Company Quick10K Filing
Quick10K
CTS
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$31.00 33 $1,030
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
8-K 2019-02-14 Enter Agreement, Leave Agreement, Off-BS Arrangement, Exhibits
8-K 2019-02-08 Other Events
8-K 2019-02-05 Regulation FD, Exhibits
8-K 2019-02-05 Earnings, Exhibits
8-K 2018-12-28 Amend Bylaw, Exhibits
8-K 2018-10-25 Earnings, Exhibits
8-K 2018-10-25 Regulation FD, Exhibits
8-K 2018-07-27 Regulation FD, Exhibits
8-K 2018-07-26 Earnings, Exhibits
8-K 2018-05-22 Officers, Exhibits
8-K 2018-05-18 Shareholder Vote
8-K 2018-04-27 Regulation FD, Exhibits
8-K 2018-04-04 Officers, Exhibits
8-K 2018-02-07 Regulation FD, Exhibits
8-K 2018-02-06 Earnings, Exhibits
8-K 2018-01-16 Regulation FD, Exhibits
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AVX AVX
TTMI TTM Technologies
CLS Celestica
CTRL Control4
VPG Vishay Precision Group
KE Kimball Electronics
PKE Park Electrochemical
INTT inTEST
SGMA SigmaTron
CTS 2018-12-31
Part I
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
Part II
Item 5. Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Note 1 - Summary of Significant Accounting Policies
Note 2 - Revenue Recognition
Note 3 - Accounts Receivable
Note 4 - Inventories
Note 5 - Property, Plant and Equipment
Note 6 - Retirement Plans
Note 7 - Goodwill and Other Intangible Assets
Note 8 - Costs Associated with Exit and Restructuring Activities
Note 9 - Accrued Expenses and Other Liabilities
Note 10 - Contingencies
Note 11 - Leases
Note 12 - Debt
Note 13 - Derivatives
Note 14 - Accumulated Other Comprehensive Loss
Note 15 - Shareholders' Equity
Note 16 - Stock-Based Compensation
Note 17 - Fair Value Measurements
Note 18 - Income Taxes
Note 19 - Business Acquisitions
Note 20 - Geographic Data
Note 21 - Quarterly Financial Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Part III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accountant Fees and Services
Part IV
Item 15. Exhibits and Financial Statements Schedules
EX-21 ex-212018.htm
EX-23 ex-232018.htm
EX-31.A ex-31a2018.htm
EX-31.B ex-31b2018.htm
EX-32.A ex-32a2018.htm
EX-32.B ex-32b2018.htm

CTS Earnings 2018-12-31

CTS 10K Annual Report

Balance SheetIncome StatementCash Flow

10-K 1 ctscorp-20181231x10xk.htm 10-K Document

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended December 31, 2018
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 1-4639
CTS CORPORATION
(Exact name of registrant as specified in its charter)
 
Indiana
 
 
 
35-0225010
 
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification Number)
 
 
 
 
 
 
 
4925 Indiana Avenue, Lisle, IL
 (Address of principal executive offices)
 
60532
 (Zip Code)
Registrant's telephone number, including area code: 630-577-8800
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Name of Each Exchange on Which Registered
Common stock, without par value
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes ¨     No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.    Yes ¨    No x
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.    Yes x     No ¨
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).    x Yes     ¨ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
 
Accelerated filer o
 
Non-accelerated filer o
 
Smaller reporting company o
Emerging growth market o
 
 
 
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes o     No    x
The aggregate market value of the voting and non-voting stock held by non-affiliates of CTS Corporation, based upon the closing sales price of CTS common stock on June 30, 2018, was approximately $1,176,000,000. There were 32,734,227 shares of common stock, without par value, outstanding on February 19, 2019.
DOCUMENTS INCORPORATED BY REFERENCE
(1)
Portions of the Proxy Statement to be filed for the annual meeting of shareholders to be held on or about May 16, 2019 are incorporated by reference in Part III.
 




TABLE OF CONTENTS


 
 
 
 
 
 
 
ITEM
 
 
PAGE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

CTS CORPORATION 1


Safe Harbor
Forward-Looking Statements
This document contains statements that are, or may be deemed to be, forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, any financial or other guidance, statements that reflect our current expectations concerning future results and events, and any other statements that are not based solely on historical fact. 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 our 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: changes in the economy generally and in respect to the business in which CTS operates; unanticipated issues in integrating acquisitions; the results of actions to reposition our business; rapid technological change; general market conditions in the transportation, telecommunications, and information technology industries, as well as conditions in the industrial, aerospace and defense, and medical markets; reliance on key customers; unanticipated natural disasters or other events; environmental compliance and remediation expenses; the ability to protect our intellectual property; pricing pressures and demand for our products; and risks associated with our international operations, including trade and tariff barriers, exchange rates and political and geopolitical risks. Many of these, and other risks and uncertainties, are discussed in further detail in Item 1A. of this Annual Report on Form 10-K. We undertake no obligation to publicly update our forward-looking statements to reflect new information or events or circumstances that arise after the date hereof, including market or industry changes.

PART I

Item 1.  Business
CTS Corporation ("CTS", "we", "our", "us" or the "Company") is a global manufacturer of sensors, electronic components, and actuators. CTS was established in 1896 as a provider of high-quality telephone products and was incorporated as an Indiana corporation in February 1929. Our principal executive offices are located in Lisle, Illinois.
We design, manufacture, and sell a broad line of sensors, electronic components, and actuators primarily to original equipment manufacturers ("OEMs") for the aerospace and defense, industrial, information technology, medical, telecommunications, and transportation markets. Our vision is to be a leading provider of sensing and motion devices as well as connectivity components, enabling an intelligent and seamless world. These devices are categorized by their ability to Sense, Connect or Move. Sense products provide vital inputs to electronic systems. Connect products allow systems to function in synchronization with other systems. Move products ensure required movements are effectively and accurately executed. We are committed to achieving our vision by continuing to invest in the development of products and technologies within these categories.
We operate manufacturing facilities in North America, Asia, and Europe. Sales and marketing are accomplished through our sales engineers, independent manufacturers' representatives, and distributors.
See the Consolidated Financial Statements and Notes included in Part II, Item 8 of this Annual Report on Form 10-K for financial information regarding the Company.

PRODUCTS BY MAJOR MARKETS
Our products perform specific electronic functions for a given product family and are intended for use in customer assemblies. Our major products consist principally of sensors and actuators used in passenger or commercial vehicles, electronic components used in telecommunications infrastructure, information technology and other high-speed applications, switches, and potentiometers supplied to multiple markets, and fabricated piezoelectric materials and substrates used primarily in medical, industrial, aerospace and defense, and information technology markets.



2 CTS CORPORATION


The following table provides a breakdown of net sales by industry as a percent of consolidated net sales:
 
2018
2017
2016
Industry
 
 
 
Transportation
64%
65%
66%
Industrial
18%
18%
17%
Medical
9%
8%
7%
Aerospace and Defense
5%
4%
4%
Telecommunications and IT
4%
5%
6%
% of consolidated net sales
100%
100%
100%
The following table identifies major products by industry. Products are sold to several industry OEMs and through distributors.
Product Description
Transportation
Industrial
Medical
Aerospace
and
Defense
Telecom
and
IT
SENSE
l
l
l
l
 
(Controls, Pedals, Piezo Sensing Products, Sensors, Switches, Transducers)
 
 
 
 
 
CONNECT
 
l
l
l
l
(EMI/RFI Filters, Capacitors, Frequency Control, Resistors, RF filters)
 
 
 
 
 
MOVE
l
l
 
 
l
(Piezo Microactuators, Rotary Actuators)
 
 
 
 
 


MARKETING AND DISTRIBUTION
Sales and marketing to OEMs is accomplished through our sales engineers, independent manufacturers' representatives, and distributors. We maintain sales offices in China, Czech Republic, Denmark, Germany, India, Japan, Scotland, Singapore, Taiwan, and the United States. Approximately 89% of 2018 net sales were attributable to our sales engineers.
Our sales engineers generally service our largest customers with application-specific products. The sales engineers work closely with major customers in designing and developing products to meet specific customer requirements.
We utilize the services of independent manufacturers' representatives for customers not serviced directly by our sales engineers. Independent manufacturers' representatives receive commissions from us. During 2018, approximately 5% of net sales were attributable to independent manufacturers' representatives. We also use independent distributors. Independent distributors purchase products from us for resale to customers. In 2018, independent distributors accounted for approximately 6% of net sales.

RAW MATERIALS
We utilize a wide variety of raw materials and purchased parts in our manufacturing processes. The following are the most significant raw materials and purchased components:
Conductive inks and contactors, passive electronic components, integrated circuits and semiconductors, certain rare earth elements ("REEs"), ceramic powders, plastic components, molding compounds, printed circuit boards and assemblies, quartz blanks and crystals, wire harness assemblies, copper, brass, silver, gold, platinum, lead, aluminum, and steel-based raw materials and components.
These raw materials and parts are purchased from a number of suppliers, and we generally do not believe we are dependent upon one or a limited number of suppliers. Although we purchase all of our semiconductors, REEs, conductive inks, and silver pastes from a limited number of suppliers, alternative sources are available.

CTS CORPORATION 3


We do not currently anticipate any significant raw material shortages that would limit production. However, the lead times between the placement of orders for certain raw materials and purchased parts and actual delivery to us may vary. Occasionally, we may need to order raw materials in greater quantities and at higher prices to compensate for the variability of lead times for delivery.

PATENTS, TRADEMARKS, AND LICENSES
We maintain a program of obtaining and protecting U.S. and non-U.S. patents relating to products that we have designed and manufactured, as well as processes and equipment used in our manufacturing technology. We were issued 10 new U.S. patents and 19 non-U.S. patents in 2018 and currently hold 147 U.S. patents and 159 non-U.S. patents. We have 9 registered U.S. trademarks, 20 registered foreign trademarks and 4 international trademark registrations. We have licensed the right to use several of our patents. In 2018, license and royalty income was less than 1% of net sales.

MAJOR CUSTOMERS
Sales to our 15 largest customers as a percentage of total net sales were as follows:
 
Years Ended December 31,
 
2018
2017
2016
Total of 15 largest customers / net sales
63.7%
64.4%
63.1%

Our net sales to significant customers as a percentage of total net sales were as follows:
 
Years Ended December 31,
 
2018
2017
2016
Cummins Inc.
15.2%
13.4%
9.9%
Honda Motor Co.
10.5%
11.2%
10.7%
Toyota Motor Corporation
10.5%
10.2%
10.4%
We sell automotive parts to these three customers for certain vehicle platforms under purchase agreements that have no volume commitments and are subject to purchase orders issued from time to time.
No other customer accounted for 10% or more of total net sales during these periods.
We continue to broaden our customer base. Changes in the level of our customers' orders have, in the past, had a significant impact on our operating results. If a major customer reduces the amount of business it does with us, or substantially changes the terms of that business, there could be an adverse impact on our operating results.

We expect to continue to depend on sales to our major customers. Because our customers are under no obligation to continue to do business with us on a long-term basis, it is possible that one or more customers may choose to work with a competitor and reduce its business with us. Customers may also reduce or delay their business with us because of economic or other conditions or decisions that reduce their need for our products or services. Since it is difficult to replace lost business on a timely basis, it is likely that our operating results would be adversely affected if one or more of our major customers were to cancel, delay, or reduce a large amount of business with us in the future. If one or more of our customers were to become insolvent or otherwise unable to pay for our products and/or services, our operating results, financial condition, and cash flows could be adversely affected.

ORDER BACKLOG
Order backlog is comprised of firm open purchase orders we have received from our customers and generally represents 1 to 2 months of sales for certain products. Our business is a mix of purchase order based business, shorter-term contracts, and multi-year awards, such as with customers who serve the automotive end market.  As such, order backlog does not provide a meaningful indication of future sales.  


