UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30,September 29, 2013

OR

 

¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from                    to                    

Commission File Number: 1-4639

 

 

CTS CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

Indiana 35-0225010

(State or other jurisdiction of

incorporation or organization)

 

(IRSI.R.S. Employer

Identification Number)

 

905 West Boulevard North, Elkhart, IN 46514
(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: 574-523-3800

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically 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  x    No  ¨

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 definition of “large accelerated filer”,filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ¨  Accelerated filer x
Non-accelerated filer ¨  (Do not check if smaller reporting company)  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  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of July 19,October 25, 2013: 33,692,251.33,692,312

 

 

 


CTS CORPORATION AND SUBSIDIARIES

TABLE OF CONTENTS

 

     Page Page
PART I. FINANCIAL INFORMATION  FINANCIAL INFORMATION

Item 1.

Financial Statements
 Item 1.

Unaudited Condensed Consolidated Statements of Earnings/(Loss)
- For the Three and Nine Months Ended September 29, 2013 and September 30, 2012

  Financial Statements3  
 

Unaudited Condensed Consolidated Statements of (Loss)/Comprehensive Earnings

3

- For the Three and SixNine Months Ended June 30,September 29, 2013 and July 1,September 30, 2012

  4
 

Unaudited Condensed Consolidated StatementsBalance Sheets
- As of Comprehensive (Loss)/EarningsSeptember 29, 2013 and December 31, 2012

  4
5  —For the Three and Six Months Ended June 30, 2013 and July 1, 2012
 

Unaudited Condensed Consolidated Balance SheetsStatements of Cash Flows
- For the Nine Months Ended September 29, 2013 and September 30, 2012

  5
6  —As of June 30, 2013 and December 31, 2012
 Unaudited Condensed Consolidated Statements of Cash Flows6
—For the Six Months Ended June 30, 2013 and July 1, 2012

Notes to Unaudited Condensed Consolidated Financial Statements

 7

Item 2.

 Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations  2223

Item 3.

 Item 3.Quantitative and Qualitative Disclosures about Market Risk  3334

Item 4.

Controls and Procedures34

PART II. OTHER INFORMATION

Item 4.Controls and Procedures33
PART II.

Item 1.

 OTHER INFORMATIONLegal Proceedings34

Item 1A.

 Item 1.Risk Factors  Legal Proceedings34  33

Item 2.

 Item 1A.Risk Factors34
Item 2Unregistered Sales of Equity Securities and Use of Proceeds  3435

Item 3.

 Item 3Defaults Upon Senior Securities  3435

Item 4.

 Item 4Mine Safety Disclosures  3435

Item 5.

 Item 5Other Information  Other Information35  34

Item 6.

 Item 6.Exhibits  Exhibits36  34
SIGNATURES  3537

PART I - FINANCIAL INFORMATION

 

Item 1.Financial Statements

CTS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS/(LOSS)/EARNINGS— - UNAUDITED

(In thousands, except per share amounts)

 

  Three Months Ended Six Months Ended   Three Months Ended Nine Months Ended 
  June 30, 2013 July 1, 2012 June 30, 2013 July 1, 2012   September 29,
2013
 September 30,
2012
 September 29,
2013
 September 30,
2012
 

Net sales

  $151,561   $154,294   $301,073   $301,263    $159,563   $137,357   $460,636   $438,620  

Costs and expenses:

          

Cost of goods sold

   116,072    128,356    234,404    253,276     122,034   110,763    356,438   364,039  

Insurance recovery for business interruption – casualties

   —      (7,423  —      (11,050

Insurance recovery for business interruption - casualties

   —     (4,192  —     (15,242

Selling, general and administrative expenses

   20,749    19,378    42,156    38,782     20,765   19,387    62,921   58,169  

Research and development expenses

   5,771    5,131    12,023    11,240     5,718   4,350    17,741   15,590  

Insurance recovery for property damage – casualties

   —      —      —      (1,769

Restructuring and impairment charge – Note M

   7,243    3,139    7,802    3,139  

Insurance recovery for property damage - Casualties

   —     —      —     (1,769

Restructuring and impairment charge - Note M

   953   245    8,755   3,384  
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Operating earnings

   1,726    5,713    4,688    7,645     10,093    6,804    14,781    14,449  

Other (expense)/income:

          

Interest expense

   (1,079  (626  (1,994  (1,285   (849  (584  (2,843  (1,869

Interest income

   446    467    859    916     442    425    1,301    1,341  

Other

   (310  (1,041  (12  (466   706    763    694    297  
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Total other (expense)/income

   (943  (1,200  (1,147  (835

Total other income/(expense)

   299    604    (848  (231
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Earnings before income taxes

   783    4,513    3,541    6,810     10,392    7,408    13,933    14,218  

Income tax expense

   12,118    1,212    11,308    1,226     3,573    1,491    14,881    2,717  
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Net (loss)/earnings

  $(11,335 $3,301   $(7,767 $5,584  

Net earnings/(loss)

  $6,819   $5,917   $(948 $11,501  
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Net (loss)/earnings per share – Note J

     

Net earnings/(loss) per share - Note J

     

Basic

  $(0.34 $0.10   $(0.23 $0.16    $0.20   $0.17   $(0.03 $0.34  
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Diluted

  $(0.34 $0.10   $(0.23 $0.16    $0.20   $0.17   $(0.03 $0.33  
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Cash dividends declared per share

  $0.035   $0.035   $0.07   $0.07    $0.035   $0.035   $0.105   $0.105  
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Average common shares outstanding:

          

Basic

   33,589    34,022    33,556    34,064     33,696    33,923    33,603    34,017  

Diluted

   33,589    34,574    33,556    34,647     34,331    34,471    33,603    34,588  

See notes to unaudited condensed consolidated financial statements.

CTS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS)/EARNINGS—EARNINGS - UNAUDITED

(In thousands of dollars)

 

   Three Months Ended  Six Months Ended 
   June 30, 2013  July 1, 2012  June 30, 2013  July 1, 2012 

Net (loss)/earnings

  $(11,335 $3,301   $(7,767 $5,584  

Other comprehensive earnings/(loss):

     

Cumulative translation adjustment, 2013 –net of tax benefit of $71 and net of tax $463; 2012- net of tax of $272 and tax benefit of $64

   231    (917  (1,510  245  

Defined benefit and post-retirement benefit plans:

     

Amortization of prior service cost included in net periodic pension costs, 2013- net of tax of $59 and $118; 2012- net of tax of $59 and $118

   91    92    182    184  

Amortization of loss included in net periodic pension costs, 2013- net of tax of $774 and $1,548; 2012- net of tax $600 and $1,206

   1,245    982    2,490    1,962  

Additional cost due to early retirement, 2013- net of tax of $0 and $0; 2012- net of tax of $110 and $110

   —      171    —      171  

Foreign exchange impact, 2013- net of tax benefit of $2 and net of tax of $72; 2012- net of tax of $33 and tax benefit of $9

   (5  66    202    (48
  

 

 

  

 

 

  

 

 

  

 

 

 

Reclassification adjustments included in net earnings – defined benefit and post-retirement benefit plans

   1,331    1,311    2,874    2,269  
  

 

 

  

 

 

  

 

 

  

 

 

 

Unrealized gain on interest swaps treated as cash flow hedges:

     

Unrealized holding gain/(loss) arising during period, 2013- net of tax of $298 and $312; 2012- net of tax benefit of $325 and $325

   467    (507  489    (507

Reclassification adjustments for losses included in net earnings, 2013- net of tax of $31 and $61; 2012- net of tax of $0 and $0

   47    —      94    —    
  

 

 

  

 

 

  

 

 

  

 

 

 

Net change in unrealized holding loss on interest rate swaps

   514    (507  583    (507
  

 

 

  

 

 

  

 

 

  

 

 

 

Other comprehensive earnings/(loss)

   2,076    (113  1,947    2,007  
  

 

 

  

 

 

  

 

 

  

 

 

 

Comprehensive (loss)/earnings

  $(9,259 $3,188   $(5,820 $7,591  
  

 

 

  

 

 

  

 

 

  

 

 

 
   Three Months Ended  Nine Months Ended 
   September 29,
2013
  September 30,
2012
  September 29,
2013
  September 30,
2012
 

Net earnings/(loss)

  $6,819   $5,917   $(948 $11,501  

Other comprehensive earnings/(loss):

     

Cumulative translation adjustment, 2013 – net of tax benefit of $430 and net of tax $32; 2012 - net of tax benefit of $444 and $508

   1,344    1,371    (166  1,616  

Defined benefit and post-retirement benefit plans:

     

Amortization of prior service cost included in net periodic pension costs, 2013 - net of tax of $53 and $171; 2012 - net of tax of $59 and $177

   83    93    265    277  

Amortization of loss included in net periodic pension costs, 2013 - net of tax of $792 and $2,340; 2012 - net of tax $612 and $1,818

   1,228    964    3,718    2,926  

Additional cost due to early retirement, 2013 - net of tax of $0 and $0; 2012 - net of tax of $0 and $110

   —      —      —      171  

Foreign exchange impact, 2013 - net of tax benefit of $74 and $2; 2012 - net of tax benefit of $58 and $67

   (139  (107  63    (155
  

 

 

  

 

 

  

 

 

  

 

 

 

Reclassification adjustments included in net earnings – defined benefit and post-retirement benefit plans

   1,172    950    4,046    3,219  
  

 

 

  

 

 

  

 

 

  

 

 

 

Unrealized gain on interest swaps treated as cash flow hedges:

     

Unrealized holding gain/(loss) arising during period, 2013 - net of tax benefit of $168 and net of tax $144; 2012 - net of tax benefit of $278 and $603

   (260  (436  229    (943

Reclassification adjustments for losses included in net earnings, 2013 - net of tax of $31 and $92; 2012 - net of tax of $0 and $0

   50    —      144    —    
  

 

 

  

 

 

  

 

 

  

 

 

 

Net change in unrealized holding loss on interest rate swaps

   (210  (436  373    (943
  

 

 

  

 

 

  

 

 

  

 

 

 

Other comprehensive earnings

   2,306    1,885    4,253    3,892  
  

 

 

  

 

 

  

 

 

  

 

 

 

Comprehensive earnings

  $9,125   $7,802   $3,305   $15,393  
  

 

 

  

 

 

  

 

 

  

 

 

 

See notes to unaudited condensed consolidated financial statements.

CTS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands of dollars except share amounts)

 

  (Unaudited)
June 30,  2013
 December 31,
2012
   (Unaudited)
September 29,
2013
 December 31,
2012
 

ASSETS

      

Current Assets

      

Cash and cash equivalents

  $86,044   $109,571    $96,730   $109,571  

Accounts receivable, less allowances (2013 – $665; 2012 – $811)

   93,908    89,342  

Inventories – Note D

   85,160    81,752  

Accounts receivable, less allowances (2013 - $721; 2012 - $811)

   96,809   89,342  

Inventories - Note D

   84,605   81,752  

Other current assets

   28,955    28,633     29,663   28,633  
  

 

  

 

   

 

  

 

 

Total current assets

   294,067    309,298     307,807    309,298  

Property, plant and equipment, less accumulated depreciation (2013 – $240,474; 2012 – $240,693)

   91,068    93,725  

Property, plant and equipment, less accumulated depreciation (2013 - $239,900; 2012 - $240,693)

   89,480    93,725  

Other Assets

      

Goodwill – Note L

   35,156    35,156     35,156    35,156  

Other indefinite-lived intangible asset – Note L

   640    820     640    820  

Other intangible assets, net – Note L

   44,457    47,538     43,179    47,538  

Deferred income taxes

   61,209    73,158     59,869    73,158  

Other

   2,076    1,484     3,732    1,484  
  

 

  

 

   

 

  

 

 

Total other assets

   143,538    158,156     142,576    158,156  
  

 

  

 

   

 

  

 

 

Total Assets

  $528,673   $561,179    $539,863   $561,179  
  

 

  

 

   

 

  

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

      

Current Liabilities

      

Accounts payable

  $70,694   $67,973    $71,512   $67,973  

Accrued liabilities

   46,786    47,056     50,253    47,056  
  

 

  

 

   

 

  

 

 

Total current liabilities

   117,480    115,029     121,765    115,029  

Long-term debt –Note E

   129,500    153,500  

Long-term debt -Note E

   128,600    153,500  

Other long-term obligations

   20,066    24,892     19,867    24,892  

Shareholders’ Equity

      

Preferred stock – authorized 25,000,000 shares without par value; none issued

   —      —    

Common stock – authorized 75,000,000 shares without par value; 55,672,410 shares issued at June 30, 2013 and 55,263,082 shares issued at December 31, 2012

   296,102    291,512  

Preferred stock - authorized 25,000,000 shares without par value; none issued

   —      —    

Common stock - authorized 75,000,000 shares without par value; 55,693,235 shares issued at September 29, 2013 and 55,263,082 shares issued at December 31, 2012

   296,315    291,512  

Additional contributed capital

   38,952    40,008     39,529    40,008  

Retained earnings

   357,681    367,800     363,320    367,800  

Accumulated other comprehensive loss

   (118,657  (120,604   (116,351  (120,604
  

 

  

 

   

 

  

 

 
   574,078    578,716     582,813    578,716  

Cost of common stock held in treasury (2013 – 21,980,159 and 2012 – 21,829,954 shares)

   (312,451  (310,958

Cost of common stock held in treasury (2013 – 22,029,923 shares and 2012 – 21,829,954 shares)

   (313,182  (310,958
  

 

  

 

   

 

  

 

 

Total shareholders’ equity

   261,627    267,758     269,631    267,758  
  

 

  

 

   

 

  

 

 

Total Liabilities and Shareholders’ Equity

  $528,673   $561,179    $539,863   $561,179  
  

 

  

 

   

 

  

 

 

See notes to unaudited condensed consolidated financial statements.

CTS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS—FLOWS - UNAUDITED

(In thousands of dollars)

 

  Six Months Ended   Nine Months Ended 
  June 30,
2013
 July 1, 2012   September 29,
2013
 September 30,
2012
 

Cash flows from operating activities:

      

Net (loss) / earnings

  $(7,767 $5,584    $(948 $11,501  

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

      

Depreciation and amortization

   11,356    9,646     16,677   14,583  

Prepaid pension asset

   (739  (3,408   (2,422 (5,122

Equity-based compensation – Note B

   2,481    2,171     3,141   3,181  

Restructuring and impairment charges – Note M

   7,802    3,139     8,755   3,384  

Amortization of retirement benefit adjustments – Note F

   4,336    3,467     6,494   5,193  

Insurance recovery for business interruption and property damage – casualties

   —      (12,819

Insurance proceeds for business interruption and property damage other than property, plant and equipment – casualties

   —      13,280  

Insurance recovery for business interruption and property damage - casualties

   —     (17,011

Insurance proceeds for business interruption and property damage other than property, plant and equipment - casualties

   —     17,703  

Changes in assets and liabilities, net of acquisition

      

Accounts receivable

   (5,304  (383   (7,639 10,020  

Inventories

   (3,782  15,252     (2,977 19,483  

Other current assets

   (649  1,218     (409 1,205  

Accounts payable and accrued liabilities

   (3,237  (23,964   33   (38,169

Other

   5,720    (1,198   4,790   (965
  

 

  

 

   

 

  

 

 

Total adjustments

   17,984    6,401     26,443    13,485  
  

 

  

 

   

 

  

 

 

Net cash provided by operating activities

   10,217    11,985     25,495    24,986  

Cash flows from investing activities:

      

Capital expenditures

   (8,359  (6,877   (10,908  (9,779

Capital expenditures to replace property, plant and equipment damaged in casualties

   —      (2,859   —      (2,859

Insurance proceeds for property, plant and equipment damaged in casualties

   —      2,250     —      2,250  

Proceeds from sale of fixed assets and assets held for sale

   189    350     593    499  

Payment for acquisition, net of cash acquired

   —      (14,689   —      (14,689
  

 

  

 

   

 

  

 

 

Net cash used in investing activities

   (8,170  (21,825   (10,315  (24,578

Cash flows from financing activities:

      

Payments of long-term debt – Note E

   (2,593,900  (2,718,850   (3,527,200  (3,979,650

Proceeds from borrowings of long-term debt – Note E

   2,569,900    2,741,450     3,502,300    3,999,750  

Payments of short-term notes payable

   (1,039  (1,666   (1,646  (2,166

Proceeds from borrowings of short-term notes payable

   1,039    1,666     1,646    2,166  

Purchase of treasury stock

   (1,493  (5,643   (2,224  (6,550

Dividends paid

   (2,345  (2,385   (3,524  (3,574

Exercise of stock options

   2,058    1,401     2,235    1,672  

Other

   30    199     16    167  
  

 

  

 

   

 

  

 

 

Net cash (used)/provided by financing activities

   (25,750  16,172     (28,397  11,815  

Effect of exchange rate on cash and cash equivalents

   176    295     376    (15
  

 

  

 

   

 

  

 

 

Net (decrease)/increase in cash and cash equivalents

   (23,527  6,627     (12,841  12,208  

Cash and cash equivalents at beginning of year

   109,571    76,412     109,571    76,412  
  

 

  

 

   

 

  

 

 

Cash and cash equivalents at end of period

  $86,044   $83,039    $96,730   $88,620  
  

 

  

 

   

 

  

 

 

Supplemental cash flow information – outstanding

   

Supplemental cash flow information

   

Cash paid during the period for:

      

Interest

  $1,690   $974    $2,506   $1,581  

Income taxes – net

  $2,984   $2,788  

Income taxes—net

  $4,756   $4,468  

See notes to unaudited condensed consolidated financial statements.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—UNAUDITED

June 30,September 29, 2013

NOTE A – Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared by CTS Corporation (“CTS” or “the Company”), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations. The unaudited condensed consolidated financial statements should be read in conjunction with the financial statements, notes thereto, and other information included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.

