UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
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x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For The Quarterly Period Ended September 30, 2016March 31, 2017
OR
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o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period from _______________ to _______________
Commission File Number: 1-4639
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CTS CORPORATION |
(Exact name of registrant as specified in its charter) |
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Indiana | | 35-0225010 |
(State or other jurisdiction of incorporation or organization) | | (IRS Employer Identification Number) |
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2375 Cabot Drive, Lisle, IL | | 60532 |
(Address of principal executive offices) | | (Zip Code) |
Registrant’s telephone number, including area code: 630-577-8800
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 ☒ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes ☒ No o
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.
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Large accelerated filer o | | Accelerated filer ☒ | | Non-accelerated filer o | | Smaller reporting company o |
| | | | (Do not check if smaller reporting company) | | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of October 25, 2016: 32,760,091.April 24, 2017: 32,851,024.
CTS CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CTS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS - UNAUDITED
(In thousands of dollars, except per share amounts)
| | | Three Months Ended | | Nine Months Ended | Three Months Ended |
| September 30, | | September 27, | | September 30, | | September 27, | March 31, | | March 31, |
| 2016 | | 2015 | | 2016 | | 2015 | 2017 | | 2016 |
Net sales | $ | 99,697 |
| | $ | 90,646 |
| | $ | 295,095 |
| | $ | 289,028 |
| $ | 100,154 |
| | $ | 96,705 |
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Cost of goods sold | 63,056 |
| | 59,200 |
| | 190,528 |
| | 192,073 |
| 65,930 |
| | 63,237 |
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Gross Margin | 36,641 |
| | 31,446 |
| | 104,567 |
| | 96,955 |
| 34,224 |
| | 33,468 |
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Selling, general and administrative expenses | 16,048 |
| | 12,689 |
| | 46,459 |
| | 43,623 |
| 15,246 |
| | 14,872 |
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Research and development expenses | 6,284 |
| | 5,692 |
| | 18,414 |
| | 16,378 |
| 6,003 |
| | 6,163 |
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Non-recurring environmental charge | — |
| | 14,541 |
| | — |
| | 14,541 |
| |
Restructuring and impairment charges | 1,969 |
| | 2,373 |
| | 2,175 |
| | 5,229 |
| 777 |
| | — |
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(Gain) loss on sale of assets | (150 | ) |
| 1 |
|
| (11,501 | ) |
| 2 |
| |
Operating earnings (loss) | 12,490 |
| | (3,850 | ) | | 49,020 |
| | 17,182 |
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Other (expense) income: | | | | | |
| | |
| |
Loss (gain) on sale of assets | | 2 |
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| (3 | ) |
Operating earnings | | 12,196 |
| | 12,436 |
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Other income (expense): | | | | |
Interest expense | (917 | ) | | (714 | ) | | (2,746 | ) | | (1,955 | ) | (684 | ) | | (820 | ) |
Interest income | 203 |
| | 713 |
| | 1,082 |
| | 2,354 |
| 253 |
| | 547 |
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Other expense | (46 | ) | | (3,072 | ) | | (1,482 | ) | | (4,641 | ) | |
Total other expense | (760 | ) | | (3,073 | ) | | (3,146 | ) | | (4,242 | ) | |
Earnings (loss) before income taxes | 11,730 |
| | (6,923 | ) | | 45,874 |
| | 12,940 |
| |
Income tax expense (benefit) | 8,010 |
| | (2,163 | ) | | 19,804 |
| | (7,667 | ) | |
Net earnings (loss) | $ | 3,720 |
| | $ | (4,760 | ) | | $ | 26,070 |
| | $ | 20,607 |
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Earnings (loss) per share: |
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| | |
| | |
| | |
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Other income (expense) | | 460 |
| | (198 | ) |
Total other income (expense) | | 29 |
| | (471 | ) |
Earnings before income taxes | | 12,225 |
| | 11,965 |
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Income tax expense | | 3,741 |
| | 4,102 |
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Net earnings | | $ | 8,484 |
| | $ | 7,863 |
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Earnings per share: | |
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| | |
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Basic | $ | 0.11 |
| | $ | (0.15 | ) | | $ | 0.80 |
| | $ | 0.62 |
| $ | 0.26 |
| | $ | 0.24 |
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Diluted | $ | 0.11 |
| | $ | (0.15 | ) | | $ | 0.79 |
| | $ | 0.61 |
| $ | 0.25 |
| | $ | 0.24 |
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Basic weighted – average common shares outstanding: | 32,759 |
| | 32,770 |
| | 32,716 |
| | 33,083 |
| 32,802 |
| | 32,632 |
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Effect of dilutive securities | 495 |
| | — |
| | 494 |
| | 485 |
| 560 |
| | 373 |
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Diluted weighted – average common shares outstanding | 33,254 |
| | 32,770 |
| | 33,210 |
| | 33,568 |
| 33,362 |
| | 33,005 |
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Cash dividends declared per share | $ | 0.04 |
| | $ | 0.04 |
| | $ | 0.12 |
| | $ | 0.12 |
| $ | 0.04 |
| | $ | 0.04 |
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See notes to unaudited condensed consolidated financial statements.
CTS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME ‑ UNAUDITED
(In thousands of dollars)
| | | Three Months Ended | | Nine Months Ended | Three Months Ended |
| September 30, |
| September 27, | | September 30, | | September 27, | March 31, |
| March 31, |
| 2016 | | 2015 | | 2016 | | 2015 | 2017 | | 2016 |
Net earnings (loss) | $ | 3,720 |
| | $ | (4,760 | ) | | $ | 26,070 |
| | $ | 20,607 |
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Net earnings | | $ | 8,484 |
| | $ | 7,863 |
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Other comprehensive income (loss): | |
| | |
| | |
| | |
| |
| | |
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Changes in fair market value of derivatives, net of tax | (263 | ) | | (17 | ) | | (36 | ) | | (34 | ) | 760 |
| | 294 |
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Changes in unrealized pension cost, net of tax | 898 |
| | 1,336 |
| | 2,753 |
| | 3,299 |
| 816 |
| | 908 |
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Cumulative translation adjustment, net of tax | (164 | ) | | (1,204 | ) | | (890 | ) | | (817 | ) | 88 |
| | (409 | ) |
Other comprehensive income | $ | 471 |
| | $ | 115 |
| | $ | 1,827 |
| | $ | 2,448 |
| $ | 1,664 |
| | $ | 793 |
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Comprehensive earnings (loss) | $ | 4,191 |
| | $ | (4,645 | ) | | $ | 27,897 |
| | $ | 23,055 |
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Comprehensive earnings | | $ | 10,148 |
| | $ | 8,656 |
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See notes to unaudited condensed consolidated financial statements.
CTS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
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| (Unaudited) | |
|
| March 31, | | December 31, |
| 2017 | | 2016 |
ASSETS | |
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Current Assets | |
| | |
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Cash and cash equivalents | $ | 121,819 |
| | $ | 113,805 |
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Accounts receivable, net | 63,016 |
| | 62,612 |
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Inventories, net | 30,954 |
| | 28,652 |
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Other current assets | 11,431 |
| | 10,638 |
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Total current assets | 227,220 |
| | 215,707 |
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Property, plant and equipment, net | 83,268 |
| | 82,111 |
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Other Assets | |
| | |
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Prepaid pension asset | 48,114 |
| | 46,183 |
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Goodwill | 61,744 |
| | 61,744 |
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Other intangible assets, net | 62,833 |
| | 64,370 |
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Deferred income taxes | 42,779 |
| | 45,839 |
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Other | 1,737 |
| | 1,743 |
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Total other assets | 217,207 |
| | 219,879 |
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Total Assets | $ | 527,695 |
| | $ | 517,697 |
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LIABILITIES AND SHAREHOLDERS’ EQUITY | |
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Current Liabilities | |
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Short-term notes payable | $ | 1,006 |
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| $ | 1,006 |
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Accounts payable | 41,937 |
| | 40,046 |
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Accrued payroll and benefits | 7,590 |
| | 11,369 |
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Accrued liabilities | 42,463 |
| | 45,708 |
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Total current liabilities | 92,996 |
| | 98,129 |
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Long-term debt | 94,000 |
| | 89,100 |
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Post-retirement obligations | 7,008 |
| | 7,006 |
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Other long-term obligations | 7,607 |
| | 5,580 |
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Total Liabilities | 201,611 |
| | 199,815 |
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Commitments and Contingencies (Note 9) |
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Shareholders’ Equity | |
| | |
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Common stock | 303,736 |
| | 302,832 |
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Additional contributed capital | 38,985 |
| | 40,521 |
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Retained earnings | 418,149 |
| | 410,979 |
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Accumulated other comprehensive loss | (91,530 | ) | | (93,194 | ) |
Total shareholders’ equity before treasury stock | 669,340 |
| | 661,138 |
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Treasury stock | (343,256 | ) | | (343,256 | ) |
Total shareholders’ equity | 326,084 |
| | 317,882 |
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Total Liabilities and Shareholders’ Equity | $ | 527,695 |
| | $ | 517,697 |
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| (Unaudited) | |
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| September 30, | | December 31, |
| 2016 | | 2015 |
ASSETS | |
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Current Assets | |
| | |
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Cash and cash equivalents | $ | 114,433 |
| | $ | 156,928 |
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Accounts receivable, net | 62,380 |
| | 54,563 |
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Inventories, net | 29,178 |
| | 24,600 |
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Other current assets | 10,852 |
| | 9,863 |
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Total current assets | 216,843 |
| | 245,954 |
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Property, plant and equipment, net | 79,329 |
| | 69,872 |
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Other Assets | |
| | |
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Prepaid pension asset | 39,678 |
| | 33,779 |
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Goodwill | 61,744 |
| | 33,865 |
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Other intangible assets, net | 65,930 |
| | 34,758 |
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Deferred income taxes | 48,963 |
| | 63,809 |
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Other | 1,084 |
| | 1,336 |
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Total other assets | 217,399 |
| | 167,547 |
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Total Assets | $ | 513,571 |
| | $ | 483,373 |
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LIABILITIES AND SHAREHOLDERS’ EQUITY | |
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Current Liabilities | |
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Accounts payable | $ | 43,290 |
| | $ | 40,299 |
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Accrued payroll and benefits | 11,876 |
| | 7,147 |
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Accrued liabilities | 45,969 |
| | 47,174 |
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Total current liabilities | 101,135 |
| | 94,620 |
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Long-term debt | 96,000 |
| | 90,700 |
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Post retirement obligations | 7,066 |
| | 7,230 |
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Other long-term obligations | 3,102 |
| | 9,169 |
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Total Liabilities | 207,303 |
| | 201,719 |
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Shareholders’ Equity | |
| | |
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Common stock | 302,156 |
| | 300,909 |
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Additional contributed capital | 40,567 |
| | 41,166 |
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Retained earnings | 403,979 |
| | 381,840 |
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Accumulated other comprehensive loss | (97,178 | ) | | (99,005 | ) |
Total shareholders’ equity before treasury stock | 649,524 |
| | 624,910 |
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Treasury stock | (343,256 | ) | | (343,256 | ) |
Total shareholders’ equity | 306,268 |
| | 281,654 |
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Total Liabilities and Shareholders’ Equity | $ | 513,571 |
| | $ | 483,373 |
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See notes to unaudited condensed consolidated financial statements.
CTS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS ‑ UNAUDITED
(In thousands of dollars)
| | | Nine Months Ended | Three Months Ended |
| September 30, |
| September 27, | March 31, |
| March 31, |
| 2016 | | 2015 | 2017 | | 2016 |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | |
Net earnings | $ | 26,070 |
| | $ | 20,607 |
| $ | 8,484 |
| | $ | 7,863 |
|
Adjustments to reconcile net earnings to net cash provided by operating activities: | |
| | |
| |
| | |
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Depreciation and amortization | 14,010 |
| | 11,987 |
| 4,708 |
| | 4,021 |
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Pension and other post-retirement plan income | (1,188 | ) | | (1,510 | ) | (417 | ) | | (427 | ) |
Equity-based compensation | 1,759 |
| | 2,655 |
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Restructuring charges | 2,175 |
| | 5,229 |
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Non-recurring environmental charge | — |
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| 14,541 |
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Stock-based compensation | | 880 |
| | 282 |
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Restructuring and impairment charges | | 777 |
| | — |
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Deferred income taxes | 8,332 |
| | (15,241 | ) | 2,313 |
| | (1,067 | ) |
Gain on sales of fixed assets | (11,501 | ) | | (121 | ) | |
Gain on foreign currency hedges | (15 | ) |
| — |
| |
Loss (gain) on sales of fixed assets | | 2 |
| | (3 | ) |
Changes in assets and liabilities: | |
| | |
| |
| | |
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Accounts receivable | (5,971 | ) | | (3,518 | ) | 7 |
| | (8,122 | ) |
Inventories | (2,318 | ) | | (34 | ) | (2,076 | ) | | 966 |
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Other assets | (489 | ) | | (222 | ) | (16 | ) | | (3,330 | ) |
Accounts payable | 2,717 |
| | (4,967 | ) | 942 |
| | 1,647 |
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Accrued payroll and benefits | 2,376 |
| | (1,573 | ) | (5,169 | ) | | 2,584 |
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Accrued expenses | (3,124 | ) | | (4,596 | ) | (3,057 | ) | | (869 | ) |
Income taxes payable | 690 |
| | 1,715 |
| 248 |
| | 735 |
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Other liabilities | (1,543 | ) | | (656 | ) | 2,232 |
| | (1,398 | ) |
Pension and other post-retirement plans | (393 | ) | | (178 | ) | (79 | ) | | (58 | ) |
Net cash provided by operating activities | 31,587 |
| | 24,118 |
| 9,779 |
| | 2,824 |
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CASH FLOWS FROM INVESTING ACTIVITIES: | |
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Capital expenditures | (14,467 | ) | | (6,559 | ) | (3,806 | ) | | (2,877 | ) |
Proceeds from sale of assets | 12,248 |
| | 1,878 |
| 1 |
| | 3 |
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Payment for acquisition, net of cash acquired | (73,063 | ) | | — |
| — |
| | (72,830 | ) |
Net cash used in investing activities | (75,282 | ) | | (4,681 | ) | (3,805 | ) | | (75,704 | ) |
CASH FLOWS FROM FINANCING ACTIVITIES: | |
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Payments of long-term debt | (2,048,000 | ) | | (943,300 | ) | (373,000 | ) | | (521,300 | ) |
Proceeds from borrowings of long-term debt | 2,053,300 |
| | 958,800 |
| 377,900 |
| | 571,900 |
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Payments of short-term notes payable | — |
| | (164 | ) | |
Proceeds from borrowings of short-term notes payable | — |
| | 164 |
| |
Purchase of treasury stock | — |
| | (15,623 | ) | |
Dividends paid | (3,923 | ) | | (3,984 | ) | (1,310 | ) | | (1,303 | ) |
Windfall tax benefits from equity awards | 696 |
| | 144 |
| |
Proceeds from exercise of stock options | — |
| | 64 |
| |
Net cash provided by (used in) financing activities | 2,073 |
| | (3,899 | ) | |
Taxes paid on behalf of equity award participants | | (1,566 | ) |
| (1,775 | ) |
Net cash provided by financing activities | | 2,024 |
| | 47,522 |
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Effect of exchange rate changes on cash and cash equivalents | (873 | ) | | 709 |
| 16 |
| | (606 | ) |
Net (decrease) increase in cash and cash equivalents | (42,495 | ) | | 16,247 |
| |
Net increase (decrease) in cash and cash equivalents | | 8,014 |
| | (25,964 | ) |
Cash and cash equivalents at beginning of period | 156,928 |
| | 134,508 |
| 113,805 |
| | 156,928 |
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Cash and cash equivalents at end of period | $ | 114,433 |
| | $ | 150,755 |
| $ | 121,819 |
| | $ | 130,964 |
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Supplemental cash flow information: | |
| | |
| |
| | |
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Cash paid for interest | $ | 2,292 |
| | $ | 1,046 |
| $ | 529 |
| | $ | 736 |
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Cash paid for income taxes, net | $ | 10,136 |
| | $ | 4,248 |
| $ | 1,386 |
| | $ | 5,407 |
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See notes to unaudited condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(in thousands except for share and per share data)
September 30, 2016March 31, 2017
NOTE 1—Basis of Presentation
The accompanying condensed consolidated financial statements have been prepared by CTS Corporation (“CTS” "we", "our", "us" or “the Company”the "Company”), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations. The unaudited condensed consolidated financial statements should be read in conjunction with the financial statements, notes thereto, and other information included in the Company’s Annual Report on Form 10‑K for the year ended December 31, 2015.2016.