4 CTS CORPORATION


COMPETITION
We compete with many domestic and foreign manufacturers principally on the basis of product features, technology, price, quality, reliability, delivery, and service. Most of our product lines encounter significant global competition. The number of competitors varies from product line to product line. No one competitor competes with us in every product line, but many competitors are larger and more diversified than we are.
Some customers have reduced or plan to reduce their number of suppliers, while increasing their volume of purchases. Customers demand lower cost and higher quality, reliability, and delivery standards from us as well as from our competitors. These trends create opportunities for us, but also increase the risk of loss of business to competitors. We are subject to competitive risks that are typical within the electronics industry, including in some cases short product life cycles and technical obsolescence.
We believe we compete most successfully in custom engineered products manufactured to meet specific applications of major OEMs.

NON-U.S. REVENUES AND ASSETS
Our net sales to customers originating from our non-U.S. operations as a percentage of total net sales were as follows:
 
Years Ended December 31,
 
2018
2017
2016
Net sales from non-U.S. operations
33%
32%
30%

Our percentages of total assets at non-U.S. locations were as follows:
 
Years Ended December 31,
 
2018
2017
2016
Total assets at non-U.S. operations
46%
49%
48%
A substantial portion of these assets, other than cash and cash equivalents, cannot readily be liquidated. We believe the business risks to our non-U.S. operations, though substantial, are normal risks for global businesses. These risks include currency controls and changes in currency exchange rates, longer collection cycles, political and transportation risks, economic downturns and inflation, government regulations, and expropriation. Our non-U.S. manufacturing facilities are located in China, Czech Republic, Denmark, India, Mexico, and Taiwan.

EMPLOYEES
We employed 3,230 people at December 31, 2018, with 81% of these employees located outside the U.S. We employed 3,222 people at December 31, 2017. Approximately 11 employees at one location in the United States were covered by two collective bargaining agreements as of December 31, 2018. Both agreements are scheduled to expire upon completion of our 2016 Restructuring Plan activities.

ADDITIONAL INFORMATION
We are incorporated in the State of Indiana. Our principal corporate office is located at 4925 Indiana Avenue Lisle, IL 60532.
Our internet address is www.ctscorp.com. We make available free of charge through our website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission ("SEC"). Other than the documents that we file with the SEC that are incorporated by reference herein, the information contained on or accessible through our website is not part of this or any other report we file or furnish to the SEC.

CTS CORPORATION 5


The SEC maintains an internet site that contains reports, proxy and information statements and other information regarding our filings at www.sec.gov.

EXECUTIVE OFFICERS OF THE COMPANY
Executive Officers.    The following serve as executive officers of CTS as of February 22, 2019. The executive officers are expected to serve until the next annual shareholders meeting, scheduled to be held on or about May 16, 2019, at which time the election of officers will be considered again by the Board of Directors.
Name
 
Age
 
Positions and Offices
Kieran O'Sullivan
 
56
 
President, Chief Executive Officer and Chairman of the Board
Ashish Agrawal
 
48
 
Vice President and Chief Financial Officer
Luis Francisco Machado
 
56
 
Vice President, General Counsel and Secretary

Kieran O'Sullivan - 56 - President, Chief Executive Officer and Chairman of the Board. Mr. O'Sullivan joined CTS on January 7, 2013. Before joining CTS, Mr. O'Sullivan served as Executive Vice President of Continental AG's Global Infotainment and Connectivity Business and led the NAFTA Interior Division, having joined Continental AG, a global automotive supplier, in 2006. Mr. O'Sullivan is a member of the board of directors, is chairman of the compensation committee, and is a member of the audit committee of LCI Industries, a supplier of components for manufacturers of recreational vehicles, manufactured homes, marine applications, and for the related aftermarkets of those industries.
Ashish Agrawal - 48 - Vice President and Chief Financial Officer. On November 11, 2013, Mr. Agrawal was elected Vice President and Chief Financial Officer for CTS. Mr. Agrawal joined CTS in June 2011 as Vice President, Treasury and Corporate Development, and was elected as Treasurer on September 1, 2011. Before joining CTS, Mr. Agrawal was with Dometic Corporation, a manufacturer of refrigerators, awnings and air conditioners, as Senior Vice President and Chief Financial Officer since 2007. Prior to that, Mr. Agrawal was with General Electric Co. in various positions since December 1994.
Luis Francisco Machado - 56 - Vice President, General Counsel and Secretary. Mr. Machado joined CTS in August 2015. Before joining CTS, Mr. Machado was at L Brands, Inc., a retailer of intimate apparel, home fragrance and beauty products under the Victoria's Secret, Pink, and Bath and Body Works Brands, as Senior Vice President, Legal and Assistant Secretary since August 2010, and Associate General Counsel, Corporate and Assistant Secretary of Wm. Wrigley Jr. Company since February 2006.
Information with respect to Directors and Corporate Governance may be found in our definitive proxy statement to be delivered to shareholders in connection with our 2019 Annual Meeting of Shareholders. Such information is incorporated herein by reference.

6 CTS CORPORATION


Item 1A.  Risk Factors
The following are certain risk factors that could affect our business, financial condition and operating results. These risk factors should be considered in connection with evaluating forward-looking statements contained in this Annual Report on Form 10-K or in any other reports filed or furnished by us, because these factors could cause our actual results and financial condition to differ materially from those projected in any such forward-looking statements. Before you invest in us, you should know that making such an investment involves risks, including the risks described below. The risks that are highlighted below are not the only ones that we face. If any of the following risks occur, our business, financial condition or operating results could be negatively affected.

Because we currently derive a significant portion of our revenues from a small number of customers, any decrease in orders from these customers could have an adverse effect on our business, financial condition and operating results.

We depend on a small number of customers for a large portion of our business, and changes in the level of our customers' orders have, in the past, had a significant impact on our results of operations. If a major customer significantly delays, reduces, or cancels the level of business it does with us, there could be an adverse effect on our business, financial condition and operating results. Significant pricing and margin pressures exerted by a major customer could also materially adversely affect our operating results. In addition, we generate significant accounts receivable from sales to our major customers. If one or more of our major customers were to become insolvent or otherwise unable to pay or were to delay payment for our products, our business, financial condition and operating results could be materially adversely affected.

Negative or unexpected tax consequences could adversely affect our results of operations.

We operate globally and changes in tax laws could adversely affect our results.  The international tax environment continues to change as a result of both coordinated actions by governments and unilateral measures enacted by individual countries, such as the comprehensive tax reform enacted in the U.S. in 2017, which could significantly impact our effective tax rate, tax liabilities, and ability to utilize deferred tax assets.

Adverse changes in the underlying profitability and financial outlook of our operations in several jurisdictions could lead to changes in our valuation allowances against deferred tax assets and other tax accruals that could materially and adversely affect our results of operations. In addition, acquisitions or divestitures may cause our effective tax rate to change.

We base our tax accounting positions upon the anticipated nature and conduct of our business and upon our understanding of the tax laws of the various countries in which we have assets or conduct activities. However, our tax accounting positions are subject to review and possible challenge by taxing authorities and to possible changes in law, which may have a retroactive effect.

We may be unable to compete effectively against competitors.

The industries in which we operate are highly competitive and characterized by price erosion and rapid technological change. We compete against many domestic and foreign companies, some of which have substantially greater manufacturing, financial, research and development, and marketing resources than we do. If any customer becomes dissatisfied with our prices, quality, or timeliness of delivery, among other things, it could award business to our competitors. Moreover, some of our customers could choose to manufacture and develop particular products themselves rather than purchase them from us. Increased competition could result in price reductions, reduced profit margins and loss of market share, each of which could materially adversely affect our business, financial condition and operating results. These developments also may materially adversely affect our ability to compete successfully going forward. We cannot assure you that our products will continue to compete successfully with our competitors' products, including OEMs.

We may be unable to keep pace with rapid technological changes that could make some of our products or processes obsolete before we realize a return on our investment.

The technologies relating to some of our products have undergone, and are continuing to undergo, rapid and significant changes. End markets for our products are characterized by technological change, frequent new product introductions and enhancements, changes in customer requirements, and emerging industry standards. The introduction of products embodying new technologies and the emergence of new industry standards could render our existing products obsolete and unmarketable before we can recover any or all of our research, development and commercialization expenses, or our capital investments. Furthermore, the life cycles of our products and the products we manufacture for others vary, may change, and are difficult to estimate.

We may experience difficulties that could delay or prevent the successful development, introduction and marketing of new products or product enhancements and our new products or product enhancements may not adequately meet the requirements of the

CTS CORPORATION 7


marketplace or achieve market acceptance. If we are unable, for technological or other reasons, to develop and market new products or product enhancements in a timely and cost-effective manner, our business, financial condition and operating results could be materially adversely affected.

Our customers may cancel their orders, change production quantities or locations or delay production.

We generally do not obtain firm, long-term purchase commitments from our customers, and regularly experience reduced or extended lead times in customer orders. Customers cancel orders, change production quantities and delay production for a number of reasons. Uncertain economic and geopolitical conditions may result in some of our customers delaying the delivery of some of the products we manufacture for them and placing purchase orders for lower volumes of products than previously anticipated. Cancellations, reductions or delays by a significant customer or by a number of customers may harm our results of operations by reducing the volumes of products we manufacture and sell, as well as by causing a delay in the recovery of our expenditures for inventory in preparation for customer orders, or by reducing our asset utilization, resulting in lower profitability.

In addition, customers may require that manufacturing of their products be transitioned from one of our facilities to another to achieve cost reductions and other objectives. Such transfers may result in inefficiencies and costs due to resulting excess capacity and overhead at one facility and capacity constraints and the inability to fulfill all orders at another. In addition, we make key decisions based on our estimates of customer requirements, including determining the levels of orders that we will seek and accept, production schedules, component procurement commitments, personnel needs and other resource requirements. The short-term nature of our customers' commitments and the changes in demand for their products may reduce our ability to estimate future customer requirements accurately. This may make it difficult to schedule production and maximize utilization of our manufacturing capacity. Anticipated orders may not materialize and delivery schedules may be deferred as a result of changes in demand for our products or our customers' products. We often increase staffing and capacity, and incur other expenses to meet the anticipated demand of our customers, which causes reductions in our gross margins if customer orders are delayed or canceled. On occasion, customers require rapid increases in production, which may stress our resources and reduce margins. We may not have sufficient capacity at any given time to meet our customers' demands. In addition, because many of our costs and operating expenses are relatively fixed over the short-term, a reduction in customer demand could harm our gross margin and operating income until such time as adjustments can be made to activity and operating levels or to structural costs.

We sell products to customers in cyclical industries that are subject to significant downturns that could materially adversely affect our business, financial condition and operating results.

We sell products to customers in cyclical industries that have experienced economic and industry downturns. The markets for our products have softened in the past and may again soften in the future. We may face reduced end-customer demand, underutilization of our manufacturing capacity, changes in our revenue mix and other factors that could adversely affect our results of operations in the near-term. We cannot predict whether we will achieve profitability in future periods.

We derive a substantial portion of our revenues from customers in the transportation, information technology and telecommunications industries and are susceptible to trends and factors affecting those industries.

Sales to the transportation, information technology and telecommunications industries represent a substantial portion of our revenues. Factors negatively affecting these industries and the demand for their products also negatively affect our business, financial condition and operating results. Any adverse occurrence, including among others, industry slowdown, recession, political instability, costly or constraining regulations, increased tariffs, reduced government budgets and spending, armed hostilities, terrorism, excessive inflation, prolonged disruptions in one or more of our customers' production schedules or labor disturbances, that results in a decline in the volume of sales in these industries, or in an overall downturn in the business and operations of our customers in these industries, could materially adversely affect our business, financial condition and operating results. These industries are generally unionized and some of our customers have experienced labor disruptions in the past. Furthermore, these industries are highly cyclical in nature and sensitive to changes in general economic conditions, consumer preferences and interest rates. The failure of manufacturers that we serve may result in the failure to receive payment in full for products sold in the past and an abrupt cancellation in demand for certain products. Weakness in demand, the insolvency of manufacturers that we serve or their suppliers, and constriction of credit markets may negatively and materially affect our facility utilization, cost structure, financial condition, and operating results.