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.

NOTE B – Equity-Based Compensation

At June 30,September 29, 2013, CTS had four equity-based compensation plans: the 2001 Stock Option Plan (“2001 Plan”), the Nonemployee Directors’ Stock Retirement Plan (“Directors’ Plan”), the 2004 Omnibus Long-Term Incentive Plan (“2004 Plan”), and the 2009 Omnibus Equity and Performance Incentive Plan (“2009 Plan”). All of these plans, except the Directors’ Plan, were approved by shareholders. As of December 31, 2009, additional grants can only be made under the 2004 and 2009 Plans. CTS believes that equity-based awards align the interest of employees with those of its shareholders.

The 2009 Plan, and previously the 2001 Plan and 2004 Plan, provides for grants of incentive stock options or nonqualified stock options to officers, key employees, and nonemployee members of CTS’ board of directors. In addition, the 2009 Plan and the 2004 Plan allow for grants of stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units, and other stock awards.

The following table summarizes the compensation expense included in the Unaudited Condensed Consolidated Statements of Earnings for the three and sixnine months ended June 30,September 29, 2013 and July 1,September 30, 2012, respectively, relating to equity-based compensation plans:

 

  Three Months Ended   Six Months Ended   Three Months Ended   Nine Months Ended 

($ in thousands)

  June 30,
2013
   July 1,
2012
   June 30,
2013
   July 1,
2012
   September 29,
2013
   September 30,
2012
   September 29,
2013
   September 30,
2012
 

Restricted stock units

   1,163     957     2,481     2,171    $660    $1,010    $3,141    $3,181  

The following table summarizes the status of these plans as of June 30,September 29, 2013:

 

  2009 Plan   2004 Plan   2001 Plan   2009 Plan   2004 Plan   2001 Plan 

Awards originally available

   3,400,000     6,500,000     2,000,000     3,400,000     6,500,000     2,000,000  

Stock options outstanding

     156,400     24,800       140,400     24,800  

Restricted stock units outstanding

   727,242     101,223       645,046     101,223    

Options exercisable

     156,400     24,800       140,400     24,800  

Awards available for grant

   1,682,842     262,686       1,755,471     262,686    

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 the Company’s stock on the date of grant. The stock options generally vest over four years and 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.

The Company estimated the fair value of the stock option on the grant date using the Black-Scholes option-pricing model and assumptions for expected price volatility, option term, risk-free interest rate, and dividend yield. Expected price volatilities were based on historical volatilities of the Company’s stock. The expected option term is derived from historical data on exercise behavior. The dividend yield was based on historical dividend payments. The risk-free rate for periods within the contractual life of the option was based on the U.S. Treasury yield curve in effect at the time of grant.

A summary of the status of stock options as of June 30,September 29, 2013 and July 1,September 30, 2012, and changes during the six-monthnine-month periods then ended, is presented below:

 

  June 30, 2013   July 1, 2012   September 29, 2013   September 30, 2012 
  Options Weighted-
Average

Exercise  Price
   Options Weighted-
Average

Exercise  Price
   Options Weighted-
Average
Exercise Price
   Options Weighted-
Average

Exercise Price
 

Outstanding at beginning of year

   447,250   $10.87     728,050   $10.24     447,250   $10.87     728,050   $10.24  

Exercised

   (227,750 $9.83     (154,750 $8.71     (243,750 $9.91     (195,300 $8.50  

Expired

   (37,300 $8.94     (11,000 $16.22     (37,300 $8.94     (24,100 $11.59  

Forfeited

   (1,000 $9.78     (10,150 $9.41     (1,000 $9.78     (68,150 $10.87  
  

 

    

 

    

 

    

 

  

Outstanding at end of period

   181,200   $12.59     552,150   $10.57     165,200   $12.74     440,500   $10.86  
  

 

  

 

   

 

  

 

   

 

  

 

   

 

  

 

 

Exercisable at end of period

   181,200   $12.59     552,150   $10.57     165,200   $12.74     440,500   $10.86  
  

 

  

 

   

 

  

 

   

 

  

 

   

 

  

 

 

The total intrinsic value of share options exercised during the six-monthnine-month periods ended June 30,September 29, 2013 and July 1,September 30, 2012, were $383,000$435,000 and $255,000,$320,000, respectively.

The weighted average remaining contractual life of options outstanding and options exercisable at June 30,September 29, 2013 and July 1,September 30, 2012 were 2.01.8 years and 1.71.6 years, respectively. The aggregate intrinsic values of options outstanding and options exercisable at June 30,September 29, 2013 and July 1,September 30, 2012 were approximately $219,000$470,000 and $182,000,$167,000, respectively.

There were no unvested stock options at June 30,September 29, 2013.

The following table summarizes information about stock options outstanding at June 30,September 29, 2013:

 

   Options Outstanding and Exercisable 

Range of
Exercise
Prices

  

Number Outstanding And
Exercisable at 6/30/13

   

Weighted Average
Remaining Contractual Life
(Years)

   

Weighted Average Exercise
Price

 
$11.04 –11.11   85,900     1.58    $11.08  
$13.68 –14.70   95,300     2.32    $13.95  
   Options Outstanding and Exercisable 
       Weighted Average     
Range of  Number Outstanding   Remaining   Weighted Average 
Exercise  And Exercisable   Contractual   Exercise 

Prices

  at 9/29/13   Life (Years)   Price 

$11.04 – 11.11

   69,900     1.37    $11.09  

$13.68 – 14.70

   95,300     2.07    $13.95  

Service-Based Restricted Stock Units

Service-based restricted stock units (“RSUs”) entitle the holder to receive one share of common stock 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. A summary of the status of RSUs as of June 30,September 29, 2013 and July 1,September 30, 2012, and changes during the six-monthnine-month periods then ended is presented below:

 

  June 30, 2013   July 1, 2012   September 29, 2013   September 30, 2012 
  RSUs Weighted-
average

Grant-Date
Fair Value
   RSUs Weighted-
average

Grant-Date
Fair Value
   RSUs Weighted-
average
Grant-Date
Fair Value
   RSUs Weighted-
average

Grant-Date
Fair Value
 

Outstanding at beginning of year

   751,798   $9.82     701,449   $9.35     751,798   $9.82     701,449   $9.35  

Granted

   336,100   $10.17     231,750   $10.41     338,600   $10.20     236,750   $10.38  

Converted

   (203,311 $9.88     (252,964 $8.51     (210,313 $9.87     (273,800 $8.68  

Forfeited

   (56,122 $9.77     (26,861 $9.06     (133,816 $9.72     (29,608 $9.18  
  

 

    

 

    

 

    

 

  

Outstanding at end of period

   828,465   $9.95     653,374   $10.07     746,269   $10.00     634,791   $10.04  
  

 

  

 

   

 

  

 

   

 

  

 

   

 

  

 

 

Weighted-average remaining contractual life

   7.6 years      8.3 years      8.0 years      8.3 years   
  

 

    

 

    

 

    

 

  

CTS recorded compensation expense of approximately $693,000$444,000 and $1,517,000$1,961,000 related to service-based restricted stock units during the three and sixnine month periods ended June 30,September 29, 2013, respectively. CTS recorded compensation expense of approximately $496,000$553,000 and $1,249,000$1,802,000 related to service-based restricted stock units during the three and sixnine month periods ended July 1,September 30, 2012, respectively.

As of June 30,September 29, 2013, there was $3,272,000$2,111,000 of unrecognized compensation cost related to nonvested RSUs. That cost is expected to be recognized over a weighted-average period of 1.1 years. CTS recognizes 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.

Performance-Based Restricted Stock Units

On February 2, 2010, CTS granted performance-based restricted stock unit awards for certain executives. Vesting maycould occur in the range from zero percent to 200% of the target amount of 78,000 units in 2012 subject to certification of the 2011 fiscal year results by CTS’ independent auditors.2012. Vesting iswas dependent upon CTS’ achievement of sales growth targets and, as a result, 49,320 units were awarded and vested.

On February 3, 2011, CTS granted performance-based restricted stock unit awards for certain executives. Vesting maycould occur in the range from zero percent to 200% of the target amount of 53,200 units in 2013 subject to certification of the 2012 fiscal year results by CTS’ independent auditors.2013. Vesting iswas dependent upon CTS’ achievement of sales growth targets. No awardsunits were awarded as the targets were not met.

On February 8, 2012, CTS granted performance-based restricted stock unit awards for certain executives. Vesting may occur in the range from zero percent to 200% of the target amount of 45,850 units in 2014 subject to certification of the 2013 fiscal year results by CTS’ independent auditors. Vesting is dependent upon CTS’ achievement of sales growth targets.

On February 8, 2012, CTS granted performance-based restricted stock unit awards for certain executives. Vesting may occur in the range from zero percent to 200% of the target amount of 39,300 units in 2014 subject to certification of the 2013 fiscal year results by CTS’ independent auditors. Vesting is dependent upon CTS’ achievement of certain cash flow targets.

On February 11, 2013, CTS granted performance-based restricted stock unit awards for certain executives. Vesting may occur in the range from zero percent to 200% of the target amount of 77,700 units in 2016 subject to certification of the 2015 fiscal year results by CTS’ independent auditors. Vesting is dependent upon CTS’ achievement of sales growth targets.

On February 11, 2013, CTS granted performance-based restricted stock unit awards for certain executives. Vesting may occur in the range from zero percent to 200% of the target amount of 66,600 units in 2016 subject to certification of the 2015 fiscal year results by CTS’ independent auditors. Vesting is dependent upon CTS’ achievement of certain cash flow targets.

CTS recorded compensation expense of approximately $279,000$116,000 and $573,000$690,000 related to performance-based restricted stock units during the three and sixnine month periods ended June 30,September 29, 2013, respectively. CTS recorded compensation expense of approximately $229,000 and $459,000$688,000 related to performance-based restricted stock units during the three and sixnine month periods ended July 1,September 30, 2012, respectively. As of June 30,September 29, 2013 there was approximately $1,710,000$1,244,000 of unrecognized compensation cost related to performance-based RSUs. That cost is expected to be recognized over a weighted-average period of 1.5 years.

Market-Based Restricted Stock Units

On July 2, 2007, CTS granted a market-based restricted stock unit award forto an executive officer. An aggregate of 25,000 units may be earned in performance years ending in the following three consecutive years on the anniversary of the award date. Vesting may occur in the range from zero percent to 150% of the target award on the end date of each performance period and is tied exclusively to CTS total stockholder return relative to 32 enumerated peer group companies’ total stockholder return rates. The vesting rate will be determined using a matrix based on a percentile ranking of CTS total stockholder return with peer group total shareholder return over a three-year period. During the year ended December 31, 2010, 12,500 units were earned and awarded to the executive officer. There were no units awarded in 2011. On July 2, 2012, 8,334 units were earned and awarded to the executive officer.

On February 2, 2010, CTS granted market-based restricted stock unit awards for certain executives and key employees. Vesting maycould occur in the range from zero percent to 200% of the target amount of 117,000 units in 2012. Vesting iswas dependent upon CTS total stockholder return relative to 28 enumerated peer group companies’ stockholder return rates and, as a result, 67,130 units were awarded and vested.

On February 3, 2011, CTS granted market-based restricted stock unit awards for certain executives and key employees. Vesting maycould occur in the range from zero percent to 200% of the target amount of 79,800 units in 2013. Vesting iswas dependent upon CTS total stockholder return relative to 28 enumerated peer group companies’ stockholder return rates. On February 11, 2013, 80,940 units were earned and awarded.

On February 8, 2012, CTS granted market-based restricted stock unit awards for certain executives and key employees. Vesting may occur in the range from zero percent to 200% of the target amount of 45,850 units in 2014. Vesting is dependent upon CTS total stockholder return relative to 28 enumerated peer group companies’ stockholder return rates.

On February 11, 2013, CTS granted market-based restricted stock unit awards for certain executives and key employees. Vesting may occur in the range from zero percent to 200% of the target amount of 77,700 units in 2016. Vesting is dependent upon CTS total stockholder return relative to 20 enumerated peer group companies’ stockholder return rates.

On February 11, 2013, CTS granted a market-based restricted stock award to an executive officer. Vesting may occur in the range from zero percent to 200% of the target amount of 32,500 units in 2016. Vesting is dependent upon CTS total stockholder return relative to 20 enumerated peer group companies’ stockholder return rates.

CTS recorded compensation expense of approximately $191,000$100,000 and $391,000$490,000 related to market-based restricted stock units during the three and sixnine month periods ended June 30,September 29, 2013, respectively. CTS recorded compensation expense of approximately $232,000$228,000 and $463,000$691,000 related to market-based restricted stock units during the three and sixnine month periods ended July 1,September 30, 2012, respectively. As of June 30,September 29, 2013, there was approximately $1,299,000$1,003,000 of unrecognized compensation cost related to market-based RSUs. That cost is expected to be recognized over a weighted-average period of 1.61.5 years.

Stock Retirement Plan

The Directors’ Plan provides for a portion of the total compensation payable to nonemployee directors to be deferred and paid in CTS common stock. The Directors’ Plan was frozen effective December 1, 2004. All future grants will be from the 2009 Plan.

NOTE C – Acquisition

In December 2012, CTS acquired D&R Technology (“D&R”), a privately-held company locatedwith locations in Carol Stream, Illinois and Juarez, Mexico for $63.5 million.million in cash. D&R is a leading manufacturer of custom designed sensors, switches and electromechanical assemblies primarily serving the automotive light-vehicle market. This acquisition expands CTS’ strategic automotive sensor product platform with new customers and a broader product portfolio. The acquisition also diversifies CTS’ Components and Sensors segment and brings new growth opportunities from sensor applications for safety systems and vehicle chassis management. Additionally, D&R brings strong sensor design and development engineering capabilities to complement CTS’ engineering team.

The following table summarizes the estimated fair values of the assets acquired and the liabilities assumed at the date of the acquisition:

 

  Estimated Fair
Values
   Estimated Fair
Values
 

($ in thousands)

  At December 21,
2012
   At December 21,
2012
 

Current assets

  $13,839    $13,839  

Property, plant and equipment

   8,635     8,635  

Goodwill

   26,991     26,991  

Amortizable intangible assets

   18,330     18,330  

In-process research and development

   500     500  

Other assets

   678     678  
  

 

   

 

 

Fair value of assets acquired

   68,973     68,973  

Less fair value of liabilities acquired

   (5,473   (5,473
  

 

   

 

 

Net cash paid

  $63,500    $63,500  
  

 

   

 

 

Included in current assets is the fair value of accounts receivable of $7,693,000. Goodwill recorded in connection with the above acquisition is primarily attributable to the synergies expected to arise after the Company’s acquisition of the business and the assembled workforce of the acquired business. The goodwill is deductible for tax purposes over a 15-year period.

The following table summarizes the net sales and earnings before income taxes of D&R that isare included in CTS’ Condensed Consolidated Statements of Earnings for the three and sixnine months ended June 30,September 29, 2013:

 

  Three Months Ended   Six Months Ended   Three Months Ended   Nine Months Ended 

($ in thousands)

  June 30, 2013   June 30, 2013   September 29, 2013   September 29, 2013 

Net Sales

  $13,194    $25,896    $11,820    $37,716  

Earnings before income taxes

  $1,706    $1,856    $602    $2,458  

The D&R acquisition is accounted for using the acquisition method of accounting whereby the total purchase price is allocated to tangible and intangible assets and liabilities based on the fair market values on the date of acquisition. CTS determines the purchase price allocations on the acquisition based on estimates of the fair values of the assets acquired and liabilities assumed. During the sixnine months ended June 30,September 29, 2013, the Company recorded a measurement period adjustment as a result of additional information provided by CTS’ external valuation consultants. This adjustment increased amortizable intangible assets by $1,457,000. Other measurement period adjustments were recorded for accounts receivable and accounts payable to reflect fair market values on the date of acquisition, which resulted in a decrease of $260,000 and an increase of $3,000, respectively. The net effect of these measurement period adjustments reduced goodwill by $1,194,000. The allocations for goodwill and other intangible assets is based onare prepared by the Company’s management utilizing a third-party valuation report and other tools available to the Company, including review with the acquired company’s management and historical experience and third party evaluation.data from the Company’s prior acquisitions. The allocations pertaining to goodwill and other intangible assets will be finalized in the fourth quarter of 2013.

