Quarterly Report (10-q)

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For The Quarterly Period Ended June 30, 2021

☐	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)

35-0225010

(State or other jurisdiction of

incorporation or organization)

(IRS Employer

Identification Number)

4925 Indiana Avenue
Lisle IL		60532
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (630) 577-8800

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class		Trading Symbol(s)		Name of Each Exchange on Which Registered
Common stock, without par value		CTS		New York Stock Exchange

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13 (a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of July 21, 2021: 32,426,574.

CTS CORPORATION AND SUBSIDIARIES

TABLE OF CONTENTS

			Page

PART I. FINANCIAL INFORMATION

	Item 1.	Financial Statements	3

		Condensed Consolidated Statements of Earnings (Unaudited) For the Three and Six Months Ended June 30, 2021 and June 30, 2020	3

		Condensed Consolidated Statements of Comprehensive Earnings (Unaudited) For the Three and Six Months Ended June 30, 2021 and June 30, 2020	4

		Condensed Consolidated Balance Sheets As of June 30, 2021 (Unaudited) and December 31, 2020	5

		Condensed Consolidated Statements of Cash Flows (Unaudited) For the Six Months Ended June 30, 2021 and June 30, 2020	6

		Condensed Consolidated Statements of Shareholder's Equity (Unaudited) For the Three and Six Months Ended June 30, 2021 and June 30, 2020	7

		Notes to Condensed Consolidated Financial Statements ‑ (Unaudited)	9

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	36

	Item 4.	Controls and Procedures	36

PART II. OTHER INFORMATION

	Item 1.	Legal Proceedings	37

	Item 1A.	Risk Factors	37

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	37

	Item 6.	Exhibits	38

SIGNATURES			39

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

CTS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS - UNAUDITED

(In thousands, except per share amounts)

	Three Months Ended						Six Months Ended
	June 30,			June 30,			June 30,			June 30,
	2021			2020			2021			2020
Net sales	$	129,585		$	84,197		$	258,012		$	187,272
Cost of goods sold		81,889			57,630			167,725			127,806
Gross margin		47,696			26,567			90,287			59,466
Selling, general and administrative expenses		20,937			14,668			39,262			31,427
Research and development expenses		6,029			5,522			11,716			12,930
Restructuring charges		151			135			232			375
Operating earnings		20,579			6,242			39,077			14,734
Other (expense) income:
Interest expense		(508	)		(909	)		(1,063	)		(1,760	)
Interest income		257			304			459			635
Other (expense) income, net		(20,929	)		256			(24,285	)		(1,726	)
Total other expense, net		(21,180	)		(349	)		(24,889	)		(2,851	)
(Loss) earnings before income taxes		(601	)		5,893			14,188			11,883
Income tax (benefit) expense		(1,476	)		1,036			1,323			3,218
Net earnings	$	875		$	4,857		$	12,865		$	8,665
Earnings per share:
Basic	$	0.03		$	0.15		$	0.40		$	0.27
Diluted	$	0.03		$	0.15		$	0.39		$	0.27
Basic weighted – average common shares outstanding:		32,397			32,262			32,358			32,364
Effect of dilutive securities		229			242			259			284
Diluted weighted – average common shares outstanding:		32,626			32,504			32,617			32,648
Cash dividends declared per share	$	0.04		$	0.04		$	0.08		$	0.08

See notes to unaudited condensed consolidated financial statements.

CTS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS ‑ UNAUDITED

(In thousands of dollars)

	Three Months Ended					Six Months Ended
	June 30,		June 30,			June 30,		June 30,
	2021		2020			2021		2020
Net earnings	$	875	$	4,857		$	12,865	$	8,665
Other comprehensive earnings (loss):
Changes in fair market value of derivatives, net of tax		268		644			392		(3,770	)
Changes in unrealized pension cost, net of tax		17,024		1,209			18,446		2,494
Cumulative translation adjustment, net of tax		1		(14	)		13		(153	)
Other comprehensive earnings (loss)	$	17,293	$	1,839		$	18,851	$	(1,429	)
Comprehensive earnings	$	18,168	$	6,696		$	31,716	$	7,236

See notes to unaudited condensed consolidated financial statements.

CTS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands of dollars)

	(Unaudited)
	June 30,			December 31,
	2021			2020
ASSETS
Current Assets
Cash and cash equivalents	$	117,397		$	91,773
Accounts receivable, net		80,795			80,981
Inventories, net		48,972			45,870
Other current assets		16,180			14,607
Total current assets		263,344			233,231
Property, plant and equipment, net		93,017			97,437
Operating lease assets, net		23,150			23,281
Other Assets
Prepaid pension asset		56,903			56,642
Goodwill		109,898			109,497
Other intangible assets, net		74,584			79,121
Deferred income taxes		23,949			24,250
Other		2,453			2,590
Total other assets		267,787			272,100
Total Assets	$	647,298		$	626,049
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Accounts payable	$	47,753		$	50,489
Operating lease obligations		3,360			3,294
Accrued payroll and benefits		14,433			12,978
Accrued expenses and other liabilities		36,765			38,171
Total current liabilities		102,311			104,932
Long-term debt		50,000			54,600
Long-term operating lease obligations		22,953			23,163
Long-term pension obligations		7,199			7,466
Deferred income taxes		6,924			7,010
Other long-term obligations		3,602			5,196
Total Liabilities		192,989			202,367
Commitments and Contingencies (Note 11)
Shareholders’ Equity
Common stock		314,341			311,190
Additional contributed capital		40,007			41,654
Retained earnings		549,553			539,281
Accumulated other comprehensive loss		(77,070	)		(95,921	)
Total shareholders’ equity before treasury stock		826,831			796,204
Treasury stock		(372,522	)		(372,522	)
Total shareholders’ equity		454,309			423,682
Total Liabilities and Shareholders’ Equity	$	647,298		$	626,049

See notes to unaudited condensed consolidated financial statements.

CTS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS ‑ UNAUDITED

(In thousands of dollars)

	Six Months Ended
	June 30,			June 30,
	2021			2020
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings	$	12,865		$	8,665
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization		13,512			13,143
Pension and other post-retirement plan expense		23,823			1,348
Stock-based compensation		3,122			1,045
Asset impairment charges		—			1,016
Deferred income taxes		(4,875	)		(466	)
Gain on foreign currency hedges, net of cash		(26	)		(133	)
Changes in assets and liabilities, net of acquisition:
Accounts receivable		316			17,850
Inventories		(2,994	)		(2,328	)
Operating lease assets		131			275
Other assets		(1,440	)		1,460
Accounts payable		(3,433	)		(12,294	)
Accrued payroll and benefits		1,145			(512	)
Operating lease liabilities		(143	)		(189	)
Accrued expenses and other liabilities		(3,028	)		(5,026	)
Pension and other post-retirement plans		(190	)		(130	)
Net cash provided by operating activities		38,785			23,724
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures		(3,970	)		(7,245	)
Payments for acquisitions, net of cash acquired		(255	)		—
Net cash used in investing activities		(4,225	)		(7,245	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long-term debt		(430,300	)		(2,207,450	)
Proceeds from borrowings of long-term debt		425,700			2,249,050
Purchase of treasury stock		—			(8,080	)
Dividends paid		(2,585	)		(2,598	)
Payments of contingent consideration		(350	)		—
Taxes paid on behalf of equity award participants		(1,480	)		(1,903	)
Net cash (used in) provided by financing activities		(9,015	)		29,019
Effect of exchange rate changes on cash and cash equivalents		79			242
Net increase in cash and cash equivalents		25,624			45,740
Cash and cash equivalents at beginning of period		91,773			100,241
Cash and cash equivalents at end of period	$	117,397		$	145,981
Supplemental cash flow information:
Cash paid for interest	$	716		$	1,442
Cash paid for income taxes, net	$	7,516		$	4,114
Non-cash financing and investing activities:
Capital expenditures incurred but not paid	$	1,288		$	1,158

See notes to unaudited condensed consolidated financial statements.

CTS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - UNAUDITED

(in thousands of dollars)

The following summarizes the changes in total equity for the three and six months ended June 30, 2021:

	Common Stock		Additional Contributed Capital			Retained Earnings			Accumulated Other Comprehensive Loss			Treasury Stock			Total
Balances at December 31, 2020	$	311,190	$	41,654		$	539,281		$	(95,921	)	$	(372,522	)	$	423,682
Net earnings		—		—			11,990			—			—			11,990
Changes in fair market value of derivatives, net of tax		—		—			—			124			—			124
Changes in unrealized pension cost, net of tax		—		—			—			1,422			—			1,422
Cumulative translation adjustment, net of tax		—		—			—			12			—			12
Cash dividends of $0.04 per share		—		—			(1,294	)		—			—			(1,294	)
Issued shares on vesting of restricted stock units		1,818		(3,218	)		—			—			—			(1,400	)
Stock compensation		—		1,180			—			—			—			1,180
Balances at March 31, 2021	$	313,008	$	39,616		$	549,977		$	(94,363	)	$	(372,522	)	$	435,716
Net earnings		—		—			875			—			—			875
Changes in fair market value of derivatives, net of tax		—		—			—			268			—			268
Changes in unrealized pension cost, net of tax		—		—			—			17,024			—			17,024
Cumulative translation adjustment, net of tax		—		—			—			1			—			1
Cash dividends of $0.04 per share		—		—			(1,299	)		—			—			(1,299	)
Issued shares on vesting of restricted stock units		1,333		(1,413	)		—			—			—			(80	)
Stock compensation		—		1,804			—			—			—			1,804
Balances at June 30, 2021	$	314,341	$	40,007		$	549,553		$	(77,070	)	$	(372,522	)	$	454,309

See notes to unaudited condensed consolidated financial statements.