8 CTS CORPORATION


Products we manufacture may contain design or manufacturing defects that could result in reduced demand for our products or services and liability claims against us.

Despite our quality control and quality assurance efforts, defects may occur in the products we manufacture due to design or manufacturing errors or component failure. Product defects could result in delayed shipments and reduced demand for our products. We may be subject to increased costs due to warranty claims on defective products. Product defects could result in product liability claims against us where defects cause, or are alleged to cause, property damage, bodily injury or death. As we grow our business in the transportation and medical device markets, the risk of exposure to product liability litigation increases. We may be required to participate in a recall involving products which are, or are alleged to be, defective. We carry insurance for certain legal matters involving product liability; however, we do not have coverage for all costs related to product defects and the costs of such claims, including costs of defense and settlement, may exceed our available coverage. Accordingly, our results of operations, cash flow and financial position could be adversely affected.

We are exposed to fluctuations in foreign currency exchange rates that may adversely affect our business, financial condition and operating results.

We transact business in various foreign countries. We present our consolidated financial statements in U.S. dollars, but a portion of our revenues and expenditures are transacted in other currencies. As a result, we are exposed to fluctuations in foreign currencies. Additionally, we have currency exposure arising from funds held in local currencies in foreign countries. Volatility in the exchange rates between the foreign currencies and the U.S. dollar could harm our business, financial condition and operating results. Furthermore, to the extent we sell our products in foreign markets, currency fluctuations may result in our products becoming too expensive for foreign customers.

Our operating results vary significantly from period to period.

We experience fluctuations in our operating results. Some of the principal factors that contribute to these fluctuations are: changes in demand for our products; our effectiveness in managing manufacturing processes, costs and timing of our component purchases so that components are available when needed for production, while mitigating the risks of purchasing inventory in excess of immediate production needs; the degree to which we are able to utilize our available manufacturing capacity; changes in the cost and availability of components, which often occur in the electronics manufacturing industry and which affect our margins and our ability to meet delivery schedules; general economic and served industry conditions; and local conditions and events that may affect our production volumes, such as labor conditions or political instability.

We face risks relating to our international operations.

Because we have significant international operations, our operating results and financial condition could be materially adversely affected by economic, political, health, regulatory and other factors existing in foreign countries in which we operate. Our international operations are subject to inherent risks, which may materially adversely affect us, including: political and economic instability in countries in which our products are manufactured; expropriation or the imposition of government controls; changes in government regulations; export license requirements; trade restrictions; earnings repatriation and expatriation restrictions; exposure to different legal standards, including related to intellectual property; health conditions and standards; currency controls; fluctuations in exchange rates; increases in the duties and taxes we pay; inflation or deflation; greater difficulty in collecting accounts receivable and longer payment cycles; changes in labor conditions and difficulties in staffing and managing our international operations; limitations on insurance coverage against geopolitical risks, natural disasters, and business operations; and communication among and management of international operations. In addition, these same factors may also place us at a competitive disadvantage compared to some of our foreign competitors.

We may face risks associated with violations of the Foreign Corrupt Practices Act ("FCPA") and similar anti-bribery laws. The FCPA and similar anti-bribery laws in other jurisdictions generally prohibit companies and their intermediaries from making improper payments to government officials for the purpose of obtaining or retaining business. Our Code of Ethics mandates compliance with these anti-bribery laws. We operate in many parts of the world where strict compliance with anti-bribery laws may conflict with local customs and practices. We cannot assure you that our internal controls and procedures always will protect us from the detrimental actions by our employees or agents. If we are found to be liable for FCPA violations (either due to our own acts or inadvertence or due to the acts or inadvertence of others), we could suffer from criminal or civil penalties or other sanctions, which could have a material adverse effect on our business.

Public health or safety concerns, conditions, or restrictions that impact the availability of labor or the movement of goods in some of the countries in which we operate could have a material adverse effect on our business, financial condition and operating results.

CTS CORPORATION 9



We may restructure our operations or fail to execute capital projects as planned, which may materially adversely affect our business, financial condition and operating results.

We have announced and initiated restructuring plans or capital projects at various times in the recent past designed to revise and consolidate certain aspects of our operations for the purpose of improving our cost structure or manufacturing efficiency. We may incur restructuring and impairment charges in the future if circumstances warrant. Additionally, if we are unsuccessful in implementing restructuring plans or in executing capital projects, we may experience disruptions in our operations and higher ongoing costs, which may materially adversely affect our business, financial condition and operating results.

Losses in the stock market could negatively impact pension asset returns and cash flow due to possible required contributions in the future.

We make a number of assumptions relating to our pension plans in order to measure the financial position of the plans and the net periodic benefit cost. The most significant assumptions relate to the discount rate and the expected long-term return on plan assets. If these assumptions prove to be significantly different from actual rates, then we may need to record additional expense relating to the pension plans, which could require cash contributions to fund future pension obligation payments and could have a material adverse effect on our financial condition and results of operations.

We may pursue acquisition opportunities that complement or expand our business as well as divestitures that could impact our business operations. We may not be able to complete these transactions, and these transactions, if executed, may pose significant risks that could materially adversely affect our business, financial condition and operating results.

On an ongoing basis we explore opportunities to buy other businesses or technologies that could complement, enhance or expand our current business or product lines or that might otherwise offer us growth opportunities. We may have difficulty finding suitable opportunities or, if we do identify these opportunities, we may not be able to complete the transactions for any number of reasons including a failure to secure financing. In addition, we may not be able to successfully or profitably integrate, operate, maintain and manage our newly acquired operations or employees. Any transactions that we are able to identify and complete may involve a number of risks, including: the diversion of management's attention from our existing business to integrate the operations and personnel of the acquired or combined business; possible adverse effects on our operating results during the integration process; difficulties managing and integrating operations in geographically dispersed locations; increases in our expenses and working capital requirements, which could reduce our return on invested capital; exposure to unanticipated liabilities of acquired companies; and our possible inability to achieve the intended objectives of the transaction. Even if we are initially successful in integrating a new operation, we may not be able to maintain uniform standards, controls, procedures and policies, and this may lead to operational inefficiencies. In addition, future acquisitions may result in dilutive issuances of equity securities or the incurrence of additional debt. These and other factors could harm our ability to achieve anticipated levels of profitability from acquired operations or realize other anticipated benefits of an acquisition, and could adversely affect our business and operating results.

We have in the past, and may in the future, consider divesting certain business operations. Divestitures may involve a number of risks, including the diversion of management's attention, significant costs and expenses, the loss of customer relationships and cash flow, and the disruption of operations in the affected business. Failure to timely complete or consummate a divestiture may negatively affect valuation of the affected business or result in restructuring charges.

If we are unable to protect our intellectual property or we infringe, or are alleged to infringe, on others' intellectual property rights, our business, financial condition and operating results could be materially adversely affected.

The success of our business depends, in part, upon our ability to protect trade secrets, trademarks, copyrights and patents, obtain or license patents and operate without infringing on the intellectual property rights of others. We rely on a combination of trade secrets, copyrights, patents, nondisclosure agreements and technical measures to protect our proprietary rights in our products and technology. The steps we have taken to prevent misappropriation of our technology may be inadequate. In addition, the laws of some foreign countries in which we operate do not protect our proprietary rights to the same extent as do the laws of the United States. Although we continue to evaluate and implement protective measures, there can be no assurance that these efforts will be successful. Our inability to protect our intellectual property rights could diminish or eliminate the competitive advantages that we derive from our technology, cause us to lose sales or otherwise harm our business.

We believe that patents will continue to play an important role in our business. However, there can be no assurance that we will be successful in securing patents for claims in any pending patent application or that any issued patent will provide us with any

10 CTS CORPORATION


competitive advantage. We also cannot provide assurance that the patents will not be challenged by third parties or that the patents of others will not materially adversely affect our ability to do business.

We may become involved in litigation in the future to protect our intellectual property or because others may allege that we infringed on their intellectual property. These claims and any resulting lawsuit could subject us to liability for damages and invalidate our intellectual property rights. If an infringement claim is successfully asserted by a holder of intellectual property rights, we may be required to cease marketing or selling certain products, pay penalties and spend significant time and money to develop a non-infringing product or process or to obtain licenses for the technology, process or information from the holder. We may not be successful in the development of a non-infringing alternative, or licenses may not be available on commercially acceptable terms, if at all, in which case we may lose sales and profits. In addition, any litigation could be lengthy and costly and could materially adversely affect us even if we are successful in the litigation.

We may experience shortages and increased costs of raw material and required electronic components.

Unanticipated raw material or electronic component shortages may prevent us from making scheduled shipments to customers. Our inability to make scheduled shipments could cause us to experience a shortfall in revenue, increase our costs and adversely affect our relationship with affected customers and our reputation as a reliable supplier. We may be required to pay higher prices for raw materials or electronic components in short supply and order these raw materials or electronic components in greater quantities to compensate for variable delivery times. We may also be required to pay higher prices for raw materials or electronic components due to inflationary trends regardless of supply. We are also dependent on our suppliers' ability to supply and deliver raw materials on a timely basis at negotiated prices. Any delay or inability to deliver raw materials by our suppliers may require that we attempt to mitigate such failure or fail to make deliveries to our customers on a timely basis. As a result, raw material or electronic component shortages, price increases, or failure to perform by our suppliers could adversely affect our operating results for a particular period due to the resulting revenue shortfall and/or increased costs.

Loss of our key management and other personnel, or an inability to attract key management and other personnel, could materially affect our business.

We depend on our senior executive officers and other key personnel to run our business. We do not have long-term employment contracts with our key personnel. The loss of any of these officers or other key personnel could adversely affect our operations. Competition for qualified employees among companies that rely heavily on engineering and technology is at times intense, and the loss of qualified employees or an inability to attract, retain and motivate additional highly skilled employees required for the operation and expansion of our business could hinder our ability to conduct research activities and develop marketable products successfully.

We are subject to a variety of environmental, health, and safety laws and regulations that expose us to potential financial liability.

Our operations are regulated by a number of federal, state, local and foreign environmental, health, and safety (“EHS”) laws and regulations that govern, among other things, air and water emissions, worker protection, and the handling, storage and disposal of hazardous materials. Compliance with EHS laws and regulations is a major consideration for us because we use hazardous materials in our manufacturing processes. If we violate EHS laws and regulations, we could be liable for substantial fines, penalties, and costs of mandated remedial actions. Our environmental permits could also be revoked or modified, which could require us to cease or limit production at one or more of our facilities, thereby materially adversely affecting our business, financial condition and operating results. EHS laws and regulations have generally become more stringent over time and could continue to do so, imposing greater compliance costs and increasing risks and penalties associated with any violation, which also could materially affect our business, financial condition and operating results.

We have been notified by the U.S. Environmental Protection Agency, state environmental agencies and, in some cases, groups of potentially responsible parties, that we are potentially liable for environmental contamination at several sites currently and formerly owned or operated by us, including sites designated as National Priorities List sites under the U.S. Environmental Protection Agency’s Superfund program. Superfund liability is joint and several and we may be held responsible for more than our share of contamination at a site. Although we estimate our potential environmental liability and reserve for such matters, we cannot assure you that our reserves will be sufficient to cover the actual costs that we incur as a result of these matters.