In January 2012, CTS acquired 100% of the common stock of Valpey-Fisher Corporation (“Valpey-Fisher”), a publicly held company located in Hopkinton, Massachusetts for approximately $18.3 million.million in cash. Valpey-Fisher is a recognized technology leader in the design and manufacture of precision frequency crystal oscillators. This acquisition expands CTS’ technology, and brings strong engineering capabilities and management leadership to support the Company’s strategic initiatives in CTS’ Component and Sensors’ segment.

The Valpey-Fisher acquisition was accounted for using the acquisition method of accounting whereby the total purchase price was allocated to tangible and intangible assets and liabilities based on the fair market values on the date of acquisition. CTS determined the purchase price allocations on the acquisition based on the fair values of the assets acquired and liabilities assumed. CTS finalized the purchase price allocation at December 31, 2012.

The following table summarizes the pro-forma combined net sales and earnings before income taxes of CTS, D&R and Valpey-Fisher on a pro forma basis for the three and sixnine months ended as if the acquisition datedates had occurred on January 1, 2011:

 

  Three Months Ended   Six Months Ended   Three Months Ended   Nine Months Ended 
  July 1, 2012   July 1, 2012   September 30, 2012   September 30, 2012 

($ in thousands)

  (Unaudited Proforma)   (Unaudited Proforma)   (Unaudited Proforma)   (Unaudited Proforma) 

Net Sales

  $167,980    $329,100    $149,508    $478,608  

Earnings before income taxes

  $5,554    $8,646    $7,997    $16,634  

NOTE D – Inventories

Inventories consistconsisted of the following:

 

($ in thousands)

  June 30,
2013
   December 31,
2012
   September 29,
2013
   December 31,
2012
 

Finished goods

  $15,323    $16,267    $13,489    $16,267  

Work-in-process

   17,745     15,860     17,541     15,860  

Raw materials

   52,092     49,625     53,575     49,625  
  

 

   

 

   

 

   

 

 

Total inventories

  $85,160    $81,752    $84,605    $81,752  
  

 

   

 

   

 

   

 

 

NOTE E – Debt

On January 10, 2012, CTS amended its November 18, 2010 unsecured revolving credit facility. This amendment provided for an increase in the revolving credit facility to $200 million and increased the accordion feature, whereby CTS can expand the facility to $300 million, subject to participating banks’ approval. Additionally, among other covenants, the amendment reduced the applicable margin by 25 basis points, increased the total consideration the companyCompany may pay for non-U.S. based acquisitions, and extended the term of the credit facility through January 10, 2017.

Long-term debt was comprised of the following:

 

($ in thousands)

  June 30,
2013
   December 31,
2012
   September 29,
2013
   December 31,
2012
 

Revolving credit facility, weighted-average interest rate of 2.0% (2013), and 1.8% (2012) due in 2017

  $129,500    $153,500  

Revolving credit facility, weighted-average interest rate of 1.9% (2013), and 1.8% (2012) due in 2017

  $128,600    $153,500  

There was $129.5$128.6 million outstanding under the $200 million revolving credit facility at June 30,September 29, 2013, and $153.5 million at December 31, 2012. The Company had $67.9$68.8 million available under the $200 million credit facility, at June 30, 2013, net of standby letters of credit of $2.6 million at September 29, 2013, and $43.9 million available, at December 31, 2012, net of standby letters of credit of $2.6 million.million at December 31, 2012. Interest rates on the revolving credit facility fluctuate based upon London Interbank Offered Rate and the Company’s quarterly total leverage ratio. CTS pays a commitment fee on the undrawn portion of the revolving credit facility. The commitment fee varies based on the quarterly leverage ratio and was 0.40 percent and 0.350.30 percent per annum at June 30,September 29, 2013 and July 1, 2012, respectively.September 30, 2012. 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 was in compliance with all debt covenants at June 30,September 29, 2013. The revolving credit facility requires CTS to 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 facility contains restrictions limiting CTS’ 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’ subsidiaries and affiliates; and make stock repurchases and dividend payments.

CTS uses interest rate swaps to convert the line of credit’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 million of long-term debt for the periods January 2013 to January 2017. In the third quarter of 2012, CTS entered into four separate interest rate swap agreements to fix interest rates on $25 million of long-term debt for the periods January 2013 to January 2017. The difference to be paid or received under the terms of the swap agreements will be recognized as an adjustment to interest expense for the related line of credit when settled.

These swaps are treated as cash flow hedges and consequently, the changes in fair value were recorded in Other Comprehensive Income.other comprehensive earnings. An unrealized loss of approximately $428,000 and an unrealized gain of approximately $765,000 and $801,000$373,000 was recorded in Other Comprehensive Incomeother comprehensive earnings for the three and sixnine months ended June 30,September 29, 2013, respectively. An unrealized loss of approximately $832,000$715,000 and $1,547,000 was recorded in Other Comprehensive Incomeother comprehensive earnings for the three and sixnine months ended July 1,September 30, 2012. CTS also reclassed approximately $78,000$81,000 and $155,000$236,000 of realized loss out of other comprehensive incomeearnings to interest expense for the three and sixnine months ended June 30,September 29, 2013, respectively. No realized loss was reclassed out of other comprehensive incomeearnings to interest expense for the three and sixnine months ended July 1,September 30, 2012. Approximately $334,000$390,000 was recorded as accrued liabilities and $341,000$633,000 recorded as a non-current liability in other long-term obligations on the Unaudited Condensed Consolidated Balance Sheets at June 30,September 29, 2013. Approximately $271,000 was recorded as accrued liabilities and $1,336,000 recorded as a non-current liability in Other Long-term Obligationsother long-term obligations on the Consolidated Balance Sheets at December 31, 2012.

As a result of the use of these derivative instruments, the Company is exposed to the risk that counterparties to derivative contracts will fail to meet their contractual obligations. To mitigate the counterparty credit risk, the Company has a policy of only entering into contracts with carefully selected major financial institutions based upon their credit ratings and other factors. CTS’ established policies and procedures for mitigating credit risk on principal transactions include reviewing and establishing limits for credit exposure and continually assessing the creditworthiness of counterparties.

NOTE F – Retirement Plans

Net pension expense for the three months ended June 30,September 29, 2013 of $545,000$533,000 and July 1,September 30, 2012 of $381,000$87,000 for our domestic and foreign plans includeincluded the following components:

 

  Domestic Pension Plans Foreign Pension Plans   Domestic Pension Plans Foreign Pension Plans 

($ in thousands)

  June 30, 2013 July 1, 2012 June 30, 2013 July 1, 2012   September 29,
2013
 September 30,
2012
 September 29,
2013
 September 30,
2012
 

Service cost

  $648   $683   $28   $31    $648   $683   $28   $31  

Interest cost

   2,711    2,987    133    143     2,711   2,979    134   143  

Expected return on plan assets(1)

   (5,042  (5,376  (101  (111   (5,042 (5,376  (103 (111

Amortization of prior service cost

   149    151    —      —       138   151    —     —    

Amortization of loss

   1,921    1,517    98    74     1,921   1,513    98   74  

Additional cost due to retirement

   —      282    —      —    
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Expense, net

  $387   $244   $158   $137    $376   $(50 $157   $137  
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

 

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

Net pension expense for the sixnine months ended June 30,September 29, 2013 of $1,091,000$1,623,000 and July 1,September 30, 2012 of $488,000$574,000 for our domestic and foreign plans includeincluded the following components:

 

  Domestic Pension Plans Foreign Pension Plans   Domestic Pension Plans Foreign Pension Plans 

($ in thousands)

  June 30, 2013 July 1, 2012 June 30, 2013 July 1, 2012   September 29,
2013
 September 30,
2012
 September 29,
2013
 September 30,
2012
 

Service cost

  $1,297   $1,367   $56   $62    $1,945   $2,050   $84   $93  

Interest cost

   5,423    5,978    265    285     8,134   8,957    398   428  

Expected return on plan assets(1)

   (10,085  (10,753  (201  (220   (15,127 (16,129  (305 (331

Amortization of prior service cost

   298    302    —      —       436   453    —     —    

Amortization of loss

   3,842    3,037    196    148     5,763   4,549    295   222  

Additional cost due to retirement

   —      282    —      —       —     282    —     —    
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Expense, net

  $775   $213   $316   $275    $1,151   $162   $472   $412  
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

 

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

Net post retirement expense for the three and sixnine months ended June 30,September 29, 2013 and July 1,September 30, 2012 for our post-retirement plan includesincluded the following components:

 

  Three Months Ended Six Months Ended   Three Months Ended Nine Months Ended 

($ in thousands)

  June 30, 2013   July 1, 2012 June 30, 2013   July 1, 2012   September 29,
2013
   September 30,
2012
 September 29,
2013
   September 30,
2012
 

OTHER POSTRETIREMENT BENEFIT PLAN

              

Service cost

  $2    $2   $4    $4    $2    $2   $6    $6  

Interest cost

   56     64    111     128     56     64    167     192  

Amortization of gain

   —       (10  —       (20   —       (10  —       (30
  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

 

Postretirement expense

  $58    $56   $115    $112    $58    $56   $173    $168  
  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

 

NOTE G – Segments

CTS reportable segments are grouped by entities that exhibit similar economic characteristics and the segment’s reporting results are regularly reviewed by CTS’ chief operating decision maker to make decisions about resources to be allocated to these segments and to evaluate theeach segment’s performance. CTS has two reportable segments: 1) Components and Sensors and 2) Electronics Manufacturing Services (“EMS”).

Components and sensors are products which perform specific electronic functions for a given product family and are intended for use in customer assemblies. Components and sensors consist principally of: automotive sensors and actuators used in commercial or consumer vehicles; electronic components used in communications infrastructure and computer markets; terminators, including ClearONE™ terminators, used in computer and other high speed applications, switches, resistor networks and potentiometers used to serve multiple markets; and fabricated piezo-electric materials and substrates used primarily in medical, computer and industrial markets.

EMS includes the higher level assembly of electronic and mechanical components into a finished subassembly or assembly performed under a contract manufacturing agreement with an Original Equipment Manufacturer (“OEM”) or other contract manufacturer. Additionally for some customers, CTS provides full turnkey manufacturing and completion including design, bill-of-material management, logistics, and repair.

The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies in the Company’s annual reportAnnual Report on Form 10-K.10-K for the year ended December 31, 2012. Management evaluates performance based upon segment operating earnings/(loss) before restructuring and impairment charge, interest expense, interest income, other non-operating income/(expense), and income tax expense.

Summarized financial information concerning CTS’ reportable segments is shown in the following table:

 

($ in thousands)  Components
and Sensors
 EMS Total   Components
and Sensors
 EMS Total 

Second Quarter of 2013

  

Net sales to external customers

  $105,381   $46,180   $151,561  
  

 

  

 

  

 

 

Segment operating earnings / (loss) before corporate and shared services charges

  $17,098   $(102 $16,996  
  

 

  

 

  

 

 

Corporate and shared services charges

   (5,731  (1,444  (7,175
  

 

  

 

  

 

 

Segment operating earnings/(loss)

  $11,367   $(1,546 $9,821  
  

 

  

 

  

 

 

Total assets

  $414,592   $114,081   $528,673  

Second Quarter of 2012

    

Third Quarter of 2013

  

Net sales to external customers

  $76,823   $77,471   $154,294    $103,632   $55,931   $159,563  
  

 

  

 

  

 

   

 

  

 

  

 

 

Segment operating earnings before corporate and shared services charges

  $8,398   $6,086   $14,484    $15,108   $2,356   $17,464  
  

 

  

 

  

 

   

 

  

 

  

 

 

Corporate and shared services charges

   (3,034  (1,906  (4,940   (4,932  (1,373  (6,305
  

 

  

 

  

 

   

 

  

 

  

 

 

Segment operating earnings

  $5,364   $4,180   $9,544    $10,176   $983   $11,159  
  

 

  

 

  

 

   

 

  

 

  

 

 

Total assets

  $361,483   $128,606   $490,089    $424,984   $114,879   $539,863  

First Six Months of 2013

    

Third Quarter of 2012

    

Net sales to external customers

  $75,565   $61,792   $137,357  
  

 

  

 

  

 

 

Segment operating earnings before corporate and shared services charges

  $9,492   $4,202   $13,694  
  

 

  

 

  

 

 

Corporate and shared services charges

   (4,185  (1,827  (6,012
  

 

  

 

  

 

 

Segment operating earnings

  $5,307   $2,375   $7,682  
  

 

  

 

  

 

 

Total assets

  $369,614   $111,762   $481,376  

First Nine Months of 2013

    

Net sales to external customers

  $203,443   $97,630   $301,073    $307,075   $153,561   $460,636  
  

 

  

 

  

 

   

 

  

 

  

 

 

Segment operating earnings before corporate and shared services charges

  $27,480   $961   $28,441    $42,588   $3,317   $45,905  
  

 

  

 

  

 

   

 

  

 

  

 

 

Corporate and shared services charges

   (11,710  (3,126  (14,836   (16,642  (4,499  (21,141
  

 

  

 

  

 

   

 

  

 

  

 

 

Segment operating earnings/(loss)

  $15,770   $(2,165 $13,605    $25,946   $(1,182 $24,764  
  

 

  

 

  

 

   

 

  

 

  

 

 

Total assets

  $414,592   $114,081   $528,673    $424,984   $114,879   $539,863  

First Six Months of 2012

    

First Nine Months of 2012

    

Net sales to external customers

  $153,241   $148,022   $301,263    $228,806   $209,814   $438,620  
  

 

  

 

  

 

   

 

  

 

  

 

 

Segment operating earnings before corporate and shared services charges

  $15,742   $6,541   $22,283    $25,233   $10,744   $35,977  
  

 

  

 

  

 

   

 

  

 

  

 

 

Corporate and shared services charges

   (7,358  (3,449  (10,807   (11,543  (5,276  (16,819
  

 

  

 

  

 

   

 

  

 

  

 

 

Segment operating earnings(1)

  $8,384   $3,092   $11,476    $13,690   $5,468   $19,158  
  

 

  

 

  

 

   

 

  

 

  

 

 

Total assets

  $361,483   $128,606   $490,089    $369,614   $111,762   $481,376  

 

(1) 

EMS segment’s operating earnings of $3,092$5,468 includes $1,769 of insurance recovery for property damage related to the flood at CTS Thailand’s manufacturing facility.

Reconciling information between reportable segments’ operating earnings and CTS’ consolidated earnings before income taxes is shown in the following table for the three and six-monthnine-month periods then ended:

 

  Three Months Ended Six Months Ended   Three Months Ended Nine Months Ended 

($ in thousands)

  June 30, 2013 July 1, 2012 June 30, 2013 July 1, 2012   September 29,
2013
 September 30,
2012
 September 29,
2013
 September 30,
2012
 

Total segment operating earnings

  $9,821   $9,544   $13,605   $11,476    $11,159   $7,682   $24,764   $19,158  

Restructuring and restructuring-related charges – Components and Sensors

   (7,667  (1,239  (7,894  (1,239   (927 (365  (8,821 (1,604

Restructuring and restructuring-related charges – EMS

   (428  (2,592  (1,023  (2,592   (139 (513  (1,162 (3,105

Interest expense

   (1,079  (626  (1,994  (1,285   (849 (584  (2,843 (1,869

Interest income

   446    467    859    916     442   425    1,301   1,341  

Other expense

   (310  (1,041  (12  (466

Other income

   706   763    694   297  
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Earnings before income taxes

  $783   $4,513   $3,541   $6,810    $10,392   $7,408   $13,933   $14,218  
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

NOTE H – Contingencies

Certain processes in the manufacture of CTS’ current and past products create hazardous waste by-products as currently defined by federal and state laws and regulations. CTS has been notified by the U.S. Environmental Protection Agency,

state environmental agencies and, in some cases, generator groups, that it is or may be a potentially responsible party regarding hazardous waste remediation at several non-CTS sites. In addition to these non-CTS sites, CTS has an ongoing practice of providing reserves for probable remediation activities at certain of its manufacturing locations and for claims and proceedings against CTS with respect to other environmental matters. In the opinion of management, based upon presently available information relating to all such matters, either adequate provision for probable costs has been made, or the ultimate costs resulting will not materially affect the consolidated financial position, results of operations, or cash flows of CTS.