CTS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - UNAUDITED

(in thousands of dollars)

The following summarizes the changes in total equity for the three and six months ended June 30, 2020:

	Common Stock		Additional Contributed Capital			Retained Earnings			Accumulated Other Comprehensive Loss			Treasury Stock			Total
Balances at December 31, 2019	$	307,932	$	43,689		$	509,766		$	(91,726	)	$	(364,442	)	$	405,219
Net earnings		—		—			3,808			—			—			3,808
Changes in fair market value of derivatives, net of tax		—		—			—			(4,414	)		—			(4,414	)
Changes in unrealized pension cost, net of tax		—		—			—			1,285			—			1,285
Cumulative translation adjustment, net of tax		—		—			—			(139	)		—			(139	)
Cash dividends of $0.04 per share		—		—			(1,298	)		—			—			(1,298	)
Acquired 220,731 shares of treasury stock		—		—			—			—			(5,304	)		(5,304	)
Issued shares on vesting of restricted stock units		2,166		(4,069	)		—			—			—			(1,903	)
Stock compensation		—		212			—			—			—			212
Balances at March 31, 2020	$	310,098	$	39,832		$	512,276		$	(94,994	)	$	(369,746	)	$	397,466
Net earnings		—		—			4,857			—			—			4,857
Changes in fair market value of derivatives, net of tax		—		—			—			644			—			644
Changes in unrealized pension cost, net of tax		—		—			—			1,209			—			1,209
Cumulative translation adjustment, net of tax		—		—			—			(14	)		—			(14	)
Cash dividends of $0.04 per share		—		—			(1,292	)		—			—			(1,292	)
Acquired 122,000 shares of treasury stock		—		—			—			—			(2,776	)		(2,776	)
Issued shares on vesting of restricted stock units		855		(855	)		—			—			—			—
Stock compensation		—		798			—			—			—			798
Balances at June 30, 2020	$	310,953	$	39,775		$	515,841		$	(93,155	)	$	(372,522	)	$	400,892

See notes to unaudited condensed consolidated financial statements.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

(in thousands except for share and per share data)

June 30, 2021

NOTE 1 — Basis of Presentation and Summary of Significant Accounting Policies

The accompanying condensed consolidated financial statements have been prepared by CTS Corporation (“CTS”, "we", "our", "us" or the "Company”), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations. The unaudited condensed consolidated financial statements should be read in conjunction with the financial statements, notes thereto, and other information included in the Company’s Annual Report on Form 10‑K for the year ended December 31, 2020.

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. Certain reclassifications have been made to prior year amounts to conform to the current year presentation. The reclassifications had no impact on previously reported net earnings.

There have been no material changes in the Company’s significant accounting policies as compared to the significant accounting policies described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

Accounting Pronouncements Recently Adopted

In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2019-12, Simplifying the Accounting for Income Taxes, as part of its simplification initiative to reduce the cost and complexity in accounting for income taxes. ASU 2019-12 removes certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences. ASU 2019-12 also amends other aspects of the guidance to help simplify and promote consistent application of U.S. GAAP. The guidance is effective for interim and annual periods beginning after December 15, 2020, with early adoption permitted. We adopted this ASU on January 1, 2021 and it did not have a material impact on our financial statements.

Recently Issued Accounting Pronouncements

In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting”, which provides temporary optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting as it relates to our LIBOR indexed instruments. ASU 2020-04 provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. ASU 2020-04 is effective for all entities as of March 12, 2020 through December 31, 2022, and an entity may elect to apply ASU 2020-04 for contract modifications by Topic or Industry Subtopic as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. We are currently evaluating the impact of the transition from LIBOR to an alternative reference interest rate in our financial instruments including the potential election of certain practical expedients. Our LIBOR based revolving credit facility includes a provision for the determination of a successor LIBOR rate, and we are still evaluating the impact to potential future hedging activities.

NOTE 2 – Revenue Recognition

The core principle of Accounting Standard Codification (“ASC”) 606 Revenue from Contracts with Customers is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance provides a five-step process to achieve that core principle:

•

Identify the contract(s) with a customer

•

Identify the performance obligations

•

Determine the transaction price

•

Allocate the transaction price

•

Recognize revenue when the performance obligations are met

We recognize revenue when the performance obligations specified in our contracts have been satisfied, after considering the impact of variable consideration and other factors that may affect the transaction price. Our contracts normally contain a single performance obligation that is fulfilled on the date of delivery or shipment based on shipping terms stipulated in the contract. We usually expect payment within 30 to 90 days from the shipping date, depending on our terms with the customer. None of our contracts as of June 30, 2021 contained a significant financing component. Differences between the amount of revenue recognized and the amount invoiced, collected from, or paid to our customers are recognized as contract assets or liabilities. Contract assets will be reviewed for impairment when events or circumstances indicate that they may not be recoverable.

To the extent the transaction price includes variable consideration, we estimate the amount of variable consideration that should be included in the transaction price utilizing the most likely amount method based on an analysis of historical experience and current facts and circumstances, which requires significant judgment. Variable consideration is included in the transaction price if, in our judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur.

Disaggregated Revenue

The following table presents revenues disaggregated by the major markets we serve:

	Three Months Ended				Six Months Ended
	June 30, 2021		June 30, 2020		June 30, 2021		June 30, 2020
Transportation	$	71,556	$	38,129	$	147,410	$	99,663
Industrial		29,260		20,213		55,885		41,056
Medical		12,802		13,038		24,078		22,408
Aerospace & Defense		12,779		9,373		24,449		18,378
Telecom & IT		3,188		3,444		6,190		5,767
Total	$	129,585	$	84,197	$	258,012	$	187,272

NOTE 3 – Business Acquisitions

On December 30, 2020, we acquired 100% of the outstanding shares of Sensor Scientific, Inc. (“SSI”). SSI is a manufacturer of high-quality thermistors and temperature sensor assemblies serving original equipment manufacturers (“OEMs”) for applications that require precision and reliability in the medical, industrial and defense markets. SSI has complementary capabilities with our existing temperature sensing platform and the acquisition expands our presence in the medical and industrial end markets. It also provides high quality ceramic processing capabilities and valuable customer partnerships that expands our temperature sensing product portfolio and builds on our strategy to focus on innovative products that sense, connect and move.

The purchase price, which includes assumed changes in working capital, of $10,309 has been allocated to the fair values of assets and liabilities acquired as of December 30, 2020. The allocation of the purchase price continues to be preliminary pending the completion of the final net working capital adjustment, which is expected to occur in the third quarter. The information included below represents our current estimate of the purchase price allocation and is not expected to materially change.

The following table summarizes the consideration paid and the fair values of the assets acquired, and the liabilities assumed as of the date of acquisition of SSI:

	Consideration Paid
Cash paid, net of cash acquired of $470	$	8,309
Contingent consideration		2,000
Purchase price	$	10,309

	Fair Values at December 30, 2020
Current assets	$	2,550
Property, plant and equipment		67
Other assets		12
Goodwill		3,412
Intangible assets		5,340
Fair value of assets acquired		11,381
Less fair value of liabilities acquired		(1,072	)
Purchase price	$	10,309

Goodwill represents value the Company expects to be created by combining the operations of the acquired business with the Company's operations, including the expansion of customer relationships, access to new customers, and potential cost savings and synergies. Goodwill related to the acquisition is expected to be deductible for tax purposes.

All contingent consideration is payable in cash and is based on success factors related to the integration process as well as upon the achievement of a revenue performance target through the year ending December 31, 2022, with the possibility of prorated interim payments. The Company recorded $2,000 as the acquisition date fair value of the contingent consideration based on an estimate of the probability of achieving the performance targets. This represents the maximum amount of contingent consideration payable by the Company. This amount is also reflected as an addition to the purchase price and will be evaluated quarterly. Refer to Note 17 for further information on contingent consideration.

The following table summarizes the carrying amounts and weighted average lives of the acquired intangible assets:

	Carrying Value		Weighted Average Amortization Period
Customer lists/relationships	$	5,200		11.0
Technology and other intangibles		140		3.0
Total	$	5,340

NOTE 4 – Accounts Receivable, net

The components of accounts receivable, net are as follows:

	As of
	June 30,			December 31,
	2021			2020
Accounts receivable, gross	$	81,681		$	81,745
Less: Allowance for credit losses		(886	)		(764	)
Accounts receivable, net	$	80,795		$	80,981

NOTE 5 – Inventories, net

Inventories, net consists of the following:

	As of
	June 30,			December 31,
	2021			2020
Finished goods	$	11,527		$	10,647
Work-in-process		16,434			16,927
Raw materials		29,070			24,893
Less: Inventory reserves		(8,059	)		(6,597	)
Inventories, net	$	48,972		$	45,870

NOTE 6 – Property, Plant and Equipment, net

Property, plant and equipment, net is comprised of the following:

	As of
	June 30,			December 31,
	2021			2020
Land and land improvements	$	1,095		$	1,095
Buildings and improvements		69,373			69,360
Machinery and equipment		237,507			233,743
Less: Accumulated depreciation		(214,958	)		(206,761	)
Property, plant and equipment, net	$	93,017		$	97,437

Depreciation expense for the six months ended June 30, 2021 and June 30, 2020 was $8,795 and $8,580, respectively.