Future events, such as the notification of potential liability at new sites, the discovery of additional contamination or changes to an approved remedy at existing sites, changes to existing EHS environmental laws and regulations or their interpretation, and more

CTS CORPORATION 11


rigorous regulatory action by government authorities, may require additional expenditures by us, which could have a negative impact on our operations.

In addition, we could be affected by future laws or regulations imposed in response to climate change concerns. Such laws or regulations could have a material adverse effect on our business, financial condition, and results of operations.

Our indebtedness may adversely affect our financial health.

Our debt consists of borrowings under our revolving credit facility. Our indebtedness could, among other things: increase our vulnerability to general economic and industry conditions, including recessions; require us to use cash flow from operations to service our indebtedness, thereby reducing our ability to fund working capital, capital expenditures, research and development efforts and other expenses; limit our flexibility in planning for, or reacting to, changes in our business and the industries in which we operate; place us at a competitive disadvantage compared to competitors that have less indebtedness; or limit our ability to borrow additional funds that may be needed to operate and expand our business. Moreover, an increase in interest rates could increase our interest expense.

Our credit facility contains provisions that could materially restrict our business.

Our 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; repurchase stock; or make dividend payments above a certain amount.

The restrictions contained in our credit facility could limit our ability to plan for or react to changes in market conditions or meet capital needs or could otherwise restrict our activities or business plans. These restrictions could adversely affect our ability to finance our operations, make strategic acquisitions, fund investments or other capital needs or engage in other business activities that could be in our interest.

Further, our ability to comply with our loan covenants may be affected by events beyond our control that could result in an event of default under our credit facility, or documents governing any other existing or future indebtedness. A default, if not cured or waived, may permit acceleration of our indebtedness. In addition, our lenders could terminate their commitments to make further extensions of credit under our credit facility. If our indebtedness is accelerated, we cannot be certain that we will have sufficient funds to pay the accelerated indebtedness or that we will have the ability to refinance accelerated indebtedness on terms favorable to us, or at all.

Regulations related to conflict minerals could adversely impact our business.

The Dodd-Frank Wall Street Reform and Consumer Protection Act contains provisions to improve transparency and accountability concerning the supply of certain minerals, known as conflict minerals, originating from the Democratic Republic of Congo ("DRC") and adjoining countries. As a result, the SEC adopted annual disclosure and reporting requirements for those companies who may use conflict minerals mined from the DRC and adjoining countries in their products. There have been and will continue to be costs associated with complying with these disclosure requirements, including diligence costs to determine the sources of minerals used in our products and other potential changes to products, processes or sources of supply to the extent necessary as a consequence of such verification activities. These rules could adversely affect the sourcing, supply and pricing of materials used in our products. As there may be only a limited number of suppliers offering conflict-free minerals, we cannot be sure that we will be able to obtain necessary conflict-free minerals from such suppliers in sufficient quantities or at competitive prices. Also, we may face reputational challenges if we determine that certain of our products contain conflict minerals or if we are unable to sufficiently verify the origins for all minerals used in our products through the procedures we may implement.

Ineffective internal control over our financial reporting may harm our business.

We are subject to the ongoing internal control provisions of Section 404 of the Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley"). Our controls necessary for continued compliance with Sarbanes-Oxley may not operate effectively or at all times and may result in a material weakness. The identification of material weaknesses in internal control over financial reporting could indicate a lack of proper controls to generate accurate financial statements. Further, the effectiveness of our internal controls may be impacted if we are unable to retain sufficient skilled finance and accounting personnel, especially in light of the increased demand for such personnel among publicly traded companies.


12 CTS CORPORATION


Natural disasters may adversely impact our capability to supply product to our customers.

Natural disasters, such as storms, flooding and associated power outages, occurring at any of our locations or supplier locations may lead to disruption of our manufacturing operations and supply chain, adversely impacting our capability to supply product to our customers. In the event of a natural disaster, it may not be possible for us to find an alternate manufacturing location for certain product lines, further impacting our capability to recover from such a disruption.

We could face risks to our systems, networks and production including increased IT security threats and more sophisticated and targeted computer crime.

Increased global information technology security threats and more sophisticated and targeted computer crime pose a risk to the security of our systems and networks and the confidentiality, availability and integrity of our data and communications. While we attempt to mitigate these risks by employing a number of measures - including employee training, comprehensive monitoring of our networks and systems, and maintenance of backup and protective systems - our systems, networks and products remain potentially vulnerable to advanced persistent threats. Depending on their nature and scope, such threats could potentially lead to the compromising of confidential information and communications, improper use of our systems and networks, manipulation and destruction of data, defective products, production downtimes and operational disruptions, which in turn could adversely affect our reputation, competitiveness and results of operations. Additionally, any updates to or implementation of systems, including the selection and implementation of an ERP system, may cause delays or disruptions in our processes or production which could adversely affect our results.


CTS CORPORATION 13


Item 1B.  Unresolved Staff Comments
Not applicable.
Item 2.  Properties
As of February 22, 2019, we had manufacturing facilities, administrative, research and development and sales offices in the following locations:
Manufacturing Facilities
Square
Footage
Owned/Leased
 
Albuquerque, New Mexico
114,525

Leased
 
Bolingbrook, Illinois
30,600

Leased
 
Elkhart, Indiana
319,000

Owned
 
Haryana, India
19,400

Leased
 
Hopkinton, Massachusetts
32,000

Owned
 
Hradec Kralove, Czech Republic
30,680

Leased
 
Juarez, Mexico
114,600

Leased
 
Kaohsiung, Taiwan
75,900

Owned
(1)
Kvistgaard, Denmark
30,680

Leased
 
Lisle, Illinois
31,000

Leased
 
Matamoros, Mexico
51,000

Owned
 
Nogales, Mexico
64,000

Leased
 
Ostrava, Czech Republic
67,600

Leased
 
Prague, Czech Republic
13,660

Leased
 
Tianjin, China
225,000

Owned
(2)
Zhongshan, China
112,600

Leased
 
Total manufacturing
1,332,245

 
 
(1) Ground lease through 2026; restrictions on use and transfer apply.
(2) Land Use Rights Agreement through 2050 includes transfer, lease and mortgage rights.
Non-Manufacturing Facilities
Square
Footage
Owned/Leased
Description
Brownsville, Texas
N/A

Owned
Land
Brownsville, Texas
10,000

Leased
Warehouse
El Paso, Texas
22,400

Leased
Office and warehouse
Matamoros, Mexico
20,000

Leased
Warehouse
Elkhart, Indiana
93,000

Owned
Idle facility
Farmington Hills, Michigan
1,800

Leased
Sales office
Glasgow, Scotland
18,600

Leased
Administrative offices and research
Lisle, Illinois
74,925

Leased
Administrative offices and research
Malden, Massachusetts
3,600

Leased
Administrative offices and research
Nagoya, Japan
800

Leased
Sales office
Singapore
5,600

Leased
Sales office
Yokohama, Japan
1,400

Leased
Sales office
Total non-manufacturing
252,125

 
 
We regularly assess the adequacy of our manufacturing facilities for manufacturing capacity, available labor, and proximity to our markets and major customers. Management believes our manufacturing facilities are suitable and adequate, and have sufficient capacity to meet our current needs. The extent of utilization varies from plant to plant and with general economic conditions. We

14 CTS CORPORATION


also review the operating costs of our facilities and may from time-to-time relocate a portion of our manufacturing activities in order to reduce operating costs and improve asset utilization and cash flow.
Item 3.  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, based upon presently available information, either adequate provision for anticipated costs have been accrued or the ultimate anticipated costs will not materially affect our consolidated financial position, results of operations, or cash flows.
See Note 10 "Contingencies" in the Notes to the Consolidated Financial Statements in this Annual Report on Form 10-K.
Item 4.  Mine Safety Disclosures
        Not applicable.

CTS CORPORATION 15


PART II
Item 5.  Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
Our common stock is listed on the New York Stock Exchange under the symbol "CTS." On February 19, 2019, there were approximately 962 shareholders of record.
As shown in the following table, we repurchased stock totaling $9,440 during the twelve months ended December 31, 2018:
(in thousands, except share data)
(a)
Total Number of
Shares
Purchased
(b)
Average Price
Paid per Share
(c)
Total Value
of Shares
Purchased as
Part of Plans or
Program
(d)
Maximum Value of
Shares That May Yet Be
Purchased Under the
Plans or Programs(1)
Balance at December 31, 2017
 

 

 

$
17,554

January 1, 2018 - September 30, 2018

$

$

$
17,554

October 1, 2018 – December 31, 2018
342,100

$
27.60

$
9,440

$
8,114

(1) In April 2015, the Board of Directors authorized a program to repurchase up to $25 million of our common stock in the open market. The authorization has no expiration.
On February 7, 2019, the Board of Directors of CTS authorized a new stock repurchase program with a maximum dollar limit of $25 million and no set expiration date. This new program replaces the program shown in the table above.

Shareholder Performance Graph
The following graph shows a five-year comparison of the cumulative total shareholder return on CTS common stock with the cumulative total returns of a general market index and a peer group index (S&P 500 and Dow Jones Electrical Components & Equipment Industry Group). The graph tracks the performance of a $100 investment in the Company's common stock and in each of the indexes (with the reinvestment of all dividends) on December 31, 2013.
stockvaluesfiveyearcompa001.jpg

16 CTS CORPORATION


Item 6.  Selected Financial Data
Five-Year Summary
(Amounts in thousands, except percentages and per share amounts)
 
2018
% of Sales
2017
% of Sales
2016
% of Sales
2015
% of Sales
2014
% of Sales
Summary of Operations
 

 

 

 

 

 

 

 

 

 

Net sales
$
470,483

100.0

$
422,993

100.0

$
396,679

100.0

$
382,310

100.0

$
404,021

100.0

Cost of goods sold
305,510

64.9

282,562

66.8

256,251

64.6

255,201

66.8

274,058

67.8

Gross Margin
164,973

35.1

140,431

33.2

140,428

35.4

127,109

33.2

129,963

32.2

Selling, general and administrative expenses
73,569

15.6

71,943

17.0

61,624

15.5

59,586

15.6

61,051

15.1

Research and development expenses
25,304

5.4

25,146

5.9

24,040

6.1

22,461

5.9

22,563

5.6

Non-recurring environmental expense






14,541

3.8



Restructuring and impairment charges
5,062

1.1

4,139

1.0

3,048

0.8

14,564

3.8

5,941

1.5

Loss (gain) on sale of assets


708

(2.9
)
(11,450
)
(2.9
)
(2,156
)
(0.6
)
(1,915
)
(0.5
)
Operating earnings
61,038

13.0

38,495

9.1

63,166

15.9

18,113

4.7

42,323

10.5

Other (expense) income
(2,935
)
(0.6
)
1,758

0.4

(5,921
)
(1.5
)
(5,852
)
(1.5
)
(2,975
)
(0.7
)
Earnings before income taxes
58,103

12.3

40,253

9.5

57,245

14.4

12,261

3.2

39,348

9.8

Income tax expense
11,571

2.5

25,805

6.1

22,865

5.8

5,307

1.4

12,826

3.2

Net earnings
$
46,532

9.9

$
14,448

3.4

$
34,380

8.7

$
6,954

1.8

$
26,522

6.6

Retained earnings - beginning of year
420,160

 

410,979

 

381,840

 

380,145

 

358,997

 

Dividends declared
(5,278
)
 

(5,267
)
 

(5,241
)
 

(5,259
)
 

(5,374
)
 

Implementation of new accounting standard
17,433

 
$

 
$

 
$

 
$

 
Retained earnings - end of year
$
478,847

 

$
420,160

 

$
410,979

 

$
381,840

 

$
380,145

 

 
 
 
 
 
 
 
 
 
 
 
Net earnings per share:
 

 

 

 

 

 