CTS manufactures accelerator pedals for a number of automobile manufacturers, including subsidiaries of Toyota Motor Corporation (“Toyota”). In January 2010, Toyota initiated a recall of a substantial number of vehicles in North America containing pedals manufactured by CTS. The pedal recall and associated events have led to the Company being named as a co-defendant with Toyota in certain litigation. In February 2010, CTS entered into an agreement with Toyota whereby Toyota agreed that it will indemnify, defend, and hold the Company harmless from, and the parties will cooperate in the defense of, third-party civil claims and actions that are filed or asserted in the United States or Canada and that arise from or relate to alleged incidents of unintended acceleration of Toyota and Lexus vehicles. The limited exceptions to indemnification restrict CTS’ share of any liability to amounts collectable from its insurers.

Certain other claims are pending against CTS with respect to matters arising out of the ordinary conduct of the Company’s business. TheseWith respect to these claims, in the opinion of management, based upon past experience and presently available information, either adequate provision for anticipated costs has been reserved or the ultimate anticipated costs will not materially affect CTS’ consolidated financial position, results of operations, or cash flows.

Scotland EMS Manufacturing Facility Fire

During the second quarter of 2011, a fire occurred at the Company’s Scotland EMS manufacturing facility. The fire damaged approximately $1.6 million of inventory and $0.2 million of machinery and equipment at net book value. Property insurance coverage with a $0.1 million deductible had substantially covered the costs of repairing and/or replacing the damaged inventory and machinery and equipment. Business interruption insurance had substantially covered the lost sales impact and related fixed costs in 2011.

During the second quarter of 2012, CTS recorded a recovery of approximately $0.2 million for business interruption in CTS’ Condensed Consolidated Statements of Earnings for the three months ended July 1, 2012. This recovery reflects the final settlement with CTS’ insurance carrier.

In the first halfnine months of 2012, CTS recovered approximately $1.0 million from the Company’s insurance carriers and recorded a recovery of approximately $0.9 million for business interruption, after deducting approximately $0.1 million for certain expenses, in CTS’ Unaudited Condensed Consolidated Statements of EarningsEarnings/(Loss) for the sixnine months ended July 1,September 30, 2012. These recoveries reflect the final settlement with CTS’ insurance carrier.

Thailand EMS Manufacturing Facility Flood

During the fourth quarter of 2011, CTS’ Thailand EMS manufacturing facility was flooded. The flood damaged approximately $0.8 million of inventory and $0.5 million of fixed assets. CTS also incurred approximately $2.5 million of fixed costs at this facility. Local property insurance covered the costs of repairing and/or replacing the damaged inventory and machinery and equipment. CTS also had business interruption insurance under these policies that covers the lost sales impact and fixed costs. The maximum amount covered under the local insurance policy was approximately $2.4 million. CTS also had a secondary global insurance policy that covered costs not covered by the local policy for up to approximately $25 million with a deductible of $250,000.

During the secondthird quarter of 2012, CTS received cash of approximately $7.5$4.2 million from the Company’sits insurance carriers. OutAll of the $7.5 million cash, approximately $7.2 million wasproceeds received were for business interruption and the remaining $0.3accordingly, CTS recorded a recovery of $4.2 million wasfor business interruption for the reimbursementquarter ended September 30, 2012 in the Company’s Unaudited Condensed Consolidated Statements of costs related to inventory.Earnings/(Loss).

In the first halfnine months of 2012, CTS received cash of approximately $14.7$18.9 million from the Company’sits insurance carriers. Out of the $14.7$18.9 million, cash, approximately $11.6$15.8 million was for business interruption and the remaining $3.1 million was for the reimbursement of costs related to property damage. Part of the cash received was to relieve the insurance receivable balance of $2.4 million recorded at December 31, 2011.

Accordingly, CTS recorded a recovery of approximately $10.2$14.4 million for business interruption and $1.8 million for property damage in CTS’ Unaudited Condensed Consolidated Statements of EarningsEarnings/(Loss) for the sixnine months ended July 1,September 30, 2012. All claims were settledCTS continued to process the insurance claim related to the flood for increased expenses and lost sales impact, with a final settlement in 2012 with CTS’ insurance carrier.fourth quarter of 2012.

NOTE I—I – Fair Value Measurement

The table below summarizes the non-financial assets that were measured and recorded at fair value on a non-recurring basis as of June 30,September 29, 2013 and the loss recorded during the sixnine months ended June 30,September 29, 2013 on those assets:

 

($ in thousands)

                            

Description

  

Carrying Value
at June 30, 2013

   

Quoted Prices
in Active
Markets for
Identical

(Level 1)

   

Significant
Other
Observable
Inputs

(Level 2)

   

Significant
Unobservable
Inputs

(Level 3)

   

Loss for Six-
Months Ended
June 30, 2013

   Carrying Value
at September 29,
2013
   Quoted Prices
in Active
Markets for
Identical

(Level 1)
   Significant
Other
Observable
Inputs

(Level 2)
   Significant
Unobservable
Inputs

(Level 3)
   Loss for Nine-
Months Ended
September 29,
2013
 

Intangible assets, other than goodwill and indefinite-lived intangibles

  $289    $—      $—      $289    $233    $244    $—      $—      $244    $233  

Long-lived assets

  $11,675    $—      $—      $11,675    $2,820    $11,460    $—      $—      $11,460    $2,926  

During the second quarter of 2013, CTS initiated the June 2013 restructuring plan which impacted certain locations in the Components and Sensors segment (See Note M). This was considered a triggering event and the companyCompany performed an impairment analysis for the impacted intangibles and long-lived assets. The resulting intangible impairment loss related to customer based intangibles in the Components and Sensors segment. The fair value of these assets were measured and recorded using an income approach. Projected future cash flows related to these assets were used under this approach to determine their fair values. CTS recorded an impairment charge of approximately $3,053,000$3,159,000 for the sixnine months ended June 30,September 29, 2013. The impairment charge was recorded under “Restructuring and Impairment Charge” on the Company’s Unaudited Condensed Consolidated Statements of Earnings.Earnings/(Loss).

The table below summarizes the financial liability that was measured at fair value on a recurring basis as of June 30,September 29, 2013 and the loss recorded during the sixnine months ended June 30,September 29, 2013:

 

($ in thousands)

  Carrying Value
at June 30, 2013
   Quoted Prices
in Active
Markets for
Identical

(Level 1)
   Significant
Other
Observable
Inputs

(Level 2)
   Significant
Unobservable
Inputs

(Level 3)
   Loss for Six-
Months Ended
June 30, 2013
   Carrying Value
at September 29,
2013
   Quoted Prices
in Active
Markets for
Identical

(Level 1)
   Significant
Other
Observable
Inputs

(Level 2)
   Significant
Unobservable
Inputs

(Level 3)
   Loss for Nine-
Months Ended
September 29,
2013
 

Interest rate swap – cash flow hedge

  $675    $—      $675    $—      $155    $1,023    $—      $1,023    $—      $236  

The fair value of CTS’ interest rate swaps were measured using a market approach which uses current industry information. There is a readily determinable market and these swaps are classified within level 2 of the fair value hierarchy. $334,000$390,000 of the fair value of these swaps is classified as a current liability and the remaining $341,000$633,000 is classified as a non-current liability on CTS’ Unaudited Condensed Consolidated Balance Sheets.

CTS’ long-term debt consists of a revolving debt facility. There is a readily determinable market for CTS’ revolving credit 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 was measured using a market approach which uses current industry information and approximates carrying value.

NOTE J –Earnings– Earnings Per Share

The table below provides a reconciliation of the numerator and denominator of the basic and diluted (loss)earnings / earnings(loss) per share (“EPS”) computations. Basic (loss) / earnings per shareEPS is calculated using the weighted average number of common shares outstanding as the denominator and net earnings as the numerator. Diluted (loss) / earnings per shareEPS is calculated by adding all potentially dilutive shares to the weighted average number of common shares outstanding for the numerator.denominator. All anti-dilutive shares are excluded from the computation of diluted earnings per share.EPS. The calculations below provide net (loss)earnings / earnings,(loss), weighted average common shares outstanding, and (loss)earnings / earnings(loss) per share for both basic and diluted EPS for the three and sixnine month periods ended June 30,September 29, 2013 and July 1,September 30, 2012.

($ in thousands, except per share amounts)

  Net (Loss) /
Earnings

(Numerator)
  Shares
(in thousands)
(Denominator)
   Per Share
Amount
 

Second Quarter 2013

     

Basic EPS

  $(11,335  33,589     (0.34
     

 

 

 

Effect of dilutive securities:

     

Equity-based compensation plans

   —      —      
  

 

 

  

 

 

   

Diluted EPS

  $(11,335  33,589     (0.34
  

 

 

  

 

 

   

 

 

 

Second Quarter 2012

     

Basic EPS

  $3,301    34,022    $0.10  
     

 

 

 

Effect of dilutive securities:

     

Equity-based compensation plans

   —      552    
  

 

 

  

 

 

   

Diluted EPS

  $3,301    34,574    $0.10  
  

 

 

  

 

 

   

 

 

 

First Six Months of 2013

     

Basic EPS

  $(7,767  33,556     (0.23
     

 

 

 

Effect of dilutive securities:

     

Equity-based compensation plans

   —      —      
  

 

 

  

 

 

   

Diluted EPS

  $(7,767  33,556     (0.23
  

 

 

  

 

 

   

 

 

 

First Six Months of 2012

     

Basic EPS

  $5,584    34,064    $0.16  
     

 

 

 

Effect of dilutive securities:

     

Equity-based compensation plans

   —      583    
  

 

 

  

 

 

   

Diluted EPS

  $5,584    34,647    $0.16  
  

 

 

  

 

 

   

 

 

 

($ in thousands, except per share amounts)

  Net Earnings /
(Loss)

(Numerator)
  Shares
(in thousands)
(Denominator)
   Per Share
Amount
 

Third Quarter 2013

   

Basic EPS

  $6,819    33,696     0.20  
     

 

 

 

Effect of dilutive securities:

     

Equity-based compensation plans

   —      635    
  

 

 

  

 

 

   

Diluted EPS

  $6,819    34,331     0.20  
  

 

 

  

 

 

   

 

 

 

Third Quarter 2012

     

Basic EPS

  $5,917    33,923    $0.17  
     

 

 

 

Effect of dilutive securities:

     

Equity-based compensation plans

   —      548    
  

 

 

  

 

 

   

Diluted EPS

  $5,917    34,471    $0.17  
  

 

 

  

 

 

   

 

 

 

First Nine Months of 2013

     

Basic EPS

  $(948  33,603     (0.03
     

 

 

 

Effect of dilutive securities:

     

Equity-based compensation plans

   —      —      
  

 

 

  

 

 

   

Diluted EPS

  $(948  33,603     (0.03
  

 

 

  

 

 

   

 

 

 

First Nine Months of 2012

     

Basic EPS

  $11,501    34,017    $0.34  
     

 

 

 

Effect of dilutive securities:

     

Equity-based compensation plans

   —      571    
  

 

 

  

 

 

   

Diluted EPS

  $11,501    34,588    $0.33  
  

 

 

  

 

 

   

 

 

 

The following table shows the potentially dilutive securities which have been excluded from the three and six-monthnine-month periods ended September 29, 2013 and September 30, 2012 dilutive earnings per share calculation because they are either anti-dilutive, or the exercise price exceeds the average market price.

 

  Three Months Ended   Six Months Ended   Three Months Ended   Nine Months Ended 

(Number of Shares in Thousands)

  June 30, 2013   July 1, 2012   June 30, 2013   July 1, 2012   September 29,
2013
   September 30,
2012
   September 29,
2013
   September 30,
2012
 

Stock options where the assumed proceeds exceed the average market price

   181     282     181     282     25     387     25     387  

Restricted stock units

   1,203     —       1,203     —       —       —       609     —    

NOTE K – Treasury Stock

Common stock held in treasury totaled 21,980,15922,029,923 shares with a cost of $312.5$313.2 million at June 30,September 29, 2013 and 21,829,954 shares with a cost of $311.0 million at December 31, 2012. Approximately 8.2 million shares are available for future issuances.

In August 2012, CTS’ Board of Directors authorized a program to repurchase up to one million shares of its common stock in the open market at a maximum price of $13 per share. In August 2013, CTS’ Board of Directors amended the August 2012 share repurchase program by removing the provision that the price per share have a maximum price of $13. The authorization has no expiration. Reacquired shares willare expected to be used to support equity-based compensation programs and for other corporate purposes. During the first halfnine months of 2013, 150,205199,969 shares were repurchased.repurchased pursuant to this share repurchase program.

In June 2013, CTS’ Board of Directors authorized aanother program to repurchase up to one million shares of its common stock in the open market. The authorization has no expiration. Reacquired shares will be used to support equity-based compensation programs and for other corporate purposes. During the first halfnine months of 2013, there were no shares were repurchased under this program.

NOTE L – Goodwill and Other Intangible Assets

CTS has the following other intangible assets and goodwill as of:

 

  June 30, 2013 December 31, 2012   September 29, 2013 December 31, 2012 
($ in thousands)  Gross
Carrying
Amount
   Accumulated
Amortization
 Gross
Carrying
Amount
   Accumulated
Amortization
   Gross
Carrying
Amount
   Accumulated
Amortization
 Gross
Carrying
Amount
   Accumulated
Amortization
 

Amortized intangible assets:

              

Customer lists/relationships

  $62,014    $(27,208 $62,014    $(25,084  $62,014    $(28,171 $62,014    $(25,084

Patents

   10,319     (10,319  10,319     (10,319   10,319     (10,319 10,319     (10,319

Other intangibles

   11,460     (1,809  11,280     (672   11,460     (2,124 11,280     (672
  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

 

Total definite lived intangible assets

   83,793     (39,336  83,613     (36,075   83,793     (40,614  83,613     (36,075

In-process research & development

   640     —      820     —       640     —      820     —    

Goodwill

   35,156     —      35,156     —       35,156     —      35,156     —    
  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

 

Total

  $119,589    $(39,336 $119,589    $(36,075  $119,589    $(40,614 $119,589    $(36,075
  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

 

During the sixnine months ended June 30,September 29, 2013, CTS retrospectively adjusted the provisional amounts recognized at the acquisition date for the D&R acquisition in December 2012. Customer lists/relationships were reduced by $7,988,000, Other intangibles were increased by $9,445,000, and Goodwill was reduced by $1,194,000 as a result of additional information provided by CTS’ external valuation consultants. The D&R allocations pertaining to goodwill and other intangible assets will be finalized in the fourth quarter of 2013. See Note C for further discussion.

There was $40.0$38.9 million and $4.5$4.3 million of net intangible assets excluding goodwill and in-process research and development at June 30,September 29, 2013 related to the Components and SensorSensors segment and the EMS segment, respectively. The in-process research and development intangible at June 30,September 29, 2013 and December 31, 2012 relates to the Components and Sensors Segment. There was $34.7 million and $0.5 million of goodwill at June 30,September 29, 2013 and December 31, 2012, related to the Components and Sensors segment and to the EMS segment, respectively.

CTS recorded amortization expense of $1.3 million and $3.0$4.3 million during the three and six-monthnine-month periods ended June 30,September 29, 2013, respectively. CTS recorded amortization expense of $0.7$0.9 million and $1.5$2.2 million during the three and six-monthnine-month periods ended July 1,September 30, 2012, respectively. The weighted average remaining amortization period for the amortizable intangible assets is 11.511.3 years. The weighted average remaining amortization period for customer lists/relationships is 12.312.1 years and for the other intangibles is 8.98.7 years. CTS estimates remaining amortization expense of $2.6$1.3 million in 2013, $4.8 million in 2014, $4.6 million in 2015, $4.3 million in 2016, $4.2 million in 2017 and $24.0 million thereafter.