NOTE 7 – Retirement Plans

Pension Plans

Net pension expense for our domestic and foreign plans included in other expense, net in the Condensed Consolidated Statements of Earnings is as follows:

	Three Months Ended				Six Months Ended
	June 30,		June 30,		June 30,		June 30,
	2021		2020		2021		2020
Net pension expense	$	21,823	$	666	$	23,780	$	1,330

The components of net pension expense for our domestic and foreign plans include the following:

	Domestic Pension Plans						Foreign Pension Plans
	Three Months Ended						Three Months Ended
	June 30,			June 30,			June 30,			June 30,
	2021			2020			2021			2020
Service cost	$	—		$	—		$	6		$	8
Interest cost		1,218			1,443			4			6
Expected return on plan assets⁽¹⁾		(1,058	)		(2,454	)		(3	)		(3	)
Amortization of loss		1,550			1,622			43			44
Settlement charges		20,063			—			—			—
Total expense, net	$	21,773		$	611		$	50		$	55

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

	Domestic Pension Plans						Foreign Pension Plans
	Six Months Ended						Six Months Ended
	June 30,			June 30,			June 30,			June 30,
	2021			2020			2021			2020
Service cost	$	—		$	—		$	12		$	15
Interest cost		2,471			2,886			8			13
Expected return on plan assets⁽¹⁾		(2,171	)		(4,908	)		(6	)		(7	)
Amortization of loss		3,317			3,244			86			87
Settlement charges		20,063			—			—			—
Total expense, net	$	23,680		$	1,222		$	100		$	108

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

In February 2020, the CTS Board of Directors authorized management to explore termination of the U.S.-based pension plan ("Plan"), subject to certain conditions. On June 1, 2020, we entered into the Fifth Amendment to the Plan whereby we set an effective termination date for the Plan of July 31, 2020. In February 2021, we received a determination letter from the Internal Revenue Service that allowed us to proceed with the termination process for the Plan. During the second quarter of 2021, the Company offered the option of receiving a lump sum payment to eligible participants with vested qualified Plan benefits in lieu of receiving monthly annuity payments. Approximately 365 participants elected to receive the settlement, and lump sum payments of approximately $35,594 were made from Plan assets to these participants in June 2021.

As required under US GAAP, the Company recognizes a settlement gain or loss when the aggregate amount of lump-sum distributions to participants equals or exceeds the sum of the service and interest cost components of the net periodic pension cost. The amount of settlement gain or loss recognized is the pro rata amount of the existing unrealized gain or loss immediately prior to the settlement. In general, both the projected benefit obligation and fair value of plan assets are required to be remeasured in order to determine the settlement gain or loss.

Upon the partial settlement of the pension liability due to the lump sum offering the Company recognized a non-cash and non-operating settlement charge of $20,063 related to pension losses, reclassified from accumulated other comprehensive loss to other (income) expense in the Company's Condensed Consolidated Statements of Earnings.

Upon final settlement of the pension liability with the purchase of annuities, expected to occur in the third quarter, we will reclassify the remaining related unrecognized pension losses, currently recorded in accumulated other comprehensive loss, to the Condensed Consolidated Statements of Earnings. Since the final amount of the settlement depends on a number of factors determined as of the liquidation date, including the annuity pricing interest rate environment and asset performance, the unrecognized losses value may fluctuate from June 30, 2021. As of June 30, 2021, we had gross unrecognized pension losses related to the Plan of $101,125.

We do not expect any cash contributions from the Company to the Plan as a result of this termination as Plan assets continue to significantly exceed estimated liabilities.

Other Post-retirement Benefit Plan

Net post-retirement expense for our other post-retirement plan includes the following components:

	Three Months Ended					Six Months Ended
	June 30,		June 30,			June 30,		June 30,
	2021		2020			2021		2020
Service cost	$	—	$	—		$	—	$	—
Interest cost		20		30			43		60
Amortization of gain		—		(21	)		—		(42	)
Total expense, net	$	20	$	9		$	43	$	18

NOTE 8 – Goodwill and Other Intangible Assets

Other Intangible Assets

Other intangible assets, net consist of the following components:

	As of
	June 30, 2021
	Gross Carrying Amount		Accumulated Amortization			Net Amount
Customer lists/relationships	$	96,889	$	(46,367	)	$	50,522
Technology and other intangibles		47,441		(23,379	)		24,062
In process research and development		2,200		(2,200	)		—
Other intangible assets, net	$	146,530	$	(71,946	)	$	74,584
Amortization expense for the three months ended June 30, 2021			$	2,348
Amortization expense for the six months ended June 30, 2021			$	4,717

	As of
	December 31, 2020
	Gross Carrying Amount		Accumulated Amortization			Net Amount
Customer lists/relationships	$	97,355	$	(44,002	)	$	53,353
Technology and other intangibles		47,301		(21,533	)		25,768
In process research and development		2,200		(2,200	)		—
Other intangible assets, net	$	146,856	$	(67,735	)	$	79,121
Amortization expense for the three months ended June 30, 2020			$	2,268
Amortization expense for the six months ended June 30, 2020			$	4,563

Remaining amortization expense for other intangible assets as of June 30, 2021 is as follows:

	Amortization Expense
2021	$	4,696
2022		9,176
2023		7,170
2024		7,008
2025		6,787
Thereafter		39,747
Total amortization expense	$	74,584

Goodwill

Changes in the net carrying amount of goodwill were as follows:

	Total
Goodwill as of December 31, 2020	$	109,497
Decrease from purchase accounting adjustments		(29	)
Increase due to acquisition		430
Goodwill as of June 30, 2021	$	109,898

In addition to the purchase accounting adjustments from the SSI transaction, goodwill increased due to an acquisition completed during the second quarter. The purchase price was approximately $510, with $255 paid in the second quarter of 2021 and an additional $255 to be paid in the second quarter of 2022. We expect small adjustments to the purchase price allocation to be completed in the third quarter.

NOTE 9 – Costs Associated with Exit and Restructuring Activities

Restructuring charges are reported as a separate line within operating earnings in the Condensed Consolidated Statements of Earnings.

Total restructuring charges are as follows:

	Three Months Ended
	June 30, 2021		June 30, 2020
Restructuring charges	$	151	$	135

	Six Months Ended
	June 30, 2021		June 30, 2020
Restructuring charges	$	232	$	375

September 2020 Plan

In September 2020, we initiated a restructuring plan focused on optimizing our manufacturing footprint and improving operational efficiency by better utilizing our systems capabilities (the "September 2020 Plan"). This plan includes transitioning certain administrative functions to a shared service center, realignment of manufacturing locations, and certain other efficiency improvement actions. The restructuring cost of the September 2020 Plan is estimated to be in the range of $4,600 to $6,000, including workforce reduction charges, building and equipment relocation charges and other contract and asset-related costs. In addition to these charges, we expect an additional $4,000 to $5,100 of other costs to be incurred related to initiatives that would not qualify as restructuring charges. These costs would include certain employee overlap and training costs as well as additional capital expenditures. Restructuring charges under the September 2020 Plan were $(10) during the three months ended June 30, 2021, consisting of $(10) in workforce reduction adjustments. Restructuring charges for the six months ended June 30, 2021 were $(27), consisting of $26 in workforce reduction costs and $(53) of other contract termination and facility closure cost true ups. The total restructuring liability related to the September 2020 Plan was $38 at June 30, 2021 and $512 at December 31, 2020.

June 2016 Plan

In June 2016, we announced plans to restructure operations by phasing out production at our Elkhart, IN facility and transitioning it into a research and development center supporting our global operations (the "June 2016 Plan"). Additional organizational changes were also implemented in various other locations. In 2017, we revised the June 2016 Plan to include an additional $1,100 in planned costs related to the relocation of our corporate headquarters in Lisle, IL and our plant in Bolingbrook, IL, both of which have now been consolidated into a single facility. These restructuring actions were completed as of March 31, 2021.

April 2014 Plan

In April 2014, we announced plans to restructure our operations and consolidate our Canadian operations into other existing facilities as part of our overall plan to simplify our business model and rationalize our global footprint (the “April 2014 Plan”). These restructuring actions were substantially completed during 2015 and the remaining liability was settled in the second quarter of 2021.

Other Restructuring Activities

From time to time we undertake other restructuring activities that are not part of a formal plan. Charges associated with these restructuring activities primarily relate to workforce reduction costs. During the three and six months ended June 30, 2021 we incurred restructuring charges of $161 and $262, respectively. During the three and six months ended June 30, 2020, we incurred restructuring charges of $135 and $407, respectively. The total restructuring liability associated with these actions was $163 at June 30, 2021 and $9 at December 31, 2020.

The following table displays the restructuring liability activity included in accrued expenses and other liabilities for all plans for the six months ended June 30, 2021:

Restructuring liability at January 1, 2021	$	1,363
Restructuring charges		232
Cost paid		(1,242	)
Other activity⁽¹⁾		(152	)
Restructuring liability at June 30, 2021	$	201

(1)	Other activity includes the effects of currency translation, non-cash asset write-downs and other charges that do not flow through restructuring expense.

NOTE 10 – Accrued Expenses and Other Liabilities

The components of accrued expenses and other liabilities are as follows:

	As of
	June 30,		December 31,
	2021		2020
Accrued product related costs	$	4,484	$	4,470
Accrued income taxes		6,027		7,320
Accrued property and other taxes		1,525		2,478
Accrued professional fees		1,281		1,663
Accrued customer related liabilities		5,242		3,815
Dividends payable		1,297		1,291
Remediation reserves		10,265		10,642
Derivative liabilities		680		671
Other accrued liabilities		5,964		5,821
Total accrued expenses and other liabilities	$	36,765	$	38,171

NOTE 11 – Commitments and Contingencies

Certain processes in the manufacture of our current and past products create by-products classified as hazardous waste. We have been notified by the U.S. Environmental Protection Agency, state environmental agencies, and in some cases, groups of potentially responsible parties, that we may be potentially liable for environmental contamination at several sites currently and formerly owned or operated by us. Two of those sites, Asheville, North Carolina and Mountain View, California, are designated National Priorities List sites under the U.S. Environmental Protection Agency’s Superfund program. We accrue a liability for probable remediation activities, claims and proceedings against us with respect to environmental matters if the amount can be reasonably estimated, and provide disclosures including the nature of a loss whenever it is probable or reasonably possible that a potentially material loss may have occurred but cannot be estimated. We record contingent loss accruals on an undiscounted basis.