The accompanying unaudited condensed consolidated financial statements reflect, in the opinion of management, all adjustments (consisting of normal recurring items) necessary for a fair statement, in all material respects, of the financial position and results of operations for the periods presented. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ materially from those estimates. The results of operations for the interim periods are not necessarily indicative of the results for the entire year.
Change in Estimate
Beginning in January 2017, we changed the method we use to calculate the service and interest cost components of net periodic benefit cost for our U.S. pension and other post-retirement benefit plans. Previously, we calculated the service and interest cost components using a single weighted-average discount rate derived from the yield curve to measure the benefit obligation at the beginning of the period. In 2017, we began using a full yield curve approach in the estimation of these components of benefit cost by applying the specific spot-rates along the yield curve to the relevant projected cash flows. This approach better aligns each of the projected benefit cash flows to the corresponding spot rates on the yield curve, resulting in a more precise measurement of service and interest costs. The change in method will result in a decrease in the service and interest components of pension costs in 2017. Any decrease to these components as a result of adoption of this approach is equally offset by a decrease in the actuarial losses included in our accumulated other comprehensive loss, with no impact on the measurement of the benefit obligation. This change is accounted for prospectively as a change in accounting estimate.
Subsequent Events
CTS hasWe have evaluated subsequent events and transactions for potential recognition or disclosure in the financial statements through the date the consolidated financial statements are issued.
Reclassifications
Certain prior period reclassifications have been made in the Condensed Consolidated Balance Sheet as a result of including our other post-retirement benefit plan liabilities in Post-retirement obligations as well as the retrospective application of a new accounting pronouncement upon the adoption of ASU 2015-17 (see Note 18 - Recent Accounting Pronouncements for additional details). The chart below quantifies the effects of these reclassification adjustments on our December 31, 2015, financial statements:
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| | | | | | | | | | | | |
| | At December 31, 2015 |
Consolidated Balance Sheet Line Item | | As previously reported | | Reclassification adjustment | | As currently reported |
Other current assets | | $ | 15,888 |
| | $ | (6,025 | ) | | $ | 9,863 |
|
Deferred income taxes | | $ | 58,544 |
| | $ | 5,265 |
| | $ | 63,809 |
|
Accrued liabilities | | $ | (53,905 | ) | | $ | 6,731 |
| | $ | (47,174 | ) |
Post-retirement obligations | | $ | (2,703 | ) | | $ | (4,527 | ) | | $ | (7,230 | ) |
Other long-term obligations | | $ | (7,725 | ) | | $ | (1,444 | ) | | $ | (9,169 | ) |
NOTE 2 – Accounts Receivable
The components of accounts receivable are as follows: | | | As of | As of |
| September 30, | | December 31, | March 31, | | December 31, |
| 2016 | | 2015 | 2017 | | 2016 |
Accounts receivable, gross | $ | 62,556 |
| | $ | 54,696 |
| $ | 63,176 |
| | $ | 62,782 |
|
Less: Allowance for doubtful accounts | (176 | ) | | (133 | ) | (160 | ) | | (170 | ) |
Accounts receivable, net | $ | 62,380 |
| | $ | 54,563 |
| $ | 63,016 |
| | $ | 62,612 |
|
NOTE 3 – Inventories
Inventories consist of the following: | | | As of | As of |
| September 30, |
| December 31, | March 31, |
| December 31, |
| 2016 | | 2015 | 2017 | | 2016 |
Finished goods | $ | 6,084 |
| | $ | 6,972 |
| $ | 7,005 |
| | $ | 7,513 |
|
Work-in-process | 9,884 |
| | 6,828 |
| 11,661 |
| | 9,596 |
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Raw materials | 19,380 |
| | 16,991 |
| 19,277 |
| | 17,680 |
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Less: Inventory reserves | (6,170 | ) | | (6,191 | ) | (6,989 | ) | | (6,137 | ) |
Inventories, net | $ | 29,178 |
| | $ | 24,600 |
| $ | 30,954 |
| | $ | 28,652 |
|
NOTE 4 – Property, Plant and Equipment
Property, plant and equipment is comprised of the following: | | | As of | As of |
| September 30, | | December 31, | March 31, | | December 31, |
| 2016 | | 2015 | 2017 | | 2016 |
Land | $ | 2,330 |
| | $ | 2,401 |
| $ | 2,330 |
| | $ | 2,330 |
|
Buildings and improvements | 63,192 |
| | 65,731 |
| 63,875 |
| | 63,621 |
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Machinery and equipment | 208,389 |
| | 191,212 |
| 216,636 |
| | 213,198 |
|
Less: Accumulated depreciation | (194,582 | ) | | (189,472 | ) | (199,573 | ) | | (197,038 | ) |
Property, plant and equipment, net | $ | 79,329 |
| | $ | 69,872 |
| $ | 83,268 |
| | $ | 82,111 |
|
| | | | |
Depreciation expense for the three months ended March 31, 2017 | | | | $ | 3,172 |
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Depreciation expense for the three months ended March 31, 2016 | | | | $ | 2,926 |
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NOTE 5 – Retirement Plans
Pension Plans
Net pension income for our domestic and foreign plans was as follows:
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| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, |
| September 27, |
| September 30, |
| September 27, |
| 2016 | | 2015 | | 2016 | | 2015 |
Net pension income | $ | (440 | ) | | $ | (532 | ) | | $ | (1,234 | ) | | $ | (1,591 | ) |
|
| | | | | | | |
| Three Months Ended |
| March 31, |
| March 31, |
| 2017 | | 2016 |
Net pension income | $ | (433 | ) | | $ | (392 | ) |
The components of net pension (income) expense for our domestic and foreign plans include the following:
| | | Domestic Pension Plans | | Foreign Pension Plans | Domestic Pension Plans | | Foreign Pension Plans |
| Three Months Ended | | Three Months Ended | Three Months Ended | | Three Months Ended |
| September 30, |
| September 27, |
| September 30, |
| September 27, | March 31, |
| March 31, |
| March 31, |
| March 31, |
| 2016 | | 2015 | | 2016 | | 2015 | 2017 | | 2016 | | 2017 | | 2016 |
Service cost | $ | 21 |
| | $ | 42 |
| | $ | 13 |
| | $ | 16 |
| $ | — |
| | $ | 22 |
| | $ | 12 |
| | $ | 12 |
|
Interest cost | 2,756 |
| | 2,815 |
| | 12 |
| | 124 |
| 2,068 |
| | 2,756 |
| | 8 |
| | 11 |
|
Expected return on plan assets (1) | (4,744 | ) | | (5,068 | ) | | (33 | ) | | (135 | ) | (4,061 | ) | | (4,744 | ) | | (5 | ) | | 7 |
|
Amortization of loss | 1,499 |
| | 1,585 |
| | 36 |
| | 89 |
| 1,446 |
| | 1,498 |
| | 38 |
| | 34 |
|
Other cost due to retirement | | 61 |
| | 12 |
| | — |
| | — |
|
(Income) expense, net | $ | (468 | ) | | $ | (626 | ) | | $ | 28 |
| | $ | 94 |
| $ | (486 | ) | | $ | (456 | ) | | $ | 53 |
| | $ | 64 |
|
(1) Expected return on plan assets is net of expected investment expenses and certain administrative expenses.
|
| | | | | | | | | | | | | | | |
| Domestic Pension Plans | | Foreign Pension Plans |
| Nine Months Ended | | Nine Months Ended |
| September 30, 2016 | | September 27, 2015 | | September 30, 2016 | | September 27, 2015 |
Service cost | $ | 65 |
| | $ | 128 |
| | $ | 38 |
| | $ | 49 |
|
Interest cost | 8,268 |
| | 8,444 |
| | 34 |
| | 371 |
|
Expected return on plan assets (1) | (14,232 | ) | | (15,204 | ) | | (19 | ) | | (402 | ) |
Amortization of loss | 4,495 |
| | 4,754 |
| | 105 |
| | 269 |
|
Other cost due to retirement | 12 |
| | — |
| | — |
| | — |
|
(Income) expense, net | $ | (1,392 | ) | | $ | (1,878 | ) | | $ | 158 |
| | $ | 287 |
|
(1) Expected return on plan assets is net of expected investment expenses and certain administrative expenses.
Other Post-retirement Benefit Plan
Net post-retirement expense for our other post-retirement plan includes the following components:
| | | Three Months Ended |
| Nine Months Ended | Three Months Ended |
| September 30, |
| September 27, |
| September 30, |
| September 27, | March 31, |
| March 31, |
| 2016 | | 2015 | | 2016 | | 2015 | 2017 | | 2016 |
Other post-retirement benefit plan | |
| | |
| | |
| | |
| |
Service cost | $ | — |
| | $ | 1 |
| | $ | 2 |
| | $ | 3 |
| $ | 1 |
| | $ | 1 |
|
Interest cost | 52 |
| | 51 |
| | 156 |
| | 153 |
| 40 |
| | 52 |
|
Amortization of gain | (37 | ) | | (25 | ) | | (112 | ) | | (75 | ) | (25 | ) | | (38 | ) |
Post-retirement expense | $ | 15 |
| | $ | 27 |
| | $ | 46 |
| | $ | 81 |
| $ | 16 |
| | $ | 15 |
|
NOTE 6 – Other Intangible Assets
Intangible assets consist of the following components:
| | | As of | As of |
| September 30, 2016 | March 31, 2017 |
| Gross Carrying Amount | | Accumulated Amortization | | Net Amount | Gross Carrying Amount | | Accumulated Amortization | | Net Amount |
Amortized intangible assets: | | | | | | |
Customer lists/relationships | $ | 63,386 |
| | $ | (29,490 | ) | | $ | 33,896 |
| $ | 63,386 |
| | $ | (31,142 | ) | | $ | 32,244 |
|
Patents | 10,319 |
| | (10,319 | ) | | — |
| 10,319 |
| | (10,319 | ) | | — |
|
Technology and other intangibles | 36,715 |
| | (6,881 | ) | | 29,834 |
| 36,255 |
| | (7,866 | ) | | 28,389 |
|
In process research and development | 2,200 |
| | — |
| | 2,200 |
| 2,200 |
| | — |
| | 2,200 |
|
Other intangible assets, net | $ | 112,620 |
| | $ | (46,690 | ) | | $ | 65,930 |
| $ | 112,160 |
| | $ | (49,327 | ) | | $ | 62,833 |
|
|
|
| |
|
| |
|
| |
Amortization expense for the three months ended September 30, 2016 |
|
| | $ | 1,638 |
| |
|
| |
| | | | | | |
Amortization expense for the nine months ended September 30, 2016 | |
| $ | 4,254 |
|
|
| |
Amortization expense for the three months ended March 31, 2017 | |
|
| | $ | 1,536 |
| |
|
|
|
| | | | | | | | | | | |
| As of |
| December 31, 2016 |
| Gross Carrying Amount | | Accumulated Amortization | | Net Amount |
Customer lists/relationships | $ | 63,386 |
| | $ | (30,318 | ) | | $ | 33,068 |
|
Patents | 10,319 |
| | (10,319 | ) | | — |
|
Technology and other intangibles | 36,715 |
| | (7,613 | ) | | 29,102 |
|
In process research and development | 2,200 |
|
| — |
|
| 2,200 |
|
Other intangible assets, net | $ | 112,620 |
| | $ | (48,250 | ) | | $ | 64,370 |
|
Amortization expense for the three months ended March 31, 2016 | |
| | $ | 1,095 |
| | |
|
|
| | | | | | | | | | | |
| As of |
| December 31, 2015 |
| Gross Carrying Amount | | Accumulated Amortization | | Net Amount |
Amortized intangible assets: | | | | | |
Customer lists/relationships | $ | 51,804 |
| | $ | (27,101 | ) | | $ | 24,703 |
|
Patents | 10,319 |
| | (10,319 | ) | | — |
|
Technology and other intangibles | 12,871 |
| | (5,016 | ) | | 7,855 |
|
In process research and development | 2,200 |
|
| — |
|
| 2,200 |
|
Other intangible assets, net | $ | 77,194 |
| | $ | (42,436 | ) | | $ | 34,758 |
|
|
|
| |
|
| |
|
|
Amortization expense for the three months ended September 27, 2015 | |
| | $ | 985 |
| | |
|
|
|
| |
|
| |
|
|
Amortization expense for the nine months ended September 27, 2015 | |
| | $ | 2,942 |
| | |
|
Amortization expense remaining for other intangible assets is as follows:
| | | | Amortization expense |
| Amortization expense | |
2016 | $ | 1,557 |
| |
2017 | 6,064 |
| $ | 4,528 |
|
2018 | 5,956 |
| 5,956 |
|
2019 | 5,947 |
| 5,947 |
|
2020 | 5,947 |
| 5,947 |
|
2021 | | 5,867 |
|
Thereafter | 40,459 |
| 34,588 |
|
Total amortization expense | $ | 65,930 |
| $ | 62,833 |
|
NOTE 7 – Costs Associated with Exit and Restructuring Activities
Costs associated with exit and restructuring activities are recorded in the Condensed Consolidated Statement of Earnings as follows: restructuring related charges are recorded as a separate component of Cost of Goods Sold, and restructuring and impairment charges are reported on a separate line and included in Operating Earnings.earnings.
Total restructuring impairment and restructuringcharges, all related chargesto the June 2016 Plan described below, were as follows:
|
| | | | | | | |
| Three Months Ended |
| September 30, 2016 | | September 27, 2015 |
Restructuring-related charges | $ | — |
| | $ | 152 |
|
Restructuring and impairment charges | 1,969 |
| | 2,373 |
|
Total restructuring, impairment, and restructuring-related charges | $ | 1,969 |
| | $ | 2,525 |
|
|
| | | | | | | |
| Nine Months Ended |
| September 30, 2016 | | September 27, 2015 |
Restructuring-related charges | $ | — |
| | $ | 444 |
|
Restructuring and impairment charges | 2,175 |
| | 5,229 |
|
Total restructuring, impairment, and restructuring-related charges | $ | 2,175 |
| | $ | 5,673 |
|
10
|
| | | | | |
| Three Months Ended |
| March 31, 2017 | | March 31, 2016 |
Restructuring and impairment charges | 777 |
| | — |
|
In June 2016, CTSwe announced plans to restructure operations by phasing out production at the Elkhart facility by mid-2018 and transitioning it into a research and development center supporting CTS'our global operations ("June 2016 Plan"). Additional organizational changes will also occur in various other locations. The cost of the plan is expected to be approximately $16,000 including$12,300 and will impact approximately 230 employees. The total restructuring liability related to severance and other one-time benefit arrangements. We have recorded $2,175 of terminationarrangements under the June 2016 Plan was $1,722 at March 31, 2017 and other one-time benefit charges impacting approximately 230 employees as of September 30,$1,739 at December 31, 2016. Additional costs related to line movements, asset impairment and equipment charges, and other costs will be expensed as incurred. The total restructuring liability related to the June 2016 Plan was $1,569 at September 30, 2016.
The following table displays the planned restructuring and impairment charges associated with the June 2016 Plan as well as a summary of the actual costs incurred through September 30, 2016:
March 31, 2017:
|
| | | | | |
| |
| Actual costs |
|
|
| incurred through |
June 2016 Plan | Planned Costs |
| September 30, 2016 |
Workforce reduction | 3,075 |
|
| 2,175 |
|
Equipment relocation | 7,925 |
|
| — |
|
Asset impairment charge | 3,700 |
|
| — |
|
Other charges | 1,300 |
|
| — |
|
Restructuring and impairment charges | 16,000 |
|
| 2,175 |
|
Total restructuring and impairment charges for the June 2016 Plan were as follows:
|
| | | | | |
| Three Months Ended |
| September 30, 2016 | | September 27, 2015 |
Restructuring and impairment charges | 1,969 |
| | — |
|
|
| | | | | |
| Nine Months Ended |
| September 30, 2016 | | September 27, 2015 |
Restructuring and impairment charges | 2,175 |
| | — |
|
Not included in restructuring and impairment charges, but directly attributable to the June 2016 Plan, is an increase in tax expense of $2,316 relating to increases in valuation allowances on deferred tax assets for state net operating losses and tax credits and the revaluation of U.S. deferred taxes as a result of a change in our expected future tax rate as discussed in Note 16. |
| | | | | |
| |
| Actual costs |
| Planned |
| incurred through |
June 2016 Plan | Costs |
| March 31, 2017 |
Workforce reduction | 3,075 |
|
| 2,581 |
|
Equipment relocation | 7,925 |
|
| 822 |
|
Other charges | 1,300 |
|
| 422 |
|
Restructuring and impairment charges | 12,300 |
|
| 3,825 |
|
In April 2014, CTSwe announced plans to restructure itsour operations and consolidate itsour Canadian operations into other existing CTS facilities as part of CTS’our overall plan to simplify its business model and rationalize itsour global footprint (“April 2014 Plan”).