NOTE M – Restructuring Charges

During June of 2012, CTS initiated certain restructuring actions to reorganize certain operations to further improve its cost structure. These actions resulted in the elimination of approximately 250 positions. These actions were substantially completed by the middle of the fourth quarter of 2012. The following table displays the planned restructuring and restructuring-related charges associated with the realignment, as well as a summary of the actual costs incurred through June 30,September 29, 2013:

 

June 2012 Plan

($ in millions)

  Planned
Costs
   Actual  incurred
through

June 30, 2013
 

($ in millions)

June 2012 Plan

  Planned
Costs
   Actual incurred
through

September 29,
2013
 

Workforce reduction

  $2.1    $2.0    $2.1    $2.0  

Asset impairment charge

   1.2     1.4     1.2     1.4  

Other charge

   0.1     0.2     0.1     0.2  
  

 

   

 

   

 

   

 

 

Restructuring and impairment charges

  $3.4    $3.6    $3.4    $3.6  
  

 

   

 

   

 

   

 

 

Inventory write-down

  $0.6    $0.7    $0.6    $0.7  

Equipment relocation

   0.5     0.3     0.5     0.3  

Other charges

   0.5     0.6     0.5     0.6  
  

 

   

 

   

 

   

 

 

Restructuring-related charges

  $1.6    $1.6    $1.6    $1.6  
  

 

   

 

   

 

   

 

 

Total restructuring and restructuring-related charges

  $5.0    $5.2    $5.0    $5.2  
  

 

   

 

   

 

   

 

 

There was $2.1 million and $3.1 million of restructuring and restructuring-related charges incurred by the Components and Sensors segment and the EMS segment, respectively. Restructuring and impairment charges are reported on a separate line on the Unaudited Condensed Consolidated Statements of Earnings.Earnings/(Loss). Restructuring-related charges are reported as a component of Cost of Goods Sold on the Unaudited Condensed Consolidated Statements of Earnings.Earnings/(Loss).

The following table displays the restructuring reserve activity for the periodnine months ended June 30,September 29, 2013:

 

June 2012 Plan

($ in millions)

    

($ in millions)

June 2012 Plan

    

Restructuring liability at January 1, 2013

  $0.1    $0.1  

Restructuring and restructuring-related charges, excluding asset impairments and write-offs

   —       —    

Cost paid

   (0.1   (0.1
  

 

   

 

 

Restructuring liability at June 30, 2013

  $—    

Restructuring liability at September 29, 2013

  $—    
  

 

   

 

 

The restructuring activities discussed above, consolidated CTS’ operations from the United Kingdom (“UK”) EMS manufacturing facility and the Tucson, AZ Components and Sensors facility into other facilities. The EMS operations at the UK EMS facility were transferred to CTS’ EMS facilities located in Londonderry, New Hampshire and Matamoros, Mexico. The Components and Sensors operations at the Tucson, AZ facility were transferred to CTS’ Components and Sensors facility located in Albuquerque, New Mexico.

During December of 2012, CTS realigned its operations to suit the business needs of the Company. These realignment actions resulted in the elimination of approximately 190 positions. These actions were completed as of March 31, 2013. The following table displays the planned restructuring and restructuring-related charges associated with the realignment, as well as a summary of the actual costs incurred through June 30,September 29, 2013:

 

December 2012 Plan

($ in millions)

  Planned
Costs
   Actual  incurred
through

June 30, 2013
 

($ in millions)

December 2012 Plan

  Planned
Costs
   Actual incurred
through
September 29,
2013
 

Workforce reduction

  $1.7    $1.8    $1.7    $1.8  

Asset impairment charge

   1.1     1.1     1.1     1.1  

Other charge

   0.3     0.4     0.3     0.4  
  

 

   

 

   

 

   

 

 

Restructuring and impairment charges

  $3.1    $3.3    $3.1    $3.3  
  

 

   

 

   

 

   

 

 

Inventory write-down

  $0.5    $0.5    $0.5    $0.5  

Equipment relocation

   0.1     0.3     0.1     0.3  

Other charges

   0.4     0.1     0.4     0.1  
  

 

   

 

   

 

   

 

 

Restructuring-related charges

  $1.0    $0.9    $1.0    $0.9  
  

 

   

 

   

 

   

 

 

Total restructuring and restructuring-related charges

  $4.1    $4.2    $4.1    $4.2  
  

 

   

 

   

 

   

 

 

Approximately $0.8 million of the restructuring and restructuring-related charges of $4.2 million were incurred in the first quarter of 2013 and six months year to date.2013. $0.6 million of these charges related to the EMS segment and $0.2 million relates to the Components and Sensors segment. Restructuring and impairment charges are reported on a separate line on the Unaudited Condensed Consolidated Statements of Earnings.Earnings/(Loss). Restructuring-related charges are reported as a component of Cost of Goods Sold on the Unaudited Condensed Consolidated Statements of Earnings.Earnings/(Loss).

The following table displays the restructuring reserve activity for the periodnine months ended June 30,September 29, 2013:

 

December 2012 Plan

($ in millions)

    

($ in millions)

December 2012 Plan

    

Restructuring liability at January 1, 2013

  $1.6    $1.6  

Restructuring and restructuring-related charges, excluding asset impairments and write-offs

   0.8     0.8  

Cost paid

   (2.4   (2.4
  

 

   

 

 

Restructuring liability at June 30, 2013

  $—    

Restructuring liability at September 29, 2013

  $—    
  

 

   

 

 

During June of 2013, CTS announced plans to further restructure its operations to align its operations to the business needs of the Company. These restructuring actions will result in the elimination of approximately 350 positions. These actions are expected to be completed in 2014. The following table displays the planned restructuring and restructuring-related charges associated with the realignment, as well as a summary of the actual costs incurred through June 30,September 29, 2013:

 

June 2013 Plan

($ in millions)

  Planned
Costs
   Actual  incurred
through

June 30, 2013
 

($ in millions)

June 2013 Plan

  Planned
Costs
   Actual incurred
through
September 29,
2013
 

Workforce reduction

  $8.3    $4.0    $8.3    $4.9  

Asset impairment charge

   3.0     3.1     3.0     3.1  

Other charges, including pension termination costs

   5.5     0.1     5.5     0.2  
  

 

   

 

   

 

   

 

 

Restructuring and impairment charges

  $16.8    $7.2    $16.8    $8.2  
  

 

   

 

   

 

   

 

 

Inventory write-down

  $0.8    $0.8    $0.8    $0.9  

Equipment relocation

   0.9     —       0.9     0.1  

Other charges

   0.1     0.1     0.1     0.0  
  

 

   

 

   

 

   

 

 

Restructuring-related charges

  $1.8    $0.9    $1.8    $1.0  
  

 

   

 

   

 

   

 

 

Total restructuring and restructuring-related charges

  $18.6    $8.1    $18.6    $9.2  
  

 

   

 

   

 

   

 

 

There was $7.7$0.9 million and $0.4$0.2 million of restructuring and restructuring related charges for the three months ended September 29, 2013 incurred by the Components and Sensors segment and the EMS segment, respectively. There was $8.6 million and $0.6 million of restructuring and restructuring related charges for the nine months ended September 29, 2013 incurred by the Components and Sensors segment and the EMS segment, respectively. Restructuring and impairment charges are reported on a separate line on the Unaudited Condensed Consolidated Statements of Earnings.Earnings/(Loss). Restructuring-related charges are reported as a component of Cost of Goods Sold on the Unaudited Condensed Consolidated Statements of Earnings.Earnings/(Loss).

The following table displays the restructuring reserve activity for the periodnine months ended June 30,September 29, 2013:

 

June 2013 Plan

($ in millions)

    

($ in millions)

June 2013 Plan

    

Restructuring liability at April 1, 2013

  $—      $—    

Restructuring and restructuring-related charges, excluding asset impairments and write-offs

   4.3     5.2  

Cost paid

   (1.4   (1.9
  

 

   

 

 

Restructuring liability at June 30, 2013

  $2.9  

Restructuring liability at September 29, 2013

  $3.3  
  

 

   

 

 

The restructuring activities discussed above, will simplify CTS’ global footprint by consolidating manufacturing facilities into existing locations. This plan includes the consolidation of operations from the United Kingdom (“UK”)UK manufacturing facility into the Czech Republic facility, the Carol Stream, Illinois manufacturing facility into the Juarez, Mexico facility and to discontinue manufacturing at its Singapore facility, bothall of which are in the Components and Sensors segment. The consolidation of additional facilities is also included in this plan, to be disclosed during the remainder of 2013.

Note N – Other Comprehensive IncomeEarnings

The following table displays the changes in Accumulated Other Comprehensive IncomeEarnings/(Loss) by components for the sixnine months ended June 30,September 29, 2013 (all amounts are stated net of tax):

 

($ in thousands)  Cumulative
translation
adjustment
  Defined
benefit
pension items
  Unrealized
gains and
losses on cash
flow hedges
  Total 

Accumulated other comprehensive income – balance at January 1, 2013

  $1,219   $(120,843) $(980) $(120,604)

Other comprehensive earnings before reclassifications

   (1,510  —      489    (1,021

Amounts reclassified from accumulated other comprehensive income

   —      2,874    94    2,968  
  

 

 

  

 

 

  

 

 

  

 

 

 

Net current period other comprehensive income

  $(1,510 $2,874   $583   $1,947  
  

 

 

  

 

 

  

 

 

  

 

 

 

Accumulated other comprehensive income – balance at June 30, 2013

  $(291 $(117,969 $(397 $(118,657)
  

 

 

  

 

 

  

 

 

  

 

 

 
($ in thousands) Cumulative
translation
adjustment
  Defined
benefit
pension items
  Unrealized
gains and
losses on cash
flow hedges
  Total 

Accumulated other comprehensive loss—balance at January 1, 2013

 $1,219   $(120,843) $(980) $(120,604

Other comprehensive loss before reclassifications

  (166  —      229    63  

Amounts reclassified from accumulated other comprehensive loss

  —      4,046    144    4,190  
 

 

 

  

 

 

  

 

 

  

 

 

 

Net current period other comprehensive loss

 $(166 $4,046   $373   $4,253  
 

 

 

  

 

 

  

 

 

  

 

 

 

Accumulated other comprehensive loss—balance at September 29, 2013

 $1,053   $(116,797 $(607 $(116,351
 

 

 

  

 

 

  

 

 

  

 

 

 

The following table displays the reclassifications out of Accumulated Other Comprehensive IncomeEarnings/(Loss) for the sixnine months ended June 30,September 29, 2013:

 

($ in thousands)

Details about Accumulated Other Comprehensive Income Components

  Amount Reclassified
from Accumulated
Other Comprehensive
Income(a)
 

Affected Line Item in the
Statement Where

Net Income is

Presented

($ in thousands)

Details about Accumulated Other Comprehensive Earnings Components

 Amount Reclassified
from Accumulated
Other Comprehensive
Earnings(a)
 Affected Line Item in
the Statement Where
Net Income is
Presented

Losses on cash flow hedges:

     

Interest rate swap contracts

  $155   Interest expense $236   Interest expense
   (61 Tax benefit (92 Tax benefit
  

 

   

 

  
  $94   Net of tax $144   Net of tax
  

 

   

 

  

Amortization of defined benefit and post-retirement benefit plans:

     

Prior service costs

  $300   (b) $436   (b)

Loss included in net periodic pension costs

   4,038   (b)  6,058   (b)

Foreign Exchange Impact

   274   Other expense

Foreign exchange impact

  61   Other expense
  

 

   

 

  
   4,612   Total before tax  6,555   Total before tax
  $(1,738 Tax benefit $(2,509 Tax benefit
  

 

   

 

  
   2,874   Net of tax  4,046   Net of tax
  

 

   

 

  

Total reclassification for the period

  $2,968   Net of tax $4,190   Net of tax
  

 

   

 

  

(a) 

Amounts in parenthesis indicate credit.

(b)(b) 

These accumulated other comprehensive incomeearnings components are included in the computation of net periodic pension cost. The actuarial loss that was reclassified to Cost of goods sold $1,504,of $2,251, Selling, general and administrative expenses $2,015of $3,017 and research and development expenses $819of $1,226 are reflected on CTS’ Unaudited Condensed Consolidated Statements of Earnings.Earnings/(Loss).

Note O – Income Taxes

The effective tax rate for the three and sixnine month periods ended June 30,September 29, 2013 was 1,546.8%34.4% and 319.3%106.8%, respectively. The effective tax rate for the three and sixnine month periods ended July 1,September 30, 2012 was 26.9%20.1% and 18.0%19.1%, respectively. The income tax expense for the three and sixnine month periods ended June 30,September 29, 2013 was $12.1$3.6 million and $11.3$14.9 million, respectively. The income tax expense for the three and sixnine month periods ended July 1,September 30, 2012 was $1.2$1.5 million and $1.2$2.7 million, respectively. Income tax expense for the nine months ended September 29, 2013 includes in both the three and six month amounts a discrete period tax expense of $10.8 million related to cash repatriation.repatriation that was recorded during the second quarter of 2013.

CTS does not provide for U.S. income taxes on undistributed earnings of its foreign subsidiaries that are intended to be permanently reinvested. The repatriation to the U.S. of approximately $30 million during the second quarter of 2013 resulted from a reduction in the amount of earnings required to remain permanently reinvested in Singapore that was made possible by the June 2013 restructuring plan. No deferred income taxes had been previously recorded for unremitted earnings from Singapore due to previous conclusions that the earnings were permanently reinvested. All other foreign subsidiary earnings remain permanently reinvested.

Note P – Subsequent Events

On October 2, 2013, CTS sold its EMS business to Benchmark Electronics, Inc. (“Benchmark”) for $75 million in cash. Included are five manufacturing facilities located in Moorpark, CA, Londonderry, NH, Bangkok, Thailand, Matamoros, Mexico, and San Jose, CA and approximately 1,000 employees. The transaction sharpens CTS’ focus on its Components and Sensors business, and provides additional capital to drive growth and enhance shareholder value. The gain/loss on the sale has not yet been finalized. Management expects the gain/loss amount to be determined in the fourth quarter of 2013 and will be disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

The unaudited condensed pro forma balance sheet of EMS and CTS excluding EMS as of September 29, 2013, assuming that the disposition of the EMS business had occurred as of that date, is provided as follows:

(In Thousands)  EMS Business
Sold
   Pro Forma CTS
Post-EMS Sale
 

Cash and cash equivalents

  $—      $169,830  

Receivables, net of allowance

   32,709     64,100  

Inventories

   50,997     33,608  

Other current assets

   6,373     23,290  

Property, plant and equipment

   14,001     75,479  

Other assets

   5,022     137,554  
  

 

 

   

 

 

 

Total Assets

  $109,102    $503,861  
  

 

 

   

 

 

 

Current liabilities

  $38,394    $85,037  

Long-term liabilities

   30     148,437  
  

 

 

   

 

 

 

Total Liabilities

  $38,424    $233,474  
  

 

 

   

 

 

 

The following unaudited pro forma condensed statement of earnings/(loss) for the nine months ended September 29, 2013 is presented as though the Company sold EMS as of January 1, 2013. The unaudited pro forma condensed statement of earnings/(loss) was prepared by adjusting the results of the Company to exclude the results of EMS and estimates of the effects of the sale of EMS on the combined financial results.

   Nine Months Ended
September 29, 2013
 
   (In thousands, except
per share data)
(Unaudited)
 

Revenues

  $307,075  

Net loss

  $(1,709

Loss per common share

  

Basic

  $(0.05

Diluted

  $(0.05

Future results may vary significantly from the results reflected in the pro forma financial information because of future events and transactions, as well as other factors.

Note Q – Recent Accounting Pronouncements

ASU 2013-07,2013-11,Income Taxes (Topic 740): Presentation of Financial Statements – Liquidation Basis of Accountingan Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists”

In AprilJuly 2013, the FASB issued Accounting Standards Update 2013-07, “Presentation2013-11, “Income Taxes (Topic 740): Presentation of Financial Statements – Liquidation Basis of Accounting,an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists,” which containsprovides guidance on applying the liquidation basisfinancial statement presentation of accounting and the related disclosure requirements.an unrecognized tax benefit (UTB) when an NOL carryforward, a similar tax loss, or a tax credit carryforward exists. The FASB’s objective in issuing this ASU is to eliminate diversity in practice resulting from a lack of guidance on this topic in current U.S. GAAP. Under thethis ASU, an entity must usewith an unrecognized tax benefit that is ‘not available’ or not intended to be used at the liquidation basis of accountingreporting date to present its financial statements when it determinesthe unrecognized tax benefit as a liability that liquidation is imminent, unlessshould not be combined with deferred tax assets. Otherwise, the liquidation isunrecognized tax benefit should be presented as a reduction to the same as that under the plan specified in an entity’s governing documents created at its inception. Liquidation is imminent when the likelihood is remote that the entity will return from liquidation and either (a) a plan for liquidation is approved by the person or persons with the authority to make such a plan effective or (b) a plan for liquidation is being imposed by other forces. The amendments require financial statements prepared using the liquidation basis of accounting to present relevant information about an entity’s expected resources in liquidation by measuring and presenting assets at the amount of the expected cash proceeds from liquidation.related deferred tax asset. These amendments are effective for public entities that determine liquidation is imminent during annual reporting periodsfor fiscal years beginning after December 15, 2013, and interim reporting periods therein. Entitieswithin those years. Early adoption is permitted. The amendments should apply the requirementsbe applied prospectively, from the day that liquidation becomes imminent.although retroactive application is permitted. The provisions of ASU 2013-072013-11 are not expected to have a material impact on CTS’ consolidated financial statements.