A roll-forward of remediation reserves included in accrued expenses and other liabilities on the Condensed Consolidated Balance Sheets is comprised of the following:

	As of
	June 30,			December 31,
	2021			2020
Balance at beginning of period	$	10,642		$	11,444
Remediation expense		421			2,769
Net remediation payments		(806	)		(3,639	)
Other activity⁽¹⁾		8			68
Balance at end of the period	$	10,265		$	10,642

⁽¹⁾	Other activity includes currency translation adjustments not recorded through remediation expense.

Unrelated to the environmental claims described above, certain other legal claims are pending against us with respect to matters arising out of the ordinary conduct of our business.

We provide product warranties when we sell our products and accrue for estimated liabilities at the time of sale. Warranty estimates are forecasts based on the best available information and historical claims experience. We accrue for specific warranty claims if we believe that the facts of a specific claim make it probable that a liability in excess of our historical experience has been or will be incurred, and provide disclosures for specific claims whenever it is reasonably possible that a material loss may be incurred which cannot be estimated.

We cannot provide assurance that the ultimate disposition of environmental, legal, and product warranty claims will not materially exceed the amount of our accrued losses and adversely impact our consolidated financial position, results of operations, or cash flows. Our accrued liabilities and disclosures will be adjusted accordingly if additional information becomes available in the future.

NOTE 12 - Debt

Long-term debt was comprised of the following:

	As of
	June 30,			December 31,
	2021			2020
Total credit facility	$	300,000		$	300,000
Balance outstanding		50,000			54,600
Standby letters of credit		1,740			1,740
Amount available, subject to covenant restrictions	$	248,260		$	243,660
Weighted-average interest rate		1.21	%		1.92	%
Commitment fee percentage per annum		0.20	%		0.23	%

On February 12, 2019, we entered into an amended and restated five-year Credit Agreement with a group of banks (the "Credit Agreement") to extend the term of the facility. The Credit Agreement provides for a revolving credit facility of $300,000, which may be increased by $150,000 at the request of the Company, subject to the administrative agent's approval.

The revolving credit facility includes a swing line sublimit of $15,000 and a letter of credit sublimit of $10,000. Borrowings under the revolving credit facility bear interest at the base rate defined in the Credit Agreement. We also pay a quarterly commitment fee on the unused portion of the revolving credit facility. The commitment fee ranges from 0.20% to 0.30% based on our total leverage ratio.

The Credit Agreement requires, among other things, that we comply with a maximum total leverage ratio and a minimum fixed charge coverage ratio. Failure to comply with these covenants could reduce the borrowing availability under the revolving credit facility. We were compliant with all debt covenants at June 30, 2021. The Credit Agreement requires that we deliver quarterly financial statements, annual financial statements, auditor certifications, and compliance certificates within a specified number of days after the end of a quarter and year. Additionally, it 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. Interest rates on the credit facility fluctuate based upon the LIBOR and the Company’s quarterly total leverage ratio.

We have debt issuance costs related to our long-term debt that are being amortized using the straight-line method over the life of the debt. Amortization expense for the three and six months ended June 30, 2021 and 2020 was approximately $42 and $42 and $84 and $84, respectively. These costs are included in interest expense in our Condensed Consolidated Statements of Earnings.

We use interest rate swaps to convert the revolving credit facility's variable rate of interest into a fixed rate on a portion of the debt as described more fully in Note 13 "Derivative Financial Instruments". These swaps are treated as cash flow hedges and consequently, the changes in fair value were recorded in other comprehensive earnings.

Note 13 - Derivative Financial Instruments

Our earnings and cash flows are subject to fluctuations due to changes in foreign currency exchange rates and interest rates. We selectively use derivative financial instruments including foreign currency forward contracts and interest rate swaps to manage our exposure to these risks.

The use of derivative financial instruments exposes the Company to credit risk, which relates to the risk of nonperformance by a counterparty to the derivative contracts. We manage our credit risk by entering derivative contracts with only highly rated financial institutions and by using netting agreements.

The effective portion of derivative gains and losses are recorded in accumulated other comprehensive (loss) income until the hedged transaction affects earnings upon settlement, at which time they are reclassified to cost of goods sold or net sales. If it is probable that

an anticipated hedged transaction will not occur by the end of the originally specified time period, we reclassify the gains or losses related to that hedge from accumulated other comprehensive (loss) income to other expense, net.

We assess hedge effectiveness qualitatively by verifying that the critical terms of the hedging instrument and the forecasted transaction continue to match, and that there have been no adverse developments that have increased the risk that the counterparty will default. No recognition of ineffectiveness was recorded in our Condensed Consolidated Statements of Earnings for the three and six months ended June 30, 2021.

Foreign Currency Hedges

We use forward contracts to mitigate currency risk related to a portion of our forecasted foreign currency revenues and costs. The currency forward contracts are designed as cash flow hedges and are recorded in the Condensed Consolidated Balance Sheets at fair value.

We continue to monitor the Company’s overall currency exposure and may elect to add cash flow hedges in the future. At June 30, 2021, we had a net unrealized gain of $811 in accumulated other comprehensive (loss) income, of which $808 is expected to be reclassified to earnings within the next 12 months. At June 30, 2020, we had a net unrealized loss of $1,247 in accumulated other comprehensive (loss) income. The notional amount of foreign currency forward contracts outstanding was $11,430 at June 30, 2021.

Interest Rate Swaps

We use interest rate swaps to convert a portion of our revolving credit facility’s outstanding balance from a variable rate of interest to a fixed rate. As of June 30, 2021, we have agreements to fix interest rates on $50,000 of long-term debt through February 2024. The difference to be paid or received under the terms of the swap agreements will be recognized as an adjustment to interest expense when settled.

These swaps are treated as cash flow hedges and consequently, the changes in fair value are recorded in other comprehensive (loss) income. The estimated net amount of the existing losses that are reported in accumulated other comprehensive (loss) income that are expected to be reclassified into earnings within the next twelve months is approximately $523.

The location and fair values of derivative instruments designated as hedging instruments in the Condensed Consolidated Balance Sheets as of June 30, 2021, are shown in the following table:

	As of
	June 30,			December 31,
	2021			2020
Interest rate swaps reported in accrued expenses and other liabilities	$	(680	)	$	(671	)
Interest rate swaps reported in other long-term obligations	$	(899	)	$	(1,546	)
Foreign currency hedges reported in other current assets	$	1,023		$	1,125

The Company has elected to net its foreign currency derivative assets and liabilities in the balance sheet in accordance with ASC 210-20 (Balance Sheet, Offsetting). On a gross basis, there were foreign currency derivative assets of $1,023 and foreign currency derivative liabilities of $0 at June 30, 2021.

The effect of derivative instruments on the Condensed Consolidated Statements of Earnings is as follows:

	Three Months Ended						Six Months Ended
	June 30,			June 30,			June 30,			June 30,
	2021			2020			2021			2020
Foreign Exchange Contracts:
Amounts reclassified from AOCI to earnings:
Net sales	$	—		$	73		$	—		$	73
Cost of goods sold		329			(519	)		550			(271	)
Selling, general and administrative expense		—			—			—			(5	)
Total gain (loss) reclassified from AOCI to earnings		329			(446	)		550			(203	)
Gain recognized in other expense for hedge ineffectiveness		—			3			—			3
Total derivative gain (loss) on foreign exchange contracts recognized in earnings	$	329		$	(443	)	$	550		$	(200	)

Interest Rate Swaps:
(Expense) recorded in Interest expense	$	(187	)	$	(109	)	$	(363	)	$	(71	)
Total gains (losses) on derivatives	$	142		$	(552	)	$	187		$	(271	)

NOTE 14 – Accumulated Other Comprehensive (Loss) Income

Shareholders’ equity includes certain items classified as accumulated other comprehensive (loss) income (“AOCI”) in the Condensed Consolidated Balance Sheets, including:

•

Unrealized gains (losses) on hedges relate to interest rate swaps to convert a portion of our revolving credit facility's outstanding balance from a variable rate of interest into a fixed rate and foreign currency forward contracts used to hedge our exposure to changes in exchange rates affecting certain revenues and costs denominated in foreign currencies. These hedges are designated as cash flow hedges, and we have deferred income statement recognition of gains and losses until the hedged transactions occur, at which time amounts are reclassified into earnings. Further information related to our derivative financial instruments is included in Note 13 - Derivative Financial Instruments and Note 17 – Fair Value Measurements.

•

Unrealized gains (losses) on pension obligations are deferred from income statement recognition until the gains or losses are realized. Amounts reclassified to income from AOCI are included in net periodic pension income (expense). Further information related to our pension obligations is included in Note 7 – Retirement Plans.

•

Cumulative translation adjustments relate to our non-U.S. subsidiary companies that have designated a functional currency other than the U.S. dollar. We are required to translate the subsidiary functional currency financial statements to dollars using a combination of historical, period-end, and average foreign exchange rates. This combination of rates creates the foreign currency translation adjustment component of other comprehensive income.

Changes in exchange rates between the functional currency and the currency in which a transaction is denominated are foreign exchange transaction gains or losses. Transaction losses for the three and six months ended June 30, 2021 were $928 and $(401), respectively, and transaction losses for the three and six months ended June 30, 2020 were $892 and $(379), respectively, which have been included in other (expense) income in the Condensed Consolidated Statements of Earnings.

