,” “predict,” “demonstrates,” “may,” “will,” “might,” “could,” “intend,” “shall,” “possible,” “would,” “approximately,” “likely,” “outlook,” “schedule,” “on track,” “poised,” “pipeline,” and variations of these terms or the negative of these terms and similar expressions are intended to identify these forward-looking statements , but the absence of these words does not mean that a statement is not forward-looking. These forward-looking statements are not guarantees of future performance, conditions or results. Forward-looking statements are based on management’s expectations, certain assumptions, and currently available information. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof and are based on various assumptions as to future events, the occurrence of which necessarily are subject to uncertainties. These forward-looking statements are made subject to certain risks, uncertainties, and other factors, which could cause CTS’ actual results, performance, or achievements to differ materially from those presented in the forward-looking statements. Examples of factors that may affect future operating results and financial condition include, but are not limited to: supply chain disruptions; changes in the economy generally, including inflationary and/or recessionary conditions, and in respect to the business in which CTS operates; unanticipated issues in integrating acquisitions including, without limitation the integration of SyQwest; the results of actions to reposition CTS’ business; rapid technological change; general market conditions in the transportation, as well as conditions in the industrial, aerospace and defense, and medical markets; reliance on key customers; unanticipated public health crises, natural disasters or other events; environmental compliance and remediation expenses; the ability to protect CTS’ intellectual property; pricing pressures and demand for CTS’ products; risks associated with CTS’ international operations, including trade and tariff barriers, exchange rates and political and geopolitical risks (including, without limitation, the potential impact U.S./China relations and the conflict between Russia and Ukraine may have on our business, results of operations and financial condition); the amount and timing of any share repurchases; and the effect of any cybersecurity incidents on our business. Many of these, and other risks and uncertainties, are discussed in further detail in Item 1A. of CTS’ most recent Annual Report on Form 10-K and other filings made with the SEC. CTS undertakes no obligation to publicly update CTS’ forward-looking statements to reflect new information or events or circumstances that arise after the date hereof, including market or industry changes.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
See Item 7A, Quantitative and Qualitative Disclosures about Market Risk, of our Annual Report on Form 10-K for the year ended December 31, 2023. During the nine months ended September 30, 2024, there have been no material changes in our exposure to market risk.
34
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q were effective in providing reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within CTS have been detected.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting for the quarter ended September 30, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we are involved in litigation with respect to matters arising from the ordinary conduct of our business, and currently certain claims are pending against us. In the opinion of management, we believe we have established adequate accruals pursuant to U.S. generally accepted accounting principles for our expected future liability with respect to pending lawsuits, claims and proceedings, where the nature and extent of any such liability can be reasonably estimated based on presently available information. However, there can be no assurance that the final resolution of any existing or future lawsuits, claims or proceedings will not have a material adverse effect on our business, results of operations, financial condition, or cash flows.
See Note 11 "Commitments and Contingencies" in the Notes to the Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q.
Item 1A. Risk Factors
There have been no material changes to our risk factors from those contained in our Annual Report on Form 10-K for the year ended December 31, 2023.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On February 2, 2024, the Board of Directors approved a share repurchase program that authorizes the Company to repurchase up to $100 million of its common stock. The share repurchase program has no set expiration date and supersedes and replaces the repurchase program approved by the Board of Directors in February 2023.
35
|
|
|
|
|
|
|
|
Total Number |
|
|
Maximum Dollar |
|
||||
|
|
|
|
|
|
|
|
of Shares |
|
|
Value of Shares |
|
||||
|
|
|
|
|
|
|
|
Purchased as |
|
|
That May Yet Be |
|
||||
|
|
Total Number |
|
|
|
|
|
Part of Publicly |
|
|
Purchased Under |
|
||||
|
|
of Shares |
|
|
Average Price |
|
|
Announced |
|
|
Publicly Announced |
|
||||
Period |
|
Purchased |
|
|
Paid per Share |
|
|
Programs |
|
|
Plans or Programs |
|
||||
July 1, 2024 - July 31, 2024 |
|
|
72,500 |
|
|
$ |
51.62 |
|
|
|
72,500 |
|
|
$ |
77,497,885 |
|
August 1, 2024 - August 31, 2024 |
|
|
92,000 |
|
|
$ |
47.70 |
|
|
|
92,000 |
|
|
$ |
73,109,313 |
|
September 1, 2024 - September 30, 2024 |
|
|
80,000 |
|
|
$ |
47.49 |
|
|
|
80,000 |
|
|
$ |
69,310,235 |
|
Total |
|
|
244,500 |
|
|
|
|
|
|
244,500 |
|
|
|
|
||
Item 5. Other Information
From time to time, our directors and officers may purchase or sell shares of our common stock in the market, including pursuant to plans intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) under the Securities Exchange Act of 1934, as amended (“Rule 10b5-1 Plans”).