ASU 2013-10, “Derivatives and Hedging – Inclusion of the Fed Funds Effective Swap Rate as a Benchmark Interest Rate for Hedge Accounting Purposes

In July 2013, the FASB issued Accounting Standards Update 2013-10, “Derivatives and Hedging – Inclusion of the Fed Funds Effective Swap Rate as a Benchmark Interest Rate for Hedge Accounting Purposes,” which permit the Fed Funds Effective Swap Rate (Overnight Interest Swap Rate) to be used as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815, in addition to UST and LIBOR. The amendments also remove the restriction on using different benchmark rates for similar hedges. These amendments are effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. The Company does not expect these provisions to have a material impact on CTS’ financial statements.

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”)

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”)

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 our financial condition include, but are not limited to: changes in the economy generally and in respect to the businesses 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; 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 1.A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2012. 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.

Overview

CTS Corporation (“we”, “our”, “us”) is a global manufacturer of components and sensors used primarily in the automotive, communications, and defense and aerospace markets. We also provide electronic manufacturing solutions, including design and supply chain management functions, primarily serving the defense and aerospace, communications, industrial and medical markets under contract arrangements with original equipment manufacturers.

Subsequent to the third quarter, on October 2, 2013, we sold our EMS business to Benchmark Electronics, Inc. (“Benchmark”) for $75 million in cash. Included are five manufacturing facilities located in Moorpark, CA, Londonderry, NH, Bangkok, Thailand, Matamoros, Mexico, and San Jose, CA and approximately 1,000 employees. The transaction sharpens our focus on the Components and Sensors business, and provides additional capital to drive growth and enhance shareholder value. The gain/loss on the sale has not yet been determined. Management expects the gain/loss amount to be determined in the fourth quarter of 2013 and will be disclosed in our Annual Report on Form 10-K for the year ended December 31, 2013. For additional information, refer to our Current Report on Form 8-K that was filed on October 8, 2013.

As discussed in more detail throughout the MD&A:

 

Net sales in the secondthird quarter of 2013 of $151.6$159.6 million were reported through two segments, Components and Sensors and Electronic Manufacturing Services (“EMS”). Net sales decreasedincreased by $2.7$22.2 million, or 1.8%16.2%, in the secondthird quarter of 2013 from the secondthird quarter of 2012. Net sales in the Components and Sensors segment increased by 37.2%37.1% versus the secondthird quarter of 2012, while net sales in the EMS segment decreased by 40.4%.

9.5% versus the third quarter of 2012.

 

Gross margin as a percent of net sales was 23.4%23.5% in the secondthird quarter of 2013 compared to 16.8%19.4% in the secondthird quarter of 2012. The increase in gross margin resulted primarily from favorable segment mix as the Components and Sensors segment percent of total sales increased to 69.5%64.9% of consolidated sales from 49.8%55.0% in the same period of 2012, and the second quarter 2012 included expenses and lost margin of approximately $5.0 million related to the flood at our Thailand facility.

2012.

 

Insurance recovery for business interruption primarily due to the flood at our Thailand facility and the fire at our Scotland facility totaled $7.4$4.2 million in the secondthird quarter of 2012. This recovery offsets related expenses and losses that negatively impacted our gross margin. There were no insurance recoveries for business interruption in the secondthird quarter 2013 as all recoveries were completed in 2012.

 

Selling, general and administrative (“SG&A”) expenses were $20.7$20.8 million, or 13.7%13.0% of net sales, in the secondthird quarter of 2013 versus $19.4 million, or 12.6%14.1% of net sales, in the secondthird quarter of 2012.

 

Research and development (“R&D”) expenses were $5.8$5.7 million, or 3.8%3.6% of net sales, in the secondthird quarter of 2013 compared to $5.1$4.4 million, or 3.3%3.2% of net sales, in the third quarter of 2012. The increase was primarily driven by spending to develop and launch new products and growth initiatives, including the spending resulting from our acquisition of D&R Technology.

During the second quarter of 2012.

During the quarter2013 we initiated certain restructuring actions to further improve our manufacturing utilization, increase overall efficiency and better position the companyus for profitable future growth. The third quarter 2013 charges recognized in restructuring and related cost as a result of these actions was approximately $8.1$1.1 million. In the secondthird quarter of 2012, restructuring and related costs were approximately $3.8$0.9 million.

Interest and other expenseincome was $0.9$0.3 million in the secondthird quarter of 2013 compared to $1.2interest and other income of $0.6 million in the same quarter of 2012. The favorableunfavorable impact of $0.3 million was primarily due to $0.7$0.3 million lower unfavorable foreign exchange impact partially offset by $0.5 million of higher net interest expense as a result of higher debt balances.

 

Income tax expense was $12.1$3.6 million and the effective tax rate was 1,546.8%34.4% in the secondthird quarter of 2013 versus income tax expense of $1.2$1.5 million and an effective tax rate of 26.9%20.1% in the samethird quarter of 2012. The increase in effective tax rate was primarily due to taxesa change in earnings mix and the third quarter of $10.8 million on2012 included a non-recurring benefit associated with the $30 million cash repatriation from Singapore to the U.S. asimpact of a result of the Singapore restructuring and taxes of $1.0 million for write-off of deferred tax assetsnon-taxable capital gain in the U.K. related to restructuring.

a foreign jurisdiction.

 

Net loss was $11.3earnings were $6.8 million, or $0.34$0.20 per diluted share, in the secondthird quarter of 2013. This compares with net earnings of $3.3$5.9 million, or $0.10$0.17 per diluted share, in the secondthird quarter of 2012. The secondthird quarter 2013 included a $0.32 per share cash repatriation tax expense related to the Singapore restructuring, a restructuring and related charge of $0.17$0.02 per share, write-off of deferred tax assets in the U.K. related to restructuring of $0.03 per share, and CEO transition costs of $0.02$0.01 per share.share, and transaction costs related to the sale of our EMS business of $0.01. The secondthird quarter 2012 diluted earnings per share included a restructuring and related charge of $0.08$0.02 per share and legal and CEO search costs of $0.01 per share.

Critical Accounting Policies

MD&A discusses our unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America.America (“U.S. GAAP”). The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

Management believes that judgment and estimates related to the following critical accounting policies could materially affect our consolidated financial statements:

 

Inventory valuation, the allowance for doubtful accounts, and other accrued liabilities

 

Long-lived and intangible assets valuation, and depreciation/amortization periods

 

Income taxes

 

Retirement plans

 

Equity-based compensation

In the secondthird quarter of 2013, there were no changes in the above critical accounting policies.

Results of Operations

Comparison of SecondThird Quarter 2013 and SecondThird Quarter 2012

Segment Discussion

Refer to Note G, “Segments,” in our Unaudited Condensed Consolidated Financial Statements for a description of our segments.

The following table highlights the segment results for the quarters ended June 30,September 29, 2013 and July 1,September 30, 2012:

 

($ in thousands)  Components
and Sensors
 EMS Total   Components
and Sensors
 EMS Total 

Second Quarter of 2013

    

Net sales to external customers

  $105,381   $46,180   $151,561  
  

 

  

 

  

 

 

Segment operating earnings/(loss) before corporate and shared services charges

  $17,098   $(102 $16,996  
  

 

  

 

  

 

 

Corporate and shared services charges

   (5,731  (1,444  (7,175
  

 

  

 

  

 

 

Segment operating earnings/(loss)

  $11,367   $(1,546 $9,821  
  

 

  

 

  

 

 

% of Net sales

   10.8  (3.3)%   6.5

Second Quarter of 2012

    

Third Quarter of 2013

   

Net sales to external customers

  $76,823   $77,471   $154,294    $103,632   $55,931   $159,563  
  

 

  

 

  

 

   

 

  

 

  

 

 

Segment operating earnings before corporate and shared services charges

  $8,398   $6,086   $14,484    $15,108   $2,356   $17,464  
  

 

  

 

  

 

   

 

  

 

  

 

 

Corporate and shared services charges

   (3,034  (1,906  (4,940   (4,932  (1,373  (6,305
  

 

  

 

  

 

   

 

  

 

  

 

 

Segment operating earnings

  $5,364   $4,180   $9,544    $10,176   $983   $11,159  
  

 

  

 

  

 

   

 

  

 

  

 

 

% of Net sales

   7.0%  5.4  6.2   9.8  1.8  7.0

Third Quarter of 2012

    

Net sales to external customers

  $75,565   $61,792   $137,357  
  

 

  

 

  

 

 

Segment operating earnings before corporate and shared services charges

  $9,492   $4,202   $13,694  
  

 

  

 

  

 

 

Corporate and shared services charges

   (4,185  (1,827  (6,012
  

 

  

 

  

 

 

Segment operating earnings

  $5,307   $2,375   $7,682  
  

 

  

 

  

 

 

% of Net sales

   7.0%  3.8  5.6

Net sales in the Components and Sensors segment increased $28.6$28.1 million, or 37.2%37.1%, from the secondthird quarter of 2012. The increase in net sales was primarily attributable to a $20.4$24.3 million increase in sales to automotive markets due to incremental sales of $13.2$11.8 million from the acquisition of D&R Technology, and sales of $6.5$5.9 million from the recently-launched smart actuator product.product, and a sales increase of $5.0 million in accelerator pedals. Sales of electronic components increased $8.2$3.8 million, or 27.8%12.0%, driven by higher sales of $7.2$1.9 million of piezoceramic products mainly for hard disk drive applications.

The Components and Sensors segment recorded operating earnings of $11.4$10.2 million in the secondthird quarter of 2013 versus $5.4$5.3 million in the secondthird quarter of 2012. The favorable earnings change resulted primarily from higher sales, including the D&R Technology acquisition.

Net sales in the EMS segment decreased $31.3$5.9 million, or 40.4%9.5%, in the secondthird quarter of 2013 from the secondthird quarter of 2012. The decrease in net sales was primarily due to the uncertain global economic conditions and our decision to exit certain customers last year.customer relationships during 2012. The lower net sales by market were $10.1$3.6 million in the industrial market, $9.7$4.0 million in the communications market, $8.1 million in the defense and aerospace market, $3.2 million in the medical market and $0.2 millionpartially offset by increases in the computer market.and medical markets.

EMS segment operating loss was $1.5earnings were $1.0 million in the secondthird quarter of 2013 versus operating earnings of $4.2$2.4 million in the secondthird quarter of 2012. The unfavorable earnings change was primarily due to lower sales and the timing of insurance recoveries related to the flood at our Thailand facility. In the second quarter of 2012, we had approximately $5.0 million of expenses and losses primarily related to the flood at our Thailand facility while we recorded $7.4 million of insurance recoveries related to business interruption.

Total Company Discussion

The following table highlights changes in significant components of the Unaudited Condensed Consolidated Statements of EarningsEarnings/(Loss) for the quarters ended June 30,September 29, 2013 and July 1,September 30, 2012:

 

  Quarter ended Increase
(Decrease)
   Quarter ended   

($ in thousands, except net earnings per share)

  June 30,
2013
 July 1,
2012
   September 29,
2013
 September 30,
2012
 Increase
(Decrease)
 

Net sales

  $151,561   $154,294   $(2,733)  $159,563   $137,357   $22,206  

Restructuring-related costs

  $852   $692   $160    $113   $633   $(520

% of net sales

   0.6  0.4  0.2   0.1 0.5 (0.4)% 

Gross margin

  $35,489   $25,938   $9,551    $37,529   $26,594   $10,935  

% of net sales

   23.4  16.8  6.6   23.5 19.4 4.1

Insurance recovery for business interruption

  $—     $(7,423 $7,423    $—     $(4,192 $4,192  

Operating expenses:

        

Selling, general and administrative expenses

  $20,749   $19,378   $1,371    $20,765   $19,387   $1,378  

% of net sales

   13.7  12.6  1.1   13.0 14.1 (1.1)% 

Research and development expenses

  $5,771   $5,131   $640    $5,718   $4,350   $1,368  

% of net sales

   3.8  3.3  0.5   3.6 3.2 0.4

Restructuring charge

  $7,243   $3,139   $4,104    $953   $245   $708  

% of net sales

   4.8  2.0  2.8   0.6 0.2 0.4

Operating earnings

  $1,726   $5,713   $(3,987  $10,093   $6,804   $3,289  

% of net sales

   1.1  3.7  (2.6)%    6.3 5.0 1.3

Interest and other expense

  $(943) $(1,200 $257  

Net interest and other income

  $299   $604   $(305

% of net sales

   (0.6)%   (0.8)%   0.2   0.2 0.4 (0.2)% 

Income tax expense

  $12,118   $1,212   $10,906    $3,573   $1,491   $2,082  

Net (loss)/earnings

  $(11,335) $3,301   $(14,636

Net earnings

  $6,819   $5,917   $902  

% of net sales

   (7.5)%   2.1  (9.6)%    4.3 4.3%�� —  

Net (loss)/earnings per share

  $(0.34) $0.10   $(0.44)

Net earnings per diluted share

  $0.20   $0.17   $0.03  

Net sales of $151.6$159.6 million in the secondthird quarter of 2013 decreased $2.7increased $22.2 million, or 1.8%16.2%, from the secondthird quarter of 2012 attributable to lower EMS segment net sales of $31.3 million partially offset by higher Components and Sensors segment net sales of $28.6$28.1 million partially offset by lower EMS segment net sales of $5.9 million.

Gross margin as a percent of net sales was 23.4%23.5% in the secondthird quarter of 2013 compared to 16.8%19.4% in the secondthird quarter of 2012. The increase in gross margin resulted primarily from favorable segment mix as the Components and Sensors segment percent of total sales increased to 69.5%64.9% of consolidated sales from 49.8%55.0% in the same period of 2012 and the second quarter 2012 expenses and lost margin of approximately $5.0 million related to the flood at our Thailand facility.2012.

Insurance recovery for business interruption primarily due to the flood at our Thailand facility totaled $7.4$4.2 million in the secondthird quarter of 2012. This recovery partially offsets related expenses and losses that negatively impacted our gross margin. There were no insurance recoveries for business interruption in the secondthird quarter 2013 as all recoveries were completed in 2012.

SG&A expenses were $20.7$20.8 million, or 13.7%13.0% of net sales, in the secondthird quarter of 2013 versus $19.4 million, or 12.6%14.1% of net sales in the secondthird quarter of 2012. SG&A expenses as a percentage of net sales increased primarily due to the acquisition of D&R Technology, and CEO transition costs.costs and transaction costs related to the sale of our EMS business.

R&D expenses were $5.8$5.7 million, or 3.8%3.6% of net sales, in the secondthird quarter of 2013 compared to $5.1$4.4 million, or 3.3%3.2% of net sales, in the secondthird quarter of 2012. The increase was primarily driven by spending to develop and launch new products and growth initiatives.initiatives, including the spending resulting from our acquisition of D&R Technology. R&D expenses are incurred by the Components and Sensors segment and are primarily focused on expanded applications of existing products and new product development, as well as current product and process enhancements.

Operating earnings were $1.7$10.1 million in the secondthird quarter of 2013, including restructuring and related charges of $8.1$1.1 million, compared to $5.7$6.8 million in the secondthird quarter of 2012, which included restructuring and related charges of $3.8$0.9 million.

Interest and other expenseincome was $0.9$0.3 million in the secondthird quarter of 2013 versus $1.2$0.6 million in the same quarter of 2012. The decreaseunfavorable impact of $0.3 million was primarily due to lower unfavorable foreign exchange impact of $0.7$0.3 million partially offset by increasedhigher net interest expense of $0.5 million as a result of higher debt balances.

The effective tax rate in the secondthird quarter of 2013 was 1,546.8%34.4% compared to 26.9%20.1% in the secondthird quarter of 2012. The increase in effective tax rate was primarily due to tax expensea change in earnings mix and the third quarter of $10.8 million on2012 included a non-recurring benefit associated with the $30 million cash repatriation from Singapore to the U.S. asimpact of a result of the Singapore restructuring andnon-taxable capital gain in a tax expense of $1.0 million for write-off of deferred tax assets in the U.K related to restructuring.foreign jurisdiction.

Net loss was $11.3earnings were $6.8 million, or $0.34$0.20 per diluted share, in the secondthird quarter of 2013 compared with net earnings of $3.3$5.9 million, or $0.10$0.17 per diluted share, in the secondthird quarter of 2012.