The components of accumulated other comprehensive (loss) income for the three months ended June 30, 2021 are as follows:

							(Gain) Loss
	As of			Gain (Loss)			Reclassified			As of
	March 31,			Recognized			from AOCI			June 30,
	2021			in OCI			to Earnings			2021
Changes in fair market value of derivatives:
Gross	$	(877	)	$	490		$	(142	)	$	(529	)
Income tax benefit (expense)		203			(113	)		33			123
Net		(674	)		377			(109	)		(406	)
Changes in unrealized pension cost:
Gross		(126,157	)		499			21,606			(104,052	)
Income tax benefit (expense)		34,492			(115	)		(4,966	)		29,411
Net		(91,665	)		384			16,640			(74,641	)
Cumulative translation adjustment:
Gross		(2,024	)		1			—			(2,023	)
Total accumulated other comprehensive (loss) income	$	(94,363	)	$	762		$	16,531		$	(77,070	)

The components of accumulated other comprehensive (loss) income for the three months ended June 30, 2020, are as follows:

							Loss
	As of			Gain (Loss)			Reclassified			As of
	March 31,			Recognized			from AOCI			June 30,
	2020			in OCI			to Earnings			2020
Changes in fair market value of derivatives:
Gross	$	(5,044	)	$	250		$	555		$	(4,239	)
Income tax (expense) benefit		1,139			(44	)		(117	)		978
Net		(3,905	)		206			438			(3,261	)
Changes in unrealized pension cost:
Gross		(122,480	)		—			1,574			(120,906	)
Income tax benefit (expense)		33,643			—			(365	)		33,278
Net		(88,837	)		—			1,209			(87,628	)
Cumulative translation adjustment:
Gross		(2,252	)		(14	)		—			(2,266	)
Total accumulated other comprehensive (loss) income	$	(94,994	)	$	192		$	1,647		$	(93,155	)

The components of accumulated other comprehensive (loss) income for the six months ended June 30, 2021, are as follows:

							(Gain) Loss
	As of			Gain (Loss)			Reclassified			As of
	December 31,			Recognized			from AOCI			June 30,
	2020			in OCI			to Earnings			2021
Changes in fair market value of derivatives:
Gross	$	(1,038	)	$	696			(187	)	$	(529	)
Income tax (expense) benefit		240			(160	)		43			123
Net		(798	)		536			(144	)		(406	)
Changes in unrealized pension cost:
Gross		(128,004	)		499			23,453			(104,052	)
Income tax benefit (expense)		34,917			(115	)		(5,391	)		29,411
Net		(93,087	)		384			18,062			(74,641	)
Cumulative translation adjustment:
Gross		(2,036	)		13			—			(2,023	)
Total accumulated other comprehensive (loss) income	$	(95,921	)	$	933		$	17,918		$	(77,070	)

The components of accumulated other comprehensive (loss) income for the six months ended June 30, 2020, are as follows:

							Loss
	As of			Gain			Reclassified			As of
	December 31,			Recognized			from AOCI			June 30,
	2019			in OCI			to Earnings			2020
Changes in fair market value of derivatives:
Gross	$	659		$	(5,172	)	$	274		$	(4,239	)
Income tax (expense) benefit		(150	)		1,181			(53	)		978
Net		509			(3,991	)		221			(3,261	)
Changes in unrealized pension cost:
Gross		(124,140	)		—			3,234			(120,906	)
Income tax benefit (expense)		34,018			—			(740	)		33,278
Net		(90,122	)		—			2,494			(87,628	)
Cumulative translation adjustment:
Gross		(2,211	)		(55	)		—			(2,266	)
Income tax benefit		98			(98	)		—			0
Net		(2,113	)		(153	)		—			(2,266	)
Total accumulated other comprehensive (loss) income	$	(91,726	)	$	(4,144	)	$	2,715		$	(93,155	)

NOTE 15 – Shareholders’ Equity

Share count and par value data related to shareholders’ equity are as follows:

	As of
	June 30,		December 31,
	2021		2020
Preferred Stock
Par value per share	No par value		No par value
Shares authorized		25,000,000		25,000,000
Shares outstanding		—		—
Common Stock
Par value per share	No par value		No par value
Shares authorized		75,000,000		75,000,000
Shares issued		57,235,379		57,076,410
Shares outstanding		32,435,756		32,276,787
Treasury stock
Shares held		24,799,623		24,799,623

On May 13, 2021, the Board of Directors approved a new share repurchase program that authorizes the Company to repurchase up to $50,000 of the Company’s common stock. The repurchase program has no set expiration date and replaces the repurchase program approved by the Board of Directors on February 7, 2019. During the six months ended June 30, 2021, no shares of common stock were repurchased. During the six months ended June 30, 2020, 342,731 shares of common stock were repurchased for $8,080. Approximately $50,000 is available for future purchases.

A roll-forward of common shares outstanding is as follows:

	Six Months Ended
	June 30,		June 30,
	2021		2020
Balance at the beginning of the year		32,276,787		32,472,406
Repurchases		—		(342,731	)
Restricted share issuances		158,969		137,632
Balance at the end of the period		32,435,756		32,267,307

Certain potentially dilutive restricted stock units are excluded from diluted earnings per share because they are anti-dilutive. The number of outstanding awards that were anti-dilutive for the three months ended June 30, 2021 and 2020 were 93 and 84,720, respectively. The number of outstanding awards that were anti-dilutive for the six months ended June 30, 2021 and 2020 were 46,810 and 61,780, respectively.

NOTE 16 - Stock-Based Compensation

At June 30, 2021, we had five active stock-based compensation plans: the Non-Employee Directors’ Stock Retirement Plan (“Directors’ Plan”), the 2004 Omnibus Long-Term Incentive Plan (“2004 Plan”), the 2009 Omnibus Equity and Performance Incentive Plan (“2009 Plan”), the 2014 Performance and Incentive Compensation Plan (“2014 Plan”), and the 2018 Equity and Incentive Compensation Plan ("2018 Plan"). Future grants can only be made under the 2018 Plan.

These plans allow for grants of stock options, stock appreciation rights, restricted stock, restricted stock units ("RSUs"), performance shares, performance units, and other stock awards subject to the terms of the specific plans under which the awards are granted.

The following table summarizes the compensation expense included in selling, general and administrative expenses in the Condensed Consolidated Statements of Earnings related to stock-based compensation plans:

	Three Months Ended				Six Months Ended
	June 30,		June 30,		June 30,		June 30,
	2021		2020		2021		2020
Service-based RSUs	$	738	$	779	$	1,425	$	1,359
Performance-based RSUs		1,066		19		1,559		(349	)
Cash-settled RSUs		99		19		138		35
Total	$	1,903	$	817	$	3,122	$	1,045
Income tax benefit		438		189		718		240
Net expense	$	1,465	$	628	$	2,404	$	805

The following table summarizes the unrecognized compensation expense related to non-vested RSUs by type and the weighted-average period in which the expense is to be recognized:

	Unrecognized
	Compensation		Weighted-
	Expense at		Average
	June 30, 2021		Period (years)
Service-based RSUs	$	2,564		1.43
Performance-based RSUs		3,692		1.98
Total	$	6,256		1.75

We recognize expense on a straight-line basis over the requisite service period for each separately vesting portion of the award as if the award was, in substance, multiple awards.

The following table summarizes the status of these plans as of June 30, 2021:

	2018 Plan		2014 Plan		2009 Plan		2004 Plan		Directors' Plan
Awards originally available		2,500,000		1,500,000		3,400,000		6,500,000	N/A
Maximum potential awards outstanding		645,035		35,100		45,200		14,545		4,722
RSUs and cash settled awards vested and released		116,967		—		—		—		—
Awards available for grant		1,737,998		—		—		—		—

Service-Based Restricted Stock Units

The following table summarizes the service-based RSU activity for the six months ended June 30, 2021:

	Units			Weighted Average Grant Date Fair Value
Outstanding at December 31, 2020		367,428		$	21.28
Granted		65,950			32.80
Vested and released		(151,280	)		20.88
Forfeited		(7,889	)		27.27
Outstanding at June 30, 2021		274,209		$	24.11
Releasable at June 30, 2021		116,767		$	15.83

Performance and Market-Based Restricted Stock Units

The following table summarizes the performance and market-based RSU activity for the six months ended June 30, 2021:

	Units			Weighted Average Grant Date Fair Value
Outstanding at December 31, 2020		225,559		$	28.97
Granted		81,622			34.38
Attained by performance		18,107			28.33
Released		(53,137	)		28.33
Forfeited		(25,872	)		26.82
Outstanding at June 30, 2021		246,279		$	31.08
Releasable at June 30, 2021		—		$	—

Cash-Settled Restricted Stock Units

Cash-Settled RSUs entitle the holder to receive the cash equivalent of one share of common stock for each unit when the unit vests. These RSUs are issued to key employees residing in foreign locations as direct compensation. Generally, these RSUs vest over a three-year period. Cash-Settled RSUs are classified as liabilities and are remeasured at each reporting date until settled. At June 30, 2021 and December 31, 2020 we had 32,085 and 30,009 cash-settled RSUs outstanding, respectively. At June 30, 2021 and December 31, 2020, liabilities of $261 and $396, respectively, were included in accrued expenses and other liabilities on our Condensed Consolidated Balance Sheets.

NOTE 17 — Fair Value Measurements

The table below summarizes our financial liabilities that were measured at fair value on a recurring basis at June 30, 2021:

				Quoted
				Prices
	(Liability) Asset			in Active		Significant
	Carrying			Markets for		Other			Significant
	Value at			Identical		Observable			Unobservable
	June 30,			Instruments		Inputs			Inputs
	2021			(Level 1)		(Level 2)			(Level 3)
Interest rate swaps	$	(1,579	)	$	—	$	(1,579	)	$	—
Foreign currency hedges	$	1,023		$	—	$	1,023		$	—
Contingent consideration	$	1,500		$	—	$	—		$	1,500

The table below summarizes the financial assets that were measured at fair value on a recurring basis as of December 31, 2020:

				Quoted
				Prices
	(Liability) Asset			in Active		Significant
	Carrying			Markets for		Other			Significant
	Value at			Identical		Observable			Unobservable
	December 31,			Instruments		Inputs			Inputs
	2020			(Level 1)		(Level 2)			(Level 3)
Interest rate swaps	$	(2,217	)	$	—	$	(2,217	)	$	—
Foreign currency hedges	$	1,125		$	—	$	1,125		$	—
Contingent consideration	$	2,000		$	—	$	—		$	2,000

We use interest rate swaps to convert a portion of our revolving credit facility’s outstanding balance from a variable rate of interest into a fixed rate and foreign currency forward contracts to hedge the effect of foreign currency changes on certain revenues and costs denominated in foreign currencies. These derivative financial instruments are measured at fair value on a recurring basis. The fair value of our interest rate swaps, and foreign currency hedges were measured using standard valuation models using market-based observable inputs over the contractual terms, including forward yield curves, among others. There is a readily determinable market for these derivative instruments, but that market is not active and therefore they are classified within Level 2 of the fair value hierarchy.