During the second quarter of 2015, CTS management revised the April 2014 Plan. The revision added $4,250 in planned costs. Additional administrative and legal costs were expected to account for $1,300 of the additional restructuring and impairment charges. The remaining $2,950 in restructuring related charges are for additional costs related to equipment relocation, training, travel and shipping.
These restructuring actions, which were completed during 2015, impacted approximately 120 positions.
The following table displays the plannedremaining restructuring and restructuring-related charges associated withliability related to the April 2014 Plan as well as a summary of the actual costs incurred through September 30, 2016:was $429 at March 31, 2017 and $423 at December 31, 2016.
|
| | | | | | | |
| | | Actual costs |
|
| | incurred through |
April 2014 Plan | Planned Costs | | September 30, 2016 |
Inventory write-down | $ | 850 |
| | $ | — |
|
Equipment relocation | 1,800 |
| | 444 |
|
Other charges | 1,400 |
| | 113 |
|
Restructuring-related charges, included in cost of goods sold | $ | 4,050 |
| | $ | 557 |
|
|
|
| |
|
|
Workforce reduction | $ | 4,200 |
| | $ | 4,423 |
|
Other charges, including pension termination costs | 1,700 |
| | 3,413 |
|
Restructuring and impairment charges | $ | 5,900 |
| | $ | 7,836 |
|
|
|
| |
|
|
Total restructuring, impairment and restructuring related charges | $ | 9,950 |
| | $ | 8,393 |
|
Total restructuring, impairment and restructuring related charges under the April 2014 Plan were as follows:
|
| | | | | | | |
| Three Months Ended |
| September 30, 2016 | | September 27, 2015 |
Restructuring-related charges | $ | — |
| | $ | 152 |
|
Restructuring and impairment charges | — |
| | 2,025 |
|
Total restructuring, impairment, and restructuring related charges | $ | — |
| | $ | 2,177 |
|
|
| | | | | | | |
| Nine Months Ended |
| September 30, 2016 | | September 27, 2015 |
Restructuring-related charges | $ | — |
| | $ | 369 |
|
Restructuring and impairment charges | — |
| | 3,902 |
|
Total restructuring, impairment, and restructuring-related charges | $ | — |
| | $ | 4,271 |
|
Total restructuring liability related to the April 2014 Plan was $436 at September 30, 2016.
In June 2013, CTS announced a restructuring plan to simplify CTS’ global footprint by consolidating manufacturing facilities into existing locations (“June 2013 Plan”). The June 2013 Plan included the consolidation of operations from the U.K. manufacturing facility into the Czech Republic facility, the Carol Stream, Illinois manufacturing facility into the Juarez, Mexico facility and discontinuing manufacturing at the Singapore facility. Certain corporate functions were consolidated or eliminated as a result of the June 2013 Plan. These restructuring actions were completed in 2015 and resulted in the reduction of approximately 350 positions.
During the fourth quarter of 2014, CTS management revised the June 2013 Plan. The revision added $4,000 in planned costs. Settlement of the U.K. pension plan was expected to account for $2,000 of the added cost. The remaining $2,000 in restructuring and impairment charges were for severance costs and resulted in the reduction of approximately 130 additional positions throughout CTS businesses. The above actions were completed in 2015.
The following table displays the planned restructuring and restructuring-related charges associated with the June 2013 Plan and a summary of the actual costs incurred through September 30, 2016:
|
| | | | | | | |
|
| | Actual |
| Planned | | incurred through |
June 2013 Plan | Costs | | September 30, 2016 |
Inventory write-down | $ | 800 |
| | $ | 1,143 |
|
Equipment relocation | 900 |
| | 1,792 |
|
Other charges | 100 |
| | 702 |
|
Restructuring-related charges, included in cost of goods sold | $ | 1,800 |
| | $ | 3,637 |
|
|
|
| |
|
|
Workforce reduction | $ | 10,150 |
| | $ | 9,615 |
|
Asset impairment charge | 3,000 |
| | 4,139 |
|
Other charges, including pension termination costs | 7,650 |
| | 10,205 |
|
Restructuring and impairment charges | $ | 20,800 |
| | $ | 23,959 |
|
|
|
| |
|
|
Total restructuring and restructuring-related charges | $ | 22,600 |
| | $ | 27,596 |
|
Under the June 2013 Plan, total restructuring, impairment and restructuring related charges incurred were as follows:
|
| | | | | | | |
| Three Months Ended |
| September 30, 2016 |
| September 27, 2015 |
Restructuring-related charges | $ | — |
| | $ | — |
|
Restructuring and impairment charges | — |
| | 348 |
|
Total restructuring, impairment, and restructuring-related charges | $ | — |
| | $ | 348 |
|
|
| | | | | | | |
| Nine Months Ended |
| September 30, 2016 | | September 27, 2015 |
Restructuring-related charges | $ | — |
| | $ | 75 |
|
Restructuring and impairment charges | — |
| | 1,327 |
|
Total restructuring, impairment, and restructuring-related charges | $ | — |
| | $ | 1,402 |
|
No remaining liability is recorded for the June 2013 Plan as of September 30, 2016.
The following table displays the restructuring liability activity for all plans for the periodthree months ended September 30, 2016:March 31, 2017:
| | Combined Plans | | |
Restructuring liability at January 1, 2016 | $ | 826 |
| |
Restructuring and restructuring-related charges, excluding asset impairments and write-offs | 2,175 |
| |
Restructuring liability at January 1, 2017 | | $ | 2,162 |
|
Restructuring and impairment charges | | 777 |
|
Cost paid | (1,026 | ) | (795 | ) |
Other activity (1) | $ | 30 |
| 7 |
|
Restructuring liability at September 30, 2016 | $ | 2,005 |
| |
Restructuring liability at March 31, 2017 | | $ | 2,151 |
|
(1) Other activity includes asset impairments, write-offs of property, plant and equipment, the effects of currency translation and other charges that do not flow through restructuring expense.
NOTE 8 – Accrued Liabilities
The components of accrued liabilities are as follows:
| | | As of | As of |
| September 30, | | December 31, | March 31, | | December 31, |
| 2016 | | 2015 | 2017 | | 2016 |
Accrued product related costs | $ | 4,622 |
| | $ | 5,245 |
| $ | 5,217 |
| | $ | 5,556 |
|
Accrued income taxes | 9,564 |
| | 8,845 |
| 10,209 |
| | 9,826 |
|
Accrued property and other taxes | 1,990 |
| | 1,838 |
| 1,853 |
| | 1,917 |
|
Accrued outside commissions | 1,267 |
| | 97 |
| |
Accrued professional fees | 907 |
| | 704 |
| 1,341 |
| | 1,633 |
|
Accrued building improvement costs | 1,669 |
| | 1,768 |
| |
Dividends payable | 1,310 |
| | 1,302 |
| 1,314 |
| | 1,309 |
|
Remediation reserves | 18,895 |
| | 20,603 |
| 17,922 |
| | 18,176 |
|
Other accrued liabilities | 5,745 |
| | 6,772 |
| 4,607 |
| | 7,291 |
|
Total accrued liabilities | $ | 45,969 |
| | $ | 47,174 |
| $ | 42,463 |
| | $ | 45,708 |
|
NOTE 9 – Contingencies
Certain processes in the manufacture of CTS'our current and past products create by-products classified as hazardous waste by-products as currently defined by federal and state laws and regulations. CTS haswaste. We have been notified by the U.S. Environmental Protection Agency, state environmental agencies, and in some cases, generator groups of potentially responsible parties, that it is orwe may be a potentially responsible party regarding hazardous substancesliable for environmental contamination at several sites either presently or historicallycurrently and formerly owned leased, or operated by CTS.us. Some sites, are Superfund sites such as in Asheville, North Carolina and Mountain View, California. CTS reservesCalifornia, are designated National Priorities List sites under the U.S. Environmental Protection Agency’s Superfund program. We reserve for probable remediation activities and for claims and proceedings against CTSus with respect to other environmental matters. CTS recordsWe record reserves on aan undiscounted basis. In the opinion of management, based upon presently available information relating to all such matters, adequate provision for probable and estimable costs have been recorded. We do not have any known environmental obligations where a loss is probable or reasonably possible of occurring for which we do not have a reserve, nor do we have any amounts for which we have not reserved because the amount of the loss cannot be reasonably estimated. Due to the inherent nature of environmental obligations, CTSwe cannot provide assurance that itsour ultimate environmental investigation and clean-up costs and liabilitiesliability will not materially exceed the amount of its current reserve. Our reserve and disclosures will be adjusted accordingly if additional information becomes available in the future.
A roll forward of remediation reserves included in accrued liabilities on the balance sheet is comprised of the following:
|
| | | | | | | |
| March 31, 2017 |
| December 31, 2016 |
Balance at beginning of period | $ | 18,176 |
|
| $ | 20,603 |
|
Remediation expense | 97 |
|
| 556 |
|
Remediation payments | (351 | ) |
| (2,983 | ) |
Balance at end of the period | $ | 17,922 |
|
| $ | 18,176 |
|
Unrelated to the environmental claims described above, certain other claims are pending against CTSus with respect to matters arising out of the ordinary conduct of CTS’our business. Although the ultimate outcome of any potential litigation resulting from these claims cannot be predicted with certainty, and some may be disposed of unfavorably to CTS, management believesus, we believe that adequate provision for anticipated costs have been established based upon all presently available information. Except as noted herein, we do not believe we have any pending loss contingencies that are probable or reasonably possible of having a material impact on our consolidated financial position, results of operations, or cash flows.
NOTE 10 - Debt
Long-term debt was comprised of the following:
| | | As of | As of |
| September 30, |
| December 31, | March 31, |
| December 31, |
| 2016 | | 2015 | 2017 | | 2016 |
Revolving credit facility due in 2020 | $ | 96,000 |
| | $ | 90,700 |
| $ | 94,000 |
| | $ | 89,100 |
|
Weighted average interest rate | 1.9 | % | | 1.5 | % | 2.0 | % | | 1.9 | % |
Amount available | $ | 201,835 |
| | $ | 106,985 |
| $ | 203,835 |
| | $ | 208,735 |
|
Total credit facility | $ | 300,000 |
| | $ | 200,000 |
| $ | 300,000 |
| | $ | 300,000 |
|
Standby letters of credit | $ | 2,165 |
| | $ | 2,315 |
| $ | 2,165 |
| | $ | 2,165 |
|
Commitment fee percentage per annum | 0.25 | % | | 0.25 | % | 0.25 | % | | 0.25 | % |
On August 10, 2015, CTSwe entered into a new five-year credit agreement (“Revolving Credit Facility”) with a group of banks in order to support CTS’our financing needs. The Revolving Credit Facility originally provided for a credit line of $200,000. On May 23, 2016, CTSwe requested and received a $100,000 increase in the aggregate revolving credit commitments under its existing credit agreement, which increased the credit line from $200,000 to $300,000.
The Revolving Credit Facility includes a swing line sublimit of $15,000 and a letter of credit sublimit of $10,000. Borrowings under the Revolving Credit Facility bear interest, at CTS’our option, at the base rate plus the applicable margin for base rate loans or LIBOR plus the applicable margin for LIBOR loans. CTSWe also payspay a quarterly commitment fee on the unused portion of the Revolving Credit Facility. The commitment fee ranges from 0.20% to 0.40% based on the CTS’our total leverage ratio.
The Revolving Credit Facility requires, among other things, that CTSwe comply with a maximum total leverage ratio and a minimum fixed charge coverage ratio. Failure of CTS to comply with these covenants could reduce the borrowing availability under the Revolving Credit Facility. CTS wasWe were in compliance with all debt covenants at September 30, 2016.March 31, 2017. The Revolving Credit Facility requires that CTSwe deliver quarterly financial statements, annual financial statements, auditors certifications and compliance certificates within a specified number of days after the end of a quarter and year. Additionally, the Revolving Credit Facility contains restrictions limiting CTS'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 CTS'our subsidiaries and affiliates; and make stock repurchases and dividend payments. Interest rates on the Revolving Credit Facility fluctuate based upon the London Interbank Offered Rate and the Company’s quarterly total leverage ratio.
CTS hasWe have debt issuance costs related to itsour long-term debt that areis being amortized using the straight-line method over the life of the debt. These costs are included in interest expense in our Condensed Consolidated Statement of Earnings. Amortization expense was approximately $46 and $61$32 for the three months ended September 30,March 31, 2017 and March 31, 2016, and September 27, 2015, respectively, and approximately $116 and $165 for the first nine months ended September 30, 2016 and September 27, 2015, respectively.
Note 11 - Derivative Financial Instruments
Our earnings and cash flows are subject to fluctuations due to changes in foreign currency exchange rates and interest rates. We selectively use derivative financial instruments including foreign currency forward contracts and interest rate swaps to manage our exposure to these risks.
The use of derivative financial instruments exposes the Company to credit risk, which relates to the risk of nonperformance by a counterparty to the derivative contracts. We manage our credit risk by entering into derivative contracts with only highly rated financial institutions and by using netting agreements.
Foreign Currency Hedges
In January of 2016, we began using forward contracts to mitigate currency risk related to a portion of our forecasted foreign currency revenues and costs. The currency forward contracts are designed as cash flow hedges and are recorded in the Condensed Consolidated Balance Sheets at fair value. At least quarterly, we assess the effectiveness of these hedging relationships based on the total change in their fair value using regression analysis. The effective portion of derivative gains and losses are recorded in accumulated other comprehensive lossincome (loss) until the hedged transaction affects earnings upon settlement, at which time they are reclassified to cost of goods sold or net sales. Ineffectiveness is recorded in other income (expense) in our Condensed Consolidated Statement of Earnings. If it becomes probable that an anticipated transaction that is hedged will not occur by the
end of the originally specified time period, we reclassify the gains or losses related to that hedge from accumulated other comprehensive income (loss) to other income (expenses)(expense).
We continue to monitor the Company’s overall currency exposure and may elect to add cash flow hedges in the future. At September 30, 2016,March 31, 2017, we had a net unrealized lossgain of $219$486 in accumulated other comprehensive income, of which $201$482 is expected to be reclassified to income within the next 12 months. At March 31, 2016 we had a net unrealized gain of $378 in accumulated other comprehensive income (loss). The notional amount of foreign currency forward contracts outstanding was $13.8$16.5 million at September 30, 2016.March 31, 2017.
Interest Rate Swaps
CTS usesWe use interest rate swaps to convert the revolving credit facility’s variable rate of interest into a fixed rate. In the second quarter of 2012, CTS entered into four separate 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, CTSwe entered into four additional 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, CTSwe entered into three additional forward-starting 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.
These swaps are treated as cash flow hedges and consequently, the changes in fair value were recorded in other comprehensive income (loss). The estimated net amount of the existing gains or losses that are reported in accumulated other comprehensive income (loss) that is expected to be reclassified into earnings within the next twelve months is approximately $246.$64.
The location and fair values of derivative instruments designated as hedging instruments in the Condensed Consolidated Balance Sheets as of September 30, 2016,March 31, 2017, are shown in the following table:
|
| | | | | | | |
| As of |
| September 30, | | December 31, |
| 2016 | | 2015 |
Foreign currency hedges reported in Accrued liabilities | $ | (234 | ) | | $ | — |
|
Interest rate swaps reported in Accrued liabilities | $ | (246 | ) | | $ | (768 | ) |
Interest rate swaps reported in Other long-term obligations | $ | (360 | ) |
| $ | — |
|
|
| | | | | | | |
| As of |
| March 31, | | December 31, |
| 2017 | | 2016 |
Foreign currency hedges reported in Accrued liabilities | $ | — |
| | $ | 601 |
|
Foreign currency hedges reported in Other current assets | $ | 522 |
|
| $ | — |
|
Interest rate swaps reported in Other current assets | $ | 64 |
|
| $ | 2 |
|
Interest rate swaps reported in Other assets | $ | 758 |
|
| $ | 751 |
|
The Company has elected to net its foreign currency derivative assets and liabilities in the balance sheet in accordance with ASC 210-20 (Balance Sheet, Offsetting). On a gross basis, there were foreign currency derivative assets of $53$548 and foreign currency derivative liabilities of $287.$26.