Kieran O’Sullivan, President, Chief Executive Officer and Chairman of the Board, entered into a Rule 10b5-1 Plan on August 27, 2024 for the sale of up to 80,000 shares of our common stock, which plan is scheduled to terminate no later than August 27, 2026.
During the quarter ended September 30, 2024, no other director or officer (as defined in Rule 16a-1(f) under the Exchange Act) of the Company
36
Item 6. Exhibits
|
|
(31)(a) |
Certification pursuant to Section 302 of the Sarbanes‑Oxley Act of 2002. |
|
|
(31)(b) |
Certification pursuant to Section 302 of the Sarbanes‑Oxley Act of 2002. |
|
|
(32)(a) |
|
|
|
(32)(b) |
|
|
|
101.1 |
The following information from CTS Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2024 formatted in Inline XBRL: (i) Condensed Consolidated Statements of Earnings; (ii) Condensed Consolidated Statements of Comprehensive Earnings; (iii) Condensed Consolidated Balance Sheets; (iv) Condensed Consolidated Statements of Cash Flows; (v) Condensed Consolidated Statements of Shareholders’ Equity; (vi) Notes to Condensed Consolidated Financial Statements, tagged as blocks of text and including detailed tags. |
|
|
104 |
The cover page from this Current Report on Form 10-Q formatted as inline XBRL |
|
|
|
|
|
|
37
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
CTS Corporation |
|
|
|
|
|
/s/ Ashish Agrawal |
|
|
Ashish Agrawal |
|
|
Vice President and Chief Financial Officer (Principal Financial Officer & Principal Accounting Officer) |
|
|
|
|
|
|
|
|
Dated: October 29, 2024 |
38
EXHIBIT (31)(a)
CERTIFICATION
I, Kieran O’Sullivan, certify that:
Date: October 29, 2024 |
|
/s/ Kieran O’Sullivan |
|
|
Kieran O’Sullivan |
|
|
Chairman, President and Chief Executive Officer |
|
EXHIBIT (31)(b)
CERTIFICATION
I, Ashish Agrawal, certify that:
Date: October 29, 2024 |
|
/s/Ashish Agrawal |
|
|
Ashish Agrawal |
|
|
Vice President and Chief Financial Officer |
|
EXHIBIT (32)(a)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of CTS Corporation (the Company) on Form 10-Q for the quarter ended September 30, 2024, as filed with the Securities and Exchange Commission on the date hereof (the Report), the undersigned officer of the Company certifies, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:
Date: October 29, 2024 |
|
/s/ Kieran O’Sullivan |
|
|
Kieran O’Sullivan |
|
|
Chairman, President and Chief Executive Officer |
A signed original of this written statement required by Section 906 has been provided to CTS Corporation and will be retained by CTS Corporation and furnished to the Securities and Exchange Commission or its staff upon request.
|
EXHIBIT (32)(b)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of CTS Corporation (the Company) on Form 10-Q for the quarter ended September 30, 2024, as filed with the Securities and Exchange Commission on the date hereof (the Report), the undersigned officer of the Company certifies, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:
Date: October 29, 2024 |
|
/s/Ashish Agrawal |
|
|
Ashish Agrawal |
|
|
Vice President and Chief Financial Officer |
A signed original of this written statement required by Section 906 has been provided to CTS Corporation and will be retained by CTS Corporation and furnished to the Securities and Exchange Commission or its staff upon request.
|