The fair value of the contingent consideration requires significant judgment. The Company's fair value estimates used in the contingent consideration valuation are considered Level 3 fair value measurements. The fair value estimates were based on assumptions management believes to be reasonable, but that are inherently uncertain, including estimates of future revenues and timing of events and activities that are expected to take place. Refer to Note 3 for further discussion on contingent consideration.

A roll-forward of the contingent consideration is as follows:

	Contingent
	Consideration
Balance at December 31, 2020	$	2,000
Settled in cash		(350	)
Reclassified to payable in accrued expenses and other liabilities		(150	)
Balance at June 30, 2021	$	1,500
Less current portion in accrued expenses and other liabilities		(1,200	)
Total long-term portion in other long-term obligations	$	300

Our long-term debt consists of debt outstanding under the revolving credit facility which is recorded at its carrying value. There is a readily determinable market for our long-term debt, and it is classified within Level 2 of the fair value hierarchy as the market is not deemed to be active. The fair value of long-term debt approximates carrying value and was determined by valuing a similar hypothetical coupon bond and attributing that value to our long-term debt under the revolving credit facility.

NOTE 18 — Income Taxes

The effective tax rates for the three and six months ended June 30, 2021 and 2020 are as follows:

	Three Months Ended						Six Months Ended
	June 30,			June 30,			June 30,			June 30,
	2021			2020			2021			2020
Effective tax rate		245.6	%		17.6	%		9.3	%		27.1	%

Our effective income tax rate was 245.6% and 17.6% in the second quarters of 2021 and 2020, respectively. This increase is primarily attributed to a one-time settlement expense related to lump sum payments made for the CTS Corporation U.S. pension plan. The second quarter 2021 tax rate was higher than the U.S. statutory federal tax rate for the same reason noted above. The second quarter 2020 tax rate was lower than the U.S. statutory federal tax rate due to foreign earnings that are taxed at lower rates and a reduction in reserves related to uncertain tax positions.

Our effective income tax rate was 9.3% and 27.1% in the first half of 2021 and 2020, respectively. This decrease is primarily attributed to the change in mix of earnings by jurisdiction, a one-time settlement expense related to lump sum payments made for the CTS Corporation U.S. pension plan, and tax benefits recorded upon vesting of restricted stock units. The tax rate in the first half of 2021 was lower than the U.S. statutory federal tax rate for the same reason noted above. The tax rate in the first half of 2020 was higher than the U.S. statutory federal tax rate primarily due to the establishment of valuation allowances on certain U.S. tax credits and the Company’s decision to no longer reinvest the earnings of its Taiwan subsidiary offset by a reduction in reserves related to uncertain tax positions.

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

(in thousands, except percentages and per share amounts)

The following discussion should be read in conjunction with our unaudited Condensed Consolidated Financial Statements and notes included under Item 1, as well as our Consolidated Financial Statements and notes and related Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2020.

Overview

CTS Corporation ("CTS", "we", "our" or "us") is a leading designer and manufacturer of products that Sense, Connect and Move. Our vision is to be a leading provider of sensing and motion devices as well as connectivity components, enabling an intelligent and seamless world. These devices are categorized by their ability to Sense, Connect or Move. Sense products provide vital inputs to electronic systems. Connect products allow systems to function in synchronization with other systems. Move products ensure required movements are effectively and accurately executed. We are committed to achieving our vision by continuing to invest in the development of products and technologies, and talent within these categories.

We manufacture sensors, actuators, and connectivity components in North America, Europe, and Asia. CTS provides engineered products to OEMs and tier one suppliers in the aerospace and defense, industrial, information technology, medical, telecommunications, and transportation markets.

There is an increasing proliferation of sensing and motion applications within various markets we serve. In addition, the increasing connectivity of various devices to the internet results in greater demand for communication bandwidth and data storage, increasing the need for our connectivity products. Our success is dependent on the ability to execute our strategy to support these trends. We are subject to challenges including periodic market softness, competition from other suppliers, changes in technology, and the ability to add new customers, launch new products or penetrate new markets.

Impact of COVID-19

The COVID-19 pandemic has resulted in a significant disruption to the global economy that has and could have continued adverse impact on our business. The extent of the impact of the COVID-19 pandemic on our business, financial results and liquidity will depend largely on future developments, including the duration of the spread of the COVID-19 outbreak, the impact on capital and financial markets and the related impact on our suppliers and customers, especially in the transportation end-market. These future developments are outside of our control, are highly uncertain and cannot be predicted. These and other potential impacts of the COVID-19 pandemic, along with the recent increases in consumer demand continue to result in critical raw material and semiconductor chip shortages as well as associated cost increases, that may adversely impact our results for the remainder of 2021, and that impact could be material. We continue to actively monitor the ongoing potential impacts of COVID-19 and the supply chain issues and will seek to mitigate and minimize their impact on our business. We remain cautious about the financial impact of these potential disruptions on our business.

Results of Operations: Second Quarter 2021 versus Second Quarter 2020

The following table highlights changes in significant components of the Unaudited Condensed Consolidated Statements of Earnings for the quarters ended June 30, 2021, and June 30, 2020:

	Three Months Ended									Percent of			Percent of
	June 30,			June 30,			Percent			Net Sales –			Net Sales –
	2021			2020			Change			2021			2020
Net sales	$	129,585		$	84,197			53.9	%		100.0	%		100.0	%
Cost of goods sold		81,889			57,630			42.1			63.2			68.4
Gross margin		47,696			26,567			79.5			36.8			31.6
Selling, general and administrative expenses		20,937			14,668			42.7			16.2			17.4
Research and development expenses		6,029			5,522			9.2			4.7			6.6
Restructuring charges		151			135			11.9			0.1			0.2
Total operating expenses		27,117			20,325			33.4			20.9			24.1
Operating earnings		20,579			6,242			229.7			15.9			7.4
Total other expense, net		(21,180	)		(349	)		5,968.8			(16.3	)		0.4
Earnings before income taxes		(601	)		5,893			(110.2	)		(0.5	)		7.0
Income tax (benefit) expense		(1,476	)		1,036			(242.5	)		(1.1	)		1.2
Net earnings	$	875		$	4,857			(82.0	)%		0.7	%		5.8	%
Earnings per share:
Diluted net earnings per share	$	0.03		$	0.15

Net sales were $129,585 in the second quarter of 2021, an increase of $45,388 or 53.9% from the second quarter of 2020. Net sales growth was driven by the overall improvement in the economy; however, we also continued to experience significant inflation in material and freight costs as well as interruptions in the supply chain particularly due to the global semiconductor chip and resin shortages impacting the operations of our business. The impact of the supply chain shortages and OEM shutdowns are expected to continue to have an adverse effect on our operations, which we are currently unable to quantify.

Net sales to transportation markets increased $33,427 or 87.7%. Net sales to other markets increased $11,961 or 26.0%. The SSI acquisition, which was completed in December 2020, added $1,639 in net sales for the quarter. Changes in foreign exchange rates increased net sales by $2,681 year-over-year due to the U.S. Dollar depreciating compared to the Chinese Renminbi and Euro.

Gross margin as a percent of net sales was 36.8% in the second quarter of 2021 compared to 31.6% in the second quarter of 2020. The increase in gross margin was driven primarily by sales volume. The second quarter of 2020 was most significantly impacted by the COVID-19 pandemic.

Selling, general and administrative ("SG&A") expenses were $20,937 or 16.2% of net sales in the second quarter of 2021 versus $14,668 or 17.4% of net sales in the second quarter of 2020. The 2020 SG&A costs included savings from cost reduction measures we had implemented while 2021 saw those measures fully restored as well as higher costs from incentive compensation.

Research and development (“R&D”) expenses were $6,029 or 4.7% of net sales in the second quarter of 2021 compared to $5,522 or 6.6% of net sales in the comparable quarter of 2020. The increase in overall R&D expenses is primarily due to changes in timing and mix of certain projects as well as cost actions implemented in Q2 2020.

Restructuring charges were $151 or 0.1% of net sales in the second quarter of 2021 compared to $135 or 0.2% of net sales in the second quarter of 2020.

Operating earnings were $20,579 or 15.9% of net sales in the second quarter of 2021 compared to operating earnings of $6,242 or 7.4% of net sales in the second quarter of 2020. The change in operating earnings was driven by the items discussed above.

Other expense and income items are summarized in the following table:

	Three Months Ended
	June 30,			June 30,
	2021			2020
Interest expense	$	(508	)	$	(909	)
Interest income		257			304
Other expense, net		(20,929	)		256
Total other expense, net	$	(21,180	)	$	(349	)

Other expense, net in the second quarter of 2021 was primarily driven by $20,063 in settlement charges from our U.S. Pension plan termination process.

	Three Months Ended
	June 30,			June 30,
	2021			2020
Effective tax rate		245.6	%		17.6	%

Our effective income tax rate was 245.6% and 17.6% in the second quarters of 2021 and 2020, respectively. This increase is primarily attributable to the impact of the U.S. Pension Plan settlement charge taken in the second quarter of 2021.