The effect of derivative instruments on the Condensed Consolidated Statements of Earnings is as follows:
| | | Three Months Ended | | Nine Months Ended | Three Months Ended |
| September 30, | | September 27, | | September 30, |
| September 27, | March 31, | | March 31, |
| 2016 |
| 2015 | | 2016 |
| 2015 | 2017 |
| 2016 |
Foreign Exchange Contracts: | | | | | | | | | | |
Loss recognized in Net Sales | $ | (35 | ) | | $ | — |
| | $ | (125 | ) | | $ | — |
| $ | (2 | ) | | $ | (7 | ) |
Gain recognized in Cost of Goods Sold | 51 |
| | — |
| | 139 |
| | — |
| |
Gain recognized in Selling, General and Administrative expense | — |
| | — |
| | 10 |
| | — |
| |
(Loss) gain recognized in Cost of Goods Sold | | (144 | ) | | 1 |
|
(Loss) gain recognized in Selling, General and Administrative expense | | (3 | ) | | 4 |
|
Loss recognized in Other (expenses) income | (5 | ) | | — |
| | (9 | ) | | — |
| (8 | ) | | 6 |
|
| | | | |
| |
| | | |
Interest Rate Swaps: | | | | |
| |
| | | |
Interest Expense | $ | 158 |
| | $ | 192 |
| | $ | 471 |
| | $ | 574 |
| |
Benefit recorded in Interest Expense | | $ | — |
| | $ | 152 |
|
Total | $ | 169 |
| | $ | 192 |
| | $ | 486 |
| | $ | 574 |
| $ | (157 | ) | | $ | 156 |
|
NOTE 12 – Accumulated Other Comprehensive (Loss) Income
Shareholders’ equity includes certain items classified as accumulated other comprehensive (loss) income (“AOCI”) in the Condensed Consolidated Balance Sheets, including:
Unrealized gains (losses) on hedges relate to interest rate swaps to convert the line of credit’srevolving credit facility's variable rate of interest into a fixed rate and foreign currency forward contracts used to hedge our exposure to changes in exchange rates affecting certain revenues and costs denominated in foreign currencies. These hedges are designated as cash flow hedges, and CTS haswe have deferred income statement recognition of gains and losses until the hedged transaction occurs, at which time amounts are reclassified into earnings. Further information related to CTS’ derivative financial instruments is included in Note 11 - Derivative Financial Instruments and Note 15 – Fair Value Measurements.
Unrealized gains (losses) on pension obligations are deferred from income statement recognition until the gains or losses are realized. Amounts reclassified to income from AOCI are included in net periodic pension income / (expense). Further information related to CTS’our pension obligations is included in Note 5 – Retirement Plans.
Cumulative translation adjustment relates to our non-U.S. subsidiary companies that have designated a functional currency other than the U.S. dollar. CTS isWe are required to translate the subsidiary functional currency financial statements to dollars using a combination of historical, period-end, and average foreign exchange rates. This combination of rates creates the foreign currency translation adjustment component of other comprehensive (loss) income.
Changes in exchange rates between the functional currency and the currency in which a transaction is denominated are foreign exchange transaction gains or losses. Transaction (losses)/gains for the three months ended March 31, 2017 were $395 and nine month periods ended September 30, 2016 were ($165) and ($1,656), respectively, andtransaction losses for the three and nine month periodsmonths ended September 27, 2015March 31, 2016 were $(3,076) and ($4,640), respectively,$231, which arehave been included in other income/(expenses)income (expense) in the Condensed Consolidated Statement of Earnings.
The components of accumulated other comprehensive (loss) income for the three months ended September 30, 2016,March 31, 2017, are as follows:
| | | | | | | Gain (Loss) | | | | | | | Gain (Loss) | | |
| As of | | Gain (Loss) | | reclassified | | As of | As of | | Gain (Loss) | | Reclassified | | As of |
| June 30, | | Recognized | | from AOCI | | September 30, | December 31, | | Recognized | | from AOCI | | March 31, |
| 2016 | | in OCI | | to income | | 2016 | 2016 | | in OCI | | to Income | | 2017 |
Changes in fair market value of hedges: | | | | | | | | | | | | | | |
Gross | $ | (403 | ) | | $ | (643 | ) | | $ | 221 |
| | $ | (825 | ) | $ | 116 |
| | $ | 1,042 |
| | $ | 150 |
| | $ | 1,308 |
|
Income tax expense (benefit) | 151 |
| | 242 |
| | (83 | ) | | 310 |
| |
Income tax benefit | | (42 | ) | | (378 | ) | | (54 | ) | | (474 | ) |
Net | (252 | ) | | (401 | ) | | 138 |
| | (515 | ) | 74 |
| | 664 |
| | 96 |
| | 834 |
|
|
| |
| |
| |
|
| |
| |
| |
|
Changes in unrealized pension cost: | | | | | | | | | | | | | | |
Gross | (158,763 | ) | | — |
| | 1,437 |
| | (157,326 | ) | (151,618 | ) | | — |
| | 1,296 |
| | (150,322 | ) |
Income tax expense (benefit) | 63,260 |
| | — |
| | (539 | ) | | 62,721 |
| 60,672 |
| | — |
| | (480 | ) | | 60,192 |
|
Net | (95,503 | ) | | — |
| | 898 |
| | (94,605 | ) | (90,946 | ) | | — |
| | 816 |
| | (90,130 | ) |
|
|
| |
| |
|
| |
|
|
|
| |
| |
|
| |
|
|
Cumulative translation adjustment: | |
| | | | |
| | |
| |
| | | | |
| | |
|
Gross | (1,995 | ) | | (161 | ) | | — |
| | (2,156 | ) | (2,414 | ) | | 86 |
| | — |
| | (2,328 | ) |
Income tax expense (benefit) | 101 |
| | (3 | ) | | — |
| | 98 |
| |
Income tax expense | | 92 |
| | 2 |
| | — |
| | 94 |
|
Net | (1,894 | ) | | (164 | ) | | — |
| | (2,058 | ) | (2,322 | ) | | 88 |
| | — |
| | (2,234 | ) |
Total accumulated other comprehensive (loss) income | $ | (97,649 | ) | | $ | (565 | ) | | $ | 1,036 |
| | $ | (97,178 | ) | $ | (93,194 | ) | | $ | 752 |
| | $ | 912 |
| | $ | (91,530 | ) |
The components of accumulated other comprehensive (loss) income for the three months ended September 27, 2015,March 31, 2016, are as follows: |
| | | | | | | | | | | | | | | |
| | | | | Gain (Loss) | | |
| As of | | Gain (Loss) | | reclassified | | As of |
| June 28, | | Recognized | | from AOCI | | September 27, |
| 2015 | | in OCI | | to income | | 2015 |
Changes in fair market value of hedges: | | |
| | | | |
Gross | $ | (1,047 | ) | | $ | (219 | ) | | $ | 192 |
| | $ | (1,074 | ) |
Income tax expense (benefit) | 394 |
| | 82 |
| | (72 | ) | | 404 |
|
Net | (653 | ) | | (137 | ) | | 120 |
| | (670 | ) |
|
| |
| |
| |
|
Changes in unrealized pension cost: | | | | | | | |
Gross | (166,161 | ) | | 2,039 |
| | — |
| | (164,122 | ) |
Income tax expense (benefit) | 63,957 |
| | (703 | ) | | — |
| | 63,254 |
|
Net | (102,204 | ) | | 1,336 |
| | — |
| | (100,868 | ) |
| | | | | | | |
Cumulative translation adjustment: | |
| | | | |
| | |
|
Gross | 572 |
| | (1,056 | ) | | — |
| | (484 | ) |
Income tax expense (benefit) | 385 |
| | (148 | ) | | — |
| | 237 |
|
Net | 957 |
| | (1,204 | ) | | — |
| | (247 | ) |
Total accumulated other comprehensive (loss) income | $ | (101,900 | ) | | $ | (5 | ) | | $ | 120 |
| | $ | (101,785 | ) |
The components of accumulated other comprehensive (loss) income for the nine months ended September 30, 2016, are as follows:
|
| | | | | | | | | | | | | | | |
| |
| |
| Gain (Loss) |
| |
| As of |
| Gain (Loss) |
| reclassified |
| As of |
| December 31, |
| Recognized |
| from AOCI |
| September 30, |
| 2015 |
| in OCI |
| to income |
| 2016 |
Changes in fair market value of hedges: | |
| |
| |
| |
Gross | $ | (768 | ) |
| $ | (742 | ) |
| $ | 685 |
|
| $ | (825 | ) |
Income tax expense (benefit) | 289 |
|
| 278 |
|
| (257 | ) |
| 310 |
|
Net | (479 | ) |
| (464 | ) |
| 428 |
|
| (515 | ) |
|
|
|
|
|
|
|
|
Changes in unrealized pension cost: | |
| |
| |
| |
Gross | (161,719 | ) |
| — |
|
| 4,393 |
|
| (157,326 | ) |
Income tax expense (benefit) | 64,361 |
|
| — |
|
| (1,640 | ) |
| 62,721 |
|
Net | (97,358 | ) |
| — |
|
| 2,753 |
|
| (94,605 | ) |
| |
|
|
|
|
|
|
|
|
|
Cumulative translation adjustment: |
|
|
| |
| |
|
| |
|
Gross | (1,279 | ) |
| (877 | ) |
| — |
|
| (2,156 | ) |
Income tax expense (benefit) | 111 |
|
| (13 | ) |
| — |
|
| 98 |
|
Net | (1,168 | ) |
| (890 | ) |
| — |
|
| (2,058 | ) |
Total accumulated other comprehensive (loss) income | $ | (99,005 | ) |
| $ | (1,354 | ) |
| $ | 3,181 |
|
| $ | (97,178 | ) |
The components of accumulated other comprehensive (loss) income for the nine months ended September 27, 2015, are as follows:
| | | | | | | Gain (Loss) | | | | | | | Gain (Loss) | | |
| As of |
| Gain (Loss) |
| reclassified |
| As of | As of | | Gain (Loss) | | Reclassified | | As of |
| December 31, |
| Recognized |
| from AOCI |
| September 27, | December 31, | | Recognized | | from AOCI | | March 31, |
| 2014 |
| in OCI |
| to income |
| 2015 | 2015 | | in OCI | | to Income | | 2016 |
Changes in fair market value of hedges: | |
| |
| |
| | | |
| | | | |
Gross | $ | (1,020 | ) |
| $ | (628 | ) |
| $ | 574 |
|
| $ | (1,074 | ) | $ | (768 | ) | | $ | 242 |
| | $ | 231 |
| | $ | (295 | ) |
Income tax expense (benefit) | 384 |
|
| 236 |
|
| (216 | ) |
| 404 |
| 289 |
| | (91 | ) | | (88 | ) | | 110 |
|
Net | (636 | ) |
| (392 | ) |
| 358 |
|
| (670 | ) | (479 | ) | | 151 |
| | 143 |
| | (185 | ) |
|
|
|
|
|
|
|
|
| |
| |
| |
|
Changes in unrealized pension cost: | |
| |
| |
| | | | | | | | |
Gross | (169,291 | ) |
| 5,169 |
|
| — |
|
| (164,122 | ) | (161,719 | ) | | — |
| | 1,451 |
| | (160,268 | ) |
Income tax expense (benefit) | 65,124 |
|
| (1,870 | ) |
| — |
|
| 63,254 |
| 64,361 |
| | — |
| | (543 | ) | | 63,818 |
|
Net | (104,167 | ) |
| 3,299 |
|
| — |
|
| (100,868 | ) | (97,358 | ) | | — |
| | 908 |
| | (96,450 | ) |
|
|
|
|
|
|
|
|
|
|
| | | | | | | |
Cumulative translation adjustment: | |
|
| |
|
| |
|
| |
| |
| | | | |
| | |
|
Gross | 245 |
|
| (729 | ) |
| — |
|
| (484 | ) | (1,279 | ) | | (406 | ) | | — |
| | (1,685 | ) |
Income tax expense (benefit) | 325 |
|
| (88 | ) |
| — |
|
| 237 |
| 111 |
| | (3 | ) | | — |
| | 108 |
|
Net | $ | 570 |
|
| $ | (817 | ) |
| $ | — |
|
| $ | (247 | ) | (1,168 | ) | | (409 | ) | | — |
| | (1,577 | ) |
Total accumulated other comprehensive (loss) income | $ | (104,233 | ) |
| $ | 2,090 |
|
| $ | 358 |
|
| $ | (101,785 | ) | $ | (99,005 | ) | | $ | (258 | ) | | $ | 1,051 |
| | $ | (98,212 | ) |
NOTE 13 – Shareholders’ Equity
Share count and par value data related to shareholders’ equity are as follows:
| | | As of | As of |
| September 30, |
| December 31, | March 31, |
| December 31, |
| 2016 | | 2015 | 2017 | | 2016 |
Preferred Stock | | | | | | |
Par value per share | No par value |
| | No par value |
| No par value |
| | No par value |
|
Shares authorized | 25,000,000 |
| | 25,000,000 |
| 25,000,000 |
| | 25,000,000 |
|
Shares outstanding | — |
| | — |
| — |
| | — |
|
Common Stock | | | | | | |
Par value per share | No par value |
| | No par value |
| No par value |
| | No par value |
|
Shares authorized | 75,000,000 |
| | 75,000,000 |
| 75,000,000 |
| | 75,000,000 |
|
Shares issued | 56,453,531 |
| | 56,242,499 |
| 56,544,741 |
| | 56,456,516 |
|
Shares outstanding | 32,759,509 |
| | 32,548,477 |
| 32,850,719 |
| | 32,762,494 |
|
Treasury stock | | | | | | |
Shares held | 23,694,022 |
| | 23,694,022 |
| 23,694,022 |
| | 23,694,022 |
|
No common stock repurchases were made during the ninethree months ended September 30, 2016.March 31, 2017. Through September 30, 2016, CTSMarch 31, 2017, we had purchased 395,763 shares of common stock for an aggregate of $7,446 under a previously board-authorized share repurchase plan allowing for up to $25,000 in stock repurchases. Approximately $17,554 is available for future purchases.
A roll-forward of common shares outstanding is as follows: | | | Nine Months Ended | Three Months Ended |
| September 30, | | September 27, | March 31, | | March 31, |
| 2016 | | 2015 | 2017 | | 2016 |
Balance at the beginning of the year | 32,548,477 |
| | 33,392,060 |
| 32,762,494 |
| | 32,548,477 |
|
Repurchases | — |
| | (851,882 | ) | — |
| | — |
|
Shares issued upon exercise of stock options | — |
| | 5,200 |
| — |
| | — |
|
Restricted share issuances | 211,032 |
| | 134,919 |
| 88,225 |
| | 210,166 |
|
Balance at the end of the period | 32,759,509 |
| | 32,680,297 |
| 32,850,719 |
| | 32,758,643 |
|
Certain potentially dilutive restricted stock units are excluded from diluted earning per share because they are anti-dilutive. The number of awards that were anti-dilutive at September 30,March 31, 2017 and March 31, 2016 were 88,592 and September 27, 2015 were 2,019 and 0,83,148, respectively.
NOTE 14 - Equity-BasedStock-Based Compensation
At September 30, 2016, CTSMarch 31, 2017, we had four equity-basedactive stock-based compensation plans: the Nonemployee Directors’ Stock Retirement Plan (“Directors’ Plan”), the 2004 Omnibus Long-Term Incentive Plan (“2004 Plan”), the 2009 Omnibus Equity and Performance Incentive Plan (“2009 Plan”), and the 2014 Performance & Incentive Plan (“2014 Plan”). Future grants can only be made under the 2014 Plan.
The 2009 Plan, and previously the 2004 Plan, provides for grants of incentive stock options or nonqualified stock options to officers, key employees, and non-employee members of CTS’ Board of Directors. In addition, the 2014 Plan, the 2009 Plan, and the 2004 Plan allow for grants of stock appreciation rights, restricted stock, restricted stock units ("RSUs"), performance shares, performance units, and other stock awards.
The following table summarizes the compensation expense included in selling, general and administrative expenses in the Condensed Consolidated Statements of Earnings related to equity-basedstock-based compensation plans:
| | | Three Months Ended | | Nine Months Ended | Three Months Ended |
| September 30, |
| September 27, |
| September 30, |
| September 27, | March 31, |
| March 31, |
| 2016 | | 2015 | | 2016 | | 2015 | 2017 | | 2016 |
Service-Based RSUs | $ | 523 |
| | $ | 295 |
| | $ | 1,471 |
| | $ | 1,244 |
| $ | 550 |
| | $ | 512 |
|
Performance-Based RSUs | 132 |
| | (62 | ) | | 107 |
| | 709 |
| 384 |
| | (182 | ) |
Market-Based RSUs | 137 |
| | 60 |
| | 181 |
| | 702 |
| |
Cash-settled RSUs | | $ | (54 | ) |
| $ | (48 | ) |
Total | $ | 792 |
| | $ | 293 |
| | $ | 1,759 |
| | $ | 2,655 |
| $ | 880 |
| | $ | 282 |
|
Income tax benefit | $ | 298 |
| | $ | 110 |
| | $ | 661 |
| | $ | 998 |
| $ | 331 |
| | $ | 106 |
|
The following table summarizes the unrecognized compensation expense related to non-vested RSUs by type and the weighted-average period in which the expense is to be recognized:
| | | Unrecognized |
| | Unrecognized |
| |
| compensation |
| Weighted- | compensation |
| Weighted- |
| expense at |
| average | expense at |
| average |
| September 30, 2016 |
| period | March 31, 2017 |
| period |
Service-Based RSUs | $ | 1,532 |
|
| 1.3 years | $ | 1,790 |
|
| 1.36 |
Performance-Based RSUs | 595 |
|
| 1.4 years | 3,810 |
|
| 2.20 |
Market-Based RSUs | 535 |
|
| 1.3 years | |
Total | $ | 2,662 |
|
| 1.3 years | $ | 5,600 |
|
| 1.93 |
CTS recognizesWe recognize expense on a straight-line basis over the requisite service period for each separately vesting portion of the award as if the award was, in substance, multiple awards.