 

 

 

 

Basic
$
1.41

 

$
0.44

 

$
1.05

 

$
0.21

 

$
0.79

 

Diluted
$
1.39

 

$
0.43

 

$
1.03

 

$
0.21

 

$
0.78

 

 
 
 
 
 
 
 
 
 
 
 
Average basic shares outstanding (000s)
33,024

 

32,892

 

32,728

 

32,959

 

33,618

 

Average diluted shares outstanding (000s)
33,569

 

33,420

 

33,251

 

33,484

 

34,130

 

Cash dividends per share (annualized)
$
0.160

 

$
0.160

 

$
0.160

 

$
0.160

 

$
0.160

 

Capital expenditures
$
28,488

 

$
18,094

 

$
20,500

 

$
9,723

 

$
12,949

 

Depreciation and amortization
$
22,514

 

$
20,674

 

$
18,992

 

$
16,254

 

$
16,971

 

 
 
 
 
 
 
 
 
 
 
 
Financial Position at Year End
 

 

 

 

 

 

 

 

 

 

Current assets
$
239,359

 

$
233,609

 

$
215,707

 

$
245,954

 

$
240,401

 

Current liabilities
103,993

 

102,412

 

98,129

 

94,620

 

79,982

 

Current ratio
2.3 to 1

 

2.3 to 1

 

2.2 to 1

 

2.5 to 1

 

3.0 to 1

 

Working capital
135,366

 

131,197

 

117,578

 

151,334

 

160,419

 

Inventories
43,486

 

36,596

 

28,652

 

24,600

 

27,887

 

Net property, plant and equipment
99,401

 

88,247

 

82,111

 

69,872

 

71,414

 

Total assets
548,341

 

539,696

 

517,697

 

483,373

 

456,926

 

Long-term debt
50,000

 

76,300

 

89,100

 

90,700

 

75,000

 

Long-term obligations, including long-term debt
66,419

 

93,479

 

101,686

 

107,099

 

87,155

 

Shareholders' equity
377,929

 

343,805

 

317,882

 

281,654

 

289,789

 

Common shares outstanding (000s)
32,751

 

32,938

 

32,762

 

32,548

 

33,392

 

Equity (book value) per share
$
11.54

 

$
10.44

 

$
9.70

 

$
8.65

 

$
8.68

 

Stock price range
24.07-39.20

 

19.30-28.35

 

12.87-24.80

 

15.30-20.25

 

15.58-21.65

 

______________________________

Certain acquisitions, divestitures, closures of operations or product lines, and certain accounting reclassifications affect the comparability of information contained in the "Five-Year Summary."

CTS CORPORATION 17


Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations
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 and technologies within these categories.
We manufacture sensors, actuators, and electronic components in North America, Europe, and Asia. CTS provides engineered products to OEMs in the aerospace and defense, industrial, information technology, medical, telecommunications, 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 challenges including periodic market softness, competition from other suppliers, changes in technology, and the ability to add new customers, launch new products or penetrate new markets.
Results of Operations: Fourth Quarter 2018 versus Fourth Quarter 2017
(Amounts in thousands, except percentages and per share amounts):
The following table highlights changes in significant components of the Consolidated Statements of Earnings (Loss) for the quarters ended December 31, 2018, and December 31, 2017:
 
Three Months Ended December 31,
 
Percent of Net Sales
 
2018
2017
Percent
Change
2018
2017
Net sales
$
120,073

$
110,910

8.3

100.0

100.0

Cost of goods sold
77,428

78,035

(0.8
)
64.5

70.4

Gross margin
42,645

32,875

29.7

35.5

29.6

Selling, general and administrative expenses
18,128

24,973

(27.4
)
15.1

22.5

Research and development expenses
5,804

6,714

(13.6
)
4.8

6.1

Restructuring and impairment charges
1,698

1,197

41.9

1.4

1.1

(Gain) loss on sale of assets
(2
)
10

(120.0
)


Total operating expenses
25,628

32,894

(22.1
)
21.3

29.7

Operating earnings (loss)
17,017

(19
)
89,663.2

14.2


Other (expense) income, net
(144
)
164

(187.8
)
(0.1
)
0.1

Earnings before income tax
16,873

145

11,536.6

14.1

0.1

Income tax (benefit) expense
(691
)
13,766

(105.0
)
(0.6
)
12.4

Net earnings (loss)
$
17,564

$
(13,621
)
228.9

14.6

(12.3
)
Diluted earnings per share:
 

 
 

 

 

Diluted net earnings (loss) per share
$
0.52

$
(0.41
)
 

 

 

Sales of $120,073 in the fourth quarter of 2018 increased $9,163 or 8.3% from the fourth quarter of 2017. Sales to transportation markets increased $5,163 or 7.2%. Sales to other end markets increased $4,000 or 10.2%. Changes in foreign exchange rates decreased sales by $880 year-over-year due to the U.S. Dollar appreciating compared to the Chinese Renminbi and Euro.
In the fourth quarter of 2017, we recorded a $13,415 one-time, non-cash pension settlement charge. During 2017, CTS offered its pension participants the opportunity to receive a lump sum payment to settle their future pension benefits. A number of participants elected the lump sum option, and the total lump sum payments distributed to these participants when the offer window closed in the fourth quarter was large enough to trigger a pension settlement charge under U.S. GAAP. This charge was recorded in the amount of $4,796 to cost of goods sold, $6,557 to selling, general and administrative expenses and $2,062 to research and development expenses.
Gross margin as a percent of sales was 35.5% in the fourth quarter of 2018 compared to 29.6% in the fourth quarter of 2017. The pension settlement charge recorded in the fourth quarter of 2017 impacted gross margin unfavorably by $4,796 or 4.3%. The

18 CTS CORPORATION


increase in gross margin was primarily driven by savings related to product line transfers associated with the June 2016 Restructuring Plan described in Note 8.
Selling, general and administrative expenses were $18,128 or 15.1% of sales in the fourth quarter of 2018 versus $24,973 or 22.5% of sales in the comparable quarter of 2017. The pension settlement charge recorded in the fourth quarter of 2017 impacted selling, general and administrative expenses unfavorably by $6,557 or 5.9%.
Research and development expenses were $5,804 or 4.8% of sales in the fourth quarter of 2018 compared to $6,714, or 6.1% of sales, in the comparable quarter of 2017. The pension settlement charge recorded in the fourth quarter of 2017 impacted research and development expenses unfavorably by $2,062, or 1.9%. Research and development expenses are focused on expanded applications of existing products, new product development, and enhancements for current products and processes.
Restructuring and impairment charges were $1,698 in the fourth quarter of 2018. These charges were mainly for building and equipment relocation, severance, and travel costs related to the restructuring of certain operations as part of the June 2016 Restructuring Plan. In the fourth quarter 2017, restructuring and impairment charges consisting of severance and other costs totaled $1,197, which were also in connection with our June 2016 Restructuring Plan.
Operating earnings were $17,017, or 14.2% of sales in the fourth quarter of 2018, compared to an operating loss of $19, or 0.0% of sales, in the comparable quarter of 2017 as a result of the items discussed above.
Other income and expense items are summarized in the following table:
 
Three Months Ended December 31,
 
2018
2017
Interest expense
$
(484
)
$
(1,134
)
Interest income
459

370

Other (expense) income
(119
)
928

Total other (expense) income, net
$
(144
)
$
164

Interest expense decreased in the fourth quarter of 2018 versus 2017 due to lower debt balances and a reduction in interest related to interest rate swaps. Interest income increased due to higher interest rates. Other income in the fourth quarter of 2017 was driven mainly by foreign currency translation gains due to the appreciation of the Chinese Renminbi compared to the U.S. Dollar.
 
Three Months Ended December 31,
 
2018
2017
Effective tax rate
(4.1
)%
9,493.8
%

The effective income tax rate for the fourth quarter of 2018 was (4.1)% compared to 9,493.8% in the fourth quarter of 2017. The tax rate in 2018 was impacted primarily by a discrete one-time rate change benefit related to the Tax Cuts and Jobs Act (“Tax Act”) resulting from the election of tax accounting method changes. The effective income tax rate in the fourth quarter of 2017 was primarily related to the initial application of the Tax Act including the remeasurement of the net deferred tax assets from 35% to 21% and the one-time mandatory transition tax on the historical earnings of foreign affiliates, which resulted in a net non-cash charge of $18,001.

Net earnings was $17,564, or $0.52 per diluted share, in the fourth quarter of 2018, compared to a net loss of $13,621, or $0.41 per share, in the comparable quarter of 2017.












CTS CORPORATION 19




Results of Operations: Year Ended December 31, 2018, versus Year Ended December 31, 2017
(Amounts in thousands, except percentages and per share amounts):
The following table highlights changes in significant components of the Consolidated Statements of Earnings for the years ended December 31, 2018, and December 31, 2017:
 
Years Ended December 31,
 
Percent of Net Sales
 
2018
2017
Percent
Change
2018
2017
Net sales
$
470,483

$
422,993

11.2

100.0

100.0
Cost of goods sold
305,510

282,562

8.1

64.9

66.8
Gross margin
164,973

140,431

17.5

35.1

33.2
Selling, general and administrative expenses
73,569

71,943

2.3

15.6

17.0
Research and development expenses
25,304

25,146

0.6

5.4

5.9
Restructuring and impairment charges
5,062

4,139

22.3

1.1

1.0
Loss on sale of assets

708

(100.0
)

0.2
Total operating expenses
103,935

101,936

2.0

22.1

24.1
Operating earnings
61,038

38,495

58.6

13.0

9.1
Other (expense) income, net
(2,935
)
1,758

(267.0
)
(0.6
)
0.4
Earnings before income tax
58,103

40,253

44.3

12.4

9.5
Income tax expense
11,571

25,805

(55.2
)
2.5

6.1
Net earnings
46,532

14,448

222.1

9.9

3.4
Diluted earnings per share:
 

 

 

 

 
Diluted net earnings per share
$
1.39

$
0.43

 

 

 

Sales were $470,483 for the year ended December 31, 2018, an increase of $47,490, or 11.2% from 2017. Sales to transportation markets increased $24,873 or 9.0%. Sales to other end markets increased $22,617 or 15.3%. The Noliac acquisition added $9,463 in sales in 2018 and $7,084 in sales in 2017. Changes in foreign exchange rates increased sales by $3,238 year-over-year due to the U.S. Dollar depreciating compared to the Chinese Renminbi and Euro.
Gross margin as a percent of sales was 35.1% in 2018 versus 33.2% in 2017. The pension settlement charge recorded in the fourth quarter of 2017 impacted gross margin unfavorably by $4,796, or 1.1% of sales. The increase in gross margin was primarily driven by savings related to product line transfers and a favorable impact of foreign exchange rate movements which were partially offset by material cost increases.
Selling, general and administrative expenses were $73,569, or 15.6% of sales for the year ended December 31, 2018, versus $71,943 or 17.0% of sales in the comparable period of 2017. The pension settlement charge recorded in the fourth quarter of 2017 impacted selling, general and administrative expenses unfavorably by $6,557 or 1.6% of sales. The increase includes higher stock-based compensation and ERP implementation costs as well as incremental costs resulting from the Noliac acquisition in 2017, including amortization of intangibles.
Research and development expenses were $25,304 or 5.4% of sales in 2018 compared to $25,146 or 5.9% of sales in 2017. The pension settlement charge recorded in the fourth quarter of 2017 impacted research and development expenses unfavorably by $2,062, or 0.5% of sales. Research and development expenses are focused on expanded applications of existing products, new product development, and enhancements for current products and processes.
Restructuring and impairment charges were $5,062 for year ended December 31, 2018. The charges were mainly for building and equipment relocation, severance, and travel costs related to the restructuring of certain operations as part of the 2016 Restructuring Plan. Restructuring charges were $4,139 in 2017.
The loss on sale of assets in 2017 was driven by a loss on the sale of vacant land at our Hopkinton, Massachusetts facility in September 2017.
Operating earnings were $61,038, or 13.0% of sales in 2018, compared to $38,495, or 9.1% of sales in 2017 as a result of the items discussed above.