Comparison of First SixNine Months 2013 and First SixNine Months 2012

Segment Discussion

The following table highlights the segment results for the six-monthnine-month periods ended June 30,September 29, 2013 and July 1,September 30, 2012:

 

($ in thousands)  Components
and Sensors
 EMS Total   Components
and Sensors
 EMS Total 

First Six Months of 2013

    

First Nine Months of 2013

    

Net sales to external customers

  $203,443   $97,630   $301,073    $307,075   $153,561   $460,636  
  

 

  

 

  

 

   

 

  

 

  

 

 

Segment operating earnings before corporate and shared services charges

  $27,480   $961   $28,441    $42,588   $3,317   $45,905  
  

 

  

 

  

 

   

 

  

 

  

 

 

Corporate and shared services charges

   (11,710  (3,126  (14,836   (16,642  (4,499  (21,141
  

 

  

 

  

 

   

 

  

 

  

 

 

Segment operating earnings (loss)

  $15,770   $(2,165 $13,605  

Segment operating earnings / (loss)

  $25,946   $(1,182 $24,764  
  

 

  

 

  

 

   

 

  

 

  

 

 

% of Net sales

   7.8  (2.2)%   4.5   8.4  (0.8)%   5.4

First Six Months of 2012

    

First Nine Months of 2012

    

Net sales to external customers

  $153,241   $148,022   $301,263    $228,806   $209,814   $438,620  
  

 

  

 

  

 

   

 

  

 

  

 

 

Segment operating earnings before corporate and shared services charges

  $15,742   $6,541   $22,283    $25,233   $10,744   $35,977  
  

 

  

 

  

 

   

 

  

 

  

 

 

Corporate and shared services charges

   (7,358  (3,449  (10,807   (11,543  (5,276  (16,819
  

 

  

 

  

 

   

 

  

 

  

 

 

Segment operating earnings(1)

  $8,384   $3,092   $11,476    $13,690   $5,468   $19,158  
  

 

  

 

  

 

   

 

  

 

  

 

 

% of Net sales

   5.5  2.1  3.8   6.0  2.6  4.4

 

(1)EMS segment’sEMS’ operating earnings of $3,092$5,468 includes $1,769 of insurance recovery for property damage related to the flood at CTS Thailand’s manufacturing facility.

Net sales in the Components and Sensors segment increased $50.2$78.3 million, or 32.8%34.2% from the first sixnine months of 2012. The increase in net sales was primarily attributable to a $37.8$62.0 million increase in sales to automotive markets due to incremental sales of $25.9$37.7 million from the acquisition of D&R Technology, and sales of $13.7$19.6 million from the recently-launched smart actuator product. Sales of electronic components increased $12.4$16.2 million, or 21.4%18.1%, driven by higher piezoceramic product sales of $10.7$12.6 million, mainly for hard disk drive applications.

The Components and Sensors segment operating earnings were $15.8$25.9 million in the first sixnine months of 2013 versus $8.4$13.7 million in the first sixnine months of 2012. The favorable earnings change resulted primarily from higher sales, including the D&R Technology acquisition,.acquisition.

Net sales in the EMS segment decreased $50.4$56.3 million, or 34.0%26.8%, in the first sixnine months of 2013 from the first sixnine months of 2012. The decrease in net sales was primarily due to the uncertain global economic conditions and our decision to exit certain customers last year.customer relationships during 2012. The lower net sales by market were $22.3$22.7 million in the defense and aerospace market, $17.2$20.9 million in the industrial market, $6.0$9.9 million in the communications market, $4.2and $3.3 million in the medical market, and $0.7partially offset by an increase of $0.6 million in the computer market.

EMS segment operating losses were $2.2$1.2 million in the first sixnine months of 2013 versus operating earnings of $3.1$5.5 million in the first sixnine months of 2012. The unfavorable earnings change was primarily due to $50.4$56.3 million of lower sales and the timing of insurance recoveries related to the flood at our Thailand facility and the fire at our Scotland facility During the first six months of 2012 we had approximately $11.3 million of expenses and losses related to the flood at our Thailand facility and the fire at our Scotland facility while we recorded $12.8 million of insurance recoveries.facility.

Total Company Discussion

The following table highlights changes in significant components of the Unaudited Condensed Consolidated Statements of EarningsEarnings/(Loss) for the six-monthnine-month periods ended June 30,September 29, 2013 and July 1,September 30, 2012:

 

  Six months ended     Nine months ended   

($ in thousands, except net earnings per share)

  June 30,
2013
 July 1,
2012
 

Increase

(Decrease)

   September 29,
2013
 September 30,
2012
 Increase
(Decrease)
 

Net sales

  $301,073   $301,263   $(190)  $460,636   $438,620   $22,016  

Restructuring-related costs

  $1,115   $692   $423    $1,228   $1,325   $(97

% of net sales

   0.4  0.2  0.2   0.3 0.3 —  

Gross margin

  $66,669   $47,987   $18,682    $104,198   $74,581   $29,617  

% of net sales

   22.1  15.9  6.2   22.6 17.0 5.6

Insurance recovery for business interruption

  $—     $(11,050)  11,050    $—     $(15,242) 15,242  

Operating expenses:

        

Selling, general and administrative expenses

  $42,156   $38,782   $3,374    $62,921   $58,169   $4,752  

% of net sales

   14.0  12.9  1.1   13.7 13.3 0.4

Research and development expenses

  $12,023   $11,240   $783    $17,741   $15,590   $2,151  

% of net sales

   4.0  3.7  0.3    3.9 3.6 0.3 

Insurance recovery for property damage

  $ —     $(1,769) $1,769    $—     $(1,769) $1,769  

Restructuring and impairment charge

  $7,802   $3,139   $4,663    $8,755   $3,384   $5,371  

% of net sales

   2.6  1.0  1.6   1.9 0.8 1.1

Operating earnings

  $4,688   $7,645   $(2,957  $14,781   $14,449   $332  

% of net sales

   1.6  2.5  (0.9)%    3.2 3.3 (0.1)% 

Interest and other expense

  $(1,147) $(835 $(312

Net interest and other income

  $(848) $(231 $(617

% of net sales

   (0.4)%   (0.3)%   (0.1)%    (0.2)%  (0.1)%  (0.1)% 

Income tax expense

  $11,308   $1,226   $10,082    $14,881   $2,717   $12,164  

Net (loss)/earnings

  $(7,767) $5,584   $(13,351  $(948) $11,501   $(12,449

% of net sales

   (2.6)%   1.9  (4.5)%    (0.2)%  2.6 (2.8)% 

Net (loss)/earnings per share

  $(0.23) $0.16   $(0.39)  $(0.03) $0.33   $(0.36)

Net sales of $301.1$460.6 million in the first sixnine months of 2013 were essentially unchangedincreased $22.0 million, or 5.0%, from the first sixnine months of 2012. Higher2012 attributable to higher Components and Sensors segment net sales of $50.2$78.3 million, werepartially offset by lower EMS segment net sales of $50.4$56.3 million.

Gross margin as a percent of net sales was 22.1%22.6% in the first sixnine months of 2013 compared to 15.9%17.0% in the first sixnine months of 2012. The increase in gross margin primarily resulted from favorable segment mix as the Components and Sensors segment percent of total sales increased to 67.6%66.7% of consolidated sales from 50.9%52.2% in the same period of 2012 and the first six months 2012 expenses and lost margin of approximately $11.3 million related to the flood at our Thailand facility and the fire at our Scotland facility.2012.

SG&A expenses were $42.2$62.9 million, or 14.0%13.7% of net sales, in the first sixnine months of 2013 versus $38.8$58.2 million, or 12.9%13.3% of net sales, in the first sixnine months of 2012. SG&A expenses as a percentage of net sales increased primarily due to the acquisition of D&R Technology and CEO transition costs.

R&D expenses were $12.0$17.7 million, or 4.0%3.9% of net sales, in the first sixnine months of 2013 versus $11.2$15.6 million, or 3.7%3.6% of net sales, in the first sixnine months of 2012. The increase was primarily driven by spending to develop and launch new products and growth initiatives. R&D expenses are incurred by the Components and Sensors segment and are primarily focused on expanded applications of existing products and new product development, as well as current product and process enhancements.

Operating earnings were $4.7$14.8 million in the first sixnine months of 2013, including restructuring and related charges of $8.9$10.0 million, compared to $7.6$14.4 million in the first sixnine months of 2012 which included restructuring and related charges of $3.8$4.7 million.

Interest and other expense in the first sixnine months of 2013 was $1.1$0.8 million versus $0.8$0.2 million in the same period of 2012 due to higher interest expense on higher debt balances, partially offset by lowerhigher foreign exchange losses.gains.

The effective tax rate for the first sixnine months of 2013 was 319.3%106.8% compared to 18.0%19.1% in the first sixnine months of 2012. The increase in tax rate was primarily due to the second quarter 2013 tax expense of $10.8 million on the $30 million cash repatriation from Singapore to the U.S. as a result of the Singapore restructuring and tax expense of $1.0 million for write-off of deferred tax assets in the U.KU.K. related to restructuring.

Net losses were $7.8$0.9 million, or $0.23$0.03 per share, in the first sixnine months of 2013 compared with net earnings of $5.6$11.5 million, or $0.16$0.33 per diluted share, in the first sixnine months of 2012.

Scotland EMS Manufacturing Facility Fire

During the second quarter of 2011, a fire occurred at our Scotland EMS manufacturing facility. The fire damaged approximately $1.6 million of inventory and $0.2 million of machinery and equipment at net book value. Property insurance coverage with a $0.1 million deductible has substantially covered the costs of repairing and/or replacing the damaged inventory and machinery and equipment. Business interruption insurance had substantially covered the lost sales impact and related fixed costs in 2011.

During the second quarter of 2012 we recorded a recovery of approximately $0.2 million for business interruption in our Condensed Consolidated Statements of Earnings for the three months ended July 1, 2012. This recovery reflects the final settlement with our insurance carrier.

In the first sixnine months of 2012, we recovered approximately $1.0 million from our insurance carriercarriers and recorded a recovery of approximately $0.9 million for business interruption, after deducting approximately $0.1 million for certain expenses, in our Unaudited Condensed Consolidated Statements of EarningsEarnings/(Loss) for the sixnine months ended July 1,September 30, 2012. All claims were settled in 2012These recoveries reflect the final settlement with our insurance carrier.

Thailand EMS Manufacturing Facility Flood

During the fourth quarter of 2011, our Thailand EMS manufacturing facility was flooded. Based on preliminary estimates, theThe flood damaged approximately $0.8 million of inventory and $0.5 million of fixed assets at net book value.assets. We also incurred approximately $2.5 million of fixed costs at this facility. Local and global property insurance coverage covered the costs of repairing and/or replacing the damaged inventory and machinery and equipment. We also havehad business interruption insurance under these policies that cover the lost sales impact and fixed costs. The maximum amount covered under the local insurance policy was approximately $2.4 million. We also had a secondary global insurance policy that covered costs not covered by the local policy for up to approximately $25 million with a deductible of $250,000.

During the secondthird quarter of 2012, we received cash of approximately $7.5$4.2 million from our insurance carrier. All of the proceeds received were for business interruption and, accordingly, we recorded a recovery of $4.2 million for business interruption for the quarter ended September 30, 2012 in our Unaudited Condensed Consolidated Statements of Earnings/(Loss).

In the first nine months of 2012, we received cash of approximately $18.9 million from our insurance carrier. Out of the $7.5$18.9 million, cash, approximately $7.2 million was for business interruption and the remaining $0.3 million was for the reimbursement of costs related to inventory.

In the first six months of 2012, we received cash of approximately $14.7 million from our insurance carrier. Out of the $14.7 million cash, approximately $11.6$15.8 million was for business interruption and the remaining $3.1 million was for the reimbursement of costs related to property damage. Part of the cash received was to relieve the insurance receivable balance of $2.4 million recorded at December 31, 2011.

WeAccordingly, we recorded a recovery of approximately $10.2$14.4 million for business interruption and $1.8 million for property damage in our Unaudited Condensed Consolidated Statements of EarningsEarnings/(Loss) for the sixnine months ended July 1,September 30, 2012. All claims were settled in 2012 with our insurance carrier.

2013 Outlook

While our Components and Sensors segment is experiencing strong growth in 2013, the EMS segment has been negatively impacted by the uncertain global macro economic environment. As a result, management is lowering its full-yearFull-year 2013 sales guidanceare expected to a 6%-8% increase over 2012, from previous guidance of the low end of a sales increase of 12% to 15% over 2012. The restructuring savings and other efficienciesbe in the balancerange of $555 million to $560 million reflecting the October 2, 2013 essentially offsetEMS divestiture. We are maintaining the impact of the EMS sales decline; therefore, management is maintaining2013 adjusted earnings per share in 2013guidance in the range of $0.78 to $0.83 per share. The adjusted earnings exclude tax expense on cash repatriation, taxes on a write-off of deferred tax assets related to the U.K., restructuring and related charges and CEO transition costs.

The following table provides a reconciliation of estimated full-year 2013 diluted earnings per share to full-year 2013 adjusted earnings per share:

 

   Full-year 2013 

Diluted earnings per share

  $0.15 -$0.200.03 - $0.08  

Restructuring and restructuring-related charges

   0.210.32  

CEO transition costs

   0.070.08  

Tax impact of cash repatriation

   0.32  

Tax impact of UK deferred tax asset write off

   0.03  
  

 

 

 

Adjusted earnings per share

  $0.78 - $0.83  
  

 

 

 

Adjusted earnings per share is a term not recognized by Generally Accepted Accounting Principles in the United States (“U.S. GAAP”).GAAP. The most directly comparable U.S. GAAP financial measure is diluted earnings per share. We calculate adjusted earnings per share to exclude restructuring and restructuring-related charge.

We use the adjusted earnings per share measure to evaluate overall performance, establish plans and perform strategic analyses. We believe using adjusted earnings per share avoids distortion in the evaluation of operating results by eliminating the impact of events that are not related to operating performance. These measures are based on the exclusion of specific items, and, as such, they may not be comparable to measures used by other companies that have similar titles. Our management compensates for this limitation when performing peer company comparisons by evaluating both U.S. GAAP and non-GAAP financial measures reported by peer companies. We believe that adjusted earnings per share is useful to our management, investors and stakeholders in that it:

 

provides a better measure of our operating performance;

 

reflects the results used by management in making decisions about the business; and

 

helps to review and project our performance over time.

We recommend that investors and stakeholders consider both diluted earnings per share and adjusted earnings per share which are both GAAP and non-GAAP measures in evaluating our performance with peer companies.

Liquidity and Capital Resources

Overview

Cash and cash equivalents were $86.0$96.7 million at June 30,September 29, 2013 and $109.6 million at December 31, 2012. Total debt on June 30,September 29, 2013 was $129.5$128.6 million compared to $153.5 million at December 31, 2012, as we decreasedpaid down the debt from cash repatriated from a foreign operation. Total debt as a percentage of total capitalization was 33.1%32.3% at the end of the secondthird quarter of 2013, compared with 36.4% at December 31, 2012. Total debt as a percentage of total capitalization is defined as the sum of notes payable and long-term debt as a percentage of total debt and shareholders’ equity.

As of September 29, 2013, the amount of cash and cash equivalents held by foreign subsidiaries was $95.5 million. If these funds are needed for our operations in the U.S., we would be required to accrue U.S. taxes to repatriate these funds. However, our intent is to permanently reinvest these funds outside the U.S. and our current plans do not require us to repatriate them to fund our U.S. operations, which have we believe have sufficient liquidity. 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 net operating losses and tax credits.

Working capital decreased by $17.7$8.2 million in the secondthird quarter of 2013 versus year-end 2012, primarily due to a decrease in cash and cash equivalents of $23.5$12.8 million, and an increase in accounts payable of $2.7$3.5 million, and an increase in other accrued liabilities of $3.2 million, partially offset by an increase in accounts receivable, net of $4.6$7.5 million, and an increase in inventories of $3.4 million, a decrease in other accrued liabilities of $0.3$2.9 million, and an increase in other current assets of $0.3$1.0 million.

Cash Flow

Operating Activities

Net cash provided by operating activities was $10.2$25.5 million during the first sixnine months of 2013. Components of net cash provided by operating activities included net loss of $7.8$0.9 million, depreciation and amortization expense of $11.4$16.7 million, restructuring and asset impairment charges of $7.8$8.8 million and add-backs of other non-cash items such as equity-based compensation and amortization of retirement benefit totaling $6.8$9.6 million, which were partially offset by net changes in assets and liabilities of $7.3$6.2 million and an increase in prepaid pension asset of $0.7$2.4 million. The changes in assets and liabilities were primarily due to increased accounts receivable of $5.3$7.6 million, inventories of $3.8$3.0 million, other current assets $0.6 million, and decreased accounts payable of $3.2$0.4 million, partially offset by an increasea decrease in other assets and liabilities of $5.7 million.$4.8 million, which includes a $10.8 million non-cash deferred tax asset decrease and a $3.7 million increase in pension liabilities.