The following table summarizes the maximum numberstatus of awards available to be granted under these plans as of September 30, 2016:March 31, 2017:
|
| | | | | | | | | | | |
| 2014 Plan | | 2009 Plan | | 2004 Plan | | Directors' Plan |
Awards originally available | 1,500,000 |
| | 3,400,000 |
| | 6,500,000 |
| | N/A |
|
Stock options outstanding | — |
| | — |
| | — |
| | — |
|
Options exercisable | — |
| | — |
| | — |
| | — |
|
Performance-based options outstanding | 320,000 |
| | — |
| | — |
| | — |
|
Service-based RSUs outstanding | 253,826 |
| | 169,444 |
| | 78,947 |
| | 25,985 |
|
Performance and market-based RSUs outstanding at 200% of target | 337,300 |
| | 86,120 |
| | — |
| | — |
|
RSUs vested and released | 49,173 |
| | — |
| | — |
| | — |
|
Awards available for grant | 539,701 |
| | 255,564 |
| | 78,947 |
| | 25,985 |
|
|
| | | | | | | | | | | |
| 2014 Plan | | 2009 Plan | | 2004 Plan | | Directors' Plan |
Awards originally available | 1,500,000 |
| | 3,400,000 |
| | 6,500,000 |
| | N/A |
|
Performance-based options outstanding | 315,000 |
| | — |
| | — |
| | — |
|
Maximum potential RSU and cash settled awards outstanding | 747,417 |
| | 156,022 |
| | 78,947 |
| | 25,985 |
|
Maximum potential awards outstanding | 1,062,417 |
| | 156,022 |
| | 78,947 |
| | 25,985 |
|
RSUs and cash settled awards vested and released | 157,212 |
| | — |
| | — |
| | — |
|
Awards available for grant | 280,371 |
| | — |
| | — |
| | — |
|
Stock Options
Stock options are exercisable in cumulative annual installments over a maximum 10-year period, commencing at least one year from the date of grant. Stock options are generally granted with an exercise price equal to the market price of CTS’ stock on the date of grant, vest over four years, andWe have a 10-year contractual life. The awards generally contain provisions to either accelerate vesting or allow vesting to continue on schedule upon retirement if certain service and age requirements are met. The awards also provide for accelerated vesting if there is a change in control event. CTS has no stock options exercisable or outstanding as of September 30, 2016,March 31, 2017, other than the performance-based stock options described below.
Performance-Based Stock Options
During 2015 and 2016, the Compensation Committee of the Board of Directors of the Company (the “Committee”) granted a total of 350,000 performance-based stock option awards (“Performance-Based Option Awards”) for certain CTS employees under the 2014 Plan, of which 320,000315,000 remain outstanding after considering forfeitures. The Performance-Based Option Awards have an exercise price of $18.37, a term of five years, and generally will become exercisable (provided the optionee remains employed by CTSthe Company or an affiliate) upon CTS’our attainment of at least $600,000 in revenues during any of CTS’our four-fiscal-quarter trailing periods (as determined by the Committee) during the term. CTS hasWe have not recognized any expense on these Performance-Based Option Awards for the nine monthsthree-month periods ended September 30,March 31, 2017 and 2016, since the revenue target iswas not deemed likely to be attained based on our current forecast.
Service-Based Restricted Stock Units
Service-based RSUs entitleThe following table summarizes the holder to receive one shareservice-based RSU activity as of common stockand for each unit when the unit vests. RSUs are issued to officers, key employees and non-employee directors as compensation. Generally, the RSUs vest over a three-year period. RSUs granted to non-employee directors vest one month after the grant date. Upon grant, each non-employee director elects to either receive the stock associated with the RSU immediately upon vesting, or defer receipt of the stock until his or her retirement from the Board of Directors. The fair value of the RSUs is equivalent to the trading value of CTS’ common stock on the grant date.three months ended March 31, 2017:
|
| | | | | | |
| Three Months Ended |
| March 31, 2017 |
| Units | | Weighted Average Grant Date Fair Value |
Outstanding at January 1, 2017 | 554,478 |
| | $ | 13.37 |
|
Granted | 33,040 |
| | 23.00 |
|
Vested and released | (114,847 | ) | | 15.11 |
|
Forfeited | (2,536 | ) | | 17.46 |
|
Outstanding at March 31, 2017 | 470,135 |
| | $ | 13.59 |
|
Releasable at March 31, 2017 | 304,883 |
| | $ | 11.38 |
|
A summary of the status of RSUs granted under the 2004, 2009, and 2014 plans is presented below:
|
| | | | | | |
| Nine Months Ended |
| September 30, 2016 |
| Units | | Weighted Average Grant Date Fair Value |
Outstanding at January 1, 2016 | 471,196 |
| | $ | 13.27 |
|
Granted | 164,922 |
| | 13.97 |
|
Vested and released | (98,633 | ) | | 14.45 |
|
Forfeited | (35,268 | ) | | 17.05 |
|
Outstanding at September 30, 2016 | 502,217 |
| | $ | 12.93 |
|
Releasable at September 30, 2016 | 278,082 |
| | $ | 11.34 |
|
A summary of the status of RSUs granted under the Director's Plan is presented below:
|
| | | | | | |
| Nine Months Ended |
| September 30, 2016 |
| Units | | Weighted Average Grant Date Fair Value |
Outstanding at January 1, 2016 | 33,974 |
|
| $ | 11.75 |
|
Granted | — |
|
| — |
|
Vested and released | (7,989 | ) |
| 11.75 |
|
Forfeited | — |
|
| — |
|
Outstanding at September 30, 2016 | 25,985 |
|
| $ | 11.75 |
|
Releasable at September 30, 2016 | 25,985 |
|
| $ | 11.75 |
|
Performance and Market-Based Restricted Stock Units
CTS grants performance-based restricted stock unit awards to certain executives. Vesting may occur in the amount of zero percent to 200% of the grant target. Vesting is subject to certification of the financial results for the last year in the performance period by CTS’ independent auditors. The number of awards vesting is dependent upon CTS’ achievement of either sales growth targets or cash flow targets as defined in the agreements.
CTS grants market-based restricted stock unit awards to certain executives and key employees. Vesting may occur in the amount of zero percent to 200% of the grant target. Vesting is subject to certification of the financial results for the last year of the target range by CTS’ independent auditors. The number of awards vesting is determined using a matrix based on a percentile ranking of CTS' total stockholder return with a peer group total shareholder return over the three-year period comprising the performance period. Vesting is tied exclusively to CTS' total stockholder return relative to peer group companies’ total stockholder return rates during the performance period.
The following table summarizes the performance and market-based RSU activity as of and for the ninethree months ended September 30, 2016:
March 31, 2017:
| | | Units | | Weighted Average Grant Date Fair Value | Units | | Weighted Average Grant Date Fair Value |
Outstanding at January 1, 2016 | 249,560 |
| | 14.59 |
| |
Outstanding at January 1, 2017 | | 201,900 |
| | $ | 16.48 |
|
Granted | 108,650 |
| | 13.56 |
| 123,919 |
| | 23.83 |
|
Attained by performance | 97,017 |
| | 10.48 |
| 15,285 |
| | 21.66 |
|
Released | (234,517 | ) | | 10.52 |
| (41,264 | ) | | 21.66 |
|
Forfeited | (9,000 | ) | | 14.41 |
| (15,070 | ) | | 21.66 |
|
Outstanding at September 30, 2016 | 211,710 |
| | 16.58 |
| |
Maximum potential units outstanding at September 30, 2016 | 423,420 |
| | 16.58 |
| |
Outstanding at March 31, 2017 | | 284,770 |
| | $ | 18.99 |
|
Releasable at March 31, 2017 | | 2,011 |
| | $ | 21.66 |
|
The following table summarizes each grant of performance awards outstanding at March 31, 2017.
|
| | | | | | | |
Description | Grant Date | Vesting Year | Vesting Dependency | Target Units Outstanding | Maximum Number of Units to be Granted |
2015 - 2017 Performance RSUs | February 5, 2015 | 2017 | 35% RTSR, 35% sales growth, 30% cash flow | 62,000 |
| 124,000 |
|
2016 - 2018 Performance RSUs | February 16, 2016 | 2018 | 35% RTSR, 35% sales growth, 30% cash flow | 92,840 |
| 185,680 |
|
2017 - 2019 Performance RSUs | February 9, 2017 | 2019 | 35% RTSR, 35% sales growth, 30% cash flow | 78,341 |
| 156,682 |
|
2017 - 2019 Performance RSUs | February 9, 2017 | 2018 - 2020 | Operating Income | 45,578 |
| 45,578 |
|
Single Crystal Performance RSUs | March 31, 2016 | 2018 | Various | 4,000 |
| 8,000 |
|
Cash-Settled Restricted Stock Units
Cash-Settled RSUs entitle the holder to receive the cash equivalent of one share of common stock for each unit when the unit vests. These RSUs are issued to key employees residing in foreign locations as direct compensation. Generally, these RSUs vest over a three-year period. Cash-Settled RSUs are classified as liabilities and are remeasured at each reporting date until settled. At March 31, 2017 and March 31, 2016 we had 16,285 and 12,074 cash-settled RSUs outstanding, respectively. At March 31, 2017 and March 31, 2016, liabilities of $115 and $46, respectively were included in Accrued liabilities on our Condensed Consolidated Balance Sheets.
NOTE 15 — Fair Value Measurements
CTS usesWe use interest rate swaps to convert our line of credit’srevolving credit facility’s variable rate of interest into a fixed rate and foreign currency forward contracts to hedge the effect of foreign currency changes on certain revenues and costs denominated in foreign currencies. These derivative financial instruments are measured at fair value on a recurring basis.
The table below summarizes CTS’our financial assets (liabilities) that were measured at fair value on a recurring basis at September 30, 2016:March 31, 2017:
| | | | | Quoted | | | | | | | | Quoted | | | | | |
| | | Prices | | | | | |
| | Prices | | | | | |
| | | in Active | | Significant | | | | Asset | | in Active | | Significant | | | |
| Carrying | | Markets for | | Other | | Significant | | Carrying | | Markets for | | Other | | Significant | |
| Value at | | Identical | | Observable | | Unobservable | | Value at | | Identical | | Observable | | Unobservable | |
| September 30, | | Instruments | | Inputs | | Inputs | | March 31, | | Instruments | | Inputs | | Inputs | |
| 2016 | | (Level 1) | | (Level 2) | | (Level 3) | | 2017 | | (Level 1) | | (Level 2) | | (Level 3) | |
Interest rate swaps | $ | (606 | ) | | $ | — |
| | $ | (606 | ) | | $ | — |
| | $ | 822 |
| | $ | — |
| | $ | 822 |
| | $ | — |
| |
Foreign currency hedges | $ | (234 | ) | | $ | — |
| | $ | (234 | ) | | $ | — |
| | $ | 522 |
| | $ | — |
| | $ | 522 |
| | $ | — |
| |
The table below summarizes the financial liabilityassets (liabilities) that waswere measured at fair value on a recurring basis as of December 31, 2015:2016:
|
| | | | | | | | | | | | | | | | |
| | | Quoted | | | | | |
| | | Prices | | | | | |
| | | in Active | | Significant | | | |
| Carrying | | Markets for | | Other | | Significant | |
| Value at | | Identical | | Observable | | Unobservable | |
| December 31, | | Instruments | | Inputs | | Inputs | |
| 2015 | | (Level 1) | | (Level 2) | | (Level 3) | |
Interest rate swaps | $ | (768 | ) | | $ | — |
| | $ | (768 | ) | | $ | — |
| |
|
| | | | | | | | | | | | | | | |
| | | Quoted | | | | |
| Asset | | Prices | | | | |
| (Liability) | | in Active | | Significant | | |
| Carrying | | Markets for | | Other | | Significant |
| Value at | | Identical | | Observable | | Unobservable |
| December 31, | | Instruments | | Inputs | | Inputs |
| 2016 | | (Level 1) | | (Level 2) | | (Level 3) |
Interest rate swaps | $ | 753 |
| | $ | — |
| | $ | 753 |
| | $ | — |
|
Foreign currency hedges | $ | (601 | ) |
| $ | — |
|
| $ | (601 | ) |
| $ | — |
|
The fair value of our interest rate swaps and foreign currency hedges were measured using standard valuation models using market-based observable inputs over the contractual terms, including forward yield curves, among others. There is a readily determinable market for these derivative instruments, but that market is not active and therefore they are classified within level 2 of the fair value hierarchy.
The table below provides a reconciliation of the recurring financial assets (liabilities) for our derivative instruments:
|
| | | | | | | |
| | | Foreign |
| Interest | | Currency |
| Rate Swaps | | Hedges |
Balance at January 1, 2015 | $ | (1,020 | ) | | $ | — |
|
Realized gains included in earnings | 768 |
| | — |
|
Unrealized (losses) | (516 | ) | | — |
|
Balance at December 31, 2015 | $ | (768 | ) | | $ | — |
|
Realized gains included in earnings | 709 |
| | — |
|
Unrealized (losses) | (547 | ) | | (234 | ) |
Balance at September 30, 2016 | $ | (606 | ) | | $ | (234 | ) |
|
| | | | | | | |
| | | Foreign |
| Interest | | Currency |
| Rate Swaps | | Hedges |
Balance at January 1, 2016 | $ | (768 | ) | | $ | — |
|
Settled in cash | — |
|
| 54 |
|
Included in earnings | 928 |
| | (18 | ) |
Included in other comprehensive earnings | 593 |
| | (637 | ) |
Balance at December 31, 2016 | $ | 753 |
| | $ | (601 | ) |
Settled in cash | — |
|
| (157 | ) |
Included in earnings | — |
| | 157 |
|
Included in other comprehensive earnings | 69 |
| | 1,123 |
|
Balance at March 31, 2017 | $ | 822 |
| | $ | 522 |
|
CTS'Our long-term debt consists of the Revolving Credit Facility which is recorded at its carrying value. There is a readily determinable market for CTS'our long-term debt and it is classified within Level 2 of the fair value hierarchy as the market is not deemed to be active. The fair value of long-term debt approximates carrying value and was determined by valuing a similar hypothetical coupon bond and attributing that value to our long-term debt under the Revolving Credit Facility.
NOTE 16 — Income Taxes
The effective tax rates for the threethree-month periods ended March 31, 2017 and nine-month periods in 2016 and 2015 are as follows:
|
| | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, |
| September 27, |
| September 30, |
| September 27, |
| 2016 |
| 2015 | | 2016 |
| 2015 |
Effective tax rate | 68.3 | % | | 31.2 | % | | 43.2 | % | | (59.2 | )% |
|
| | | | | |
| Three Months Ended |
| March 31, |
| March 31, |
| 2017 |
| 2016 |
Effective tax rate | 30.6 | % | | 34.3 | % |
CTS'Our effective income tax rate was 68.3%30.6% and 31.2%34.3% in the thirdfirst quarter of 20162017 and 2015,2016, respectively. The tax rate in the thirdfirst quarter 2017 was lower than the U.S. statutory tax rate due primarily to tax benefits recorded upon vesting of restricted stock units and first nine monthsfavorable tax rates on foreign earnings, offset by the impact of 2016 reflected 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 7. The rates also reflect an increase in a valuation allowance on certain non-U.S. losses as a result of changes in the expectation of CTS' ability to utilize those losses, changes in the mix of earnings by jurisdiction, various other discrete items, CTS' decision to no longer permanently reinvest the earnings of its Canadian and U.K. subsidiaries, and tax expense for withholding taxes on the anticipated distribution of earnings in China, that are not anticipated to be maintained in China. CTS began recording tax expense for withholding taxes in China in the fourth quarter of 2015 and expects to continue this practice going forward. During the first nine months of 2015, CTS reflected a benefit attributable to filing amended U.S. federal tax returns in order to take credits for foreign taxes paid which was partially offset by a reserve recorded on an uncertain tax position.other various permanent items.
CTS’Our continuing practice is to recognize interest and/or penalties related to income tax matters as income tax expense. For the three months ended September 30,March 31, 2017, and March 31, 2016, we recorded $176 and September 27, 2015, CTS accrued $181 and $136$184, respectively, of interest or penalties in income tax expense. For the nine months ended September 30, 2016 and September 27, 2015, CTS accrued $552 and $957 of interest or penalties in income tax expense.