20 CTS CORPORATION



Other income and expense items are summarized in the following table:
 
Years Ended December 31,
 
2018
2017
Interest expense
$
(2,085
)
$
(3,343
)
Interest income
1,826

1,284

Other (expense) income
(2,676
)
3,817

Total other (expense) income, net
$
(2,935
)
$
1,758

Interest expense decreased in the year ended December 31, 2018, versus the same period in 2017 primarily due to lower debt balances, a reduction in interest related to interest rate swaps, and a one-time charge related to a liability that was settled in 2017. Interest income increased due to higher interest rates. Other expense in the year ended December 31, 2018, was driven by foreign currency translation losses mainly due to the appreciation of the U.S. Dollar compared to the Chinese Renminbi and the Euro. Other income in the year ended December 31, 2017 was driven mainly by foreign currency translation gains due to the depreciation of the U.S. Dollar compared to the Chinese Renminbi and the Euro.
 
Years Ended December 31,
 
2018
2017
Effective tax rate
19.9
%
64.1
%
The effective income tax rate in 2018 was 19.9% compared to 64.1% in the prior year. The tax rate in 2018 was favorably impacted by a discrete one-time rate change benefit related to the Tax Act resulting from the election of tax accounting method changes, partially offset by a one-time withholding tax on repatriation of earnings from one of our foreign subsidiaries that was completed during the year to enable the use of tax credits due to expire in 2018. The tax rate in 2017 was unfavorably impacted by the application of the Tax Act, driven by the remeasurement of the net deferred tax assets from 35% to 21% and the one-time mandatory transition tax on the historical earnings of foreign affiliates, which resulted in a net non-cash charge of $18,001.
Net earnings were $46,532 or $1.39 per diluted share for the year ended December 31, 2018, compared to earnings of $14,448 or $0.43 per diluted share in the comparable period of 2017.

Results of Operations: Years Ended December 31, 2017, versus Year Ended December 31, 2016
(Amounts in thousands, except percentages and per share amounts):
The following table highlights changes in significant components of the Consolidated Statements of Earnings for the years ended December 31, 2017, and December 31, 2016:
 
Years Ended December 31,
 
Percent of Net Sales
 
2017
2016
Percent
Change
2017
2016
Net sales
$
422,993

$
396,679

6.6

100.0
100.0

Cost of goods sold
282,562

256,251

10.3

66.8
64.6

Gross margin
140,431

140,428


33.2
35.4

Selling, general and administrative expenses
71,943

61,624

16.7

17.0
15.5

Research and development expenses
25,146

24,040

4.6

5.9
6.1

Restructuring and impairment charges
4,139

3,048

35.8

1.0
0.8

Loss (gain) on sale of assets
708

(11,450
)
(106.2
)
0.2
(2.9
)
Total operating expenses
101,936

77,262

31.9

24.1
19.5

Operating earnings
38,495

63,166

(39.1
)
9.1
15.9

Other income (expense), net
1,758

(5,921
)
(129.7
)
0.4
(1.5
)
Earnings before income tax
40,253

57,245

(29.7
)
9.5
14.4

Income tax expense
25,805

22,865

12.9

6.1
5.8

Net earnings
14,448

34,380

(58.0
)
3.4
8.7

Diluted earnings per share:
 

 

 

 
 

Diluted net earnings per share
$
0.43

$
1.03

 

 
 


CTS CORPORATION 21



Sales were $422,993 for the year ended December 31, 2017, an increase of $26,314, or 6.6% from 2016. Sales to transportation markets increased $12,586 or 4.8%. Other sales increased $13,728 or 10.2%. The Noliac acquisition added $7,084 in sales in 2017.
Gross margin as a percent of sales was 33.2% in 2017 versus 35.4% in 2016. The pension settlement charge recorded in the fourth quarter of 2017 impacted gross margin unfavorably by $4,796, or 1.1% of sales. The remaining decrease in gross margin resulted from costs relating to certain production rework issues that were resolved in 2017 and an unfavorable impact of foreign exchange rate movements.
Selling, general and administrative expenses were $71,943, or 17.0% of sales for the year ended December 31, 2017, versus $61,624 or 15.5% of sales in the comparable period of 2016. The pension settlement charge recorded in the fourth quarter of 2017 impacted selling, general and administrative expenses unfavorably by $6,557 or 1.6% of sales. The remaining increase was primarily attributable to an increase in stock-based compensation as well as incremental costs resulting from the Noliac acquisition in 2017 and the single crystal acquisition in 2016, including amortization of intangibles.
Research and development expenses were $25,146 or 5.9% of sales in 2017 compared to $24,040 or 6.1% of sales in 2016. The pension settlement charge recorded in the fourth quarter of 2017 impacted research and development expenses unfavorably by $2,062, or 0.5% of sales. The remaining decrease is related to higher reimbursements from customers for research and development costs in 2017 and timing of certain expenses. Research and development expenses are focused on expanded applications of existing products, new product development, and enhancements for current products and processes.
Restructuring and impairment charges were $4,139 for year ended December 31, 2017. The charges were mainly for building and equipment relocation, severance and travel costs related to the restructuring of certain operations as part of the 2016 Restructuring Plan. Restructuring charges were $3,048 in 2016.
The loss on sale of assets in 2017 was driven by a loss on the sale of vacant land at our Hopkinton, Massachusetts facility in September 2017. The 2016 gain on sale of assets of $11,450 is driven principally by a gain on the sale of our former manufacturing facility in Canada in June 2016.
Operating earnings were $38,495, or 9.1% of sales in 2017, compared to $63,166, or 15.9% of sales in 2016 as a result of the items discussed above.
Other income and expense items are summarized in the following table:

 
Years Ended December 31,
 
2017
2016
Interest expense
$
(3,343
)
$
(3,702
)
Interest income
1,284

1,305

Other expense (income)
3,817

(3,524
)
Total other expense (income), net
$
1,758

$
(5,921
)

Interest expense decreased in the year ended December 31, 2017, versus the same period in 2016 primarily as a result of a reduction in interest related to interest rate swaps. Interest income was down slightly in 2017 versus 2016. Other income in the year ended December 31, 2017, was driven mainly by foreign currency translation gains due to the depreciation of the U.S. Dollar compared to the Chinese Renminbi and the Euro. Other expense in the year ended December 31, 2016, was driven by foreign currency translation losses, mainly due to the appreciation of the U.S. Dollar compared to the Chinese Renminbi and the Euro.

 
Years Ended December 31,
 
2017
2016
Effective tax rate
64.1
%
39.9
%


22 CTS CORPORATION


The effective income tax rate in 2017 was 64.1%, which was primarily due to a provisional one-time tax expense of $18,001 resulting from the Tax Cuts and Jobs Act, which was enacted on December 22, 2017. The rate also reflects a decrease in the valuation allowance on certain non-U.S. losses as a result of changes in the expectation of our ability to utilize those losses and changes in the mix of earnings by jurisdiction. The effective income tax rate in 2016 was 39.9%, which includes restructuring charges, one-time items, an increase in valuation allowances recorded against certain state net operating losses and tax credits, and the revaluation of U.S. deferred taxes as a result of the June 2016 restructuring activities discussed in Note 8, "Costs Associated with Exit and Restructuring Activities". The rate also reflects an increase in the valuation allowance on certain non-U.S. losses as a result of changes in the expectation of our ability to utilize those losses, changes in the mix of earnings by jurisdiction, our decision to no longer permanently reinvest the earnings of our Canadian and U.K. subsidiaries, tax expense for withholding taxes on earnings in China that are not anticipated to be maintained in China, and various other discrete items.
Net earnings were $14,448 or $0.43 per diluted share for the year ended December 31, 2017, compared to earnings of $34,380 or $1.03 per diluted share in the comparable period of 2016.

Liquidity and Capital Resources
(Amounts in thousands, except percentages and per share amounts):
Cash and cash equivalents were $100,933 at December 31, 2018, and $113,572 at December 31, 2017, of which $96,762 and $112,531, respectively, were held outside the United States. The decrease in cash and cash equivalents of $12,639 was driven principally by cash generated from operating activities of $58,152, which was offset by capital expenditures of $28,488, net debt payments of $26,300, purchase of treasury stock of $9,440, and dividends paid of 5,285. Total debt as of December 31, 2018, and December 31, 2017, was $50,000 and $76,300, respectively. Total debt as a percentage of total capitalization, defined as long-term debt as a percentage of total debt and shareholders’ equity, was 11.7% at December 31, 2018, compared to 18.2% at December 31, 2017.
Working capital increased by $4,169 from December 31, 2017, to December 31, 2018, primarily due to increases in accounts receivable and inventory, which were partially offset by the decrease in cash.
Cash Flows from Operating Activities
Net cash provided by operating activities was $58,152 during the year ended December 31, 2018. Components of net cash provided by operating activities included net earnings of $46,532, depreciation and amortization expense of $22,514, stock-based compensation of $5,256, and other net non-cash items totaling $340, which were offset by net changes in assets and liabilities of $15,482 and deferred income taxes of 1,008.
Cash Flows from Investing Activities
Net cash used in investing activities for the year ended December 31, 2018, was $28,485, driven by the net capital expenditures of $28,488.
Cash Flows from Financing Activities
Net cash used in financing activities for the year ended December 31, 2018, was $42,493. This cash outflow was the result of net debt payments of $26,300, the purchase of treasury stock of $9,440, dividend payments of $5,285, and taxes paid on behalf of equity award participants of $1,468.









CTS CORPORATION 23


Capital Resources
Long-term debt was comprised of the following:
 
As of December 31,
 
2018
2017
Total credit facility
$
300,000

$
300,000

Balance Outstanding
$
50,000

$
76,300

Standby letters of credit
$
1,940

$
2,065

Amount available
$
248,060

$
221,635

Weighted-average interest rate
3.10
%
2.30
%
Commitment fee percentage per annum
0.20
%
0.25
%
On August 10, 2015, we entered into an unsecured five-year revolving credit agreement (“Revolving Credit Facility”) with a group of banks in order to support our financing needs.  The Revolving Credit Facility originally provided for a credit line of $200,000. On May 23, 2016, we requested and received a $100,000 increase in the aggregate revolving credit commitments under our existing credit agreement, which increased the credit line from $200,000 to $300,000. 
The Revolving Credit Facility requires, among other things, that we comply with a maximum total leverage ratio and a minimum fixed charge 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 December 31, 2018
On February 12, 2019, CTS entered into a new amended and restated five-year credit agreement with a group of banks that expires on February 12, 2024. This credit agreement provides for a revolving credit facility of $300 million, which may be increased by $150 million at the request of the Company, subject to the administrative agent’s approval. This new unsecured credit facility replaces the prior $300 million unsecured credit facility, which would have expired August 10, 2020. Borrowings of $50 million under the prior credit agreement were refinanced and the prior agreement was terminated as of February 12, 2019.
We use interest rate swaps to convert the Revolving Credit Facility’s variable rate of interest into a fixed rate on a portion of our debt balance. In the second quarter of 2012, we entered into four separate one-year interest rate swap agreements to fix interest rates on $50,000 of long-term debt for the periods January 2013 to January 2017. In the third quarter of 2012, we entered into four additional one-year interest rate swap agreements to fix interest rates on $25,000 of long-term debt for the periods January 2013 to January 2017. In the third quarter of 2016, we entered into three additional one-year interest rate swap agreements to fix interest rates on $50,000 of long-term debt for the periods August 2017 to August 2020. The difference to be paid or received under the terms of the swap agreements will be recognized as an adjustment to interest expense when settled.
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. 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, and debt service requirements for at least the next twelve months. However, we may choose to pursue additional equity and debt financing to provide additional liquidity or to fund acquisitions.
Critical Accounting Policies and Estimates
Management prepared the consolidated financial statements under accounting principles generally accepted in the United States of America. These principles require the use of estimates, judgments, and assumptions. We believe that the estimates, judgments, and assumptions we used are reasonable, based upon the information available.
Our estimates and assumptions affect the reported amounts in our financial statements. The following accounting policies comprise those that we believe are the most critical in understanding and evaluating our reported financial results.
Revenue Recognition
Beginning in January 2018, CTS adopted the provisions of Accounting Standards Update ("ASU") No. 2014-09, "Revenue from Contracts with Customers (Topic 606)". Product revenue is recognized when the transfer of promised goods to a customer occurs in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods. We follow the five step model to determine when this transfer has occurred: 1) identify the contract(s) with the customer; 2) identify the performance obligations in the contract; 3) determine the transaction price; 4) allocate the transaction price to the performance obligations in the contract; 5) recognize revenue when (or as) the entity satisfies a performance obligation.