Results of Operations: Six Months ended June 30, 2021 versus Six Months Ended June 30, 2020

The following table highlights changes in significant components of the Unaudited Condensed Consolidated Statements of Earnings for the six months ended June 30, 2021, and June 30, 2020:

	Six Months Ended									Percent of			Percent of
	June 30,			June 30,			Percent			Net Sales –			Net Sales –
	2021			2020			Change			2021			2020
Net sales	$	258,012		$	187,272			37.8	%		100.0	%		100.0	%
Cost of goods sold		167,725			127,806			31.2			65.0			68.2
Gross margin		90,287			59,466			51.8			35.0			31.8
Selling, general and administrative expenses		39,262			31,427			24.9			15.2			16.8
Research and development expenses		11,716			12,930			(9.4	)		4.5			6.9
Restructuring charges		232			375			(38.1	)		0.1			0.2
Total operating expenses		51,210			44,732			14.5			19.8			23.9
Operating earnings		39,077			14,734			165.2			15.1			7.9
Total other (expense), net		(24,889	)		(2,851	)		773.0			(9.6	)		(1.5	)
Earnings before income taxes		14,188			11,883			19.4			5.5			6.3
Income tax expense		1,323			3,218			(58.9	)		0.5			1.7
Net earnings	$	12,865		$	8,665			48.5	%		5.0	%		4.6	%
Earnings per share:
Diluted net earnings per share	$	0.39		$	0.27

Net sales were $258,012 in the six months ended June 30, 2021, an increase of $70,740 or 37.8% from the six months ended June 30, 2020. Net sales growth was driven by the overall improvement in the economy; however, we also continued to experience significant inflation in material and freight costs as well as interruptions in the supply chain particularly due to the global semiconductor chip and resin shortages impacting the operations of our business. The impact of the supply chain shortages and OEM shutdowns are expected to continue to have an adverse effect on our operations, which we are currently unable to quantify.

Net sales to transportation markets increased $47,748 or 47.9%. Net sales to other markets increased $22,993 or 26.2%. The SSI acquisition, which was completed in December 2020, added $3,487 in net sales for the six months ended June 30, 2021. Changes in foreign exchange rates increased net sales by $5,177 year-over-year due to the U.S. Dollar depreciating compared to the Chinese Renminbi and Euro.

Gross margin as a percent of net sales was 35.0% for the six months ended June 30, 2021 compared to 31.8% for the six months ended June 30, 2020. The increase in gross margin was driven primarily by sales volume. The first six months of 2020 were impacted significantly by the COVID-19 pandemic, particularly in Q2 2020.

SG&A expenses were $39,262 or 15.2% of net sales for the six months ended June 30, 2021 versus $31,427 or 16.8% of net sales for the six months ended June 30, 2020. The 2020 year to date SG&A costs include savings from cost reduction measures we had implemented while 2021 saw those measures fully restored as well as higher costs from incentive compensation.

R&D expenses were $11,716 or 4.5% of net sales for the six months ended June 30, 2021 compared to $12,930 or 6.9% of net sales in the comparable period of 2020. The decrease in overall R&D expenses is primarily due to changes in timing and mix of certain projects.

Restructuring charges were $232 or 0.1% of net sales for the six months ended June 30, 2021 compared to $375 or 0.2% of net sales for the six months ended June 30, 2020.

Operating earnings were $39,077 or 15.1% of net sales for the six months ended June 30, 2021 compared to operating earnings of $14,734 or 7.9% of net sales for the six months ended June 30, 2020. The change in operating earnings were driven by the items discussed above.

Other expense and income items are summarized in the following table:

	Six Months Ended
	June 30,			June 30,
	2021			2020
Interest expense	$	(1,063	)	$	(1,760	)
Interest income		459			635
Other expense, net		(24,285	)		(1,726	)
Total other expense, net	$	(24,889	)	$	(2,851	)

Other expense, net in the first six months of 2021 was primarily driven by $20,063 in settlement charges from our U.S. Pension plan termination process in the second quarter of 2021.

	Six Months Ended
	June 30,			June 30,
	2021			2020
Effective tax rate		9.3	%		27.1	%

Our effective income tax rate was 9.3% and 27.1% in the six months ended June 30, 2021 and 2020, respectively. This decrease is primarily attributable to the change in the mix of earnings by jurisdiction as well as $20,063 in settlement charges from our U.S. Pension plan termination process in the second quarter of 2021.

Liquidity and Capital Resources

Cash and cash equivalents were $117,397 at June 30, 2021, and $91,773 at December 31, 2020, of which $113,719 and $90,051, respectively, were held outside the United States. The increase in cash and cash equivalents of $25,624 was primarily driven by cash generated from operating activities of $38,785, which was partially offset by net payments on long-term debt of $4,600, capital expenditures of $3,970, dividends paid of $2,585, taxes paid on behalf of equity award participants of $1,480, payments of contingent consideration of $350, and payments for acquisitions of $255. Total long-term debt was $50,000 as of June 30, 2021 and $54,600 as of December 31, 2020. Total debt as a percentage of total capitalization, defined as long-term debt as a percentage of total debt and shareholders' equity, was 9.9% at June 30, 2021, compared to 11.4% at December 31, 2020.

Working capital increased by $32,734 during the six months ended June 30, 2021, primarily due to the increase in cash and cash equivalents from strong operating cash flows.

Cash Flows from Operating Activities

Net cash provided by operating activities was $38,785 during the six months ended June 30, 2021. Components of net cash provided by operating activities included net earnings of $12,865, depreciation and amortization expense of $13,512, non-cash pension and other post-retirement plan expenses of $23,823, and other net non-cash items of ($1,779), and a net cash outflow from changes in assets and liabilities of $9,636.

Cash Flows from Investing Activities

Net cash used in investing activities for the six months ended June 30, 2021 was $4,225, driven primarily by capital expenditures.

Cash Flows from Financing Activities

Net cash used in financing activities for the six months ended June 30, 2021 was $9,015. The net cash outflow was the result of a decrease in borrowings of long-term debt of $4,600, dividends paid of $2,585, taxes paid on behalf of equity award participants in the amount of $1,480, and payments of contingent consideration of $350.

Capital Resources

Long‑term debt is comprised of the following:

	As of
	June 30,			December 31,
	2021			2020
Total credit facility	$	300,000		$	300,000
Balance outstanding		50,000			54,600
Standby letters of credit		1,740			1,740
Amount available, subject to covenant restrictions	$	248,260		$	243,660
Weighted-average interest rate		1.21	%		1.92	%
Commitment fee percentage per annum		0.20	%		0.23	%

Our Credit Agreement provides for a revolving credit facility of $300,000, which may be increased by $150,000 at the request of the Company, subject to the administrative agent's approval.

We have entered into interest rate swap agreements to fix interest rates on $50,000 of long-term debt through February 2024. The difference to be paid or received under the terms of the swap agreements is recognized as an adjustment to interest expense when settled.

We have historically funded our capital and operating needs primarily through cash flows from operating activities, supported by available credit under our revolving credit facility. We believe that cash flows from operating activities and available borrowings under our revolving credit facility will be adequate to fund our working capital needs, capital expenditures, debt service and dividend requirements for at least the next twelve months. However, we may choose to pursue additional equity and debt financing to provide additional liquidity or to fund acquisitions.

Critical Accounting Policies and Estimates

Management prepared the Condensed Consolidated Financial Statements under accounting principles generally accepted in the United States of America. These principles require the use of estimates, judgments, and assumptions. We believe that the estimates, judgments, and assumptions we used are reasonable, based upon the information available.

Our estimates and assumptions affect the reported amounts in our financial statements. The following accounting policies comprise those that we believe are the most critical in understanding and evaluating our reported financial results.

Revenue Recognition

Product revenue is recognized when the transfer of promised goods to a customer occurs in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods. We follow the five step model to determine when this transfer has occurred: 1) identify the contract(s) with the customer; 2) identify the performance obligations in the contract; 3) determine the transaction price; 4) allocate the transaction price to the performance obligations in the contract; 5) recognize revenue when (or as) the entity satisfies a performance obligation.

Product Warranties

Provisions for estimated warranty expenses primarily related to our automotive products are made at the time products are sold. These estimates are established using a quoted industry rate. We adjust our warranty reserve for any known or anticipated warranty claims as new information becomes available. We evaluate our warranty obligations at least quarterly and adjust our accruals if it is probable that future costs will be different than our current reserve. Over the last three years, product warranty reserves have ranged from 0.5% to 2.7% of total sales. We believe our reserve level is appropriate considering all facts and circumstances surrounding any outstanding quality claims and our historical experience selling our products to our customers.

Accounts Receivable

We have standardized credit granting and review policies and procedures for all customer accounts, including:

•

Credit reviews of all new customer accounts,

•

Ongoing credit evaluations of current customers,

•

Credit limits and payment terms based on available credit information,

•

Adjustments to credit limits based upon payment history and the customer's current credit worthiness,

•

An active collection effort by regional credit functions, reporting directly to the corporate financial officers, and

•

Limited credit insurance on the majority of our international receivables.

We reserve for estimated credit losses based on historical experience, specific customer collection issues, current conditions and reasonable and supportable forecasts that affect the collectability of the remaining cash flows over the contractual terms of our receivables and other financial assets. Over the last three years, accounts receivable reserves have been approximately 0.1% to 1.1% of total accounts receivable. We believe our reserve level is appropriate considering the quality of the portfolio. While credit losses have historically been within expectations of the reserves established, we cannot guarantee that our credit loss experience will continue to be consistent with historical experience or our current forecasts.

Inventories

We value our inventories at the lower of the actual cost to purchase or manufacture using the first-in, first-out ("FIFO") method, or net realizable value. We review inventory quantities on hand and record a provision for excess and obsolete inventory based on historical usage, forecasts of product demand and related production requirements.

Over the last three years, our reserves for excess and obsolete inventories have ranged from 10.2% to 14.1% of gross inventory. We believe our reserve level is appropriate considering the quantities and quality of the inventories.