Note 17 - Business Combinations
On March 11, 2016, CTSwe acquired all of the outstanding membership interests in CTG Advanced Materials, LLC (“CTG-AM”), a privately-held company, for $73 million in cash plus a working capital adjustment. CTG-AM, formerly operated as H.C. Materials, is the market leading designer and manufacturer of single crystal piezoelectric materials, serving major original equipment manufacturers throughout the medical marketplace. These materials enable high definition ultrasound imaging (3D and 4D), as well as intravascular ultrasound applications. Other applications for these materials include wireless pacemakers, implantable hearing aids, and defense technologies.
With the CTG-AM acquisition, CTS gainswe gain technology and proprietary manufacturing methods that expand its offering of piezoelectric materials. This allows CTSus to become the leading large-scale commercial producer of both single crystal materials and traditional piezoelectric ceramics.
The purchase price of $73,063, net of cash acquired of $4, has been allocated to the fair values of assets and liabilities acquired as of March 11, 2016.
The following table summarizes the fair values of the assets acquired and the liabilities assumed at the date of acquisition:
|
| | | | |
| | Fair Values at March 11, 2016 |
Current assets | | $ | 4,215 |
|
Property, plant and equipment | | 6,173 |
|
Other assets | | 37 |
|
Goodwill | | 27,879 |
|
Intangible assets | | 35,427 |
|
Fair value of assets acquired | | 73,731 |
|
Less fair value of liabilities acquired | | (668 | ) |
Net cash paid | | $ | 73,063 |
|
Goodwill represents value the Company expects to be created by combining the operations of the acquired business with the Company's operations, including the expansion into markets within our existing business, access to new customers, and potential cost savings and synergies. Goodwill related to the acquisition is expected to be deductible for tax purposes.
The following table summarizes the carrying amounts and weighted average lives of the acquired intangible assets:
|
| | | | | |
Intangible Asset Type | Fair Value | | Weighted Average Amortization Period (in years) |
Developed Technology | $ | 23,730 |
| | 15.0 |
Customer Relationships and Contracts | 11,502 |
| | 14.6 |
Other | 195 |
| | 0.8 |
Total | $ | 35,427 |
| | 14.8 |
CTS
We incurred $804 in transaction related costs during in the nine monthsyear ended September 30,December 31, 2016. These costs are included in selling, general, and administrative costs in our Condensed Consolidated Statement of Earnings.
Results of operations for CTG -AMCTG-AM are included in our consolidated condensed financial statements beginning on March 11, 2016. The amount of net sales and net loss from CTG-AM sincein the acquisition datequarter ended March 31, 2016 that have been included in the Condensed Consolidated Statement of Earnings are as follows:
| | | | For the period March 11, 2016 through September 30, 2016 | | For the period March 11, 2016 through March 31, 2016 |
Net sales | | $ | 7,096 |
| | $ | 758 |
|
Net earnings | | $ | 256 |
| | $ | (64 | ) |
NOTE 18 — Recent Accounting Pronouncements
ASU 2017-07 "Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Post-retirement Benefit Cost"
In March 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2017-07 "Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and net Periodic Post-retirement Benefit Cost". This ASU is meant to improve the presentation of net periodic pension and net periodic post-retirement benefits costs. Currently, pension and post-retirement benefit costs are comprised of several components reflecting the different aspects of an employer's financial arrangements and cost of providing benefits to employees. These components are aggregated for reporting, but prior guidance does not prescribe where the net cost should be presented in the income statement or capitalized in assets. This ASU requires disaggregation of the service cost component from other components of net benefit cost and provides explicit guidance on how to present the service cost and other components in the income statement, allowing only the service cost component of net benefit costs to be eligible for capitalization. This ASU is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. Early adoption is permitted as of the beginning of an annual period for which financial statements have not been issued or made available for issuance. These amendments should be applied retrospectively for the presentation of the service cost and other components of net periodic pension and net post-retirement benefit cost in the income statement and prospectively for the capitalization of the service cost and net periodic pension cost and periodic post-retirement benefit in assets. This ASU is not expected to have a material impact on our financial statements because the service cost component of our pension cost is expected to be immaterial to our financial results on a prospective basis.
ASU 2017-04 "Intangibles -Goodwill and Other (Topic 305): Simplifying the Test for Goodwill Impairment"
In January 2017, the FASB issued ASU No. 2017-04 "Intangibles - Goodwill and Other (Topic 305): Simplifying the Test for Goodwill Impairment". This ASU is meant to simplify the subsequent measurement of goodwill for impairment by eliminating the current Step 2 analysis in computing the implied fair value of goodwill. In addition, this ASU requires an entity to consider income tax effects on any tax deductible goodwill on the carrying amount of the reporting unit when measuring an impairment loss, if applicable. Under this ASU, impairment is determined by comparing the reporting unit's fair value to the carrying value. This amendment is effective for fiscal years beginning after December 15, 2019, with early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We do not expect this guidance to have an impact on our financial statements.
Supplemental Pro Forma InformationASU 2017-01 "Business Combinations (Topic 805): Clarifying the Definition of Business"
In January 2017, the FASB issued ASU No. 2017-01 "Business Combinations (Topic 805): Clarifying the Definition of Business". This ASU is meant to clarify the definition of a business to add guidance when determining when an acquisition or disposal should be accounted for as a sale of assets or business. This ASU provides a more robust framework to use in determining when a set of assets or activities should be classified as a business, providing more consistency in accounting for business or asset acquisitions. This ASU is effective for public companies, for fiscal years beginning after December 15, 2017, including interim periods within those periods. The unaudited pro forma amounts below include CTG-AM's revenuesASU will be applied prospectively.
ASU 2016-16 "Income Taxes (Topic 740) Intra-Entity Transfers of Assets Other Than Inventory"
In October 2016, the FASB issued ASU No. 2016-16, "Intra-Entity Transfers of Assets Other Than Inventory". This ASU is meant to improve the accounting for the income tax effect of intra-entity transfers of assets other than inventory. Currently, US GAAP prohibits the recognition of current and deferred income taxes for intra-entity asset transfers until the asset is sold to a third party. This ASU will now require companies to recognize the income tax effect of an intra-entity asset transfer (other than inventory) when the transaction occurs. This ASU is effective for public companies, for fiscal years beginning after December 15, 2019 and interim periods within those annual reporting periods. Early adoption is permitted and is to be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings that would have been included in our Condensed Consolidated Statement of Earnings had the acquisition date been January 1, 2015.
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 27, | | September 30 | | September 27, |
| 2016 | | 2015 | | 2016 | | 2015 |
Net sales | $ | 99,697 |
| | $ | 93,818 |
| | $ | 297,407 |
| | $ | 299,123 |
|
Net earnings | $ | 3,720 |
| | $ | (4,014 | ) | | $ | 25,969 |
| | $ | 22,301 |
|
|
| |
| |
| |
|
Earnings per share: |
| |
| |
| |
|
Basic | $ | 0.11 |
| | $ | (0.12 | ) | | $ | 0.79 |
| | $ | 0.67 |
|
Diluted | $ | 0.11 |
| | $ | (0.12 | ) | | $ | 0.78 |
| | $ | 0.66 |
|
The pro forma results have been prepared for informational purposes only and include adjustments to amortize acquired intangible assets with finite life, reflect additional interest expense on debt used to fund the acquisition, and to record the tax consequencesas of the pro forma adjustments. Included inbeginning of the pro forma results are nonrecurring expenses for transaction costsperiod of $0 and $804 and additional cost of goods sold of $0 and $1,151 for the three and nine-month periods ended September 30, 2016 for inventory recognized at fair value asadoption. This guidance is not expected to have a result of acquisition-related adjustments.
NOTE 18 — Recent Accounting Pronouncementsmaterial impact on our consolidated financial statements.
ASU 2016-15 "Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments"
In August 2016, the Financial Accounting Standards Board ("FASB")FASB issued Accounting Standards Update ("ASU")ASU No. 2016-15, "Classification of Certain Cash Receipts and Cash Payments". This ASU reduces the diversity in reporting of eight specific cash flow issues due to accounting guidance that is unclear or does not exist. The eight issues relate to certain debt activities, business combination activities, insurance settlements and other various activities. This guidance is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. Early adoption is permitted and is to be applied retrospectively using a transition method for each period presented. An entity that elects early adoption of the amendment under this ASU must adopt all aspects of the amendment in the same period. This guidance willis not expected to have a material impact on our consolidated financial statements.
ASU 2016-9 "Compensation-Stock Compensation (Topic 718): Improvement to Employee Share Based Payment Accounting"
In March 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-09, “Improvements to Employee Share-Based Payment Accounting.” This ASU simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, forfeitures, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods. Early adoption is permitted. An entity that elects early adoption of the amendment under this ASU must adopt all aspects of the amendment in the same period. We are currently evaluating the impact this guidance will have on our consolidated financial statements.
ASU 2016-5 "Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships"
In March 2016, the FASB issued ASU No. 2016-5 "Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships". This amendment clarifies that a change in the counterparty to a derivative instrument does not on its own require dedesignation of the hedging instrument under Topic 815, provided that all other hedge accounting criteria (including those in paragraphs 815-20-35-14 through 35-18) continue to be met. This update can be applied prospectively or retrospectively and is effective for fiscal years beginning after December 15, 2016, and interim periods within those years. This update is not expected to have an impact to our financial statements.
ASU 2016-22016-02 "Leases (Topic 842)"
In February 2016, the FASB issued ASU 2016-2,2016-02, "Leases (Topic 842)". This amendment created a new Topic under the accounting standards codification to account for the provisions of the ASU. This amendment is meant to provide transparency and to improve comparability between entities. The ASU requires companies to record an asset and liability toon the balance sheet for leases that were formerly designated as operating leases as well as leases designated as financing leases. The provisions of the ASU predominately change the recognition of leases for lessees, the provisions do not substantially change the accounting for lessors. This ASU will supersede the provisions of Topic 840 Leases.
The liability recorded for a lease is meant to recognize the lease payments and the asset as a right to use the underlying asset for the lease, including optional periods if it is reasonably certain the option will be exercised. Recording of the liability should be based on the present value of the lease payments. If a lease term is less than twelve month,months, a company is allowed to elect not to record the asset and liability. Expense related to these leases are to be amortized straight-line over the expected term of the lease.
Additionally, the provisions of this ASU provide additional guidance on separating lease terms from maintenance and other type of provisions that provide a good or service, accounting for sale-leaseback provisions, and leveraged leases.
Reporting in the cash flow statement remains virtually unchanged. Additional qualitative and quantitative disclosures are required.
These updates are required to be applied under a modified retrospective approach from the beginning of the earlier period presented. The modified approach provides optional practical expedients that may be elected, which will allow companies to continue to account for leases under the previous guidance for leases that commenced prior to the effective date.
The provisions of this ASU are effective for fiscal years beginning after December 15, 2018, and interim periods within those periods. Early adoption is allowed. The provisionsWe have not yet commenced the process for evaluating the impact of this guidance are still being evaluatedASU on our financial statements, and thetherefore it's impact on CTS' financial statements has not yet been determined.
ASU 2015-17, 2014-09“Income Taxes, "Revenue from Contracts with Customers (Topic 740): Balance Sheet Classification of Deferred Taxes”606)"
In November 2015,May 2014, the FASB issued ASU 2015-17, "Income Taxes2014-09, "Revenue from Contracts with Customers (Topic 740): Balance Sheet Classification of Deferred Taxes"606)". The amendment requires Company'sguidance in this ASU affects any entity that either enters into contracts with customers to begin classifying all deferred income taxes as non-current.transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (for example, insurance contracts or lease contracts). The provisions are expectednew revenue recognition guidance more closely aligns U.S. GAAP with International Financial Reporting Standards
to simplify the presentation of deferred income taxes and align the presentation of deferred income taxes with the International Financial Reporting Standards ("IFRS"). The amendments in this update are effective for annual periods beginning after December 16, 2016, and interim periods within those annual periods. The update can be applied prospectively or retrospectively.
The Company early adopted the above guidance on January 1, 2016 and elected to retrospectively apply its provisions. This resulted in reclassificationcore principle of the amounts in our December 31, 2015 Consolidated Balance Sheet as shown in Note 1 - Basis of Presentation.
ASU 2015-16, “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments”
In September 2015, the FASB issued Accounting Standards Update (“ASU”) 2015-16, "Business Combinations (Topic 805) Simplifying the Accounting for Measurement-Period Adjustments of Inventory". The amendments clarifyguidance is that an acquirerentity should recognize adjustmentsrevenue to provisional amountsdepict the transfer of promised goods or services to customers in an amount that are identified duringreflects the measurement period in the reporting period inconsideration to which the adjustment amounts are determined. The acquirer needsentity expects to record,be entitled in the same period’s financial statements, the effect of changes in depreciation, amortization,exchange for those goods or other income as a result of the change to the provisional amounts as if the accounting had been completed at the acquisition date. This amendment requiresservices.
To achieve that core principle, an entity to present separately onshould apply the face of the income statement or disclose in the notes the portion of the amount recorded in current period earnings by line item, as if the provisional adjustments had been recognized as of the acquisition date. This ASU became effective for CTS on January 1, 2016 and its provisions did not have an impact on our financial statements.following steps:
ASU 2015-14, "Revenue from Contracts with Customers (Topic 606)"
| |
Step 1: | Identify the contract(s) with a customer. |
| |
Step 2: | Identify the performance obligations in the contract. |
| |
Step 3: | Determine the transaction price. |
| |
Step 4: | Allocate the transaction price to the performance obligations in the contract. |
| |
Step 5: | Recognize revenue when (or as) the entity satisfies a performance obligation. |
In August 2015, the FASB issued ASU 2015-14, "Accounting2015-14: Accounting for Revenue from Contracts with Customers (Topic 606)". The amended guidance deferred the effective date of ASU 2014-09 "Revenue from Contracts with Customers(Topic 606)" 2014-9 to annual periods beginning after December 15, 2017 and interim periods within that reporting period.those fiscal years. Early adoption is permitted for annual periods beginning after December 15, 2016 and interim periods within that annual period.those fiscal years. In addition, in April 2016 the FASBfour other ASUs have been issued amending and clarifying ASU 2014-09 and must be adopted concurrently.
ASU 2016-08 "Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
ASU 2016-10 "Revenue from Contracts with Customers:Customers (Topic 606): Identifying Performance Obligations and Licensing (Topic 606)", which amends the revenue guidance on identifying performance obligations and accounting for intellectual property licenses. In May 2016, the FASB issued Licensing"
ASU 2016-12 "Revenue from Contracts with Customers:Customers (Topic 606): Narrow-Scope Improvements and Practical ExpedientsExpedients"
ASU 2016-20 "Revenue from Contracts with Customers (Topic 606)", which provides additional guidance in assessing whether a transaction meets the definition of revenue, in narrowed circumstances during the transition to ASU 2014-09: Technical Corrections and subsequent to implementation. Improvements"
This update can either be applied under either a cumulative effect or retrospective method. ASU 2016-10We are in the process of reviewing customer contracts and ASU 2016-12 mustagreements to determine the potential effects of the standard based on our revenue streams and current revenue recognition practices. Following review of customer contracts, we will summarize contract terms, reference the findings to the applicable new guidance, determine the financial statement impact, and then update policies and controls to ensure application of the new provisions will be adopted concurrently with ASU 2014-09. Theapplied consistently throughout the Company. While the impact of the adoption of this ASU 2014-9 on our financial statements has not yet been determined.determined, we expect there to be minor differences in the timing of revenue recognition, due primarily to changes in how variable consideration is estimated. The Company expects to adopt the provisions of this standard using the modified retrospective approach, which requires a cumulative effect adjustment to the opening balance of retained earnings on the date of adoption. The Company will adopt ASU 2014-09 effective January 1, 2018.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”)
(in thousands, except percentages and per share amounts)
The following discussion should be read in conjunction with our unaudited Condensed Consolidated Financial Statements and notes included under Item 1, as well as our Consolidated Financial Statements and notes and related Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2015.2016.
Overview
CTS Corporation (“CTS”, “we”, “our” or “us”) is a leading designer and manufacturer of products that Sense, Connect and Move. CTS manufacturesWe manufacture sensors, actuators and electronic components in North America, Europe, and Asia, and suppliessupply these products to OEMs in the aerospace, communications, defense, industrial, information technology, medical and transportation markets.