24 CTS CORPORATION


Prior to January 1, 2018, product revenue was recognized once four criteria were met: 1) we have persuasive evidence that an arrangement exists; 2) delivery has occurred and title has passed to the customer, which generally happens at the point of shipment provided that no significant obligations remain; 3) the price is fixed and determinable; and 4) collectability is reasonably assured.
Product Warranties
Provisions for estimated warranty expenses primarily related to our automotive products are made at the time products are sold. These estimates are established using a quoted industry rate. We adjust our warranty reserve for any known or anticipated warranty claims as new information becomes available. We evaluate our warranty obligations at least quarterly and adjust our accruals if it is probable that future costs will be different than our current reserve. Over the last three years, product warranty reserves have ranged from 0.5% to 2.4% of total sales. We believe our reserve level is appropriate considering all facts and circumstances surrounding any outstanding quality claims and our historical experience selling our products to our customers.
Accounts Receivable
We have standardized credit granting and review policies and procedures for all customer accounts, including:
Credit reviews of all new significant customer accounts,
Ongoing credit evaluations of current customers,
Credit limits and payment terms based on available credit information,
Adjustments to credit limits based upon payment history and the customer's current creditworthiness,
An active collection effort by regional credit functions, reporting directly to the corporate financial officers, and
Limited credit insurance on the majority of our international receivables.
We reserve for estimated credit losses based upon historical experience and specific customer collection issues. Over the last three years, accounts receivable reserves have ranged from 0.3% to 0.7% of total accounts receivable. We believe our reserve level is appropriate considering the quality of the portfolio. While credit losses have historically been within expectations of the reserves established, we cannot guarantee that our credit loss experience will continue to be consistent with historical experience.
Inventories
We value our inventories at the lower of the actual cost to purchase or manufacture using the first-in, first-out ("FIFO") method, or net realizable value. We review inventory quantities on hand and record a provision for excess and obsolete inventory based on forecasts of product demand and production requirements.
Over the last three years, our reserves for excess and obsolete inventories have ranged from 11.2% to 19.5% of gross inventory. We believe our reserve level is appropriate considering the quantities and quality of the inventories.
Retirement Plans
Actuarial assumptions are used in determining pension income and expense and our defined benefit obligations. We utilize actuaries from consulting companies in each applicable country to develop our discount rates, matching high-quality bonds currently available and expected to be available during the period to maturity of the pension benefit in order to provide the necessary future cash flows to pay the accumulated benefits when due. After considering the recommendations of our actuaries, we have assumed a discount rate, expected rate of return on plan assets, and a rate of compensation increase in determining our annual pension income and expense and the projected benefit obligation. During the fourth quarter of each year, we review our actuarial assumptions in light of current economic factors to determine if the assumptions need to be adjusted. Changes in the actuarial assumptions could have a material effect on our results of operations.
Impairment of Goodwill
Goodwill of a reporting unit is tested for impairment annually, or more frequently if an event occurs or circumstances change that would more-likely-than-not reduce the fair value of a reporting unit below its carrying amount. Examples of such events or circumstances include, but are not limited to, the following:
Significant decline in market capitalization relative to net book value,
Significant adverse change in legal factors or in the business climate,

CTS CORPORATION 25


Adverse action or assessment by a regulator,
Unanticipated competition,
More-likely-than-not expectation that a reporting unit or a significant portion of a reporting unit will be sold or otherwise disposed of,
Testing for recoverability of a significant asset group within a reporting unit, and
Allocation of a portion of goodwill to a business to be disposed.
If we believe that one or more of the above indicators of impairment have occurred, we perform an impairment test. We have the option to perform a qualitative assessment (commonly referred to as "step zero" test) to determine whether further quantitative analysis for impairment of goodwill and indefinite-lived intangible assets is necessary. The qualitative assessment includes a review of macroeconomic conditions, industry and market considerations, internal cost factors, and our own overall financial and share price performance, among other factors. If, after assessing the totality of events or circumstances we determine that it is not more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, we do not need to perform a quantitative analysis.
If a quantitative assessment is required, we estimate the fair value of each reporting unit using a combination of discounted cash flow analysis and market-based valuation methodologies. Determining fair value using a quantitative approach requires significant judgment, including judgments about projected revenues, operating expenses, working capital investment, capital expenditures, and cash flows over a multi-year period. The discount rate applied to our forecasts of future cash flows is based on our estimated weighted average cost of capital. In assessing the reasonableness of our determined fair values, we evaluate our results against our market capitalization. Changes in these estimates and assumptions could materially affect the determination of fair value and impact the goodwill impairment assessment.
Our latest assessment was performed using a qualitative approach as of October 1, 2018, and we determined that it was likely that the fair values of our reporting units were more than their carrying amounts, and therefore no impairment charges were recorded. We will monitor future results and will perform a test if indicators trigger an impairment review.
Impairment of Other Intangible and Long-Lived Assets
We evaluate the impairment of identifiable intangibles and other long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors considered that may trigger an impairment review consist of, but are not limited to, the following:
Significant decline in market capitalization relative to net book value,
Significant underperformance relative to expected historical or projected future operating results,
Significant changes in the manner of use of the acquired assets or the strategy for the overall business,
Significant negative industry or economic trends.
If we believe that one or more indicators of impairment have occurred, we perform a recoverability test by comparing the carrying amount of an asset or asset group to the sum of the undiscounted cash flows expected to result from the use and the eventual disposition of the asset or asset group. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value. No indicators of impairment were identified during the year ended December 31, 2018.
Environmental and Legal Contingencies
U.S. GAAP requires a liability to be recorded for contingencies when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated. Significant judgment is required to determine the existence and amounts of our environmental, legal and other contingent liabilities. We regularly consult with attorneys and consultants to determine the relevant facts and circumstances before we record a liability. Changes in laws, regulatory orders, cost estimates, participation of other parties, timing of payments, input of attorneys and consultants, or other circumstances may have a material impact on the recorded liability.



26 CTS CORPORATION


Income Taxes
Our income tax expense, deferred tax assets and liabilities, and liabilities for unrecognized tax benefits reflect management’s best estimate of current and future taxes to be paid. We are subject to income taxes in the United States and numerous foreign jurisdictions. Significant judgments and estimates are required in the determination of consolidated income tax expense.
Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, which will result in taxable or deductible amounts in the future. In evaluating our ability to recover our deferred tax assets in the jurisdiction from which they arise, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax-planning strategies, and results of recent operations. The assumptions about future taxable income require the use of significant judgment and are consistent with the plans and estimates we are using to manage our underlying businesses.
The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in a multitude of jurisdictions across our global operations. Accounting Standards Codification (ASC) No. 740 states that a tax benefit from an uncertain tax position may be recognized when it is more-likely-than-not that the position will be sustained upon examination, including resolution of any related appeals or litigation processes, on the basis of its technical merits.  We record unrecognized tax benefits as liabilities in accordance with ASC 740 and adjust these liabilities when our judgment changes as a result of the evaluation of new information not previously available. Because of the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the unrecognized tax benefit liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which new information is available.
Our practice is to recognize interest and penalties related to income tax matters as part of income tax expense.
Generally, outside of Canada and the United Kingdom, it has been our historical practice to permanently reinvest the earnings of our non-U.S. subsidiaries in those operations. As previously noted, the Tax Act made significant changes to the taxation of undistributed foreign earnings, requiring that all previously untaxed earnings and profits of our controlled foreign corporation be subjected to a one-time mandatory deemed repatriation tax. The transition tax substantially eliminated the basis difference that existed prior to the Tax Act. However, there are limited other taxes that could continue to apply such as foreign withholding and certain state taxes. We completed the evaluation of our indefinite reinvestment assertion as a result of the Tax Act during the fourth quarter of 2018 and decided not to reinvest the current year earnings of our primary operations, except for in the Czech Republic, Denmark, India, Mexico and Taiwan. We intend to continue to indefinitely reinvest the earnings in these non-U.S. subsidiaries.
Contractual Obligations
Our contractual obligations as of December 31, 2018, were:
 
Payments due by period
 
Total
2019
2020-2021
2022-2023
2024-beyond
Long-term debt, including interest
$
51,680

$
1,045

$
50,635

$

$

Operating lease payments
31,029

3,859

6,209

4,875

16,086

Retirement obligations
6,663

779

1,476

1,370

3,038

Total
$
89,372

$
5,683

$
58,320

$
6,245

$
19,124

We have no off-balance sheet arrangements, except for operating leases, that have a material current effect or are reasonably likely to have a material future effect on our financial condition or changes in our financial condition.
Management believes that existing capital resources and funds generated from operations are sufficient to finance anticipated capital requirements.



CTS CORPORATION 27


Item 7A.  Quantitative and Qualitative Disclosures About Market Risk
(in thousands)
Our cash flows and earnings are subject to fluctuations resulting from changes in foreign currency exchange rates and interest rates. We manage our exposure to these market risks through internally established policies and procedures and, when deemed appropriate, through the use of derivative financial instruments. Our policies do not allow speculation in derivative instruments for profit or execution of derivative instrument contracts for which there are no underlying exposures. We do not use financial instruments for trading purposes and we are not a party to any leveraged derivatives. We monitor our underlying market risk exposures on an ongoing basis and believe that we can modify or adapt our hedging strategies as needed.
Interest Rate Risk
We are exposed to risk of changes in interest rates on our revolving credit facility. There was $50,000 and $76,300 outstanding under our revolving credit facility at December 31, 2018, and 2017, respectively. As of December 31, 2018, we had interest rate swaps that fix interest costs on $50,000 of our long-term debt through August 2020.
Foreign Currency Risk
We are exposed to foreign currency exchange rate risks. Our significant foreign subsidiaries are located in China, Czech Republic, Mexico, and Taiwan. As of December 31, 2018, we had $15,700 outstanding foreign currency forward exchange contracts to hedge our exposure against the Mexican Peso.
Commodity Price Risk
Many of our products require the use of raw materials that are produced in only a limited number of regions around the world or are available from only a limited number of suppliers. Our results of operations may be materially and adversely affected if we have difficulty obtaining these raw materials, the quality of available raw materials deteriorates, or there are significant price increases for these raw materials. For periods in which the prices of these raw materials are rising, we may be unable to pass on the increased cost to our customers, which would result in decreased margins for the products in which they are used. For periods in which the prices are declining, we may be required to write down our inventory carrying cost of these raw materials, since we record our inventory at the lower of cost or net realizable value.