Retirement Plans

Actuarial assumptions are used in determining pension income and expense and our defined benefit obligations. We utilize actuaries from consulting companies in each applicable country to develop our discount rates, matching high-quality bonds currently available and expected to be available during the period to maturity of the pension benefit in order to provide the necessary future cash flows to pay the accumulated benefits when due. After considering the recommendations of our actuaries, we have assumed a discount rate, expected rate of return on plan assets, and a rate of compensation increase in determining our annual pension income and expense and

the projected benefit obligation. During the fourth quarter of each year, we review our actuarial assumptions in light of current economic factors to determine if the assumptions need to be adjusted. Changes in the actuarial assumptions could have a material effect on our results of operations.

We do not expect any cash contributions from the Company to the Plan as a result of this termination as Plan assets continue to significantly exceed estimated liabilities.

Impairment of Goodwill

Goodwill of a reporting unit is tested for impairment annually, or more frequently if an event occurs or circumstances change that would more-likely-than-not reduce the fair value of a reporting unit below its carrying amount. Examples of such events or circumstances include, but are not limited to, the following:

•

Significant decline in market capitalization relative to net book value,

•

Significant adverse change in regulatory factors or in the business climate,

•

Unanticipated competition,

•

More-likely-than-not expectation that a reporting unit or a significant portion of a reporting unit will be sold or otherwise disposed of,

•

Testing for recoverability of a significant asset group within a reporting unit, and

•

Allocation of a portion of goodwill to a business to be disposed.

If we believe that one or more of the above indicators of impairment have occurred, we perform an impairment test. We have the option to perform a qualitative assessment (commonly referred to as "step zero" test) to determine whether further quantitative analysis for impairment of goodwill and indefinite-lived intangible assets is necessary. The qualitative assessment includes a review of macroeconomic conditions, industry and market considerations, internal cost factors, and our own overall financial and share price

performance, among other factors. If, after assessing the totality of events or circumstances we determine that it is not more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, we do not need to perform a quantitative analysis.

If a quantitative assessment is required, we estimate the fair value of each reporting unit using a combination of discounted cash flow analysis and market-based valuation methodologies. Determining fair value using a quantitative approach requires significant judgment, including judgments about projected revenues, cash flows over a multi-year period, discount rates and estimated valuation multiples. The discount rate applied to our forecasts of future cash flows is based on our estimated weighted average cost of capital. In assessing the reasonableness of our determined fair values, we evaluate our results against our market capitalization. Changes in these estimates and assumptions could materially affect the determination of fair value and impact the goodwill impairment assessment.

Our latest assessment was performed using a quantitative approach as of October 1, 2020, and we determined that it was likely that the fair values of our reporting units were more than their carrying amounts, and therefore no impairment charges were recorded. We will monitor future results and will perform a test if indicators trigger an impairment review.

Impairment of Other Intangible and Long-Lived Assets

We evaluate the impairment of identifiable intangibles and other long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors considered that may trigger an impairment review consist of, but are not limited to, the following:

•

Significant decline in market capitalization relative to net book value,

•

Significant under performance relative to expected historical or projected future operating results,

•

Significant changes in the manner of use of the acquired assets or the strategy for the overall business, and

•

Significant negative industry or economic trends.

If we believe that one or more indicators of impairment have occurred, we perform a recoverability test by comparing the carrying amount of an asset or asset group to the sum of the undiscounted cash flows expected to result from the use and the eventual disposition of the asset or asset group. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value. No indicators of impairment were identified during the quarter ended June 30, 2021.

Environmental and Legal Contingencies

U.S. GAAP requires a liability to be recorded for contingencies when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated. Significant judgment is required to determine the existence and amounts of our environmental, legal and other contingent liabilities. We regularly consult with attorneys and consultants to determine the relevant facts and circumstances before we record a liability. Changes in laws, regulatory orders, cost estimates, participation of other parties, timing of payments, input of attorneys and consultants, or other circumstances may have a material impact on the recorded liability.

Income Taxes

Our income tax expense, deferred tax assets and liabilities, and liabilities for unrecognized tax benefits reflect management’s best estimate of current and future taxes to be paid. We are subject to income taxes in the United States and numerous foreign jurisdictions. Significant judgments and estimates are required in the determination of consolidated income tax expense.

Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, which will result in taxable or deductible amounts in the future. In evaluating our ability to recover our deferred tax assets in the jurisdiction from which they arise, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax-planning strategies, and results of recent operations. The assumptions about future taxable income require the use of significant judgment and are consistent with the plans and estimates we are using to manage our underlying businesses.

The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in a multitude of jurisdictions across our global operations. Accounting Standards Codification (“ASC”) No. 740 states that a tax benefit from an uncertain tax position may be recognized when it is more-likely-than-not that the position will be sustained upon examination, including resolution of any related appeals or litigation processes, on the basis of its technical merits. We record unrecognized tax benefits as liabilities in accordance with ASC 740 and adjust these liabilities when our judgment changes as a result of the evaluation of new information not previously available. Because of the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the unrecognized tax benefit liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which new information is available.

Our practice is to recognize interest and penalties related to income tax matters as part of income tax expense.

Following the enactment of the 2017 Tax Cut and Jobs Act and the associated one-time transition tax, in general, repatriation of foreign earnings to the U.S. can be completed with no incremental U.S. tax. However, there are limited other taxes that continue to apply such as foreign withholding and certain state taxes. The Company records a deferred liability for the estimated foreign earnings and state tax cost associated with the undistributed foreign earnings that are not permanently reinvested.

Significant Customers

Our net sales to customers representing at least 10% of total net sales is as follows:

	Three Months Ended						Six Months Ended
	June 30,			June 30,			June 30,			June 30,
	2021			2020			2021			2020
Cummins Inc.		14.3	%		9.7	%		15.0	%		13.4	%
Toyota Motor Corporation		13.3	%		11.6	%		13.3	%		11.7	%

Forward‑Looking Statements

This document contains statements that are, or may be deemed to be, forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, any financial or other guidance, statements that reflect our current expectations concerning future results and events, and any other statements that are not based solely on historical fact. Forward-looking statements are based on management's expectations, certain assumptions and currently available information. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof and are based on various assumptions as to future events, the occurrence of which necessarily are subject to uncertainties. These forward-looking statements are made subject to certain risks, uncertainties and other factors, which could cause our actual results, performance or achievements to differ materially from those presented in the forward-looking statements. Examples of factors that may affect future operating results and financial condition include, but are not limited to: the ultimate impact of the COVID-19 pandemic on our business, results of operations or financial condition, changes in the economy generally and in respect to the business in which CTS operates; unanticipated issues in integrating acquisitions; the results of actions to reposition our business; rapid technological change; general market conditions in the transportation, telecommunications, and information technology industries, as well as conditions in the industrial, aerospace and defense, and medical markets; reliance on key customers; unanticipated public health crises, natural disasters or other events; environmental compliance and remediation expenses; the ability to protect our intellectual property; pricing pressures and demand for our products; and risks associated with our international operations, including trade and tariff barriers, exchange rates and political and geopolitical risks. Many of these, and other risks and uncertainties, are discussed in further detail in Item 1A. of our Annual Report on Form 10-K. We undertake no obligation to publicly update our forward-looking statements to reflect new information or events or circumstances that arise after the date hereof, including market or industry changes.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

For a discussion of current market conditions resulting from the COVID-19 pandemic, refer to Part I, Item 2, "Management's Discussion and Analysis of Financial Condition” hereof.

There have been no other material changes in our market risk from the disclosure contained in our Annual Report on Form 10-K for the year ended December 31, 2020.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q were effective in providing reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within CTS have been detected.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting for the quarter ended June 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

From time to time we are involved in litigation with respect to matters arising from the ordinary conduct of our business, and currently certain claims are pending against us. In the opinion of management, we believe we have established adequate accruals pursuant to U.S. generally accepted accounting principles for our expected future liability with respect to pending lawsuits, claims and proceedings, where the nature and extent of any such liability can be reasonably estimated based on presently available information. However, there can be no assurance that the final resolution of any existing or future lawsuits, claims or proceedings will not have a material adverse effect on our business, results of operations, financial condition, or cash flows.

See Note 11 "Commitments and Contingencies" in the Notes to the Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q.

Item 1A. Risk Factors

There have been no significant changes to our risk factors from those contained in our Annual Report on Form 10-K for the year ended December 31, 2020.

Item 2. Unregistered Sales of Equity

Securities and Use of Proceeds

On May 13, 2021, the Board of Directors authorized a stock repurchase program with a maximum dollar limit of $50 million. This program authorizes us to make repurchases of our common stock from time to time on the open market, but does not obligate us to make repurchases, and it has no expiration date. The authorization of the stock repurchase program replaced the stock repurchase program authorized by the Board of Directors on February 7, 2019. There were no repurchases of the Company's equity securities during the six months ended June 30, 2021. As of June 30, 2021, approximately $50 million remained available under the repurchase program.

Item 6. Exhibits



(31)(a)	Certification pursuant to Section 302 of the Sarbanes‑Oxley Act of 2002.

(31)(b)	Certification pursuant to Section 302 of the Sarbanes‑Oxley Act of 2002.

(32)(a)	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.

101.1	The following information from CTS Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2021 formatted in Inline XBRL: (i) Condensed Consolidated Statements of Earnings for the three and six months ended June 30, 2021 and 2020; (ii) Condensed Consolidated Statements of Comprehensive Earnings for the three and six months ended June 30, 2021 and 2020; (iii) Condensed Consolidated Balance Sheets at June 30, 2021 and December 31, 2020; (iv) Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2021 and 2020; (v) Condensed Consolidated Statements of Shareholders’ Equity for the three and six months ended June 30, 2021 and 2020; (vi) Notes to Condensed Consolidated Financial Statements, tagged as blocks of text and including detailed tags.

104	The cover page from this Current Report on Form 10-Q formatted as inline XBRL

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

CTS Corporation		CTS Corporation

/s/ Thomas M. White		/s/ Ashish Agrawal
Thomas M. White		Ashish Agrawal
Corporate Controller (Principal Accounting Officer)		Vice President and Chief Financial Officer (Principal Financial Officer)


Dated: July 27, 2021		Dated: July 27, 2021