Results of Operations: ThirdFirst Quarter 20162017 versus ThirdFirst Quarter 20152016
The following table highlights changes in significant components of the Unaudited Condensed Consolidated Statements of Earnings for the quarters ended September 30, 2016,March 31, 2017, and September 27, 2015:March 31, 2016:
|
| | | | | | | | | | | | | | | | |
| Three Months Ended | | | | Percent of | | Percent of |
| September 30, | | September 27, | | Percent | | Net Sales – | | Net Sales – |
| 2016 | | 2015 | | Change | | 2016 | | 2015 |
Net sales | $ | 99,697 |
| | $ | 90,646 |
| | 10.0 |
| | 100.0 |
| | 100.0 |
|
Cost of goods sold(1) | 63,056 |
| | 59,200 |
| | 6.5 |
| | 63.2 |
| | 65.3 |
|
Gross margin | 36,641 |
| | 31,446 |
| | 16.5 |
| | 36.8 |
| | 34.7 |
|
Selling, general and administrative expenses | 16,048 |
| | 12,689 |
| | 26.5 |
| | 16.1 |
|
| 14.0 |
|
Research and development expenses | 6,284 |
| | 5,692 |
| | 10.4 |
| | 6.3 |
|
| 6.3 |
|
Non-recurring environmental charge | — |
| | 14,541 |
| | — |
| | — |
|
| 16.0 |
|
Restructuring and impairment charges | 1,969 |
| | 2,373 |
| | (17.0 | ) | | 2.0 |
|
| 2.6 |
|
(Gain) loss on sale of assets | (150 | ) | | 1 |
| | — |
| | (0.1 | ) | | — |
|
Total operating expenses | 24,151 |
| | 35,296 |
| | (31.6 | ) | | 24.3 |
| | 38.9 |
|
Operating earnings | 12,490 |
| | (3,850 | ) | | (424.4 | ) | | 12.5 |
|
| (4.2 | ) |
Total other expense | (760 | ) | | (3,073 | ) | | (75.3 | ) | | (0.8 | ) |
| (3.4 | ) |
Earnings (loss) before income taxes | 11,730 |
| | (6,923 | ) | | (269.4 | ) | | 11.7 |
| | (7.6 | ) |
Income tax expense (benefit) | 8,010 |
| | (2,163 | ) | | (470.3 | ) | | 8.0 |
|
| (2.4 | ) |
Net earnings (loss) | $ | 3,720 |
| | $ | (4,760 | ) | | (178.2 | ) | | 3.7 |
| | (5.2 | ) |
Earnings per share: | | | | | | | | | |
Diluted net earnings per share | $ | 0.11 |
| | $ | (0.15 | ) | | | | | | |
(1) Cost of goods sold includes restructuring related charges of $0 in 2016 and $152 in 2015. |
| | | | | | | | | | | | | | | |
| Three Months Ended | | | | Percent of | | Percent of |
| March 31, | | March 31, | | Percent | | Net Sales – | | Net Sales – |
| 2017 | | 2016 | | Change | | 2017 | | 2016 |
Net sales | $ | 100,154 |
| | $ | 96,705 |
| | 3.6 |
| | 100.0 | | 100.0 |
|
Cost of goods sold | 65,930 |
| | 63,237 |
| | 4.3 |
| | 65.8 | | 65.4 |
|
Gross margin | 34,224 |
| | 33,468 |
| | 2.3 |
| | 34.2 | | 34.6 |
|
Selling, general and administrative expenses | 15,246 |
| | 14,872 |
| | 2.5 |
| | 15.2 |
| 15.4 |
|
Research and development expenses | 6,003 |
| | 6,163 |
| | (2.6 | ) | | 6.0 |
| 6.4 |
|
Restructuring and impairment charges | 777 |
| | — |
| | — |
| | 0.8 |
| — |
|
Loss (gain) on sale of assets | 2 |
| | (3 | ) | | — |
| | — | | — |
|
Total operating expenses | 22,028 |
| | 21,032 |
| | 4.7 |
| | 22.0 | | 21.8 |
|
Operating earnings | 12,196 |
| | 12,436 |
| | (1.9 | ) | | 12.2 |
| 12.9 |
|
Total other income (expense) | 29 |
| | (471 | ) | | (106.2 | ) | | — |
| (0.5 | ) |
Earnings before income taxes | 12,225 |
| | 11,965 |
| | 2.2 |
| | 12.2 | | 12.4 |
|
Income tax expense | 3,741 |
| | 4,102 |
| | (8.8 | ) | | 3.7 |
| 4.2 |
|
Net earnings | $ | 8,484 |
| | $ | 7,863 |
| | 7.9 |
| | 8.5 | | 8.2 |
|
Earnings per share: | | | | | | | | | |
Diluted net earnings per share | $ | 0.25 |
| | $ | 0.24 |
| | | | | | |
Sales of $99,697$100,154 in the thirdfirst quarter of 20162017 increased $9,051$3,449 or 10.0%3.6% from the thirdfirst quarter of 2015.2016. Sales to automotive markets increased $3,173$242 driven by higher volumes which were partially offset by unfavorable foreign exchange impact. Other sales increased $5,878$3,207 due to the addition of sales from the single crystal acquisition and higher demand for electronic components in certain end markets. Changes in foreign exchange rates reduced sales by $600$853 year-over-year due to the U.S. Dollar appreciating compared to the Chinese Renminbi and Euro and relating mostly to sales of automotive products.
Gross margin as a percent of sales was 36.8%34.2% in the thirdfirst quarter of 20162017 compared to 34.7%34.6% in the thirdfirst quarter of 2015.2016. The increasedecrease in gross margin resulted from cost savings from continued efficiency gains, material and labor productivity projects, savings from restructuring projects, favorable mix, andwas driven mainly by certain production rework issues that were resolved during the addition of sales from the single crystal acquisition. In addition, foreign exchange rates had a favorable impact on manufacturing costs primarily due to the strengthening of the U.S. Dollar compared to the Mexican Peso.quarter.
Selling, general and administrative expenses were $16,048$15,246 or 16.1%15.2% of sales in the thirdfirst quarter of 20162017 versus $12,689$14,872 or 14.0%15.4% of sales in the comparable quarter of 2015.2016. The increase iswas primarily attributable to addedincremental costs as a resultresulting from the 2016 single crystal acquisition, including amortization of intangibles, and the single crystaltiming of certain expenses.
Research and development expenses were $6,003 or 6.0% of sales in the first quarter of 2017 compared to $6,163 or 6.4% of sales in the comparable quarter of 2016. The decrease was due to timing of projects, which relate to our continued investment in new
acquisition, including amortization of intangibles, and the timing of certain expenses. In addition, CTS paid an early termination fee related to its leased facility in Lisle, Illinois in anticipation of a move in the 2017/2018 time frame to another leased facility in the same area, which will consolidate the Bolingbrook and Lisle, Illinois sites into one facility and reduce ongoing expenses.
Research and development expenses were $6,284 or 6.3% of sales in the third quarter of 2016 compared to $5,692 or 6.3% of sales in the comparable quarter of 2015. The increase was related to continued investment in new products to drive organic growth. Research and development expenses are focused on expanded applications of existing products and new product development as well as current product and process enhancements.
A non-recurring environmental charge of $14,541 was recorded in the third quarter of 2015 related to a site in Asheville, North Carolina. The charge recorded included both the interim remediation proposed by CTS and accepted by the Environmental Protection Agency ("EPA") and anticipated future remediation and monitoring.
Restructuring and impairment charges were $1,969$777 or 2.0%0.8% of sales in the thirdfirst quarter 2016 compared to $2,373 or 2.6% of sales in the second quarter of 2015.2017. The 2016 charges are mainly for severance, equipment relocation and travel costs related to the restructuring of certain operations as part of the 2016 Restructuring Plan announced in June 2016. The 2015There were no restructuring and impairment charges consist primarily of severance, transition and shutdown costs related toin the consolidation of CTS' Canadian operation in Streetsville, Ontario into other CTS facilities.comparable prior year quarter.
Operating earnings were $12,490$12,196 or 12.5%12.2% of sales in the thirdfirst quarter of 20162017 compared to an operating lossearnings of $3,850$12,436 or (4.2)%12.9% of sales in the comparable quarter of 20152016 as a result of the items discussed above.
Other income and expense items are summarized in the following table: | | | Three Months Ended | Three Months Ended |
| September 30, |
| September 27, | March 31, |
| March 31, |
| 2016 | | 2015 | 2017 | | 2016 |
Interest expense | $ | (917 | ) | | $ | (714 | ) | $ | (684 | ) | | $ | (820 | ) |
Interest income | 203 |
| | 713 |
| 253 |
| | 547 |
|
Other expense, net | (46 | ) | | (3,072 | ) | |
Total other expense | $ | (760 | ) | | $ | (3,073 | ) | |
Other income (expense) | | 460 |
| | (198 | ) |
Total other income (expense) | | $ | 29 |
| | $ | (471 | ) |
Interest expense increaseddecreased in the thirdfirst quarter of 2017 versus the same quarter of 2016 versus the third quarter of 2015primarily as a result of higher borrowingsa reduction in interest related to the single crystal acquisition.interest rate swaps. Interest income decreased due to lower cash balances. Other expenseincome in the thirdfirst quarter of 20152017 was principally driven by foreign currency translation losses, primarilygains, mainly due to the appreciation of the U.S. Dollar compared to the Chinese Renminbi.
|
| | | | | |
| Three Months Ended |
| September 30, | | September 27, |
| 2016 | | 2015 |
Effective tax rate | 68.3 | % | | 31.2 | % |
CTS' effective income tax rate was 68.3% and 31.2% in the third quarter of 2016 and 2015, respectively. The tax rate in the third quarter of 2016 reflected 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 7. The rate also reflects an increase in a valuation allowance on certain non-U.S. losses as a result of changes in the expectation of CTS' ability to utilize those losses, changes in the mix of earnings by jurisdiction, various other discrete items, CTS' decision to no longer permanently reinvest the earnings of its Canadian and U.K. subsidiaries, and tax expense for withholding taxes on earnings in China that are not anticipated to be maintained in China. CTS began recording tax expense for withholding taxes in China in the fourth quarter of 2015 and expects to continue this practice going forward.
Results of Operations: Nine months ended September 30, 2016 versus Nine months ended September 27, 2015
The following table highlights changes in significant components of the unaudited Condensed Consolidated Statements of Earnings for the nine months ended September 30, 2016, and September 27, 2015:
|
| | | | | | | | | | | | | | | | |
| Nine Months Ended | | | | Percent of | | Percent of |
| September 30, | | September 27, | | Percent | | Net Sales – | | Net Sales – |
| 2016 | | 2015 | | Change | | 2016 | | 2015 |
Net sales | $ | 295,095 |
| | $ | 289,028 |
| | 2.1 |
| | 100.0 |
| | 100.0 |
|
Cost of goods sold(1) | 190,528 |
| | 192,073 |
| | (0.8 | ) | | 64.6 |
| | 66.5 |
|
Gross margin | 104,567 |
| | 96,955 |
| | 7.9 |
| | 35.4 |
| | 33.5 |
|
Selling, general and administrative expenses | 46,459 |
| | 43,623 |
| | 6.5 |
| | 15.8 |
| | 15.1 |
|
Research and development expenses | 18,414 |
| | 16,378 |
| | 12.4 |
| | 6.2 |
| | 5.7 |
|
Non-recurring environmental charge | — |
| | 14,541 |
| | — |
| | — |
| | 5.0 |
|
Restructuring and impairment charges | 2,175 |
| | 5,229 |
| | (58.4 | ) | | 0.7 |
| | 1.8 |
|
(Gain) loss on sale of assets | (11,501 | ) | | 2 |
| | — |
| | (3.9 | ) | | — |
|
Total operating expenses | 55,547 |
| | 79,773 |
| | (30.4 | ) | | 18.8 |
| | 27.6 |
|
Operating earnings | 49,020 |
| | 17,182 |
| | 185.3 |
| | 16.6 |
| | 5.9 |
|
Total other expense | (3,146 | ) | | (4,242 | ) | | (25.8 | ) | | (1.1 | ) | | (1.4 | ) |
Earnings (loss) before income taxes | 45,874 |
| | 12,940 |
| | 254.5 |
| | 15.5 |
| | 4.5 |
|
Income tax expense (benefit) | 19,804 |
| | (7,667 | ) | | (358.3 | ) | | 6.7 |
| | (2.6 | ) |
Net earnings | $ | 26,070 |
| | $ | 20,607 |
| | 26.5 |
| | 8.8 |
| | 7.1 |
|
Earnings per share: | | | | | | | | | |
Diluted net earnings per share | $ | 0.79 |
| | $ | 0.61 |
| | | | | | |
(1) Cost of goods sold includes restructuring related charges of $0 in 2016 and $444 in 2015.
Sales of $295,095 in the nine months ended September 30, 2016 increased $6,067 or 2.1% from the nine months ended September 27, 2015. Sales to automotive markets increased $1,712 driven by higher volumes which were partially offset by unfavorable foreign exchange impact. Other sales increased $4,355 due to the addition of sales from the single crystal acquisition which were partially offset by lower demand for electronic components in certain end markets. Changes in foreign exchange rates reduced sales by $1,697 year-over-year due to the U.S. Dollar appreciating compared to the Chinese Renminbi and relating mostly to sales of automotive products.
Gross margin as a percent of sales was 35.4% in the first nine months of 2016 compared to 33.5% in the first nine months of 2015. The increase in gross margin resulted from cost savings from continued efficiency gains, material and labor productivity projects, savings from restructuring projects, favorable mix, and the addition of sales from the single crystal acquisition. In addition, foreign exchange rates had a favorable impact on manufacturing costs primarily due to the strengthening of the U.S. Dollar compared to the Mexican Peso.
Selling, general and administrative expenses were $46,459 or 15.8% of sales in the nine-month period ended September 30, 2016 versus $43,623 or 15.1% of sales in the comparable year-to-date period in 2015. Expenses in 2016 include added costs as a result of the single crystal acquisition, including amortization of intangibles. In addition, CTS paid an early termination fee related to its leased facility in Lisle, Illinois in anticipation of a move in the 2017/2018 time frame to another leased facility in the same area, which will consolidate the Bolingbrook and Lisle, Illinois sites into one facility and reduce ongoing expenses.
Research and development expenses were $18,414 or 6.2% of sales in the nine months ended September 30, 2016 compared to $16,378 or 5.7% of sales in the comparable prior year period. The increase was related to continued investment in new products to drive organic growth. Research and development expenses are focused on expanded applications of existing products and new product development as well as current product and process enhancements.
A non-recurring environmental charge of $14,541 was recorded in the third quarter of 2015 related to a site in Asheville, North Carolina. The charge recorded included both the interim remediation proposed by CTS and accepted by the Environmental Protection Agency ("EPA") and anticipated future remediation and monitoring.
Restructuring and impairment charges were $2,175 or 0.7% of sales in the first nine months of 2016 compared to $5,229 or 1.8% of sales in the first half of 2015. The 2016 charges are for severance costs related to the restructuring of certain operations as part of the 2016 Restructuring Plan announced in June 2016. The 2015 charges consist primarily of severance, transition and shutdown costs related to the consolidation of CTS' Canadian operation in Streetsville, Ontario into other CTS facilities. The information as set forth under Note 7, Costs Associated with Exit and Restructuring Activities, in the condensed consolidated financial statements included in Part I, Item 1 of this report is incorporated herein by reference.
The gain on sale of assets is driven primarily by the gain on sale of the building in Canada in June 2016.
Operating earnings were $49,020 or 16.6% of sales in the nine months ended September 30, 2016 compared to operating earnings of $17,182 or 5.9% of sales in the nine months ended September 27, 2015 as a result of the items discussed above.
Other income and expense items are summarized in the following table: |
| | | | | | | |
| Nine Months Ended |
| September 30, |
| September 27, |
| 2016 | | 2015 |
Interest expense | $ | (2,746 | ) | | $ | (1,955 | ) |
Interest income | 1,082 |
| | 2,354 |
|
Other expense, net | (1,482 | ) | | (4,641 | ) |
Total other expense | $ | (3,146 | ) | | $ | (4,242 | ) |
Interest expense increased in the first nine months of 2016 versus the nine months of 2015 as a result of higher borrowings related to the single crystal acquisition. Interest income decreased due to lower cash balances. Other expense in the first nine months of 2016 is largely the result of foreign currency translation losses, primarily due to the appreciation of the U.S. Dollar compared to the Chinese Renminbi. Other expense in the first nine months of 2015 was also driven by foreign currency translation losses, primarily due to the appreciationdepreciation of the U.S. Dollar compared to the Chinese Renminbi and Euro and Canadian Dollar.during the quarter.
|
| | | | | |
| Nine Months Ended |
| September 30, | | September 27, |
| 2016 | | 2015 |
Effective tax rate | 43.2 | % |
| (59.2 | )% |
|
| | | | | |
| Three Months Ended |
| March 31, | | March 31, |
| 2017 | | 2016 |
Effective tax rate | 30.6 | % | | 34.3 | % |
CTS'Our effective income tax rate was 43.2%30.6% and (59.2)%34.3% in the first nine monthsquarter of 20162017 and 2015,2016, respectively. The decrease in the tax rate in the first nine months of 2016 reflected an increase in valuation allowances recorded against certain state net operating losses andwas primarily driven by favorable discrete tax credits and the revaluation of U.S. deferred taxesitems, largely as a result of the June 2016 restructuring activities discussed in Note 7. The rate also reflects an increase in a valuation allowance on certain non-U.S. losses as a resulttax benefits recorded upon vesting of changes in the expectation of CTS' ability to utilize those losses, changes in the mix of earnings by jurisdiction, various other discrete items, CTS' decision to no longer permanently reinvest the earnings of its Canadian and U.K. subsidiaries, and tax expense for withholding taxes on earnings in China that are not anticipated to be maintained in China. CTS began recording tax expense for withholding taxes in China in the fourth quarter of 2015 and expects to continue this practice going forward. During the first nine months of 2015, CTS reflected a benefit attributable to filing amended U.S. federal tax returns in order to take credits for foreign taxes paid which was partially offset by a reserve recorded on an uncertain tax position.restricted stock units.