28 CTS CORPORATION


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


Board of Directors and Shareholders
CTS Corporation
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of CTS Corporation (an Indiana corporation) and subsidiaries (the “Company”) as of December 31, 2018 and 2017, the related consolidated statements of earnings, comprehensive earnings, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2018, and the related notes and financial statement schedule included under Item 15(a) (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated February 22, 2019 expressed an unqualified opinion.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company’s auditor since 2005.



/s/ GRANT THORNTON LLP            
Chicago, Illinois
February 22, 2019








CTS CORPORATION 29


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


Board of Directors and Shareholders
CTS Corporation

We have audited the internal control over financial reporting of CTS Corporation (an Indiana corporation) and subsidiaries (the “Company”) as of December 31, 2018, based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in the 2013 Internal Control-Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended December 31, 2018, and our report dated February 22, 2019 expressed an unqualified opinion on those financial statements.
Basis for opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and limitations of internal control over financial reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.


/s/ GRANT THORNTON LLP            
Chicago, Illinois
February 22, 2019


30 CTS CORPORATION


CTS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Earnings
(in thousands)
 
Years Ended December 31,
 
2018
2017
2016
Net sales
$
470,483

$
422,993

$
396,679

Cost of goods sold
305,510

282,562

256,251

Gross Margin
164,973

140,431

140,428

Selling, general and administrative expenses
73,569

71,943

61,624

Research and development expenses
25,304

25,146

24,040

Restructuring and impairment charges
5,062

4,139

3,048

Loss (gain) on sale of assets

708

(11,450
)
Operating earnings
61,038

38,495

63,166

Other (expense) income:
 

 

 

Interest expense
(2,085
)
(3,343
)
(3,702
)
Interest income
1,826

1,284

1,305

Other (expense) income
(2,676
)
3,817

(3,524
)
Total other (expense) income, net
(2,935
)
1,758

(5,921
)
Earnings before taxes
58,103

40,253

57,245

Income tax expense
11,571

25,805

22,865

Net earnings
$
46,532

$
14,448

$
34,380

Net earnings per share:
 

 

 

Basic
1.41

0.44

1.05

Diluted
1.39

0.43

1.03

Basic weighted-average common shares outstanding
33,024

32,892

32,728

Effect of dilutive securities
545

528

523

Diluted weighted-average common shares outstanding
33,569

33,420

33,251

Cash dividends declared per share
$
0.16

$
0.16

$
0.16

The accompanying notes are an integral part of the consolidated financial statements.

CTS CORPORATION 31


CTS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Comprehensive Earnings
(in thousands)

 
Years Ended December 31,
 
2018
2017
2016
Net earnings
$
46,532

$
14,448

$
34,380

Other comprehensive earnings (loss):
 

 

 

Changes in fair market value of hedges, net of tax
795

110

553

Changes in unrealized pension cost, net of tax
(1,830
)
13,687

6,412

Cumulative translation adjustment, net of tax
(311
)
437

(1,154
)
Other comprehensive (loss) earnings
$
(1,346
)
$
14,234

$
5,811

Comprehensive earnings
$
45,186

$
28,682

$
40,191

The accompanying notes are an integral part of the consolidated financial statements.


32 CTS CORPORATION


CTS CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands)
 
December 31,
 
2018
2017
ASSETS
 

 

Current Assets
 

 

Cash and cash equivalents
$
100,933

$
113,572

Accounts receivable, net
79,518

70,584

Inventories, net
43,486

36,596

Other current assets
15,422

12,857

Total current assets
239,359

233,609

Property, plant and equipment, net
99,401

88,247

Other Assets
 

 

Prepaid pension asset
54,100

57,050

Goodwill
71,057

71,057

Other intangible assets, net
60,180

66,943

Deferred income taxes
22,201

20,694

Other assets
2,043

2,096

Total other assets
209,581

217,840

Total Assets
$
548,341

$
539,696

LIABILITIES AND SHAREHOLDERS' EQUITY
 

 

Current Liabilities
 

 

Accounts payable
$
51,975

$
49,201

Accrued payroll and benefits
14,671

11,867

Accrued expenses and other liabilities
37,347

41,344

Total current liabilities
103,993

102,412

Long-term debt
50,000

76,300

Long-term pension obligations
6,510

7,201

Deferred income taxes
3,990

3,802

Other long-term obligations
5,919

6,176

Total Liabilities
170,412

195,891

Commitments and Contingencies (Note 10)




Shareholders' Equity
 

 

Common stock
306,697

304,777

Additional contributed capital
42,820

41,084

Retained earnings
478,847

420,160

Accumulated other comprehensive loss
(97,739
)
(78,960
)
Total shareholders' equity before treasury stock
730,625

687,061

Treasury stock
(352,696
)
(343,256
)
Total shareholders' equity
377,929

343,805

Total Liabilities and Shareholders' Equity
$
548,341

$
539,696

The accompanying notes are an integral part of the consolidated financial statements.

CTS CORPORATION 33


CTS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
 
Years Ended December 31,
 
2018
2017
2016
Cash flows from operating activities:
 

 

 

Net earnings
$
46,532

$
14,448

$
34,380

Adjustments to reconcile net earnings to net cash provided by operating activities:
 

 

 

Depreciation and amortization
22,514

20,674

18,992

Stock-based compensation
5,256

4,184

2,738

Pension and other post-retirement plan expense (income)
422

11,570

(1,599
)
Deferred income taxes
(1,008
)
16,710

10,297

Loss (gain) on sale of assets

708

(11,450
)
(Gain) loss on foreign currency hedges, net of cash received
(82
)
94

(36
)
Changes in assets and liabilities, net of acquisitions and divestitures:
 

 

 

Accounts receivable
(9,877
)
(5,198
)
(7,120
)
Inventories
(7,521
)
(5,404
)
(2,290
)
Other assets
(2,675
)
(1,531
)
(289
)
Accounts payable
5,113

5,387

537

Accrued payroll and benefits
2,349

(1,666
)
1,876

Accrued expenses
(3,795
)
28

451

Income taxes payable
1,564

(4,555
)
966

Other liabilities
(258
)
2,918

52

Pension and other post-retirement plans
(382
)
(319
)
(303
)
Total adjustments
11,620

43,600

12,822

Net cash provided by operating activities
58,152

58,048

47,202

Cash flows from investing activities:
 

 

 

Capital expenditures
(28,488
)
(18,094
)
(20,500
)
Proceeds from sale of assets
3

541

12,296

Payment for acquisitions, net of cash acquired

(19,121
)
(73,063
)
Net cash used in investing activities
(28,485
)
(36,674
)
(81,267
)
Cash flows from financing activities:
 

 

 

Payments of long-term debt
(1,060,100
)
(1,518,200
)
(2,458,400
)
Proceeds from borrowings of long-term debt
1,033,800

1,505,400

2,456,800

Payments of short-term notes payable

(1,150
)

Purchase of treasury stock
(9,440
)


Dividends paid
(5,285
)
(5,260
)
(5,234
)
Taxes paid on behalf of equity award participants
(1,468
)
(1,604
)
(1,809
)
Net cash used in financing activities
(42,493
)
(20,814
)
(8,643
)
Effect of exchange rate on cash and cash equivalents
187

(793
)
(415
)
Net decrease in cash and cash equivalents
(12,639
)
(233
)
(43,123
)
Cash and cash equivalents at beginning of year
113,572

113,805

156,928

Cash and cash equivalents at end of year
$
100,933

$
113,572

$
113,805

Supplemental cash flow information:
 

 

 

Cash paid for interest
$
1,582

$
2,130

$
2,939

Cash paid for income taxes, net
$
9,916

$
10,884

$
10,471

Non-cash investing and financing activities:






Purchase of assets with short-term notes payable
$

$

$
1,006

Capital expenditures incurred not paid
$
4,312

$
5,914

$
3,214

The accompanying notes are an integral part of the consolidated financial statements.


34 CTS CORPORATION


CTS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
(in thousands)
 
Common
Stock
Additional
Contributed
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Earnings/(Loss)
Treasury
Stock
Total
Balances at January 1, 2016
$
300,909

$
41,166

$
381,840

$
(99,005
)
$
(343,256
)
$
281,654

Net earnings


34,380



34,380

Changes in fair market value of hedges, net of tax



553


553

Changes in unrealized pension cost, net of tax



6,412


6,412

Cumulative translation adjustment, net of tax



(1,154
)

(1,154
)
Cash dividends of $0.16 per share


(5,241
)


(5,241
)
Issued shares on vesting of restricted stock units
1,923

(3,307
)



(1,384
)
Stock compensation

2,662




2,662

Balances at December 31, 2016
$
302,832

$
40,521

$
410,979

$
(93,194
)
$
(343,256
)
$
317,882

Net earnings


14,448



14,448

Changes in fair market value of hedges, net of tax



110


110

Changes in unrealized pension cost, net of tax



13,687


13,687

Cumulative translation adjustment, net of tax



437


437

Cash dividends of $0.16 per share


(5,267
)


(5,267
)
Issued shares on vesting of restricted stock units
1,945

(3,549
)



(1,604
)
Stock compensation

4,112




4,112

Balances at December 31, 2017
$
304,777

$
41,084

$
420,160

$
(78,960
)
$
(343,256
)
$
343,805

Net earnings


46,532



46,532

Changes in fair market value of hedges, net of tax



795


795

Changes in unrealized pension cost, net of tax



(1,830
)

(1,830
)
Cumulative translation adjustment, net of tax



(311
)

(311
)
Cash dividends of $0.16 per share


(5,278
)


(5,278
)
Acquired 342,100 shares for treasury stock




(9,440
)
(9,440
)
Issued shares on vesting of restricted stock units
1,920

(3,389
)



(1,469
)
Implementation of ASU No. 2018-02 (see Note 1)


17,433

(17,433
)


Stock compensation

5,125




5,125

Balances at December 31, 2018
$
306,697

$
42,820

$
478,847

$
(97,739
)
$
(352,696
)
$
377,929

The accompanying notes are an integral part of the consolidated financial statements.

CTS CORPORATION 35


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except for share and per share data)
NOTE 1 — Summary of Significant Accounting Policies
Description of Business: CTS Corporation ("CTS", "we", "our", "us" or the "Company") is a global manufacturer of sensors, electronic components, and actuators. We operate manufacturing facilities located throughout North America, Asia and Europe and service major markets globally.
CTS consists of one reportable business segment.
Principles of Consolidation: The consolidated financial statements include the accounts of CTS and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.
Fiscal Calendar: We began using a calendar period end in 2016. Prior to that, we operated on a 4 week/ 4 week/ 5 week fiscal quarter, and each fiscal quarter ended on a Sunday that always began on January 1 and ended on December 31.
Use of Estimates: The preparation of financial statements in conformity with the accounting principles generally accepted in the United States of America ("U.S. GAAP") 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 reporting period. Actual results could differ materially from those estimates.
Cash and Cash Equivalents: All highly liquid investments with maturities of three months or less at the date of purchase are considered to be cash equivalents.
Accounts Receivable and Allowance for Doubtful Accounts: Accounts receivable consists primarily of amounts due from normal business activities. We maintain an allowance for doubtful accounts for estimated uncollectible accounts receivable. Our reserves for estimated credit losses are based upon historical experience and specific customer collection issues. Accounts are written off against the allowance account when they are determined to no longer be collectible.
Concentration of Credit Risk: Financial instruments that potentially subject us to concentrations of credit risk consist of cash and cash equivalents and trade receivables. Our cash and cash equivalents, at times, may exceed federally insured limits. Cash and cash equivalents are deposited primarily in banking institutions with global operations. We have not experienced any losses in such accounts. We believe we are not exposed to any significant credit risk on cash and cash equivalents.
Trade receivables subject us to the potential for credit risk with major customers. We sell our products to customers principally in the aerospace and defense, industrial, information technology, medical, telecommunications, and transportation markets, primarily in North America, Europe, and Asia. We perform ongoing credit