Net cash provided by operating activities was $12.0$25.0 million during the first sixnine months of 2012. Components of net cash provided by operating activities included net earnings of $5.6$11.5 million, depreciation and amortization expense of $9.6$14.6 million, restructuring and asset impairment charges of $3.1$3.4 million and add-backs of other non-cash items such as equity-based compensation, amortization of retirement benefit and net insurance recovery totaling $6.1$9.1 million, which were partially offset by net changes in assets and liabilities of $9.1$8.4 million and an increase in the prepaid pension asset of $3.4$5.1 million. The changes in assets and liabilities were primarily due to decreased accounts payable and accrued liabilities of $24.0$38.2 million partially offset by decreased inventories of $15.3$19.5 million and decreased accounts receivable of $10.0 million.

Investing Activities

Net cash used in investing activities for the first sixnine months of 2013 was $8.2$10.3 million primarily for capital expenditures of $8.4$10.9 million, partially offset by proceeds from sale of fixed assets of $0.6 million.

Net cash used in investing activities for the first sixnine months of 2012 was $21.8$24.6 million primarily for the Valpey-Fisher acquisition of $14.7 million, net of cash acquired, capital expenditures of $6.9$9.8 million, and capital expenditures to replace casualty-damaged property damaged by casualty of $2.9 million partially offset by insurance proceeds for casualty-damaged property damage due to casualty of $2.3 million.

Financing Activities

Net cash used by financing activities for the sixfirst nine months of 2013 was $25.8$28.4 million, consisting primarily of a net decrease in long-term debt of $24.0$24.9 million, $2.3$3.5 million in dividend payments and $1.5$2.2 million in Treasuryrepurchases of our common stock, purchases, partially offset by stock issuance of $2.1$2.2 million.

Net cash provided by financing activities for the sixnine months of 2012 was $16.2$11.8 million, consisting primarily of a net increase in long-term debt of $22.6$20.1 million, offset by $5.6$6.6 million in Treasurytreasury stock purchases and $2.4$3.6 million in dividend payments. The additional debt was primarily used to fund the Valpey-Fisher acquisition and to meet usual working capital requirements and to fund the Valpey-Fisher acquisition.requirements.

Capital Resources

Refer to Note E, “Debt,” to our unaudited consolidated financial statementsUnaudited Condensed Consolidated Financial Statements for further discussion.

On January 10, 2012, we amended our November 18, 2010 unsecured revolving credit facility. This amendment provided for an increase in the revolving credit facility to $200 million and increased the accordion feature, whereby we can expand the facility to $300 million, subject to participating banks’ approval. Additionally, among otherIn addition to changes to certain covenants, the amendment reduced the applicable margin by 25 basis points, increased the total consideration we may pay for non-U.S. based acquisitions, and extended the term of the credit facility through January 10, 2017.

Long-term debt was comprised of the following:

 

($ in thousands)

  June 30,
2013
   December 31,
2012
   September 29,
2013
   December 31,
2012
 

Revolving credit facility, weighted-average interest rate of 2.0% (2013), and 1.8% (2012) due in 2017.

  $129,500    $153,500  

Revolving credit facility, weighted-average interest rate of 1.9% (2013), and 1.8% (2012) due in 2017

  $128,600    $153,500  

There was $129.5$128.6 million outstanding under the $200 million revolving credit facility at June 30,September 29, 2013, and $153.5 million at December 31, 2012. We had $67.9$68.8 million available under the $200 million credit facility, at June 30, 2013, net of standby letters of credit of $2.6 million at September 29, 2013, and $43.9 million, available at December 31, 2012, net of standby letters of credit of $2.6 million.million at December 31, 2012. Interest rates on the revolving credit facility fluctuate based upon London Interbank Offered Rate and our quarterly total leverage ratio. We pay a commitment fee on the undrawn portion of the revolving credit facility. The commitment fee varies based on the quarterly leverage ratio and was 0.400.30 percent and 0.30 percent per annum at June 30,September 29, 2013 and July 1,September 30, 2012, respectively. The revolving credit facility requires, among other things, that we comply with a maximum total leverage ratio and a minimum fixed charge coverage ratio. Our failure to comply with these covenants could reduce the borrowing availability under the revolving credit facility. We were in compliance with all debt covenants at June 30,September 29, 2013. The revolving credit facility requires us to 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 facility contains restrictions limiting our ability to: dispose of assets; incur certain additional debt; repay other debt or amend subordinated debt instruments; create liens on assets; make investments, loans or advances; make acquisitions or engage in mergers or consolidations; engage in certain transactions with our subsidiaries and affiliates; and make stock repurchases and dividend payments.

We use interest rate swaps to convert the line of credit’s variable rate of interest into a fixed rate. In the second quarter of 2012, we entered into four separate interest rate swap agreements to fix interest rates on $50 million of long-term debt for the periods January 2013 to January 2017. In the third quarter of 2012, we entered into four separate interest rate swap agreements to fix interest rates on $25 million of long-term debt for the periods January 2013 to January 2017. The difference to be paid or received under the terms of the swap agreements will be recognized as an adjustment to interest expense for the related line of credit when settled.

These swaps are treated as cash flow hedges and consequently, the changes in fair value were recorded in Other Comprehensive Income.other comprehensive earnings. An unrealized loss of approximately $428,000 and an unrealized gain of approximately $765,000 and $801,000$373,000 was recorded in Other Comprehensive Incomeother comprehensive earnings for the three and sixnine months ended June 30,September 29, 2013, respectively. An unrealized loss of approximately $832,000$715,000 and $1,547,000 was recorded in Other Comprehensive Incomeother comprehensive earnings for the three and sixnine months ended July 1,September 30, 2012. We also reclassed approximately $78,000$81,000 and $155,000$236,000 of realized loss out of other comprehensive incomeearnings to interest expense for the three and sixnine months ended June 30,September 29, 2013, respectively. No realized loss was reclassed out of other comprehensive incomeearnings to interest expense for the three and sixnine months ended July 1,September 30, 2012. Approximately $334,000$390,000 was recorded as accrued liabilities and $341,000$633,000 recorded as a non-current liability in other long-term obligations on the Unaudited Condensed Consolidated Balance Sheets at June 30,September 29, 2013. Approximately $271,000 was recorded as accrued liabilities and $1,336,000 recorded as a non-current liability in Other Long-term Obligationsother long-term obligations on the Consolidated Balance Sheets at December 31, 2012.

As a result of the use of these derivative instruments, we are exposed to the risk that counterparties to derivative contracts will fail to meet their contractual obligations. To mitigate the counterparty credit risk, we have a policy of only entering into contracts with carefully selected major financial institutions based upon their credit ratings and other factors. WeOur established policies and procedures for mitigating credit risk on principal transactions include reviewing and establishing limits for credit exposure and continually assessing the creditworthiness of counterparties.

In August 2012, CTS’our Board of Directors authorized a program to repurchase up to one million shares of itsour common stock in the open market at a maximum price of $13 per share. In August 2013, our Board of Directors amended the August 2012 share repurchase program by removing the provision that the price per share have a maximum price of $13. The authorization has no expiration. Reacquired shares willare expected to be used to support equity-based compensation programs and for other corporate purposes. During the first halfnine months of 2013, 150,205199,969 shares were repurchased.repurchased pursuant to this share repurchase program.

In June 2013, CTS’our Board of Directors authorized aanother program to repurchase up to one million shares of itsour common stock in the open market. The authorization has no expiration. Reacquired shares will be used to support equity-based compensation programs and for other corporate purposes. During the first halfnine months of 2013, there were no shares were repurchased under this program.

We have historically funded our capital and operating needs primarily through cash flows from operating activities, supported by available credit under our credit agreements. We believe that expected positive cash flows from operating

activities and available borrowings under our current credit agreements 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/or debt financing to provide additional liquidity and/or fund acquisitions.

Recent Accounting Pronouncements

ASU 2013-07,2013-11,Income Taxes (Topic 740): Presentation of Financial Statements – Liquidation Basis of Accountingan Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists”

In AprilJuly 2013, the FASB issued Accounting Standards Update 2013-07, “Presentation2013-11, “Income Taxes (Topic 740): Presentation of Financial Statements – Liquidation Basis of Accounting,an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists,” which containsprovides guidance on applying the liquidation basisfinancial statement presentation of accounting and the related disclosure requirements.an unrecognized tax benefit (UTB) when an NOL carryforward, a similar tax loss, or a tax credit carryforward exists. The FASB’s objective in issuing this ASU is to eliminate diversity in practice resulting from a lack of guidance on this topic in current U.S. GAAP. Under thethis ASU, an entity must usewith an unrecognized tax benefit that is ‘not available’ or not intended to be used at the liquidation basis of accountingreporting date to present its financial statements when it determinesthe unrecognized tax benefit as a liability that liquidation is imminent, unlessshould not be combined with deferred tax assets. Otherwise, the liquidation isunrecognized tax benefit should be presented as a reduction to the same as that under the plan specified in an entity’s governing documents created at its inception. Liquidation is imminent when the likelihood is remote that the entity will return from liquidation and either (a) a plan for liquidation is approved by the person or persons with the authority to make such a plan effective or (b) a plan for liquidation is being imposed by other forces. The amendments require financial statements prepared using the liquidation basis of accounting to present relevant information about an entity’s expected resources in liquidation by measuring and presenting assets at the amount of the expected cash proceeds from liquidation.related deferred tax asset. These amendments are effective for public entities that determine liquidation is imminent during annual reporting periodsfor fiscal years beginning after December 15, 2013, and interim reporting periods therein. Entitieswithin those years. Early adoption is permitted. The amendments should apply the requirementsbe applied prospectively, from the day that liquidation becomes imminent.although retroactive application is permitted. The provisions of ASU 2013-072013-11 are not expected to have a material impact on our consolidated financial statements.

ASU 2013-10, “Derivatives and Hedging – Inclusion of the Fed Funds Effective Swap Rate as a Benchmark Interest Rate for Hedge Accounting Purposes

In July 2013, the FASB issued Accounting Standards Update 2013-10, “Derivatives and Hedging – Inclusion of the Fed Funds Effective Swap Rate as a Benchmark Interest Rate for Hedge Accounting Purposes,” which permit the Fed Funds Effective Swap Rate (Overnight Interest Swap Rate) to be used as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815, in addition to UST and LIBOR. The amendments also remove the restriction on using different benchmark rates for similar hedges. These amendments are effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. We do not expect these provisions to have a material impact on CTS’ financial statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Item 3.Quantitative and Qualitative Disclosures About Market Risk

There have been no other material changes into our market risk sinceas described in our Annual Report of Form 10-K for the year ended December 31, 2012.

Item 4. Controls and Procedures

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 June 30, 2013, provided that the evaluation did not include an evaluation of the effectiveness of the internal control over financial reporting for the acquired business, as described further below.September 29, 2013.

Since the date of acquisition of D&R Technology, our management has not completed an evaluation of the business’s internal controls over financial reporting for the acquired entity, whose results are included in the financial statements and notes filed in this Form 10-Q.

Changes in Internal Control Over Financial Reporting

Other than the changes resulting from the acquisition described above, thereThere were no changes in our internal control over financial reporting for the quarter ended June 30,September 29, 2013 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

Item 1.Legal Proceedings

We manufacture accelerator pedals for a number of automobile manufacturers, including subsidiaries of Toyota. In January 2010, Toyota initiated a recall of a substantial number of vehicles in North America containing pedals manufactured by CTS. The pedal recall and associated events have led to us being named as a co-defendant with Toyota in certain litigation.

In February 2010, we entered into an agreement with Toyota whereby Toyota agreed that it will indemnify, defend, and hold us harmless from, and the parties will cooperate in the defense of, certain third-party civil claims and actions that are filed or asserted in the United States or Canada and that arise from or relate to alleged incidents of unintended acceleration of Toyota and Lexus vehicles. If it is determined that CTS acted negligently in selecting materials or processes where we had sole control over the selection process, in failing to meet Toyota’s specifications, or in making unapproved changes in component design or materials, and such negligence caused or contributed to a claim, we will be responsible for any judgment that may be rendered against us individually, or any portion of a judgment that may be allocated to us, but limited only to the extent of insurance collected from our insurers. Toyota would remain responsible to defend CTS in these actions and would remain responsible for any balance of the remaining liability over amounts recovered by insurance. The agreement also does not cover costs or liabilities in connection with government investigations, government hearings, or government recalls.

Presently, we have been served process and named as co-defendant with Toyota in approximately thirty-eight open lawsuits; we have been dismissed as a defendant from an additional thirty-four lawsuits. The claims generally fall into two categories, those that allege sudden unintended acceleration of Toyota vehicles led to injury or death, and those that allege economic harm to owners of Toyota vehicles related to vehicle defects. Some suits combine elements of both. Claims include demands for compensatory and special damages. To date, the only actions filed where we are aware we have been named as a co-defendant are civil actions filed in the Unites States or Canada. All currently open lawsuits are subject to the indemnification agreement described above. Some of these lawsuits arise out of incidents involving models for which we do not manufacture the pedal, such as all Lexus models, the Toyota Prius, and the Toyota Tacoma, or for which we manufacture only a portion of the pedals, such as the Toyota Camry. Many lawsuits have been consolidated in federal multidistrict litigation in the United States District Court, Southern District of California, though some remain in various other courts.

Certain other claims are pending against us with respect to matters arising out of the ordinary conduct of our business. For all other claims, 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

Item 1A.Risk Factors

There have been no significantmaterial changes to ourthe risk factors sincedescribed in our Annual Report on Form 10-K for the year ended December 31, 2012.

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

The following table summarizes the repurchases of CTS common stock made by the Company during the three-month period ending June 30,September 29, 2013:

 

   (a)
Total Number  of
Shares Purchased
   (b)
Average Price
Paid per Share
   (c)
Total Number of  Shares
Purchased as Part of
Plans or Programs
   (d)
Maximum Number
of Shares
That May Yet Be
Purchased Under the
Plans or Programs
(1)
 
         363,041  

April 1, 2013 – April 28, 2013

   44,941    $9.91     44,941     318,100  

April 29, 2013 – May 26, 2013

   —       —       —       318,100  

May 27, 2013 – June 30, 2013

   —       —       —       1,318,100  
  

 

 

     

 

 

   

Total

   44,941       44,941    
  

 

 

     

 

 

   
  (a)
Total Number of
Shares Purchased
  (b)
Average Price
Paid per Share
  (c)
Total Number of Shares
Purchased as Part of
Publicly Announced

Plans or Programs
  (d)
Maximum Number
of Shares
That May Yet Be
Purchased Under the
Plans or Programs (1)(2)
 
     1,318,100  

July 1, 2013 – July 28, 2013

  —     $—      —      1,318,100  

July 29, 2013 – August 25, 2013

  —      —      —      1,318,100  

August 26, 2013 – September 29, 2013

  49,764    14.69    49,764    1,268,336  
 

 

 

   

 

 

  

Total

  49,764     49,764   
 

 

 

   

 

 

  

 

(1)In August 2012, CTS’ Board of Directors authorized a program to repurchase up to one million shares of its common stock in the open market. The authorization has no expiration.
(1)(2)In June 2013, CTS’ Board of Directors authorized aanother program to repurchase up to one million shares of its common stock in the open market. The authorization has no expiration.

 

Item 3.Defaults Upon Senior Securities

Not applicableapplicable.

 

Item 4.Mine Safety Disclosures

Not applicableapplicable.

 

Item 5.Other Information

Not applicableapplicable.

Item 6.Exhibits

 

(2)(a)Stock Purchase Agreement, dated October 2, 2013, between CTS Corporation and Benchmark Electronics, Inc.*
(31)(a) Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
(31)(b) Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
(32)(a) Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(32)(b) Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.XML*101.XML XBRL Instance Document
101.XSD*101.XSD XBRL Taxonomy Extension Schema Document
101.CAL*101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE*101.PRE XBRL Taxonomy Extension Presentation Linkbase Document

 

*XBRL (Extensible Business Reporting Language) information is furnishedPursuant to Item 601(b)(2) of Regulation S-K, certain exhibits and not filed herewith, is not part of a registration statement or Prospectus for purposes of sections 11 or 12 ofschedules have been omitted and the Company agrees to furnish supplementally to the Securities Actand Exchange Commission a copy of 1933, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.any omitted exhibits upon request.

SIGNATURES

Pursuant to the requirements 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/ John R. DudekThomas A. Kroll

/s/ Kieran O’Sullivan

Thomas A. Kroll

Vice President and Chief Financial Officer

  

/s/ Thomas A. KrollKieran O’Sullivan

John R. Dudek Vice President, General Counsel and SecretaryThomas A. Kroll
Vice

President and Chief FinancialExecutive Officer

Dated: July 25,October 29, 2013  Dated: July 25,October 29, 2013

 

3537