Liquidity and Capital Resources
Cash and cash equivalents were $114,433$121,819 at September 30, 2016March 31, 2017, and $156,928$113,805 at December 31, 2015,2016, of which $113,359$120,239 and $156,310,$112,736, respectively, were held outside the United States. The decreaseincrease in cash and cash equivalents of $42,495$8,014 was primarily driven by cash used in investinggenerated from operating activities of $75,282, which included a payment for a business acquisition in the amount of $73,063, capital expenditures of $14,467 and offset by net borrowings on our credit facility of $5,300 proceeds from the sale of assets of $12,248, and cash generated from operations of $31,587.$9,779. Total long-term debt was $96,000$94,000 as of September 30, 2016March 31, 2017 and $90,700$89,100 as of December 31, 2015.2016. Total debt as a percentage of total capitalization, defined as the sum of notes payable and long-term debt as a percentage of total debt and shareholders' equity, was 23.9%22.6% at September 30, 2016,March 31, 2017, compared to 24.4%22.1% at December 31, 2015.2016.
Working capital decreasedincreased by $35,626$16,646 during the ninethree months ended September 30, 2016,March 31, 2017, primarily due to the aforementioned decreasean increase in cash and cash equivalents. equivalents of $8,014 and a decrease in accrued liabilities of $7,024.
Cash Flows from Operating Activities
Net cash provided by operating activities was $9,779 during the first three months of 2017. Components of net cash provided by operating activities included net earnings of $8,484, depreciation and amortization expense of $4,708, stock-based compensation of $880 and other non-cash items including losses on sales of fixed assets, deferred income taxes, and restructuring charges of $3,092, offset by net changes in assets and liabilities of $6,968 and pension and other post-retirement plan income of $417.
Cash Flows from Investing Activities
Net cash used in investing activities for the first three months of 2017 was $3,805, driven almost entirely by capital expenditures.
Cash Flows from Operating Activities
Net cash provided by operating activities was $31,587 during the first nine months of 2016. Components of net cash provided by operating activities included net earnings of $26,070, depreciation and amortization expense of $14,010, and equity-based compensation of $1,759 offset by amortization of retirement benefit adjustments of $1,188, net changes in assets and liabilities of $8,055, and other non-cash items such as gains on sales of fixed assets, deferred income taxes, and restructuring charges of $1,009.
Cash Flows from Investing Activities
Net cash used in investing activities for the first nine months of 2016 was $75,282, which includes a payment for a business acquisition of $73,063, net of cash acquired, $14,467 for capital expenditures and offset by proceeds from the sale of assets of $12,248.
Cash Flows from Financing Activities
Net cash provided by financing activities for the first ninethree months of 20162017 was $2,073.$2,024. These cash inflows were the result of net borrowings under our credit facility totaling $5,300 and windfall tax benefits from$4,900 offset by taxes paid on behalf of employees for equity awards in the amount of $696 which were partially offset by$1,566 and dividend payments of $3,923.$1,310.
Capital Resources
Long‑term debt was comprised of the following:
| | | As of | As of |
| September 30, | | December 31, | March 31, | | December 31, |
| 2016 | | 2015 | 2017 | | 2016 |
Revolving credit facility due in 2020 | $ | 96,000 |
| | $ | 90,700 |
| $ | 94,000 |
| | $ | 89,100 |
|
Weighted average interest rate | 1.9 | % | | 1.5 | % | 2.0 | % | | 1.5 | % |
Amount available | $ | 201,835 |
| | $ | 106,985 |
| $ | 203,835 |
| | $ | 208,735 |
|
Total credit facility | $ | 300,000 |
| | $ | 200,000 |
| $ | 300,000 |
| | $ | 300,000 |
|
Standby letters of credit | $ | 2,165 |
| | $ | 2,315 |
| $ | 2,165 |
| | $ | 2,165 |
|
Commitment fee percentage per annum | 0.25 | % | | 0.25 | % | 0.25 | % | | 0.25 | % |
On August 10, 2015, CTSwe entered into a new five-year credit agreement (“Revolving Credit Facility”) with a group of banks in order to support CTS’our financing needs. The Revolving Credit Facility originally provided for a credit line of $200,000. On May 23, 2016, CTSwe requested and received a $100,000 increase in the aggregate revolving credit commitments under its existing credit agreement, which increased the credit line from $200,000 to $300,000.
The Revolving Credit Facility requires, among other things, that CTS comply with a maximum total leverage ratio and a minimum fixed charge coverage ratio. Failure of CTS to comply with these covenants could reduce the borrowing availability under the Revolving Credit Facility. CTS wasWe were in compliance with all debt covenants at September 30, 2016.March 31, 2017.
CTS usesWe use interest rate swaps to convert the revolving credit facility’sRevolving Credit Facility’s variable rate of interest into a fixed rate. In the second quarter of 2012, CTSwe entered into four separate 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, CTSwe entered into four additional 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, CTSwe entered into three additional forward-starting 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.
Generally, CTS'our practice and intention is to reinvest the earnings of itsour non-U.S. subsidiaries outside the U.S. However, CTSwe determined during 2015 that as a result of changes in the business, the foreign earnings of itsour subsidiaries in Canada and the U.K. were no longer permanently reinvested. Therefore, a provision for the expected taxes on repatriation of those earnings was recorded at that time. Any repatriation may not result in significant cash income tax payments as the taxable event would likely be offset by the utilization of the then available tax credits, resulting in no significant net cash taxes being incurred. CTS doesWe do not provide for U.S. income taxes on undistributed earnings of its foreign subsidiaries that are intended to be permanently reinvested.
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, 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 of CTS 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 CTS'our reported financial results.
Revenue Recognition
Product revenue is recognized once four criteria are 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 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.
Accounts Receivable
We have standardized credit granting and review policies and procedures for all customer accounts, including:
Credit reviews of all new 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 credit worthiness,
An active collection effort by regional credit functions, reporting directly to the corporate financial officers, andand;
Limited credit insurance on the majority of our international receivables.
We reserve for estimated credit losses based on historical experience and specific customer collection issues. Over the last three years, accounts receivable reserves have been approximately 0.2% to 0.3% 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 and 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 the current estimated marketnet 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 17.5%18.4% to 20.4%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 pension benefit obligation. We utilize actuaries from consulting companies in each applicable country to develop our discount rates that match 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.
Valuation 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: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,
Adverse action or assessment by a regulator,
Unanticipated competition,
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 CTS believeswe believe that one or more of the above indicators of impairment have occurred, we perform an impairment test. The performance of the test involves a two-step process. The first step of the impairment test involves comparing the fair values of the applicable reporting units with their aggregate carrying values, including goodwill. We generally determine the fair value of our reporting units using two valuation methods: "Income Approach — Discounted Cash Flow Method" and "Market Approach — Guideline Public Company Method". The approach defined below is based upon our last impairment test conducted as of October 1, 2015.2016.
Under the "Income Approach — Discounted Cash Flow Method", the key assumptions considerinclude sales, cost of sales, and operating expenses projectedexpense projections through the year 2020.2021. These assumptions were determined by management utilizing our internal operating plan and assuming growth rates for revenues, operating expenses, and gross margin assumptions. The fourth key assumption under this approach is the discount rate, which is determined by looking at current risk-free rates, current market interest rates and the evaluation of risk premium relevant to the business segment. If any of our assumptions relative to growth rates were to change or were incorrect, our fair value calculation may change, which could result in impairment.
Under the "Market Approach — Guideline Public Company Method", we identified eight publicly traded companies including CTS, which we believe have significant relevant similarities.similarities to CTS. For these eight companies, we calculated a range of EBITDA multiples derived from the mean ratio of invested capitalenterprise value to revenuesEBITDA and invested capitalcompared these multiples to EBITDA.the corresponding multiples for each of our reporting units. Similar to the Incomeincome approach discussed above, sales, cost of sales, operating expenses and their respective growth rates were the key assumptions utilized.utilized in developing projected EBITDA levels for each of our reporting units. The market prices of CTS and the other guideline companycompany's shares are also key assumptions. If these market prices increase, the estimated market value would increase. If the market prices decrease, the estimated market value would decrease.assumptions as they are used to calculate enterprise value.
The results of these two methods are weighted based upon management's determination. The Market approach is based upon historical and current economic conditions, which might not reflect the long-term prospects or opportunities for CTS' businessour reporting units being evaluated.
If the carrying amount of a reporting unit exceeds the reporting unit's fair value, we perform the second step of the goodwill impairment test to determine the amount of impairment loss, whichif any. This involves comparing the implied fair value of the affected reporting unit's goodwill with the carrying value of that goodwill.
There have not been any significant changes to our impairment testing methodology other than updates to the assumptions to reflect the current market environment. As discussed above, key assumptions used in the first stepBased upon our latest assessment, we determined that our goodwill was not impaired as of the goodwill impairment test were determined by management utilizing CTS' internal operating plan. The key assumptions utilized include forecasted growth rates for revenues and operating expenses as well as a discount rate which is determined by looking at current risk-free rates of capital, current market interest rates and the evaluation of a risk premium relevant to the business segment. CTSOctober 1, 2016. We will monitor future results and will perform a test if indicators trigger an impairment review.
We test the impairment of goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Based upon our latest assessment, we determined that our goodwill was not impaired as of December 31, 2015, and there have been no further indicators of goodwill impairment since that time.
Valuation of Long-LivedOther Intangible and Other IntangibleLong-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: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,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 as of March 31, 2017.
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 declinejudgments and estimates are required in CTS' stock price for a sustained period, and
Significant decline in market capitalization relative to net book value.the determination of the consolidated income tax expense.
If CTS believes that one or moreDeferred income taxes arise from temporary differences between the tax basis of the above indicators of impairment have occurredassets and the undiscounted cash flow test failedliabilities and their reported amounts in the case of amortizable assets, it measures impairment based on projected discounted cash flows using a discount rate that incorporates the risk inherentfinancial statements, which will result in taxable or deductible amounts in the cash flows.
Income Taxes
CTS identified, evaluated, and measured the amount of income tax benefitsfuture. In evaluating our ability to be recognized for all ofrecover our income tax positions. Included in 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 amountsconsistent with the plans and estimates we are using to manage the 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. ASC 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 resolutions 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 federal, state and foreign net operating losses. CTS intends to utilize these net operating loss carryforwards to offset future income taxes.tax expense in the period in which new information is available.
CTS'Our practice is to recognize interest and penalties related to income tax matters as part of income tax expense.
CTS earnsWe earn a significant amount of itsour operating income outside of the U.S., which is generally deemed to be permanently reinvested in foreign jurisdictions. However, CTSwe determined during 2015 that as a result of changes in the business, the foreign earnings of itsour subsidiaries in Canada and the U.K. were no longer permanently reinvested. Therefore, a provision for the expected taxes on repatriation of those earnings was recorded. CTS doesWe do not intend to repatriate funds beyond the amount from itsour Canadian and U.K. subsidiaries; however, should CTSwe require more capital in the U.S. than is generated by our domestic operations, CTSwe could elect to repatriate funds held in foreign jurisdictions or raise capital in the U.S. through debt or equity issuances. Repatriation would result in a higher effective tax rate. Borrowing in the U.S. would result in increased interest expense.
Significant Customers
Our net sales to customers representing at least 10% of total net sales were as follows:
| | | Three Months Ended |
| Nine Months Ended | Three Months Ended |
| September 30, |
| September 27, |
| September 30, |
| September 27, | March 31, |
| March 31, |
| 2016 | | 2015 | | 2016 | | 2015 | 2017 | | 2016 |
Cummins Inc. | | 12.9 | % |
| 10.4 | % |
Toyota Motor Corporation | | 10.8 | % | | 10.7 | % |
Honda Motor Co. | 10.5 | % |
| 11.7 | % |
| 10.8 | % |
| 10.5 | % | 9.8 | % | | 11.7 | % |
Toyota Motor Corporation | 9.9 | % | | 10.3 | % | | 10.5 | % |
| 9.5 | % | |
Cummins Inc. | 9.5 | % | | 10.0 | % | | 9.8 | % |
| 9.0 | % | |
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 automotive, communications, and computer industries, as well as conditions in the industrial, defense and aerospace, and medical markets; reliance on key customers; unanticipated natural disasters or other events; the ability to protect our intellectual property; pricing pressures and demand for our products; unanticipated developments that could occur with respect to contingencies such as litigation and environmental matters as well as any product liability claims; 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 CTS' Annual Report on Form 10‑K for the fiscal year ended December 31, 2015.2016. 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in our market risk since December 31, 2015.2016.
Item 4. Controls and Procedures
Pursuant to Rule 13a-15(e) of the Securities and Exchange Act of 1934, management, under the direction of our Chief Executive Officer and Chief Financial Officer, evaluated our disclosure controls and procedures. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2016.March 31, 2017.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting for the quarter ended September 30, 2016,March 31, 2017, that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
PART II - OTHER INFORMATION
Not applicable
Item 1. Legal Proceedings
From time to time we are involved in litigation with respect to matters arising from the ordinary conduct of our business, and currently certain claims are pending against us. In the opinion of management, 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.
Item 1A. Risk Factors
There have been no significant changes to our risk factors since December 31, 2015.2016.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On April 27, 2015, CTSwe announced that itsour Board of Directors authorized an expansion to its repurchase program by authorizing the purchase of an additional $25 million dollars of its common stock in the open market. This authorization has no expiration. As shown in the following table, there were no stock repurchases during the quarter ended September 30, 2016.March 31, 2017.
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| | | | | | | | | | | | |
| | | | | (c) | | |
| | | | | Total Number | | (d) |
| (a) | | | | of Shares | | Maximum Dollar Value |
| Total Number of | | (b) | | Purchased as | | of Shares That May Yet Be |
| Shares | | Average Price | | Part of Plans or | | Purchased Under the |
| Purchased | | Paid per Share | | Program | | Plans or Programs(2) |
|
| |
| |
| |
|
|
Balance at June 30, 2016 | | | | | | | $ | 17,554 |
|
July 1, 2016 - September 30, 2016 | — |
| | — |
| | — |
| | $ | — |
|
Total | — |
| | — |
| | — |
| | $ | 17,554 |
|
|
| | | | | | | | | | | | |
| | | | | (c) | | |
| | | | | Total Number | | (d) |
| (a) | | | | of Shares | | Maximum Dollar Value |
| Total Number of | | (b) | | Purchased as | | of Shares That May Yet Be |
| Shares | | Average Price | | Part of Plans or | | Purchased Under the |
| Purchased | | Paid per Share | | Program | | Plans or Programs(2) |
|
| |
| |
| |
|
|
Balance at December 31, 2016 | | | | | | | $ | 17,554 |
|
January 1, 2017 - March 31, 2017 | — |
| | — |
| | — |
| | $ | — |
|
Total | — |
| | — |
| | — |
| | $ | 17,554 |
|
Item 6. Exhibits
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(31)(a) | Certification pursuant to Section 302 of the Sarbanes‑Oxley Act of 2002. |
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(31)(b) | Certification pursuant to Section 302 of the Sarbanes‑Oxley Act of 2002. |
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(32)(a) | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes‑Oxley Act of 2002. |
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(32)(b) | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes‑Oxley Act of 2002. |
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101.INS | XBRL Instance Document |
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101.SCH | XBRL Taxonomy Extension Schema Document |
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101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF | XBRL Taxonomy Extension Definition Linkbase Document |
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101.LAB | XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. |
| | |
CTS Corporation | | CTS Corporation |
| | |
/s/ Luis F. Machado | | /s/ Ashish Agrawal |
Luis F. Machado Vice President, General Counsel and Secretary | | Ashish Agrawal Vice President and Chief Financial Officer |
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Dated: October 28, 2016April 27, 2017 | | Dated: October 28, 2016April 27, 2017 |